As risk premiums rise and economic uncertainty mounts, Invico Capital Corporation makes the case for first lien corporate credit as a defensive strategy with high contractual yields
This article was produced in partnership with Invico.
As 2025 unfolds, investors are faced with a pivotal inflection point: The emphasis is shifting away from maximizing returns on capital and towards ensuring the return of capital itself. After an extended period of abundant liquidity and compressed risk premiums, risk is being repriced and the long-dormant premium for bearing it is set to reassert itself - potentially with force.
Tyler Gramatovich, Portfolio Manager at Invico Capital Corporation, says this is long overdue and the portfolio has been positioned accordingly. “What we’re selling is yield and protection of capital,” he notes. As headlines swirl with economic uncertainty on both sides of the border, Invico’s approach of disciplined lending feels less like foresight and more like necessity.
Disciplined lending emerges as a pragmatic solution
Policy divergence between Canada and the U.S. is set to continue and Invico’s focus is clear: disciplined lending to U.S.-based companies. Those loans are secured by first lien positions at the top of the capital structure, denominated in U.S. dollars, and anchored by rigorous underwriting that assumes little to no economic growth.
First lien corporate credit - particularly U.S. syndicated senior secured loans - are a foundational segment of the fixed income universe. Approaching $1.5 trillion in size with decades of data - the asset class offers a rare combination of low volatility and high current yields. According to Gramatovich, the institutional asset class should continue its expansion as private credit and public credit are beginning to look strikingly similar.
For Gramatovich and the Invico team, this isn’t simply about finding yield. It’s about constructing portfolios that can withstand economic headwinds without relying on optimistic growth assumptions. “We typically don’t need growth for our investments to work,” Gramatovich explains. Instead, they focus on companies with predictable free cash flows, net debt to EBITDA metrics below that of the broader market, and conservative capital structures – in other words, businesses that can weather storms.
And while equities and treasuries jostle for investors’ attention, both present a less compelling proposition. Corporate margins are under pressure, and valuations remain stretched in many sectors. Meanwhile, fixed income investors face their own dilemmas.
The autopilot strategies of the past decade are losing runway. What worked over the last decade - reliance on beta, passive strategies, and broad asset class exposure - is unlikely to deliver similar results going forward.
Slower growth is the new normal
While the exact trajectory of global growth is uncertain, the direction is clear. Gramatovich frames it candidly: “The broader economic picture points in one direction. Trade wars and macroeconomic uncertainty are a net negative for businesses, for margins, for consumer spending, and this is conducive to a much lower growth backdrop going forward. This touches every borrower and every industry in different ways but it feels like this was the catalyst for markets and valuations to begin to reprice.”
That uncertainty is having direct consequences on the ground. Hiring decisions are delayed, capital expenditures are cut, and the prospect of layoffs looms larger as the year progresses. “Businesses frankly just can’t plan,” Gramatovich continues. “That affects investment decisions and consumer sentiment. Really, it’s about quantifying how negative the outlook is. I think that’s where the market is sitting right now.”
While equity investors navigate shifting sand and the need to get so many variables correct, lenders at the top of the capital structure benefit from predictability of interest income and a margin of safety. Invico’s strategy does not depend on an optimistic economic scenario, but rather on the sustainability of free cash flows and asset coverage in a wide range of conditions.
Canada and the U.S.: A widening divide
The economic fault line between Canada and the U.S. has only deepened in 2025. While both economies face challenges, Canada’s structural weaknesses are increasingly exposed. An overleveraged consumer, rising unemployment, and an erosion of business investment are converging to create a fragile economic environment and a weaker Canadian dollar. Gramatovich doesn’t mince words: “Canada doesn’t have a ton of negotiating leverage when the economy relies on a single trading partner. Companies and capital continue to move south to access a better economic backdrop and where capital is treated more favourably. Unfortunately for the country, that capital doesn’t come back quickly… even with broad policy changes in Canada,” which Gramatovich is hopeful for.
The Canadian economy, already slowing dramatically, continues to face headwinds and an increasingly aggressive need for interest rate cuts by the Bank of Canada. By contrast, the U.S. economy remains resilient, even as economic growth looks to be slowing. Base interest rates are expected to remain elevated relative to the past 15 years, providing a solid foundation for USD-denominated floating rate loan investments tied to those base rates.
For Invico, this divergence is critical to their portfolio positioning. The firm’s liquid holdings remain focused almost exclusively on USD-denominated loans to companies based in the U.S. The broader, deeper U.S. capital markets offer far greater diversity of borrowers and industries, and the superior economic backdrop makes U.S. first lien corporate credit the logical destination for investors prioritizing steady yield and lower volatility than other asset classes.
Why active credit selection is the difference between defense and distress
Yet, not all loans are created equal. Years of abundant capital and investor complacency have left portions of the syndicated loan market exposed to significant risk. Aggressive underwriting, inflated EBITDA figures through generous addbacks, and weakened covenant protections have become commonplace in recent years. Gramatovich emphasizes the importance of security selection in this environment. “The beta trade has worked in most asset classes, but with a slowing economy, first lien loans levered at six times debt to EBITDA have very limited room for error.”
Invico’s approach is to remain highly selective, focusing on loans with sustainable leverage, meaningful asset coverage, and consistent free cash flow generation. They actively avoid transactions where the risk is not appropriately compensated by yield. As risk is repriced across the market, Gramatovich sees opportunity. “The air coming out of the U.S. exceptionalism trade has started to open up quality first lien credits trading below par. We expect to take advantage of that.”
That selectivity is central to Invico’s approach. “We’ve been hypersensitive to the recent influx of capital to the corporate credit space from CLOs, private credit, and ETFs,” Gramatovich adds. Now, however, the market dynamic is beginning to shift. The leveraged loan market has softened by about one point - an adjustment Gramatovich views as not only healthy but necessary. “Asset class outflows are exactly the time we want to be buyers - when funds are forced to sell holdings for non-fundamental reasons. That’s where disciplined credit managers can find discounts on performing credit that adds to the contractual interest income return.”
Invico’s strategy is grounded in a bottom-up, fundamentally driven research process where conservative EBITDA projections leave a large margin of safety to ensure that capital structures are sustainable even under stress. “Our job as an active credit manager in this market is to make sure we have an exit for our principal to be returned,” Gramatovich explains. “This is typically from a refinancing through the capital markets. So if the borrower has a capital structure that’s sustainable, the odds of a refinancing - and full principal repayment at par - are very high. That’s how we control default risk.”
While Invico doesn’t rely on credit ratings to determine investment quality, most of their borrowers fall into the single-B category. This reflects the size bias of rating agency models more than any underlying credit risk. Gramatovich highlights the “size arbitrage” that exists in the market, where smaller issuers - often with solid fundamentals - receive lower ratings and therefore offer higher yields relative to their risk.
For Invico, these smaller borrowers are typically around $2 billion in enterprise value and $250 million in EBITDA, which is where they find the most attractive opportunities. Sourcing a portion of these loans requires deep relationships with U.S. trading desks and agent banks, built over years of experience in the market. It is this execution capability that enables Invico to capitalize on dislocations and inefficiencies within the syndicated loan market.
Generating yield while playing defense
Senior secured loans offer both defensive positioning and attractive income with the yield on the U.S. loan asset class having been about 9% over the past three years. “At the outset,” Gramatovich explains, “you’re at the very top of the capital structure of a company with unsecured debt and/or equity as the first loss capital underneath the loan investment. If something goes wrong, those securities are the first to feel it. And so we think with all the uncertainty, protection of capital looks better than stepping out on the risk curve to stretch for return.”
Staying at the top of the capital structure, in Gramatovich’s view, is not simply a defensive move—it’s a prudent one. “Given the slowdown in economic growth we’re forecasting, this works just fine for credit. This is not the best recipe for equities, but for first lien lenders, the businesses we lend to produce free cash flow at these levels, and they can sustain any impact from a stagflationary environment.”
Credit is a negative art, as Gramatovich aptly points out. What you don’t buy is more important than what you do.
