Investor Appetite for High-Yield Bonds Grows Amid Tightening Credit Spreads

The high-yield bond market is witnessing a surge in investor demand, fueled by a robust U.S. economy and increasing confidence in risk assets.¹ Despite this appetite, the supply of lower-rated bonds, particularly those rated triple-C, has not kept pace. ¹ This dynamic has led to historically tight credit spreads and a shrinking volume of distressed debt, signaling a favorable environment for marginal borrowers to access capital at attractive terms. ¹

Tightening Credit Spreads and Investor Confidence

• Record Low Spreads: U.S. corporate credit spreads have narrowed to multi-year lows, with the spread on the ICE BofA U.S. High Yield Index dipping to 261 basis points (bps) on November 13.¹ This level is a low not seen since June 2007 and significantly below the early August peak of 393 bps.¹

• Economic Optimism: Investors are showing growing confidence in the U.S. economy, partly due to a clear outcome in the presidential election and anticipated tax cuts under the new administration.³

• Demand for Risk Assets: High-yield bond funds have seen substantial inflows, with investors extending down the ratings scale to find valued yield.¹ The volume of distressed debt has also shrunk dramatically, accounting for just 3.99% of the Morningstar U.S. High-Yield Bond Index as of October 1.¹

Supply-Demand Imbalance in Triple-C Rated Bonds

• Limited Supply: Despite the favorable market conditions, the issuance of triple-C rated bonds remains low. Year-to-date issuance stands at almost $11 billion, a significant increase from $2.4 billion in 2023 but still below historical averages.¹

• Investor Selectivity: Investors are able to pick and choose deals that best fit their parameters due to steady inflows and new-issue volumes.¹ This selectivity has resulted in many single- and double-B deals pricing at the money and making little headway in the secondary market. SOURCE

• Performance of Lower-Rated Bonds: Triple-C rated bonds have outperformed the broader index by approximately 50 bps, returning around 10.1% in the third quarter, compared to 4.6% and 4.3% for single-B and double-B rated bonds, respectively.¹

Notable High-Yield Issuances

Shearer's Foods

• Dividend Deal: In September, Shearer's Foods issued a triple-C rated dividend deal that priced through guidance with a small upsize due to a 9.625% yield.¹

• Market Reception: The notes due 2032 are trading above 105, indicating strong investor demand for higher-yielding assets.¹

Garda World Security

• New Offering: On October 29, Garda World Security issued $500 million of 8.375% eight-year senior notes rated CCC+/Caa2/B-.¹

• Investor Response: The deal cleared at the tight end of guidance and is trading at 101.75 to yield about 7.94%, reflecting investors' willingness to accept lower yields for marginal credits.¹

Chobani

• PIK Toggle Notes: Chobani issued $650 million of CCC+/Caa1 rated 8.75% senior pay-in-kind (PIK) toggle notes due October 2029.¹

• Upsized Offering: The deal was upsized by $150 million and included special call rights in the event of an IPO.¹

• Market Performance: The notes hit top trades at 105.75 after pricing through talk at 99, demonstrating strong investor appetite for structured deals.¹

Market Analysts' Perspectives

• Brian Gelfand, TCW: Emphasizes caution, noting that while markets are accommodating, such deals may "sow the seeds for future investment opportunities into volatility in the secondary market."¹

• Sinjin Bowron, Beach Point Capital Management: Observes that there is "significant demand driven by the technical tailwinds to the market," especially for deals with the right company and pricing.¹

• Steven Oh, PineBridge Investments: Highlights a "level of complacency" in the market, suggesting that prices may not fully account for potential economic slowdowns.²

Global Credit Market Rally Post-Election

• Trump's Election Impact: Credit markets rallied globally following Donald Trump's U.S. presidential election victory, with investors anticipating tax cuts and pro-business policies.³

• CDX North American High Yield Index: The index, which rises as perceived credit risk declines, reached its highest level since January 2022.³

• Investor Sentiment: Scott Kimball of Loop Capital Asset Management notes that the permanence of Trump’s corporate tax policy is positive for revenues and cash flows, which is "king for credit investors."³

Risks and Considerations

• Economic Uncertainties: Some market participants express concern that corporate debt investors may be overly optimistic given potential economic risks ahead.²

• Potential Recession: While the probability of a meaningful recession is considered low, there is caution that prices may not reflect the possibility of a sharper economic slowdown.²

• Trade Policies: The potential for increased tariffs and trade wars under the new administration could impact sectors sensitive to global trade, such as technology.³

Conclusion

The high-yield bond market is experiencing a period of strong investor demand and tightening credit spreads, signaling confidence in the U.S. economy and risk assets. However, the limited supply of lower-rated bonds and potential economic headwinds warrant cautious optimism. Market participants are advised to remain selective and consider whether they are being adequately compensated for the risks associated with marginal credits and complex deal structures.

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_{1. PitchBook, Slim Triple-C Bond Issuance Volume Belies Demand for Marginal Credits and Structures, 2024.}

_{2. Reuters, U.S. Credit Spreads Narrow to New Lows as Economy Looks Up, 2024.}

_{3. Financial Post, Credit Market Risk Falls Sharply as Trump Closes in on Win, 2024.}

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