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Weekly Market Summary
Sep 16 to Sep 20, 2024
Extra Credit*
- BBB- issuers continued to deleverage, contributing to lower BBB cash balances. BBB- leverage fell 0.2x year-over-year, as worse-quality issuers focused on preserving their credit standing within the investment-grade universe. At the same time, cash balances for BBBs fell the most among all rating buckets year-over-year, with some used for bond buybacks/deleveraging purposes.
- For the second consecutive quarter, BBB- issuers have demonstrated a commitment to rating preservation by focusing on bringing down leverage, creating a more fundamentally sound picture for issuers most in danger of becoming fallen angels. The A2 notch posted a significant increase in net leverage year-over-year as several large issuers engaged in M&A activity that drove this metric higher.
- Digging into ratings, BBs were primarily behind the increase in net leverage for high-yield bonds in the second quarter. BB issuer net leverage increased to 4.5x from 4.3x, while single-B issuer net leverage remained flat quarter-over-quarter at 5.5x. Meanwhile, the deterioration in interest coverage was much more uniform. Both BB and single-B issuers had their interest coverage decline 0.1x: BBs decreased to 5.0x from 5.1x, and single-B issuers decreased interest coverage to 3.9x from 4.0x.
- Looking at the drivers of these two metrics—leverage and interest coverage—might shed some light on issuer behavior. In 2Q24, the average high-yield issuer increased debt on its balance sheet by 3%, increased cash holdings by over 4%, and had EBITDA increase just under 2% quarter-over-quarter. The increase in net leverage was more about adding debt rather than deterioration in earnings. Interestingly, this is the opposite of what happened in 1Q24, when issuers reduced debt, leading to decreased leverage despite a quarter-over-quarter decline in EBITDA. The addition of debt in 2Q24 also meant a nearly 5% increase in interest expense, which was the chief driver of the decrease in interest coverage.
- Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month both at 1.18% for high-yield bonds and 0.98% for bank loans, down and up from 1.40% and 1.16% in the month prior. This is also well below the long-term historical default rate of 3% for loans and 3.4% for high yield, and the historical post-GFC default rates of 2.3% and 2.5%, respectively.
Sources: Bloomberg and JP Morgan as of 9/16/24.
Previous reports
*Source: Morningstar®, Bloomberg, Credit Suisse. OAS is Options Adjusted Spread. 4-year discount margin is used for spread for bank loans. Yield quoted is yield-to-worst or equivalent calculation. YTD Low / High for yields are based on end of week and not intraday movements. Indexes and sub-indexes: Investment-grade corporates represented by Bloomberg US Corporate Bond Index. High-yield bonds represented by Bloomberg US Corporate High Yield Index. Bank loans represented by Credit Suisse Leverage Loan Index. The red and green arrows depicted under Yields, Option Adjusted Spreads, and Prices indicate a higher or lower value from the previous week.
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