Corporate Credit Highlights

• Citi Strategy on first-quarter investment-grade fundamentals: “Our snapshot of first-quarter 2024 fundamentals suggests that U.S. investment-grade (IG) corporate-credit metrics at the index level have been resilient and remain at generally healthy levels. IG issuer leverage has flatlined (all U.S. IG non-financial issuers). While gross and net leverage remain low compared to the 2015 to present range, they are high relative to the years 2005-2014. Twelve-month EBITDA growth of 7% in Q1 is healthy and has accelerated from Q4 levels of 5%.” ¹
• Barclays Strategy on IG supply: “Relative to this time last year, issuance is up 19% year-over-year, as the primary market has been extremely active after a downswing as issuers held out for lower rates in 2023. When excluding 2020, year-to-date volumes are larger than previous years by a wide margin, over $70 billion or 10% higher than the next most active year. If one were simply to assume the seasonal average in the second half of 2024 based on first half volumes, 2024 year-end would sit at about $1.41 trillion in issuance, behind only the $1.69 trillion 2020 record.” ²
• DB Strategy mid-year IG outlook update: “While credit valuations have come a long way since last year, this backdrop should be good enough for spreads to continue grinding tighter in the next 3-6 months. IG credit should remain firmly supported by technicals. While supply has recently increased across the U.S. investment-grade market, this is being driven by increasing demand plus some desire to pre-fund ahead of the November U.S. election. Issuance is unlikely to become a major headwind with credit-negative M&A activity still below average. At the same time, the benign macro-backdrop should continue to attract fund inflows. We expect U.S. IG spreads to tighten from 90 basis points to 75 basis points.” ³

• BAML Strategy on rising stars and fallen angels: “Heavy rising-star activity was one of the notable tailwinds for high-yield (HY) cash last year with $112 billion in paper being upgraded to investment grade versus a more subdued $22 billion in debt downgraded to high yield. This year has seen a significantly more subdued pace of both rising-star and fallen-angel activity, with only $18 billion of the former and $5 billion of the latter.” Our analysis shows a continued moderate pace of rising star activity in 2024 (about $45 billion), while fallen angel volumes should remain benign (about $30 billion). ⁴
• Barclays Strategy on high-yield supply: “A wave of supply washed over the U.S. high-yield market in the first half of this year, with more than $160 billion of issuance so far in 2024 (through June 30, 2023). With higher yields and tighter financing conditions keeping companies out of the market for most of 2022 and 2023, issuers seem to be capitulating to the need for funding, and 2024 appears to be on track to be a more average year. As a result, the high-yield market has grown by about $30 billion in 2024, reversing its steady decline since 2021, which was punctuated by $40 billion leaving the index in fall of 2023 when Ford was upgraded to investment grade. Although the rising star/fallen angel dynamic is still biased toward the former, with $18 billion of rising stars year-to-date and $4 billion of fallen angels, the increase in supply has been more than enough to offset this. Very little of this wave of supply has been true new money entering the leveraged finance market, however. Year-to-date, the overwhelming majority of supply has been refinancings at over 80%, which is the highest fraction on record. Of the refinancing supply, about half was strictly bond for bond and did not contribute to the increase in size, but the other half was bond for loan, which did contribute.” ⁵
• JP Morgan on June default activity in high yield: “Including distressed exchanges, the par-weighted U.S. high-yield bond default rate decreased 23 basis points month-over-month to 1.79%, down 109 basis points since year-end. For context, the 25-year average high-yield default rate is 3.4%. Notably, the gap between leveraged loan and HY par-weighted default rates (131 basis points) is at a high since November 2014. Historically HY default rates have been 40 basis points wide of loan default rates, a 171-basis-point difference compared with today. Meanwhile, the HY bond and loan issuer-weighted default rates, including distressed exchanges, decreased by 45 basis points and 43 basis points month-over monthly to 3.59% and 4.09%, respectively. The difference between par and issuer-based default rates is the highest on record and underscores the impact distressed exchanges have had on default activity over the last few years. Excluding distressed exchanges, the par weighted high-yield bond and loan default rates are only 1.17% and 1.09%, respectively. … [W]e forecast high-yield bond default rate to end 2024 at 2%, and we expect them to rise in 2025 to 3%.” ⁶

• JPM Strategy on bank-loan market growth: “The institutional loan universe has grown by $7 billion or 0.4% year-to-date to $1.57 trillion after contracting by $84 billion (or 5%) from June 2022 through 2023 year-end.” ⁷
• LCD note on bank-loan leverage ratios: “Although the sample of buyouts remains relatively thin relative to long-term averages, deals that did get done carried higher leverage ratios this year, averaging 5.2x versus 4.9x in 2023. However, recent levels are about a half turn lower than the five years preceding the start of the rate hikes. In addition, highly aggressive leverage ratios remain very rare in the current market—less than 20% of leveraged buyouts (LBOs) tracked by LCD had initial debt/EBITDA ratio of 6x or higher, on par with 2023. In contrast, more than half of LBOs fell into this category in 2022 and 2021.” ⁸
• Barclays Strategy on bank-loan supply: “We increase our leveraged loan supply forecast for 2024 from $320-350 billion to $380-400 billion. Strength in secondary markets has allowed primary market activity to pick up meaningfully in the first half of 2024, with year-to-date supply (excluding repricings) of around $235 billion (annualized = about $475 billion).” 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%.
• 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 valuation adjustment is a change to the market value of derivative instruments to account for counterparty credit risk.
• ‍Default is the failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security.
• The default rate is the percentage of all outstanding loans that a lender has written off as unpaid after a prolonged period of missed payments.
• A distressed exchange is proposed by a company to avoid a bankruptcy, improve liquidity, reduce debt, manage its maturity dates (by exchanging debt securities that are coming due for debt securities with an extended maturity).
• A downswing is a sudden downward movement in something such as an economy, that had previously been improving.
• EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income.
• ‍Fallen angels refers to investment grade bonds that are given a reduced rating to “junk bond” due to a decline 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.
• An institutional loan is made by institutional investors (such as CLOs, debt funds, pension funds, and insurance companies) instead of by banks.
• ‍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.
• A leveraged buyout (LBO) is a type of acquisition in the business world 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).
• The term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount.
• A macro-backdrop is typically used to refer to the overall economic environment in which a business or individual operates.
• The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major business assets through financial transactions between companies. A company may purchase and absorb another company outright, merge with it to create a new company, acquire some or all of its major assets, make a tender offer for its stock, or stage a hostile takeover.
• The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option.
• Par value weighted average is a very poor metric of measuring (short term) portfolio risk and is useful for analyzing long term default probabilities in a large universe of long-term bonds.
• A refinance refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.
• 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.
• Spread refers to the difference or gap between two prices, rates, or yields.
• Syndicated loan is a form of loan business in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and with different duties and sign the same loan agreement.
• Yield is the income returned on an investment, such as the interest received from holding a security.
• Yield to worst (YTW) is a measure of the lowest possible yield that can be received on a bond with an early retirement provision.