Corporate Credit Highlights

• HSBC on mergers and acquisitions (M&A) activity in investment grade (IG) market: “Q1 was the largest quarter ($66 billion) for M&A supply since 2022, and February is the largest month since 2020 ($52.65 billion).  Currently M&A supply is up 43% vs 2023YTD.” ¹
• Deutsche Bank Strategy on April IG issuance: “Issuance last month was nearly evenly split between NonFinancial ($62billion) and Financial ($55 billion) issuers. After January and February were well above average months for gross IG supply, March and April were much closer to recent historic trends. Financial gross and net supply is nearly in lock-step with 2022’s pace, on the back of normalizing regional bank issuance after being largely shut off last year, potential pre-funding by money centers, and issuers looking to pull forward issuance needs ahead of any volatility in the second half of the year near the election. Non-Financial gross and net issuance is second only to 2020.” ²

• Deutsche Bank Strategy on year-to-date (YTD) high-yield (HY) supply: “Gross and net issuance through the first three months of the year was only larger in 2021. HY gross supply is at $143.5 billion through the end of April, while net supply is just under $80 billion and tracking between the 2020 and 2021 run-rates….75% of YTD issuance has been used to refinance debt.”³
• J.P. Morgan Strategy April default recap: “Default activity moderated in April with total volume affected by defaults or distressed exchanges coming in at a 9-month low.  As well, the high yield and leveraged loan default rates declined to a seven month and twelve month low, respectively.” ⁴
• Morgan Stanley Strategy on HY supply YTD: “Year to date through April 18, $79 billion, or 75%, of HY issuance was earmarked for refinancing as companies seek to take advantage of receptive market conditions to extend maturity runways. More encouragingly, we have also seen low-rated corporates (rated B- or below) being able to come to the market to address near-term maturities. As a result, maturity walls continue to get pushed out. As of end-March, HY issuers have $98 billion in near-term maturities by end-2025, down $29 billion or 23% since the start of the year. CCC near-term maturities have dropped $4.7 billion year to date to $16 billion.”⁵

• J.P. Morgan Strategy on size of the loan market: “The institutional loan universe has grown by $8 billion or 0.5% year-to-date to $1.57 trillion after contracting by $84 billion (or 5%) from June 2022 through year-end 2023.  2024’s modest expansion has been accompanied by modest net new-issue volumes and an increase in syndicated loans issued to refinance high-yield bonds and private credit. And the past few years’ contraction was due to a collapse in supply and cannibalization by the private credit universe.” ⁶
• Goldman Sachs Strategy on defaults: “While we continue to expect annual default rates will finish the year lower, the prospect of a delayed start and shallower U.S. easing cycle do pose some upside risk, especially in the U.S. leveraged loan market. That said, we think the composition of defaults will likely remain largely skewed towards small issuers and out-of-court restructurings which should have little impact on the performance of the broader leveraged loan and HY bond indices.” ⁷
• J.P. Morgan Research on loan asset demand in higher for longer environment: “A higher for longer rate narrative coupled with resilient growth is serving to boost the allure of the floating rate leveraged loan asset class in 2024. This is translating into significant outperformance versus alternatives within fixed income (3.3% YTD), the most significant capital market activity in years ($387 billion of gross issuance), and the largest retail inflows ($6 billion) since the Fed’s interest rate hike campaign began in early 2022. For example, leveraged loan mutual funds have seen 18 consecutive weekly inflows. And inflows year-to-date for loan funds equate to 8% of assets under management (AUM) or a 47 basis points boost to AUM per week.  Meanwhile, HY funds’ allocation to loans in 1Q24 increased quarter over quarter by the most in a decade (57 basis points to 3.6%). As well, collateralized loan obligation (CLO) volume ex-refinance/resets totaling $64.1 billion in 2024 is off to its fastest start on record and more than 50% ahead of last year’s pace ($41.6 billion year-to-date 2023). And while these strong demand conditions leave 50% of the leveraged loan universe now trading above par, the current pricing environment is sustainable in the context of an average coupon above 9%. Especially with capital market access broadening (B3 refi activity at a multi-year high) and the distressed universe easing to a multi-year low.” ⁸
• CreditSights note on loan upgrade/downgrade ratio: “The Index upgrade/downgrade ratio climbed to 0.94 in April from 0.64 in March. That’s the highest read since April 2022. For the three-month rolling period, the ratio reached a 23-month high of 0.78:1 in April from 0.71:1 in Q1 2024.  YTD there has been 118 upgrades/154 downgrades, for a ratio of 0.77:1 compared to 85 upgrades/179 downgrades, or 0.47, during the comparable period in 2023.”⁹

Definitions
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• Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM is used in conjunction with management performance and management experience when evaluating a company.
• Bank loans (also known as floating-rate loans or leveraged loans) invest in bonds and other fixed-income securities that have variable, as opposed to fixed, interest rates.
• A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%.
• B3/B- refers to the letter grades ratings agencies assign to companies, issuers, and securities that are considered speculative and carry a greater degree of risk than investment grade bonds.
• CCC bonds are considered low credit quality bonds and are commonly referred to as junk bonds.
• ‍A collateralized loan obligation (CLO) is a single security backed by a pool of loans, collected into a marketable instrument via process known as securitization.
• Default is the failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security.
• The default rate is the percentage of all outstanding loans that a lender has written off as unpaid after a prolonged period of missed payments.
• A distressed exchange is proposed by a company to avoid a bankruptcy, improve liquidity, reduce debt, manage its maturity dates (by exchanging debt securities that are coming due for debt securities with an extended maturity).
• A downgrade is a negative change in the rating of a stock's expected performance, issued by an analyst for a financial services firm.
• A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets.
• High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• Institutional loans are student loans offered by individual colleges and universities.
• ‍Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's.
• An issue is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.
• A leveraged loan is a type of loan made to borrowers who already have high levels of debt and/or a low credit rating. Lenders consider leveraged loans to have an above-average risk that the borrower will be unable to pay back the loan (also known as the risk of default).
• A nonfinancial asset is an asset that derives its value from its physical traits. Examples include real estate and vehicles. It also includes all intellectual property, such as patents and trademarks.
• Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed or it will cease to exist.
• The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major business assets through financial transactions between companies. A company may purchase and absorb another company outright, merge with it to create a new company, acquire some or all of its major assets, make a tender offer for its stock, or stage a hostile takeover.
• A money center bank is similar in structure to a standard bank; however, it's borrowing, and lending activities are with governments, large corporations, and regular banks. These types of financial institutions (or designated branches of these institutions) generally do not borrow from or lend to consumers.
• A refinance refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.
• A reset rate is the new interest rate that a borrower must pay on the principal of a variable interest rate loan when a scheduled reset date occurs.
• An upgrade refers to the positive change in an analyst's outlook of a particular security's valuation based primarily on that security's improving fundamentals.
• Upside risk refers to the uncertain upward potential for a financial instrument, market, sector, or economy. Upside risk is positive, which means it can work to an investor or company's favor.
• ‍Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.
• Yield is the income returned on an investment, such as the interest received from holding a security.