Thursday, April 26, 2012

Fitch's Quarterly Report on U.S. High Yield Bonds, Leveraged Loans and CLOs (BofA Merrill 'CCC' Yield Chart)

I couldn't find Fitch's U.S. High Yield Chart Book (there was a European Chart Book released), but today Fitch released its Q1 2012 U.S. Leveraged Market Quarterly, which is packed with charts showing trends in the U.S. high yield bond, leveraged loan, and CLO (collateralized loan obligation) markets. Fitch mentioned that $86.9 billion of high yield bonds were issued in Q1 2012, a new record high. From the press release:

"The U.S. high yield bond market set a new quarterly issuance record with $86.9 billion in the first quarter. The previous quarterly record was $80.6 billion, set in the fourth quarter of 2010. February's issuance total of $34.4 billion, was the second busiest month on record. Nearly 52% of total issuance during the quarter was directed toward refinancing or redeeming other bonds or notes. High yield retail funds took in strong inflows totalling more than $15 billion during the quarter.

Primary leveraged loan market activity remained brisk throughout the quarter. U.S. leveraged loan issuance totaled $144 billion, up 42% from the fourth quarter of 2011. Loan refinancing or repricings represented nearly 61% of total loan issuance in the quarter, while new money issuance represented only 38%. New money issuance will likely need to increase going forward in order for the loan market to maintain its current pace.

Twelve broadly syndicated collateralized loan obligations (CLO) totaling approximately $5.6 billion priced during the first quarter, representing the single most active quarter of issuance since 2008. Momentum is unlikely to wane in the second quarter, as the primary CLO forward calendar remains active as liability spreads continue to tighten."

Here are more details on the high yield bond issuance from the Fitch report.

"A narrowing of spreads through the quarter prompted issuers to refinance higher priced debt to cut funding costs and push out maturities. Nearly 52% of total issuance during the quarter was directed toward refinancing or redeeming other bonds or notes. Of that total, nearly 25% of high yield proceeds were used to repay bank debt."

However, Fitch mentioned in its report that bonds rated 'CCC' or below could be a "new hazard" if the default rate keeps rising.

"The default rate across the ‘CCC’ or lower pool of bonds ended the quarter at a year-to-date 2.5%, compared with a negligible rate for the rest of the market. A concern emerging in 2012 is that for the first time in several years, this high risk group is growing larger, reaching $209.3 billion at the end of March from $196.8 billion at year-end 2011. This growth is notably not issuance-driven but rather a result of downgrades" 

This quote was also in a Fitch press release on April 19, 2012: "Fitch: U.S. High Yield Default Rate Hits 1.9% in March, 30% of Distressed Debt Exchanges Flop." To monitor 'CCC' or Below risk, watch the chart of the BofA Merrill Lynch US High Yield CCC or Below Effective Yield at the St. Louis Fed's FRED database (chart below). There are also 1-month charts of high yield bond credit default swap indices (CDX.NA.HY, CDX.NA.NY.BB, CDX.NA.HY.B) available at Markit, and watch the high yield bond ETFs $HYG and $JNK as well for a proxy of the high yield bond market.



St. Louis Fed Chart: BofA Merrill Lynch US High Yield CCC or Below Effective Yield

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