Lesson 1
Credit Cycle Phases
Track credit conditions (SLOOS, spreads, leverage) to anticipate economic turns. When credit is expanding with loose standards, get defensive. When credit is at peak distress, prepare to buy.
📊 Indicators mentioned in this lesson (click for details):
The credit cycle is the expansion and contraction of lending. It often LEADS the business cycle.
Phase 1: Expansion
- Banks loosening lending standards
- Credit spreads tightening
- Leverage increasing
- 'This time is different' narratives emerge
Phase 2: Peak
- Spreads at tightest levels
- Leverage at cycle highs
- SLOOS starts showing tightening (first cracks)
- Deals at extreme valuations (cov-lite, 10x LBOs)
Phase 3: Contraction
- Banks tightening standards aggressively
- Spreads widening rapidly
- Defaults starting to rise
- Fire sales begin
Phase 4: Distress/Repair
- Peak defaults (but rate slowing)
- Balance sheet repair begins
- Distressed opportunities emerge
- Credit creation at minimum
Check your understanding
Lesson Quiz
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Quiz Check
Why do tight credit spread (BAMLH0A0HYM2)s signal peak complacency rather than safety?