Corporate Credit Highlights
Highlights from investment-grade, bank-loan, and high-yield asset classes.
2/28/23
2/28/23
2/28/23
2/28/23
2/28/23
2/28/23
Source: Bloomberg, Credit Suisse and Morningstar® as of 2/28/23.
U.S. credit represented by the Bloomberg US Credit Index and index components. Bank loans are represented by the Credit Suisse Leveraged Loan Index and index components. High yield is represented by the Bloomberg US Corporate High Yield Index and index components.
*3-year discount margin show for bank loans.
HIGHLIGHTS
Investment Grade
- BAML: IG issuer funding costs should remain low for years after companies have locked very cheap funding previously. We estimate that if US non-financial issuers were to refinance all their debt today at the current index yield (5.4%), the coverage ratio (LTM EBITDA / LTM interest expense) would drop to about 9x from 13.6x in 3Q-22. That would be near the low end of historical range. However, given the average bond maturity of 10 years, we estimate that refinancing debt at maturity at the current index yield would bring the coverage ratio to about 11.5x by the end of 2026 – still well above the 10.5x historical median.”1
- This has been the busiest February of IG primary new bond issuance on record with a total of $124bn thus far pricing through Friday with another 17 deals on tap to price today [Feb. 27. 2023]. This compares to a five-year average for February of $93bn in new bond issuance and expectations calling for $100bn of new supply coming into the month.2
High-Yield Corporates
- JP Morgan strategy on rising stars: “Including prior candidate MSCI’s $4.2bn upgrade last week, rising stars total $6.4bn year-to-date after reaching a record $113.0bn in 2022. Note 2022’s rising stars equated to 14% and 7% of outstanding for the BB and HY universes, respectively. What could transition in the intermediate term (i.e., 6 months) using a combination of rating permutations and pricing? There are $352bn of bonds rated BB+/Ba1 by at least one of the three major rating agencies, of which $118bn is on the “cusp” of transitioning from HY to IG indices using a few permutations (i.e., one or two agency actions).”3
Bank Loans
- Per Citi’s Loan Tracker, currently [Feb.28, 2023] 12.1% of the loan market is trading above par.4
- Jefferies strategy on loan outperformance relative to HY: “leveraged loans have wildly outperformed over the past few weeks; US leveraged loans are up ~0.65% MTD while US high yield is actually down ~1.57%. Loans have benefitted from strong CLO creation and the lack of rate duration exposure. Consistent with our view on duration above we think it makes sense to look to sell loans vs fixed rate credit here.”5
- Per CS, the LTM USD loan issuer default rate has risen to 1.5%, and CS expects it to finish 2023 at 3%. Based on current levels of market distress, the loan issuer default rate will reach 2% over the next six months.”6
1Seliger, Yuri et al. Credit Market Strategist BofA Global Research “Situation Room,” February 2023.
2Pacific Asset Management Analysis, Feb. 27, 2023.
3Nelson, Jantzen, JPM Daily Credit Strategy & CDS/COX AM Update. J.P. Morgan, Feb, 28, 2023.
4Citi Loan Tracker, Feb. 28, 2023.
5Hamid, Sherif, Jefferies Strategy, Feb. 24, 2023.
6Koch, Fer et al. CS Credit Strategy Daily Comment. Feb. 2, 2023.
Disclosures
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