Azhar’s crunching credit – a shrinking high yield market

With October continuing the government bond sell-off leading to intra-month highs of 5% on the 10-year US treasury (before settling 35bps wider at 4.92%), corporate spreads started to leak wider across the board leading to negative months in all core fixed income asset classes.

Key indicators

• High yield bonds outpaced investment grade bonds marginally. Global high yield returned -1.00% and global investment grade -1.07%.
• High yield spreads widened to 482bps, 35bps wider on the month, dispersion was back with weaker names seeing greater impact – CCCs were 113bps wider, single Bs 43bps wider and BBs 21bps wider.
• Investment grade spreads – widened by 6bps to 142bps.
• Investment grade bond returns dipped negative for the year, but only marginally, so at -0.03% return year to date. Over the same time period, high yield markets have delivered +4.55%.
• The spread and rate volatility muted the amount of issuance with just $9bn pricing in the US, taking the year-to-date number to $144bn.

Area of focus – a shrinking high yield market

• The month ended with Ford being upgraded by S&P, leading to $40bn of eligible debt leaving the high yield market. The high yield market continues to shrink, not by reason of default as default rates remain low, but by refinancings into private markets and by upgrades – not something many would have anticipated a year ago.
• Defaults remain range bound, with the global par default rate at 3.4% (on a last 12-month basis). We expect the full year 2023 rate to now come in close to this level.
• The loan market was more active than the bond market – with $20bn of issuance in the US across 25 different issuers. Interestingly only three of these deals were fresh leveraged buyouts (totalling just $1.7bn) and a further $670m was for mergers and acquisitions, so over $17bn was for refinancings. With all-in yields of close to 8-10% issuers are preferring to tap the loan market rather than lock in fixed yields, with longer non-call periods, in the high yield market.

Credit stories

• Venture Global borrowed $4bn in the month consisting of a $1.5bn 5-year and $2bn 10-year new issues which priced at 9.5% and 9.875% respectively, This BB- rated issuer has now tapped the high yield market for a total of $9bn of debt – a nice reversal of the bond-to-loan trend we have seen. Venture is a liquid natural gas (LNG) terminal owner and operator with the aim of becoming the world’s second largest LNG exporter behind Qatar.
• Rite Aid – the US pharmaceutical retailer filed for Chapter 11 in October. This staple of the high yield market was ultimately brought down by opioid liabilities after regulators blocked its merger with Walgreens in 2017. Rite Aid had been a constituent of high yield indices for 24 years after being downgraded from investment grade back in October 1999.

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