Distressed Debt

The U.S. and European high yield markets generated another quarter of strong performance, gaining 5.2% in the United States and 2.6% in Europe for the three-month period ended September 30, 2020. With these results, year-to-date performance improved to -1.3% in the U.S. and to -3.3% in euro-currency. Notably, U.S. high yield has recovered 24% since the 2020 lows on March 23rd.

High yield spreads continued to tighten in the third quarter. In the United States, spreads declined approximately 120 basis points from June to September, ending at 603 basis points, while spreads in Europe trended similarly, also compressing approximately 120 basis points to close the quarter at 488 basis points. In both markets, lower-rated CCCs outperformed higher-rated bonds during the quarter, returning 7.5% in the U.S. and 3.4% in Europe, with sectors such as retail, automotive, consumer products, and energy leading the gains in the U.S. market.

The U.S. high yield default rate was 6.4% at the end of September. Though volume was significantly lower than the previous quarter’s $80 billion, 26 companies defaulted or completed a distressed exchange in the third quarter, with over $19 billion of loans and bonds affected. The year-to-date activity through September ranks as the second highest annual default level on record, trailing only 2009. Energy, retail, and consumer products accounted for more than 50% of the 92 companies that had defaulted through September. In Europe, 14 issuers and €7 billion of debt were affected during the first nine months of the year, resulting in high yield default rates increasing to 2.9% at quarter-end.

The second and third quarters of 2020 were the two largest on record for U.S. high yield new issuance, with July through September volume of $132 billion just behind the $146 billion of gross new supply in April through June. Refinancing again represented the majority of activity—accounting for approximately 80% of volume—with BB- or higher-rated issuers driving greater than 50% of new issuance, which was diversified across sectors. In Europe, third quarter issuance of €27 billion was a record, and year-to-date new supply of €70 billion is currently second to only 2014.

Following a record $44 billion of net inflows in the second quarter of 2020, U.S. high yield funds continued to draw capital from investors, with a reported $11 billion of new monies received in the third quarter. Year-to-date through September, U.S. high yield funds experienced net inflows of approximately $39 billion, well surpassing the $19 billion of inflows for all of 2019. In Europe, high yield funds took in €770 million in July through September, though the asset class experienced net outflows of approximately €2 billion for the first nine months of the year.

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

Though index prices and spreads have retraced, ticker dispersion, in particular, remains elevated.

Distressed ratios (percentage of par trading >1,000 basis points) have returned to sub-10% levels.

The second and third quarters of 2020 represented record volumes of high yield issuance.

Year-to-date defaults through September already rank as the second-highest annual level on record.

High yield fund flows spiked after the first quarter, as investors returned to higher-risk spread products.

After substantial purchases at the program’s onset, the Federal Reserve’s secondary market activity has leveled off.

Angelo Gordon’s Capital Markets Perspectives

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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