Executive Summary Blog
Executive Summary Blog on Current Conditions and Outlook in the High-Yield Bond and Distressed Debt Markets
Defaults in the second quarter of 2019 were $10.75 billion, resulting in a quarterly dollar-denominated high-yield bond default rate of 0.65%, higher than the rates both one year (0.23%) and one quarter prior (0.48%). However, if we had included the bond defaults of PG&E, whose securities were still investment grade rated as of December 31, 2018, but high-yield about three weeks prior to the actual default date, in both the par value outstanding and par value of defaults in the first-quarter 2019, the resulting default rate for that three-month period would have been 1.52%, significantly higher than the second-quarter rate. The trailing 12-month default rate on the $1.7 trillion high-yield bond market increased to 1.58%, up from 1.17% at the end of the first-quarter 2019, but was still well below the weighted average annual default rate since 1971 of 3.27%.
The S&P/LSTA 12-month, dollar-denominated default rate on leveraged loans rose from 0.93% at first-quarter end 2019 to 1.24%, while the issuer default rate increased from 1.40% to 1.54%. In the majority of months since March 2013, the dollar-denominated loan default rate exceeded the issuer-denominated rate due to relatively large defaults by only a few issuers. During benign credit cycles, however, the issuer-denominated default rate on loans and bonds typically exceeds the dollar-denominated rate. In the first six months of 2019, the issuer-denominated default rate exceeded that of the dollar-denominated rate in five of the six months, perhaps indicating a return to the more typical comparison.
The recovery rate on defaulted bond issues for the six months ended June 30, 2019 was 48.9%, slightly above the historical average of 46.0%, but lower than the year-end 2018 recovery rate of 52.1%. Recoveries on the thirteen distressed debt exchanges thus far in 2019 were 58.9%, while for the remaining defaulting issues it was 44.3%. Default losses for the first six months of the year were 62bp, similar to the 63bp loss for the same period one year ago.
Returns on high-yield bonds for the six months ended June 30 were 9.89% (FTSE Index). The excess return (loss) compared to 10-yr US Treasury bonds was 2.48%, falling by 180bp since the end of the first quarter, when the excess return was 4.28%. The yield-to-maturity spread versus the 10-yr US Treasury benchmark increased to 4.54%, widening 15bp from first-quarter end, while the option-adjusted spread (OAS) increased to 4.07%, widening by 2bp during the same period.
US high-yield bond issuance in the second quarter was $64.3 billion (BofA Merrill Lynch), considerably higher than new issuance during the same period last year ($38.8 billion), and slightly more so than in the prior quarter ($53.3 billion). Leveraged loan issuance decreased somewhat in the second quarter to $108 billion, lower than the $131 billion issued during the prior quarter, and was significantly lower than the $209 billion issued in the second quarter of 2018. The proportion of high-yield bonds issued at B- or lower was only slightly lower than the 22.7% average of the last five years, with 22.1% issued in these rating categories so far this year. Concurrently, though 2018 witnessed the highest annual proportion of CCC new issuance (17.3%) since 2013, only 10.2% of the first-half 2019 high-yield new issuance was rated within this highest risk category.
The distress ratio of high-yield bonds yielding more than 1,000bp over comparable duration Treasuries, measured by number of issues, increased slightly from 7.2% at the end of the first-quarter 2019 to 7.9% at the end of the second quarter. This level, which is below the historical mean from 2000-2018 (16.81%), is also below the median (9.91%) for the same period.
We estimate that the face value of the defaulted and distressed debt market increased to about $773 billion (market value $413 billion) as of June 30, 2019, up from $758 billion ($401 billion market value) at the end of the first-quarter. This increase was primarily due to the slight rise in the distress ratio.
The return on a portfolio of defaulted bonds and bank loans for the first six months of the year was -1.35%, with defaulted bonds outperforming defaulted loans, -0.73% versus -3.76%. Distressed bonds (OAS greater than 1,000bp) returned 6.26% in the first six months of 2019. A portfolio of 50% defaulted and 50% distressed bonds returned 2.77% through the second quarter.
Defaults in the second quarter of 2019 were $10.75 billion, resulting in a quarterly dollar-denominated high-yield bond default rate of 0.65%, higher than the rates both one year (0.23%) and one quarter prior (0.48%). However, if we had included the bond defaults of PG&E, whose securities were still investment grade rated as of December 31, 2018, but high-yield about three weeks prior to the actual default date, in both the par value outstanding and par value of defaults in the first-quarter 2019, the resulting default rate for that three-month period would have been 1.52%, significantly higher than the second-quarter rate. The trailing 12-month default rate on the $1.7 trillion high-yield bond market increased to 1.58%, up from 1.17% at the end of the first-quarter 2019, but was still well below the weighted average annual default rate since 1971 of 3.27%.
The S&P/LSTA 12-month, dollar-denominated default rate on leveraged loans rose from 0.93% at first-quarter end 2019 to 1.24%, while the issuer default rate increased from 1.40% to 1.54%. In the majority of months since March 2013, the dollar-denominated loan default rate exceeded the issuer-denominated rate due to relatively large defaults by only a few issuers. During benign credit cycles, however, the issuer-denominated default rate on loans and bonds typically exceeds the dollar-denominated rate. In the first six months of 2019, the issuer-denominated default rate exceeded that of the dollar-denominated rate in five of the six months, perhaps indicating a return to the more typical comparison.
The recovery rate on defaulted bond issues for the six months ended June 30, 2019 was 48.9%, slightly above the historical average of 46.0%, but lower than the year-end 2018 recovery rate of 52.1%. Recoveries on the thirteen distressed debt exchanges thus far in 2019 were 58.9%, while for the remaining defaulting issues it was 44.3%. Default losses for the first six months of the year were 62bp, similar to the 63bp loss for the same period one year ago.
Returns on high-yield bonds for the six months ended June 30 were 9.89% (FTSE Index). The excess return (loss) compared to 10-yr US Treasury bonds was 2.48%, falling by 180bp since the end of the first quarter, when the excess return was 4.28%. The yield-to-maturity spread versus the 10-yr US Treasury benchmark increased to 4.54%, widening 15bp from first-quarter end, while the option-adjusted spread (OAS) increased to 4.07%, widening by 2bp during the same period.
US high-yield bond issuance in the second quarter was $64.3 billion (BofA Merrill Lynch), considerably higher than new issuance during the same period last year ($38.8 billion), and slightly more so than in the prior quarter ($53.3 billion). Leveraged loan issuance decreased somewhat in the second quarter to $108 billion, lower than the $131 billion issued during the prior quarter, and was significantly lower than the $209 billion issued in the second quarter of 2018. The proportion of high-yield bonds issued at B- or lower was only slightly lower than the 22.7% average of the last five years, with 22.1% issued in these rating categories so far this year. Concurrently, though 2018 witnessed the highest annual proportion of CCC new issuance (17.3%) since 2013, only 10.2% of the first-half 2019 high-yield new issuance was rated within this highest risk category.
The distress ratio of high-yield bonds yielding more than 1,000bp over comparable duration Treasuries, measured by number of issues, increased slightly from 7.2% at the end of the first-quarter 2019 to 7.9% at the end of the second quarter. This level, which is below the historical mean from 2000-2018 (16.81%), is also below the median (9.91%) for the same period.
We estimate that the face value of the defaulted and distressed debt market increased to about $773 billion (market value $413 billion) as of June 30, 2019, up from $758 billion ($401 billion market value) at the end of the first-quarter. This increase was primarily due to the slight rise in the distress ratio.
The return on a portfolio of defaulted bonds and bank loans for the first six months of the year was -1.35%, with defaulted bonds outperforming defaulted loans, -0.73% versus -3.76%. Distressed bonds (OAS greater than 1,000bp) returned 6.26% in the first six months of 2019. A portfolio of 50% defaulted and 50% distressed bonds returned 2.77% through the second quarter.