31 Mar 2022 3 min read

Private credit: three reasons BBs shouldn’t be ignored

By Lushan Sun , Sam Jones

Credit investors commonly draw a line in the sand between investment grade (IG) and sub-investment grade. Crossover credit, rated BBB- to BB, straddles this area and is an emerging part of the institutional private-credit market. We believe it can offer an attractive risk/reward proposition and shouldn't be ignored.

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Here are three reasons why:

1. Structural protections

Investors can, quite naturally, be nervous venturing into BB-rated debt. For context, we are not referring to junior or leveraged loans here; rather, we are focusing on senior-ranking private credit rated one to three notches below IG. Historically, this has been a heartland of bank finance, but as borrowers have sought to diversify their liquidity sources – and longer-term funding – for future growth, pension schemes and other institutional clients have begun to harvest the rewards from investing in this space.

A key reason for looking at BB-rated private credit issuers is to identify those that have strong financial profiles and resilient revenue streams, but are considered sub-IG largely because they are smaller firms (with revenue in the tens of millions rather than hundreds of millions) and/or operate in less-mature sectors.

Loans are usually structurally similar to IG private-credit transactions and similarly offer stringent structural protections to the lender. This can provide further insulation against defaults and losses, which we believe is valuable during periods of volatility. 

2. Value

So-called “crossover” private credit sits between the IG assets sought by insurers and the more leveraged private investment market (which we believe is often mistakenly conflated with the traditional IG “private credit” world). Demand can start to thin near the IG/sub-IG threshold, creating inefficiencies that can result in enhanced returns. In the IG space, we typically see a premium over public bonds of 30-60 basis points. Investing in BB can allow investors to increase the premium further, while achieving better documentary protections.

3. Diversification

Crossover private credit is highly complementary to other credit assets from an asset class, sector and issuer perspective, in our view. It provides opportunities to gain exposure to nascent sectors that have strong growth potential due to their alignment with key structural trends, such as net zero and digitisation.


We believe crossover private credit represents a unique and interesting opportunity for investors without IG-rating constraints. It can provide attractive investment returns without materially increasing credit risk, as a result of lending to borrowers that are financially strong but not large enough to achieve a higher credit rating. Sector and issuer exposure includes sectors expected to benefit from long-term structural trends, which can help to maximise both the opportunity set and the return and diversification benefits.

Lushan Sun

Private Credit Research Manager

Lushan joined LGIM in 2021 and is responsible for private credit research within our Real Assets division. Prior to LGIM, Lushan was a senior consultant at Mercer, providing advice to UK DB pension schemes on asset allocation, portfolio construction and manager selection. Lushan has a MSci from Imperial College in Chemistry and is a Fellow of the Institute and Faculty of Actuaries. Outside work she spends most of her time pursuing her passion for food, exercise and the latest foreign dramas on Netflix.

Lushan Sun

Sam Jones

Portfolio Manager, Real Assets

Sam is a fund manager within the Private Credit team, with responsibility for investments across corporates, infrastructure and property. Prior to this, he was a Transition Manager within LGIM’s Solutions group after having joined as a graduate in 2011. Sam graduated from University College London and holds a first class BEng degree. He also holds the Investment Management Certificate and is CFA charterholder.

Sam Jones