A credit correction is "unavoidable," says S&P, noting nearly half of corporate debt issuers are estimated to be highly leveraged. Some believe the correction is already underway, says the team, and could likely stretch for the next few years as defaults spike.
Total global corporate debt as of the end of last year was $51.4T and is estimated to hit $75T by 2020.
The team coined the term "Crexit" to denote what could be a rapid departure of both lenders and lower-quality borrowers from the debt markets.
Corporate credit is now attractively valued relative to government paper, and has the added bonus of effectively hedging equity exposure, says Societe Generale.
"We see high-yield credit, including the riskier contingent convertible (CoCo) debt market, as presenting the best opportunities after being the hardest hit from weakness in oil, a stronger U.S. dollar and outsized outflows over the past 18 months," says the team, taking note of an even more dovish turn by global central banks, including the ECB's plan to make outright purchases of European investment-grade bonds.
BlackRock launches the iShares Currency Hedged Global ex-USD High Yield Bond ETF (NYSEARCA:HHYX), tracking an index of junk bonds issued in euros, pounds, and loonies, but hedging against currency risk.
The existing iShares Global ex-USD High Yield Corporate Bond ETF (BATS:HYXU) is lower by 7.7% YTD, in part thanks to a gain in the dollar of 6.5%.
The hedged version has expenses of 0.43% vs. $0.40 for the unhedged.
With the Fed threatening to take away the punch bowl, American companies have found a friend in the ECB, whose QE has made borrowing across the pond far less expensive than doing it here, writes Lisa Abramowicz.
Yields on investment-grade corporates in Europe have dipped all the way to 0.99% vs. 2.9% in the U.S., according to BAML. U.S. companies can save money even if they pay for expensive currency hedges. Consequently, roughly 65% of the record €60B of euro-denominated bonds sold in March (a record) came from overseas companies.
Junk-rated credits are also looking to the Continent, where yields on euro-denominated high-yield bonds of 4.3% are about 220 basis points lower than the States.
"Simple broad credit allocations are to be avoided," says Invesco Fixed Income Chief Strategist Rob Waldner. "With volatility comes opportunity, but it is more important than ever for investors to do detailed research to avoid credit accidents that are likely to come with increasing frequency in coming quarters.”
As for credit's troubles from the crash in oil , current market sentiment and pricing is pricing in a recovery in oil prices which isn't guaranteed to happen.
Waldner is particularly cautious on high-yield and emerging market debt - both sovereign and corporate.
In the wake of ECB's QE launch, more than €1B moved into European high-yield bond funds for the week ended Jan. 28. It's the largest weekly amount since JPMorgan began tracking the numbers in 2011 and stands against median inflows of €95M over the past four years.
European high-yield bonds have an average yield of 4.2%, according to Markit, compared with 1.2% for investment-grade paper.
“The global search for yield should prompt some investors to move down the credit quality spectrum into the noninvestment-grade market,” says one portfolio manager, summing up the conventional wisdom.
Investors pulled $523M from global high-yield funds in the week ended Wednesday, according to EPFR Global, and pulled $868M from U.S. funds, bringing assets below $100B for the first time since Sept. 2013.
The exit occurs even as the ECB's QE is designed to push investors into riskier assets, so what gives? "The transmission of the monetary policy mechanism will be less effective" with yields already so low, said Ray Dalio at Davos. "We have a deflationary set of circumstances which makes it appealing to just stuff your money under a mattress."
For years sovereign debt has been the globe's most-hated asset, but that title now goes to junk bonds, according to a Bloomberg poll. Of those surveyed, 18% - if given one asset class to short - would short high-yield. Least-favored shorts at just 3% and 4% respectively are G-7 currencies and real estate.
Searching for an after-the-fact reason: Slowing global growth makes it harder for the lowest-rated companies to pay their bills.
The high-yield market "rebounded spectacularly" between last Wednesday's panicky action and the start of this week, says Martin Fridson. If one were to annualize the 1.32% total return from this period, it would work out to a 160.9% gain.
Some more numbers: The average yield in the BAML high-yield index topped 6.4% last week, and has dropped back to 5.9%, bringing the spread to Treasurys down more than 50 bps to 4.5%.
Barron's Michael Aneiro continues to see value in a number of sizable closed-end funds still trading at around double-digit discounts to NAV, notably the BlakcRock Corporate High Yield Fund (HYT +1.2%), the AllianceBernstein Global High Income Fund (AWF +0.2%), and the Wells Fargo Advantage Income Opportunities Fund (EAD +0.7%).
Observers say sentiment changed in early August as institutional buyers stepped in hunting for bargains.
Example: Gulfport Energy (NASDAQ:GPOR) this week increased a $250M junk bond offering to $300M, giving it more cash to pay down its revolving credit line and for other general corporate purposes.
Also, a debut bond offering for XPO Logistics (NYSE:XPO) priced at par to yield 7.875%, at the issuer-friendly end of the original suggested 7.875%-8.125% range.
Many investors this year have expressed concerns that a pullback in junk bond prices could signal that market participants are rethinking their willingness to take risk, and the latest inflows could ease some of the concerns.
The average yield has jumped to 5.77% today from 4.85% on June 24, and Barron's Michael Aneiro notes the two most popular ETFs - JNK and HYG - briefly traded at up to 2% discounts to NAV last week, though these disappeared pretty quickly.
Not disappearing - and in fact growing - are discount to NAVs in some high-yield closed-end funds, with many now trading at double-digit discounts. Among some of the larger funds, writes Aneiro, the BlackRock Corporate High Yield Fund (HYT +1.7%) trades at a 10.2% discount to NAV and the AllianceBernstein Global High Income Fund (AWF +0.8%) sells for a 9.9% discount. The Western Asset High Income Fund II (HIX +1.1%) offers a 2.7% discount.
High-yield bond funds and ETFs totaled record outflows of $7.1B in the week ended Wednesday, Lipper reports, which shatters the previous record single-week outflow (set during the June 2013 bond-market swoon) of $4.6B.
It’s the fourth straight week of billion-dollar outflows, with an average outflow of $3.15B during the period; the full-year reading is now $5.9B in the red, with 43% of the withdrawal tied to ETFs.
Equity investors should care, Zero Hedge writes, because "bond managers are reaching desperately for protection in the CDS market - which is now at six-month wides - but in the end are forced to liquidate holdings as ETF flows dominate."
Investment-grade funds, on the other hand, saw inflows of roughly $4.2B, their 31st consecutive week of inflows.
Jim Reid's Deutshce notes high-yield has been struggling this month, but no signs of stress have emerged. Indeed, the high-yield issuance market remains open for business, with another $1.3B priced just yesterday.
In what may or may not end up being a bell-ringer of a deal, French cable company Numericable finalizes its record €7.9B junk bond offering, reportedly pricing the yield even lower than the initial whisper numbers. The size blows past the previous record - Sprint's $6.5B issuance last year.
This deal is spread over €2.25B of euro-denominated paper, $7.75B of dollar-denominated, and across three tranches of varying maturities.
RBS's Albert Gallo: “The new deal highlights strong growth in the European high-yield bond market, which has grown fivefold over the past five years to nearly €300B . . . Despite the strong supply, we expect European high-yield spreads to continue to tighten over the year, on recovering growth, easy ECB policy, stable fundamentals and low default rates.”
The proceeds are to be used to fund Altice's (Numericable's parent) purchase of Vivendi's telecoms business.
It may not be the peak, but it's a lot closer to the top than the bottom. Europe's lagging - compared to the U.S. - junk bond market is about to see a $11.6B sale by French cable company Numericable Group. It would be the largest junk-bond sale ever both in Europe and the States.
Numbericable is a subsidiary of Altice, which will be using the proceeds to fund its purchase of Vivendi's telecoms business SFR. The deal was originally supposed to consists of a €5.6B bank loan and a smaller offering, but the bank part has pulled back and the high-yield issuance grown.