Corporate Credit Highlights

• Citi Strategy on BBBs: “Investment-grade credit spreads have round-tripped from 80 basis points (bps) in October 2021, to wides of 160 bps in late 2022/early 2023, and returning to around 80 bps in October 2024. Higher-beta BBBs, not surprisingly, have outperformed in this time.” ¹
  
• •BAML Strategy 2025 investment-grade supply forecast: “We look for investment-grade supply to accelerate in 2025 to $1.69 trillion from the expected $1.49 trillion for 2024. Maturities will increase by $175 billion next year, although that is partially offset by significant pre-funding in 2024. Supply should also be higher due to more mergers and acquisitions and debt-funded share buybacks next year, as recession fears fade. Bank supply should again remain relatively steady. Putting it all together results in net investment-grade supply at around $700 billion—similar to 2024.” ²
  
• •Goldman Sachs’ head of investment-grade syndicate Jonny Fine notes the market is on pace this year to be the largest gross issuance year since 2020, making it the second biggest year on record. For next year, Fine is forecasting another 10% increase in 2025 above this year’s pace. If pricing remains attractive in the immediate aftermath of the U.S. presidential election and volatility remains subdued, Fine expects borrowers to tap the market early for their 2025 financing needs. In terms of private involvement in the investment-grade market, there is no substitute for the investment-grade syndicate process: “Public high-grade debt markets provide benefits in terms of liquidity, low transaction costs, standardization and price tension that direct lending doesn’t. It creates a value proposition for an issuer that private markets can’t compete with,” he said. ³

• J.P. Morgan Strategy’s high-yield vs. bank-loan yield comparison: “The yield for the J.P. Morgan Domestic High-Yield Index is now 86 bps below the Credit Suisse Leveraged Loan Index. The Leveraged Loan Index’s three-year effective yield has traded an average 102 bps above the high-yield index over the past 12 months. Note the average yield for the loan-only issuer base is 8.48%, which compares with 7.59% for the loan-issuer base with bonds outstanding. Notably, yields for the high-yield bond index (7.25%) are now 34 bps below yields for loan issuers with bonds outstanding (7.59%), which compares with an average gap of 54 bps below over the past 12 months. Over the past five years, the high-yield bond index has traded an average 15 bps below yields for loan issuers with bonds outstanding.” ⁴
  
• Barclays Strategy on size of the collateralized loan obligation (CLO) market: “The global CLO market stood at $1.35 trillion as at the end of September 2024, growing by a modest 6.7% year-over-year, but supported by the 20% growth in the U.S. middle-market CLO market.” ⁵
  
• Morgan Stanley Strategy on loan default rates: “Per our estimates, defaults for the trailing three months ticked up modestly for bank loans and stayed flat for high yield. Looking ahead, we expect loan defaults to decline modestly to 3.75% through mid-2025 as earnings rebound and rates come down. Significant dry powder of private credit is poised to take out risky loans in the syndicated market, helping to smooth out the default cycle. Distressed exchanges accounted for two-thirds of all defaults over the past year. While distressed exchanges remain the dominant type of default, they may not be sufficient to help companies survive a sustained period of high rates, leading to subsequent defaults. Year-to-date, a third of defaults were repeat offenders that had defaulted over the prior two years.” ⁶

• J.P. Morgan Strategy on size of high-yield asset class: “The U.S. high-yield bond universe has grown by $47 billion or 3.7% year-to-date to $1.33 trillion after contracting by $243 billion (or 17%) in 2022-23. The high-yield bond universe has expanded in 2024 following two consecutive years of contraction. ⁷
  
• •BAML Strategy comparing 2007 high-yield composition to today: “We note that current spreads are historically tight too and sit close to those witnessed at the 2021and 2007 tights. High yield has also seen significant compositional changes over time. In terms of credit rating, today’s market is in-line with 2021, but higher in quality than 2007. As with investment grade, there has been a lack of long-dated issuance in high-yield markets over the last couple of years, leading to a big drop in market duration. Finally, the current average price of high-yield cash markets sits at $96, below 2021 and 2007 levels. While it is important to consider compositional differences when comparing current spread levels with those from the past, the economic backdrop is also important. Take the current yield-focused buying environment, which is similar to that in 2005-07 when 10-year Treasury bond yields sat in the same context as today.” ⁸
  
• •BAML Strategy high-yield supply forecast for 2025: “We estimate gross high-yield supply will increase by 10% next year, reaching $340 billion. We are already seeing a pickup in M&A/LBO activity within the high-yield space, with more to come.” ⁹

Definitions
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• Bank loans (also known as floating-rate loans or leveraged loans) invest in bonds and other fixed-income securities that have variable, as opposed to fixed, interest rates.
• A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%.
• Beta is a statistical measure of the volatility of a stock versus the overall market.
• A bond is a fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.
• ‍A collateralized loan obligation (CLO) is a single security backed by a pool of loans, collected into a marketable instrument via process known as securitization.
• Credit rating or quality is when bond ratings are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard & Poor's, Moody's and Fitch. These firms evaluate a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from “AAA,” which is the highest grade, to “D,” which is the lowest grade.
• The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. senior-secure credit (leveraged-loan) market.
• A debt market trades loans that pay interest.
• A distressed exchange is proposed by a company to avoid a bankruptcy, improve liquidity, reduce debt, manage its maturity dates.
• The distress ratio is the percentage of corporate speculative-grade securities with market yields that are considered distressed.
• Duration measures how long it takes, in years, for an investor to be repaid a bond’s price through its total cash flows. Duration can also be used to measure how sensitive the price of a bond or fixed-income portfolio is to changes in interest rates.
• The effective yield is a financial metric that measures the interest rate (or coupon rate) return on a bond
• A fallen angel refers to investment grade bond that is given a reduced rating to “junk bond” due to adecline in the credit rating of the issuer.
• High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• ‍Investment grade refers to the quality of a company's credit. To be considered an investment-grade issue, the company must be rated at "BBB" or higher by Standard and Poor's or Moody’s.
• An issue or issuance is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.
• The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market.
• Leverage refers to using debt (borrowed funds) to amplify returns from an investment.
• A leveraged buyout (LBO) is a type of acquisition whereby the vast majority of the cost of buying a company is financed by borrowed funds.
• A leveraged loan is a type of loan made to borrowers who already have high levels of debt and/or a low credit rating. Lenders consider leveraged loans to have an above-average risk that the borrower will be unable to pay back the loan (also known as the risk of default).
• Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
• Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist.
• Mergers and acquisitions (M&A) refers to the consolidation of companies or their major business assets through financial transactions between companies.
• A middle market firm is a company with annual revenues that fall in the middle of the range for its industry.
• Private markets entail investments in assets not readily accessible or traded. Private market investments encompass a wide canvas, including private equity, venture capital, real estate, to other alternative investments.
• New issue concession is a negative difference in yield between a new bond and a comparable seasoned bond already trading in the secondary market. It is the investment yield given up by investors, and cost of borrowing saved by issuers.
• A rising star refers to a bond that is rated as a "junk bond" but could become investment grade because of improvements in the issuing company's credit quality.
• A secondary market isa market where investors purchase securities or assets from other investors, ratherthan from issuing companies themselves.
• A share buyback is a company's purchase of its outstanding stock shares. Buybacks reduce the number of shares available on the open market.
• ‍Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by Treasury bonds. Spread income refers to the additional income from this difference.
• Syndication is the process by which banks and investors join to make a loan to a company.
• A tight spread means that the difference between the asking price and the bid price is low.
• Trailing three months is a backward-looking indicator that refers to the most recent three-month period.
• U.S. Treasuries represent the Bloomberg US Treasury Index, which is made up of U.S. government bonds of various durations.
• Volatility is the range of price change a security experiences over a given period of time.