Corporate Credit Highlights

• BAML Strategy on fourth-quarter (Q4) of 2024 investment-grade (IG) earnings: “Most of the four quarter earnings season are now behind us. By now, 88% of U.S. IG public companies have reported, accounting for 91% of the aggregate expected 4Q earnings. Note that we exclude Boeing from all results below to make the numbers more representative of the typical IG issuer. These almost-final results show that the 4Q earnings season was very strong both in terms of growth and surprise. Earnings have come in 7.7% ahead of expectations at the start of the season, significantly above the 3.7% pre-COVID average surprise. Revenues were 0.6% above expectations, slightly below the 0.7% pre-COVID average, suggesting stronger than expected margins. For our “core core” IG issuers (excluding finance, energy and the Magnificent 7), we are tracking 14.4% year-over-year earnings growth and earnings surprise of 7.5%.” ¹
• JP Morgan Strategy on investment-grade (IG) supply year-to-date (YTD): “On the supply front, with February nearly over, YTD supply totals about $335 billion, down by $54 billion (-14%) compared with the $389 billion issued in Jan. and Feb. 2024. Our full-year forecast is for a similar $1.5 trillion of issuance this year as last year, so it is interesting that we are running behind this pace so far. This is primarily due to reduced mergers and acquisitions (M&A) issuance, which totals $19 billion YTD compared to $60 billion in YTD in 2024. While there is optimism for increased M&A activity under the new Trump administration, actual announcements have been limited. In contrast, global systemically important bank (GSIB) issuance is ahead of last year’s pace, with $45 billion issued YTD (vs. $28 billion in YTD in 2024).” ²

• JP Morgan on February default activity: “Default/liability management exercise (LME) activity was light in February, registering the lowest default/distressed exchange volume during a calendar month since December 2022. Specifically, there were no payment defaults and three distressed transactions totaling $1.6 billion in bonds ($150 million) and loans ($1.5 billion). For context, there has been an average of $6.7 billion default/LME volume per month since the beginning of 2023. Through the first two months of the year, three companies have defaulted totaling $3.2 billion in bonds ($1.2 billion) and loans ($2.0 billion) and five companies have completed a distressed exchange totaling $2.8 billion in bonds ($597 million) and loans ($2.2 billion).And the year-to-date combined total of eight defaults/LMEs totaling $6.0 billion compares with 19 defaults/LMEs totaling $15.9 billion over the first two months of 2024. Including distressed exchanges, the par-weighted U.S. high-yield bond and loan default rates decreased 28 basis points and 60 basis points month-over month to 1.25% and 3.90%, respectively, which are down 130 basis points and up 55 basis points, respectively, from a year ago. This is a two-and-a-half-year low for high-yield default rates, and this was the first month-over-month decline in loan default rates since June.” ³
• JPM Strategy on new-issue loan performance: “Represented by a rolling 35-day portfolio of newly issued loans, new issues are outperforming by only 4 basis points year-to-date after outperforming by 117 basis points in 2024 (10.5% versus 9.3%). Notably a new-issue portfolio of loans has posted an average annual return of 4.5% over a 17-year period (2007-2024, ex-2009), which is outperforming a secondary portfolio’s average annual gain of 3.4% by 113 basis points. Furthermore, the new-issue portfolio of loans has underperformed secondary only once over the past 12 years (during 2020’s pandemic).” ⁴
• LCD note on bank-loan fund AUM growth: “Leveraged-loan fund assets under management grew by $6.14 billion in January, the second strongest monthly rise in three years, according to Morningstar data. ETFs have been driving the recent growth, expanding by 14% ($3.5 billion) in January alone. The trend appears to be continuing in February, with the streak of inflows to loan funds extending to eight weeks through Feb. 19, led by ETFs, according to funds that report data on a weekly basis.” ⁵‍

• JP Morgan Strategy on new-issue outperformance over existing bonds: “An investor can significantly enhance portfolio performance by increasing participation in new issues. Represented by a rolling 35-day portfolio of newly issued bonds, high-yield (HY) new issues are outperforming secondary by 17 basis points year-to-date (2.22% vs 2.05%) compared to the narrowest outperformance in 2024 (23 basis points) since 2009. Notably, a new-issue portfolio of HY bonds has posted an average annual return of 14.4% since 2000, which is outperforming a secondary portfolio’s average annual gain of 7.6% by 681 basis points. Note that new issues managed to outperform even during the markets down years in 2018 (new-issues 2.3% vs -2.0% secondary), 2015 (13.3% vs -4.1%), and 2022 (-4.0% vs -10.6%). Furthermore, the new-issue portfolio of bonds has outperformed in every single calendar year since 2009.” ⁶
• Goldman Sachs Strategy on secured high-yield (HY) issuance: “2022 and 2023 saw a notable increase in HY-secured issuance, a trend that reflected issuers’ focus on reducing marginal funding costs. This trend reached a peak in early 2024 when nearly 60% of the primary market supply over the previous six months had been secured. We warned at the time that the trend was not sustainable and that eventually issuers would run out of collateral to pledge for issuing secured debt. … [F]or the last year the share of secured issuance in the USD HY market has been trending back down, a trend we think will persist. This normalization has coincided with a dramatic collapse in the gap between secondary market yields and weighted-average coupons that has made it more palatable to issue unsecured debt again.” ⁷
• BAML Strategy on high-yield (HY) duration: “A record short duration of the HY index is one of the reasons behind its low volatility as any given move in rates/yields produces smaller price impact. And it is not just HY—the investment-grade (IG) index is now at 6.8-year duration (a 12-year low). We view this as an important structural factor, supporting credit spreads at levels tighter than normal, given that duration is not likely to change anytime soon, even if the reasons that drove it shorter reverse. This process will take years to play out—peak duration was registered 28 years ago in HY and five years ago in IG. … So what were the reasons driving duration short to begin with? We see five key factors playing a role: Issuers deferring ReFies to preserve old coupons: at its most basic instinct, most issuers choose to delay the coupon resets as long as possible. This factor is least reliable going forward, since sooner or later old coupons will be gone. Issuers choose to place shorter bonds: 40% of HY new issues are coming in at five years or less last two years (double the average of the previous decade). Simply put, most HY issuers don't like fixing new elevated coupons for longer. Investor preference for shorter duration: it is also likely that the shortening in HY new issues is a function of proliferation of short-duration investment mandates. Where there is demand, the market will create supply. Bond math: higher rates shorten duration calculation—frontend cashflows are more valuable in net present value terms. Rising stars: a wave of names reversed their COVID-time downgrades to HY, and contributed about 0.2 years to shortening of the index, a less material factor.” ⁸

Definitions
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• Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors.
• 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 isa 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 concession isa selling group's compensation in a stock or bond underwriting agreement.
• A corporate bond isa debt security that is issued by a company to raise capital.
• A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity.
• The credit market refers to the marketplace through which companies and governments issue debt to investors in exchange for regular interest payments.
• Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk.
• An exchange-traded fund (ETF) isa type of pooled investment security that operates much like a mutual fund.
• High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• The ICE BofA US Corporate Index isa benchmark index that tracks the performance of investment grade corporate debt in the United States.
• 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.
• Investment Grade (IG) Index refers to the ICE BofA US Corporate Index.
• 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.
• Leverage refers to using debt (borrowed funds) to amplify returns from an investment. 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 (or maturity wall) 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.
• The Magnificent 7 stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
• Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.
• ‍Passive investing is an investment strategy that aims to maximize returns in large part by minimizing the costs of buying and selling securities. Index investing is one common passive investing strategy.
• A refinance (ReFies) 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 stars are bonds that were considered speculation grade when issued but have since improved their financials, reducing the risk of default.
• ‍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.
• The 10-year treasury bond yield is the interest rate the U.S. government pays to borrow money for a decade, serving as a benchmark for other interest rates and a key indicator of investor sentiment about economic conditions.
• Total Return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period.‍
• Weighted Average Coupon is the average gross interest rate of the underlying mortgages in a mortgage-backed security at the time it was issued.
• Yield isa measure of the profit that an investor will be paid for investing in a stock or a bond. It is usually computed on an annual basis.
• Yield to worst (YTW) estimates the lowest possible return on a bond without the issuer defaulting.