Distressed Debt

The U.S. and European high yield markets both delivered positive performance in the second quarter, with gains of 2.8% in the United States and 1.6% in Europe for the three-month period ended June 30, 2021. With these results, U.S. high yield returns increased to 4.2% through the first half of the year, while returns for euro-currency high yield rose to 3.6% year-to-date.

In the U.S., high yield bond spreads tightened 36 basis points during the quarter to end at 370 basis points—the lowest level since October 2018—while yields decreased to a record low 4.3% in June. Spreads in Europe trended similarly, compressing 24 basis points over the three-month period to close the second quarter at 352 basis points. Lower-quality again outperformed in the second quarter and extended its year-to-date performance gap versus higher-rated segments; in the first half of 2021, CCC-rated bonds returned 7.3% in the U.S. and 7.8% in Europe, while BBs returned 2.4% in both the U.S. and Europe. Consistent with the risk-on theme, energy, transportation, and gaming & leisure were the top performing sectors in U.S. through the first half.

There were $5 billion of defaults and distressed exchange transactions in the second quarter, bringing the year-to-date total to 13 companies that defaulted on a combined $8.5 billion of debt. This was the lightest first-half volume since 2011 and compared to more than $100 billion of defaults and distressed exchanges during the first six months of last year. As the heavy second quarter 2020 activity rolled out of the 12-month calculation, the trailing one-year U.S. high yield default rate as of June declined sharply to 1.9% and less than 1.0% excluding energy. In Europe, the trailing 12-month default rate declined to 2.9% at the end of June.

Borrowers continued to take advantage of strong investor demand for new issuance, with U.S. high yield adding over $140 billion of new pricings in the second quarter—the third-highest quarterly level—following a record $159 billion of primary supply in the first quarter of 2021. Of note, four of the five largest quarterly new issue volumes have occurred since the second quarter of last year. In Europe, high yield primary issuance of €48 billion in the second quarter of 2021 bested the quarterly record of €45 billion set in the previous quarter.

U.S. high yield funds recorded over $3 billion of outflows in the second quarter, increasing year-to-date withdrawals to $14 billion through June. This trend was driven by negative flows in five of the first six months of 2021, as investors continue to shift away from fixed-rate instruments. Flows for European high yield retail funds remained unchanged during the second quarter, resulting in a decline of €1.4 billion year-to-date through June.

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

Over 80% of U.S. high yield bonds yield less than 5%.

Default rates have declined sharply from last year’s levels.

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