Distressed Debt

The U.S. and European high yield markets generated another quarter of strong performance, advancing 6.6% in the U.S. and 5.6% in Europe for the three-month period ended December 31, 2020, with gains driven by the outcome of the U.S. presidential election and optimism around the development of multiple COVID-19 vaccines. With these results, 2020 full-year performance rose to 5.2% in the U.S. and to 2.1% in euro-currency. In the U.S., high yield bond yields decreased to an all-time low of 4.7% at year-end.

Remarkably, in the U.S., high yield spreads closed 2020 only 20 basis points higher than at the start of the year. However, spread levels were volatile throughout the year, widening more than 700 basis points over 23 trading days to peak at 1,139 basis points in late March and then tightening steadily thereafter to end December at 444 basis points. In Europe, spreads followed a similar path, also ending 2020 nearly unchanged from levels a year earlier. In both regions, lower-rated bonds outperformed higher-rated cohorts during the fourth quarter and for the full year, with CCCs returning 9.3% in the U.S. and 7.2% in Europe in 2020.

After beginning the year at 2.6%, the U.S. high yield default rate (including distressed exchanges) increased to 6.8% at the end of December, nearly double the 3.5% long-term annual average. The more than $140 billion of defaulted high yield debt in 2020 represented the second highest annual total on record, trailing only the $205 billion of defaults in 2009. Energy, retail, and consumer products accounted for more than 50% of the 109 companies that defaulted during the year. Notably, excluding energy, the U.S. high yield default rate lowered to 4.5% at year-end. In Europe, default activity was relatively muted throughout the year, with 17 issuers defaulting on approximately €10 billion of euro-currency bonds, resulting in a modest 3.3% default rate for 2020.

Following the record volume of the second and third quarters, U.S. high yield issuance reached $100 billion in the fourth quarter and drove total new supply to $450 billion for 2020. Refinancing represented the majority of activity—accounting for approximately two-thirds of full-year volume—as borrowers took advantage of strong investor demand and lower rates, while general corporate purposes represented an estimated 25% of new supply. Primary issuance in European high yield topped €103 billion for the year, a record.

More than $8 billion of new capital flowed into U.S. high yield funds in the fourth quarter, raising the full-year 2020 total to $44 billion and well surpassing the $19 billion of net inflows in 2019. Much of the increase occurred in the second quarter, as investors sought to benefit from recovering markets. Conversely, European high yield fund flows declined modestly on the year, ending approximately €2 billion lower for the twelve-month period.

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

U.S. high yield bond yields closed 2020 at an all-time low.

New supply totaled $450 billion in 2020, driven by record volume in Q2 and Q3.

Lower-rated bonds outperformed in both the United States and Europe.

Defaults rose significantly throughout 2020, led by the energy, retail, and consumer products sectors.

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