Distressed Debt

The U.S. and European high yield markets generated strong gains in the second quarter amid increased investor optimism about a V-shaped recovery and market support from governments and central banks, notably the Federal Reserve’s corporate bond purchasing programs. U.S. high yield rose 9.5% in April through June, producing the largest quarterly gain since the third quarter of 2009, while euro-currency high yield rebounded 12.2% in the second quarter. With these strong results, year-to-date performance retraced to -6.2% in the U.S. and -5.8% in euro-currency.

In the U.S., spreads tightened 227 basis points, from 949 basis points in March to 722 basis points at the end of June. Spreads in Europe trended similarly, compressing 290 basis points to close the quarter at 611 basis points. While higher-rated bond segments outperformed early in the quarter in reaction to government asset purchase programs, CCCs led the quarter with a 11.6% return, though BB-rated bonds still had the smallest year-to-date losses at -3.3%. Energy, gaming & leisure, and housing were the top performing sectors in the quarter.

At the end of June, the U.S. high yield default rate reached a 10-year high of 6.6%. During the quarter, 47 companies defaulted, filed for bankruptcy, or completed a distressed exchange; the $82 billion of bonds affected surpassed the prior record of the first quarter of 2009, and the six-month total already ranks as the second highest annual default amount on record behind 2009. Energy, retail, and consumer were the most impacted sectors. In Europe, high yield default rates remained muted during the quarter, ending at 1.5% as of June.

U.S. high yield new issuance set records in the second quarter, with gross volume of $146 billion eclipsing the prior high of $121 billion in the second quarter of 2014. Of note, June was the most active month of all time, with $62 billion of new issues, and several of the sectors most impacted by the effects of COVID-19 – such as casinos, energy, and automotive – were among the most active in raising capital through the primary market. Conversely, in Europe, new high yield supply was slow to recover in the second quarter, with primary issuance limited to €20 billion.

After nearly $12 billion of outflows in March alone, U.S. high yield mutual funds reported record inflows of $47 billion in the second quarter of 2020. April, May, and June represented three of the four highest monthly inflows of all time. In contrast, U.S. loan funds experienced their 21st consecutive month of outflows in June, bringing the total capital redeemed to approximately $80 billion over this period. European high yield funds took in approximately €5 billion in April through June, partially offsetting the nearly €8 billion lost in the first quarter.

For more information on Distressed Debt, visit angelogordon.com/strategies/credit/distressed-debt/

Less of the high yield market is trading at distressed levels since spiking in March.

Higher quality bonds have outperformed lower quality bonds in the U.S., but returns by rating are less differentiated in Europe.

Spread dispersion in the lower-quality CCC segment continues to increase.

Downgrades from investment grade to high yield have grown significantly in 2020.

U.S. high yield inflows hit a record $47 billion in Q2 2020 after $17 billion of outflows in Q1 2020.

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AG Capital Markets Perspectives (“CMP”) provides our portfolio managers’ views on the credit, real estate, and private equity markets. To access this quarter’s CMP and past quarterly reports, please complete the form below.

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