Distressed Debt

The U.S. and European high yield markets delivered modest positive performance in the third quarter, with gains of 1.0% in the United States and 0.9% in Europe for the three-month period ended September 30, 2021. With these results, U.S. high yield returns increased to 5.2% through the first three quarters of the year, while returns for euro-currency high yield rose to 4.6% year-to-date.

High yield bond spreads generally remained steady quarter-over-quarter, increasing 15 basis points in the U.S. to end September at 385 basis points, while widening 3 basis points in Europe to close the third quarter at 355 basis points. In July, spreads touched a multi-year low of 369 basis points, and yields reached a record-low 4.22%. There was minimal dispersion among ratings during the quarter, so lower-quality maintained its year-to-date outperformance compared to higher-rated segments; in the first three quarters of 2021, CCC-rated bonds returned 8.4% in the U.S. and 7.8% in Europe, while BBs returned 3.5% in the U.S. and 2.1% in Europe. Sector returns in the third quarter were generally banded, with no material overperformance or underperformance across industries.

There were $1.1 billion of defaults and distressed exchange transactions in the third quarter—the lowest quarterly volume since the fourth quarter of 2013—bringing the year-to-date total to 16 companies that defaulted on a combined $9.7 billion of debt. The U.S. high yield default rate declined to 0.99%, the lowest level since March 2014. In Europe, there were no defaults in the high yield bond market in the third quarter; this caused the trailing 12-month default rate to decline to 1.5% as of the end of September.

U.S. high yield added over $108 billion of new pricings in the third quarter, the seventh-highest quarterly level. Of note, five of the seven largest quarterly new issue volumes have occurred since the second quarter of last year. While acquisition financing experienced an uptick in activity, refinancing again represented the majority of primary volume during the quarter and was the largest use of proceeds for the 17th consecutive month. In Europe, high yield primary issuance decreased to €26 billion in the third quarter, down from the record €48 billion set in the previous quarter.

After two quarters of outflows, U.S. high yield funds recorded $1.9 billion of inflows in the third quarter, bringing year-to-date withdrawals to approximately $12 billion, as compared to $35 billion of inflows in the first nine months of 2020. Similarly in the European market, inflows increased, pushing the year-to-date flows back into positive territory at €650 million through September.

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

80% of the U.S. high yield market trades inside 5%.

Maturities are minimal in the near term but begin to rise mid-decade.

Annualized default volume is at a decade low.

Five of the seven largest quarters for new issuance have occurred since March 2020.

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