A key fundamental dynamic that could help extend the current credit cycle in the high yield and leveraged loan market is the amount of refinancing that has occurred over the last five years. This refinancing wave has not only greatly reduced interest burdens, by virtue of the low interest rate environment, but it has also pushed out the market’s next material set of maturities.
About $350 billion of high yield bonds and leveraged loans come due between 2015 and 2017. This represents a relatively modest percentage of the approximate $2.5 trillion leveraged credit market. Another way to put this into context, the cumulative $350 billion due over the next three years compares to about $700 billion in annual high yield and loan new issuance every year since 2012.
Key takeaway: Unless capital market conditions worsen for the leveraged credit markets, default rates should remain below historical levels over the next few years given the lack of material maturities. Defaults, to the extent they accelerate in the medium term, are likely to be driven by sector-specific factors (e.g., rapidly declining energy prices) rather than broad-based market factors.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.