Notes from the Desk: Credit Team Update
The market continued to gain momentum in May as investors focused on further stimulus and easing restrictions, reinforcing optimism that global activity has bottomed and will recover. The May US jobs report stoked expectations for a strong recovery, reporting that unemployment fell to 13.3% from 14.7% – contrary to what many economists had forecast. However, markets are clearly still highly sensitive to COVID-19. Following what had been a stunning weeks-long rally, fears of a second wave in the US led to the return of volatility on June 10, with the S&P 500 experiencing its largest single-day pull back since March.
Brent Crude prices rallied in early June to levels not seen since March 6 on the news that the Organization of the Petroleum Exporting Countries (OPEC) would reach an agreement to extend production cuts through July. Prices have subsequently retreated with broader markets, however.
The yield on the 10-Year US Treasury widened 0.07% to 0.896%¹, its highest level since March 19. Issuance of senior secured debt in April ($16.5 billion) and May ($14.4 billion) were the second and fourth largest on record as companies tap this debt capacity for rescue financing across COVID-19 affected sectors. The new-issue high-yield market also continues to be very active, as last week’s new issue volume totaled $14.0 billion. High-yield new-issue volume has climbed to $170.9 billion ($72.5 billion net of refinancing) year-to-date¹, which is up 49% (and 86%) year-over-year.
Eight companies filed for bankruptcy or missed an interest payment in May, affecting $11.2 billion in bonds and loans. This followed a record 20 defaults or distressed exchanges in April which totaled $36.0 billion. Among the largest filings over the past month were Hertz Global ($24.4 billion in liabilities), Latam Airlines ($18.0 billion in liabilities), Intelast ($16.8 billion in liabilities), and JC Penney ($8.0 billion in liabilities). Mergers and acquisitions (M&A) activity has been muted as corporations cautiously navigate the post-COVID-19 market, but bankers and investors believe that activity will increase later in 2020.
We have been busy through earnings season as companies provided investors with much needed information around liquidity, cash flow, and steps taken during the pandemic. This led to several large positive moves in the energy and aerospace part of the portfolio. We have also looked at numerous high-profile financings by companies such as Boeing, which have tapped the new issue markets in order to increase liquidity. Another large area of recent interest has been the convertible bond market. Although new issuance in that market is at decade highs, we focused our attention in March and April on busted or out-of-the-money bonds which generally moved higher with the strong equity rally.
¹ As of June 5, 2020.
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