abrdn Income Credit Strategies Fund (ACP) featuring Portfolio Manager, Steve Logan

Listen to Mike Taggart, Aberdeen's Head of Closed-end Fund Investor Relations and Steven Logan, Portfolio Manager for abrdn Income Credit Strategies Fund (ACP) discuss the outlook for the credit markets. 

Transcript

Podcast Transcript

Aberdeen Income Credit Strategies Fund (ACP)

November 2025

 Mike Taggart:  Welcome to the latest podcast for the Aberdeen Income Credit Strategies Fund, ticker symbol ACP. I'm Mike Taggart, Aberdeen's Head of Closed-end Fund Investor Relations. With me is Steve Logan, Aberdeen's Head of European High Yield Credit and a Portfolio Manager for ACP. Steve, thanks for taking the time to discuss the fund today. 

Steve Logan: Hello, Mike. Great to talk to you. And yeah, it's always great talking to our shareholders. 

Mike Taggart: So, Steve, 2025 has been quite a year for fixed income investors at first, at least here in the States, we were in rate cut limbo and now the Federal Reserve has resumed interest rate cuts. But since the end of the summer, we've seen volatility increase in the credit markets. So how do you view all of this and what does it mean for ACP?

Steve Logan: Well I think you know just stepping back for a second. It's been a solid year. You know total returns have been decent. The market's grown investor demand has been strong until quite recently as you pointed out. And I think it's really quite recent that we've seen this decompression. So. So for example, just the weaker parts of the market have started to struggle and it's quite marked. So you know, if you look at the average spread for Double B's it's pretty much unchanged this year. Single Bs have widened cheapens up by about 30 basis points. And triple C's of widened by about 150, most of which has taken place in the last sort of six weeks. And if you look at the reasons for that, it's really the more cyclical sectors that have really struggled. And any sort of earnings misses from the sort of weaker, more cuspy companies have been punished quite harshly. And, and I think this is can be really attributed to, a couple of large defaults in the US which happened in September with trickle first brands, which, we've seen to evolve quite a bit of fraud from the looks of it. And also you have US regional banks emerging with, reporting about credit losses. And that's definitely unsettled investors. 

I think the flip side of this is that when we get more dispersion and more volatility for us as active investors, it creates opportunities. So there is a flip side to it. 

Mike Taggart: And then you know just in general. So when you're talking about you know Triple C's versus you know Double B's Triple C's - just for our listeners are the riskier part of the high yield credit market.

Steve Logan: So yes, and to be clear. Correct. Yes. That's fair. And, you know, they probably make up around 10% of the overall US high yield market. So they're quite small. They tend to attract a lot of attention because they that's where all the defaults happen. And a lot of the you can kind of if you get your security selection right, you can make a lot of money. There were only about 4% of the European market. So they are the tail of the market. But people look to them as the canary in the coal mine. 

Mike Taggart: Right. The tail wagging the dog, so to speak. 

Steve Logan: Yeah. 

Mike Taggart: So when it comes to high yield investments, you know, speaking of defaults, the one thing investors are always looking at is the overall default rate.

So, you know, you mentioned, tricolor and first brands. But how has, you know, the overall market been behaving and what's your outlook for defaults over the next year or two? 

Steve Logan: Well, I think it's like a strange environment that really, in the sense that we haven't had a traditional business cycle for years. What we've had instead of these kind of rolling default cycles for individual sectors. And if you go back nine years, you had the oil and gas sector, which blew up in the US. And then you went into Covid in the more retail and leisure sectors were impacted. And then when inflation came through and, and rates backed up, then, then you had real estate losses which are still fading through in terms of those, US regional banks.

 So you haven't had a big spike in defaults. So where we are today is global defaults of around 4.5% for the last 12 months, slightly higher than average. But if you look at the the universe, if you look at all the, the market in the US and Europe, only about 3.25% of both markets are trading at distressed levels. And that's using average cash prices below $0.80 on the dollar or spreads wider than a thousand basis points. So that's quite low. And generally around half of that will default over the next 12 months. So it does suggest defaults and more than likely to trickle lower than four. And a half percent over the next 12 months. And I think that's probably going to be supported by rate cuts from the fed as well, which will help the weaker parts of the market. 

Mike Taggart: If I could just jump in what is like the very long term default rate in high. 

Steve Logan: Yeah, it's it's around for a 4%. It's around 4%, something like that for four and a half. 

Mike Taggart: Okay. So we're just a little bit above that now. Yeah. So you were saying that you think the Federal Reserve would jump in if it got much higher than it is currently?

 Steve Logan: Well, I at the moment, the market is pricing in around three cuts from the Federal Reserve through to September next year. And really that's based on, I think, two things. One, I think, you know, there's clearly it looks like there's more of a dovish, leader of the fed coming in. And also inflation has been, you know, more normalizing.

 The there are question marks over that in terms of what tariffs might do. But the rhetoric seems to be that inflation is abating. And and perhaps the economy might be slowing a bit with labor market data, weakening a little bit. And also, some sort of higher credit losses in auto, subprime and credit cards. So there are the weaker parts of the consumer, definitely showing signs of stress. So I think the Federal Reserve will want to support the kind of weaker parts of the economy.

Mike Taggart: Okay. Excellent. And now, you know, this is a global fund ACP. So I'd like to go around the world kind of keeping things fair and balanced, with kind of three different areas. So first, where are you seeing opportunities and headwinds in Europe? 

Steve Logan: I think well, just addressing the headwinds first. The two main sectors in Europe that are struggling are autos and chemicals. Autos because of well, we have tariffs on the European manufacturers. Plus you have a lot of cheap well made electric vehicles coming in from China. And they're having to compete with that.

And the auto sector is having to effectively, re-engineer its whole business model into EVs from internal combustion engines. So there's a huge amount of CapEx and costs involved in that transition. So without doubt, the auto sector is under pressure. Similarly, chemicals are under pressure in Europe because, relying on cheap Russian gas is no longer an option.

And also there's a lot of cheap chemicals being exported from China. And the China, producers don't need to comply with emission rules or carbon taxes, etc., for climate change reasons. So, you know, those sectors have got structural challenges. Also, construction is pretty weak throughout. So the France, Germany, the UK. So those those three sectors, definitely struggling.

 But if you look at the, if you look at the, the kind of opportunities we're seeing, it's really in select names, whether it be retail, hospitality sectors, and some small but growing financial, firms that we quite like. So it's quite idiosyncratic as ever in high yield. But definitely there's, there's some major structural challenges in sectors, but there still are very interesting upside opportunities.

Mike Taggart:  Excellent. And then if I could jump to the US, where are you seeing headwinds and opportunities in the US?

 Steve Logan: At the moment there's you're seeing quite a large amount of issuance for the purposes of funding data centers and AI financing deals. Now, this is very much the topic dejoure and sentiment around the sector remains very fickle because people see the CapEx spend. But the actual returns on that CapEx and the execution risk remains very high. So, you know, there are some beginning to see some quite attractive, high yielding new issuance in the sector, but also it could prove a headwind, you know, just in terms of the amount of funding that needs to be done. So the investors want to fund that sector.

We're already seeing private credit investors stepping back from the sector. So, it's very interesting at the moment. We do see M&A picking up in the US, and we expect that to be, a very attractive, set of opportunities in terms of picking off those well-priced, attractive new transactions. 

Mike Taggart: Excellent. And then finally, just outside of the US, in Europe, any areas that, are providing, you know, opportunities or headwinds there?

 Steve Logan: Well, we, we do invest in emerging market debt as well. And, we have a strong franchise in that area. And over the last two years, there's been a wave of rating agency upgrades in both sovereigns and corporates. The asset class in emerging markets seeing the highest inflows in the last seven years. And the default rate is just expected to be around 1% next year in corporates in emerging markets, which will be the lowest in several years.

And this is really after we've had a bit of a pickup in defaults, after the Chinese real estate bubble burst and the Russia-Ukraine war and the fallout from that. But in general, balance sheets are in good shape and stable growth is expected from the vast majority of countries. The only I guess challenge is valuations are a little bit average.

Like, you know, a lot of the credit market.

Mike Taggart: Okay. Well thanks for that. And then finally ACP is leveraged like many closed-end funds. And you and the other portfolio managers don't always utilize the full amount of leverage available to you. So I'm kind of wondering, how do you think about using us dollar leverage to invest in non-US dollar securities? 

Steve Logan: Well you're right. Well, credit spreads are a little bit on the rich side. Yields aren't too bad. So if you look at the average yield in the US, it's around US ten year average. Similar to Europe, in fact, Europe's a little bit higher. But credit spreads, you know, on the, on the rich side. But, you know, we quite like the market yield here. We think credit markets should be supported by interest rate cuts from the fed to a large extent, and maybe some from the ECB, although they've come in and been priced out.

But you know, we do like using European credit in this strategy because when you hedge European currency risk we don't take any foreign exchange risk in ACP. We had it all out. But you do get a pick up of around 2% on the hedge into a US denominated cash flow like you do. Yeah. 

Mike Taggart: Currently you're getting an okay.

Steve Logan: So we like doing that. And that gives us a much larger opportunity set with higher rolling yield in dollar terms. 

Mike Taggart: Okay. Well thank you, Steve for that thorough update. Really appreciate it. 

Steve Logan: No problem Mike. Great talking to you. 

Mike Taggart: There are three convenient ways to learn more about ACP. Visit its website. Aberdeenacp.com. Second, you can email us at Investor.Relations@Aberdeenplc.com. Or give us a call at 1-800-522-5465. I'm Mike Taggart of Aberdeen. Thank you for listening.

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