WEBVTT 1 00:00:08.400 --> 00:00:11.730 High-yield investors benefited from tightening credit spreads year-to-date, 2 00:00:11.940 --> 00:00:15.450 which added capital appreciation to already higher prevailing yields. 3 00:00:16.080 --> 00:00:19.290 We have plotted the credit spread of the ICE Bank of America U.S. High Yield 4 00:00:19.290 --> 00:00:20.123 Index. 5 00:00:20.340 --> 00:00:24.150 Spreads finished the quarter 49 basis points tighter and all but erased the 6 00:00:24.150 --> 00:00:27.390 impact of the regional banking crisis in March. For the year, 7 00:00:27.690 --> 00:00:30.990 credit spreads are 66 basis points tighter than where they started. 8 00:00:32.490 --> 00:00:36.030 The lowest quality issuers have outperformed through the first half of 2023. 9 00:00:36.660 --> 00:00:40.650 The CCC-rated segment of the ICE Bank of America U.S. High Yield Index saw 10 00:00:40.650 --> 00:00:43.290 credit spreads move 202 basis points tighter, 11 00:00:43.410 --> 00:00:46.140 versus B-rated issues at 75 basis points, 12 00:00:46.410 --> 00:00:49.320 and higher quality BB issues at 36 basis points. 13 00:00:50.100 --> 00:00:54.030 This translates to a 9.8% year-to-date return for the CCC segment, 14 00:00:54.420 --> 00:00:58.690 outperforming B at 5.7% and BB at 4.2%. 15 00:00:59.790 --> 00:01:03.000 If the inversion in the yield curve is signalling recession in lower rates, 16 00:01:03.120 --> 00:01:05.160 the high-yield market did not get the message. 17 00:01:05.610 --> 00:01:08.940 Tightening credit spreads have pushed further inside of the historic average and 18 00:01:08.940 --> 00:01:12.360 further away from cycle peaks. At current valuations, 19 00:01:12.390 --> 00:01:15.270 we continue to believe that outside of some special situations, 20 00:01:15.450 --> 00:01:17.520 there is not enough compensation for the risk. 21 00:01:18.960 --> 00:01:22.440 New issuance in the high-yield bond market continues to see a revival from the 22 00:01:22.440 --> 00:01:23.610 lows of 2022. 23 00:01:24.210 --> 00:01:28.380 JP Morgan calculates gross new issuance at 96 billion U.S. dollars in the first 24 00:01:28.380 --> 00:01:32.940 half of this year, compared to 106 billion U.S. dollars for all of 2022. 25 00:01:34.120 --> 00:01:37.710 This lift in activity is relative to the lowest issuance total since the global 26 00:01:37.710 --> 00:01:41.700 financial crisis in 2008. Within a broader historical context, 27 00:01:41.700 --> 00:01:43.470 new issuance remains modest, 28 00:01:43.770 --> 00:01:47.850 particularly when stacked up against successive record-breaking years in 2020 29 00:01:47.850 --> 00:01:51.510 and 2021. After a blip in March, 30 00:01:51.690 --> 00:01:54.720 the line has continued an upwards trend but remains modest. 31 00:01:55.890 --> 00:01:59.040 It is also important to consider that the U.S. high-yield market has grown 32 00:01:59.040 --> 00:02:02.190 substantially since the lows of 2008 presented in the graph. 33 00:02:03.420 --> 00:02:08.280 At 458 billion U.S. dollars, the 2008 high-yield bond market was a fraction of 34 00:02:08.280 --> 00:02:11.430 the size of the 1.2 trillion U.S. dollar market today. 35 00:02:12.180 --> 00:02:13.950 Despite the pickup in activity this year, 36 00:02:14.130 --> 00:02:17.760 we continue to believe that relatively modest new issuance has been supportive 37 00:02:17.760 --> 00:02:18.660 of credit spreads. 38 00:02:19.620 --> 00:02:23.130 Another telling trend is that high-yield issuers continue to turn to secured 39 00:02:23.130 --> 00:02:23.963 issues this year. 40 00:02:24.540 --> 00:02:29.280 Leveraged commentary and data calculates secured high-yield bond issuance at 56 41 00:02:29.280 --> 00:02:30.360 billion U.S. dollars this year, 42 00:02:30.690 --> 00:02:33.240 which remains comfortably ahead of unsecured issuance. 43 00:02:33.960 --> 00:02:35.040 According to their research, 44 00:02:35.310 --> 00:02:37.980 unsecured issuance has been higher in every year on record. 45 00:02:38.670 --> 00:02:42.270 This reversal in trend has been largely driven by lower-quality issuers that 46 00:02:42.270 --> 00:02:46.110 have had to offer security to fulfill their funding needs or refinance looming 47 00:02:46.140 --> 00:02:47.280 near-term maturities. 48 00:02:48.990 --> 00:02:51.960 Higher yields in the institutional leveraged loan market are also pushing 49 00:02:51.960 --> 00:02:54.750 issuers to refinance with relatively lower-cost bonds. 50 00:02:55.320 --> 00:02:59.590 Average new issue yields in the loan market ended the period at 9.7% while the 51 00:02:59.590 --> 00:03:04.210 average new issue yield in high-yield bonds is 8.4%. Both numbers are 52 00:03:04.210 --> 00:03:06.850 markedly higher than the 2021 historic lows. 53 00:03:07.540 --> 00:03:11.800 LCD tracked 14 billion U.S. dollars of bonds to take out loans in the first half 54 00:03:11.800 --> 00:03:15.610 of the year, the largest of which was the insurance brokerage HUB International, 55 00:03:15.820 --> 00:03:20.740 which issued 2.175 billion U.S. dollars in bonds to help refinance loans coming 56 00:03:20.740 --> 00:03:21.970 due in 2025. 57 00:03:23.140 --> 00:03:26.710 Default activity also continues to tick up in the high-yield bond and leveraged 58 00:03:26.710 --> 00:03:30.880 loan markets. The past quarter saw three of the five largest defaults this year, 59 00:03:31.000 --> 00:03:34.210 which included Envision Healthcare: 10.3 U.S. billion dollars, 60 00:03:34.630 --> 00:03:38.590 Wesco Aircraft Holding: 3 billion U.S. dollars, and, most recently, 61 00:03:38.650 --> 00:03:41.860 ATM Maker Diebold Nixdorf: 2 billion U.S. dollars. 62 00:03:42.700 --> 00:03:44.320 According to data from JP Morgan, 63 00:03:44.590 --> 00:03:49.510 26 companies have defaulted this year for a total of 15.7 billion U.S. dollars 64 00:03:49.510 --> 00:03:52.810 in bonds and 25.4 billion U.S. dollars in loans. 65 00:03:53.440 --> 00:03:57.280 An additional nineteen companies have completed distressed exchanges totalling 66 00:03:57.280 --> 00:03:59.290 10.9 billion U.S. dollars. 67 00:03:59.890 --> 00:04:03.160 The combined total has now surpassed last year's full-year total. 68 00:04:04.630 --> 00:04:06.100 Despite increasing defaults, 69 00:04:06.280 --> 00:04:09.970 12-month rolling default rates remain below the historic average and are quite 70 00:04:09.970 --> 00:04:11.620 modest relative to cycle peaks. 71 00:04:12.280 --> 00:04:14.530 We continue to believe that with tighter market conditions, 72 00:04:14.860 --> 00:04:17.680 the ongoing need to refinance historically low-cost debt, 73 00:04:17.740 --> 00:04:20.590 as well as the immediate impact of higher rates on floating rate loans, 74 00:04:20.950 --> 00:04:22.660 will likely continue to put pressure on 75 00:04:22.660 --> 00:04:26.810 defaults.