Maybe I should call the blog "High Yield Investing"

Earlier today, Peter Acciavatti, J.P. Morgan's head of High Yield Strategy gave a presentation at JPM's 2010 US Fixed Income Outlook Conference. Some key take-aways from the call:

  • High yield and leveraged loans remain attractive with solid expected returns. He pointed to a slide a ~12% expected return for high yield and a ~13.5% expected return on leveraged loans.
  • These returns are driven by spread tightening, modestly offset on the high yield side of the world by the treasury curve widening (bank debt is floating and hence would not be negatively affected by rising rates)
  • In the high yield market, demand has modestly outpaced supply. In loans, demand is dramatically higher than supply due to limited levered loan issuance this year.
The saddest slide for me, and I am sure my readers, was one pointing out how small the distressed universe is right now.

In November of 2008, there was over $230B of corporate debt trading below 50% of par. Today there is less than $10B. As a percent of the market, 31.4% was distressed in November and now only approximately 1%. Hence the reason for the title of the post: There is no more distressed - just a lot of high yield.

What compounds this situation, which Peter correctly alluded to in his presentation, is distressed funds have had a huge year. A huge year is generally followed by capital raising - more capital to the distressed space means asset prices being bid up and IRR's decreasing.

Of course, as mentioned in previous months, I believe this is a long drawn out cycle and distressed debt will return in force when the wall of maturities in 2012, 2013, and 2014 begin to tumble onto a weaker market where structured credit buyers are no longer forceful participants. But it could happen sooner if economic growth continues to be lukewarm at best. To position myself I am buying event-driven names with a definite catalyst: Six Flags' bank debt for instance, which was weaker earlier in the week on a new plan by the HoldCo note holders (full write-up at the DDIC).

John Hussman puts it best:
We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.
Maybe I would not use the term "terrific second act." Though if it happens soon, it will surely be bad for all those buying CCC+ bonds at a 11% yield.

More high yield versus distressed debt posts in the future? Given the animal spirits in the market these days, I'd would venture a disappointing yes.


capital loans 12/03/2009  

Thanks for sharing with us.Your blog is very informative.keep posting.. capital loans

David 8/15/2010  

It is unfortunate that many of the cheap investments have gone away since early 2009.

It may be too risky to take on CCC+ bonds because of a potential double dip recession. However, if the double dip doesn't happen , then you will get rewarded well. I don't think it will. I think we'll just have a slow recovery.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.