Weekly Market Summary

Extra Credit^*

• For investment-grade credit, fundamentals still look strong with the one blemish being a decline in interest coverage. On the flip side, cash balances have improved as companies have become more conservative with share repurchases and capital expenditures. 
• While interest coverage has broadly fallen for non-financial investment-grade companies (declining from 15.7 in 2Q22 to 12.6 in 2Q23), it still remains above pre-COVID levels. Most of this decline can be attributed to rising interest costs, but the effects of the higher rate environment have not been felt on the same level across sectors. Interest coverage will likely become more of a concern in as we enter a potentially higher-for-longer rate environment.
• After reaching lows in net leverage and highs in interest coverage in 4Q22, the high-yield market has posted two straight quarters of increasing leverage and declining coverage. The decline in interest coverage was more pronounced, falling 0.3x quarter-over-quarter, while leverage was comparatively flat, increasing 0.1x quarter-over-quarter. Fundamentals are still strong, but it appears that 4Q22 could have been the peak and fundamentals may continue to deteriorate. BBs saw the biggest decrease in interest coverage, as a net $44 billion of fundamentally stronger rising stars exited the index in 2Q23. Consumer cyclicals was the sector with the largest     deterioration in both leverage and coverage. 
• On the asset-back securities (ABS) front, following the completion of Frontier's landmark $1.59 billion ABS transaction, the fiber ABS sector has been drawing significant attention as a potential source of funding for large corporate issuers in the broadband internet sector. Since the start of the year, the sector has more than doubled in size from $3.1 billion to $7.2 billion and is expected to continue to grow as other companies engaging in FTTP (fiber-to-the-premises) build programs and enterprise dark fiber/lit services evaluate ABS financing opportunities over time. 
• The trailing 12-month default rates for bank loans and high-yield bonds, excluding distressed exchanges, finished the month at 2.24% and 1.29%, respectively, down from 2.33% and 1.18% from July. The long-term historical default rate for loans and high-yield bonds is 3.1% and 3.2%, respectively.

Sources: Bloomberg and JP Morgan as of 9/19/23.