High Yield Market Update

High Yield Update

Written By: Kevin Price

People like to use the phrase terrible-2s, because toddlers at this age can be a handful.  As I’m writing this with my screaming kid in the background, I can attest that 3s are not much better.  My three-year-old will cry until we threaten to punish her or just give in and give her what she wants.  Dad tends to do the latter, which seems to work… temporarily.

Similarly, the High Yield markets continue going crazy and it seems the only thing to do is give them what they want.  January has seen a 71% increase in High Yield issuances from this same time-period last year.  As the issuers continue to scream for better terms, investors have continued to break down and give in.  On the primary market we are seeing names such as CrowdStrike (Ba3 rated) printing 8-year NC3 money at 3.000% or T-Mobile (Ba3 rated) printing 8-year NC3 at 2.625%.  So much for High Yield delivering high yield!  Just last year we were printing money for very strong split rated Ba1/BBB- names in the high 3s (Centene).  On the secondary market, we are seeing the BB High Yield index at 3.37% YTW versus 3.56% YTW at the start of 2020.  With companies being more levered today compared to last year, uncertainty around COVID-19 and deteriorating credit health, the logical reasoning for these markets is that investors need to put money to work and they are taking what they can get.

While the easy way out for investors is to just give into the screaming and pay whatever the companies are asking, there is the other option of putting them back in time-out.  Some of the companies that have fallen out of favor, yet still have similar credit ratings as the names mentioned above, are seeing this.  For example, Mercer International (Ba3 rated) printed 8-year NC3 money at 5.125% (significant delta between this and what CrowdStrike or T-Mobile are printing).  While credit ratings are certainly NOT the only metric to look at when comparing issuances, deltas such as these should be investigated further.  The number of Ba3 companies printing 5.125% paper are few and far between.  

While larger managers have much capital to deploy, they need to give companies what they are asking for or else they will be sitting on hordes of cash.  Our smaller Funds are able to navigate this problem.  We have the ability to be picky and choosy as to where we place money.  This enables us the opportunity to put companies in the so-called time-out and demand the higher yields they are named for.