High-yield credit prices have fallen 3% this month, and are down 2% lower for the year.
CCC-rated credit is the worst performing area of the market, while commodity names have been hit the hardest – metals & mining has plunged 13% and energy is down 5% year-to-date.
“High-yield spreads were 632bps as of Friday [21st August], which is 117bps wider since the beginning of June,” said Tim Beck, Stenham’s head of credit and event driven strategies.
“Excluding commodities, the spread is 541bps. However, this is not as high as the 724bps at the end of 2011.”
Using the historic average excess spread, the high-yield market, excluding commodities, is pricing in a default rate of 3.6%.
However, Beck points out that sell-side default expectations are approximately 1.5% for 2015 and 2016.
“The high-yield market is pricing in more defaults than is anticipated, so being long the asset class will probably prove profitable from this point, though it is clearly not as attractive as at the end of 2011” he added.
“With real issues in commodities, the overall default rate will be higher than the 2012/13 period, when being long high-yield generated strong performance. The issues in energy have created knock-on opportunities and spread widening”.
JPMorgan has forecasted high-yield energy sector defaults of 20% to 35% through 2017, dependent upon the price of oil.
This sector, says Beck, is pricing in a 19% to 23% default rate, depending upon a recovery rate of 30% to 40%.
He explained: “Of non-defaulted high-yield bonds trading below 70 cents on the dollar, 77% are in energy and metals & mining. In other words, only 1.9% of non-commodity related high-yield is trading at truly distressed levels.
“We do not expect our high-yield exposure to increase dramatically from here, but being short is less attractive than it was.
“The real opportunity will be when the energy companies default – we expect some in 2015 and 2016, but this will intensify in 2017.”
