Description
HIGH YIELD
COMMENTARY
DECEMBER 2015
Market Overview
Portfolio Overview
 Negative return for US High Yield in 2015
− The Credit Suisse High Yield Index lost 2.95% in December
and 2.58% in the fourth quarter, bringing its 2015 return to
-4.93%.
− Excluding the volatile Energy and Metals/Minerals sectors,
the index returned -0.54% in the quarter and +0.11% for
the year.
 Increased volatility and negative sentiment had impact on
technicals
− US high yield mutual funds and ETFs recorded an outflow of
$3.5 billion in the fourth quarter. (source: JP Morgan)
− New issuance totaled $42.3 billion in the fourth quarter,
below the previous quarter’s volume of $59.7 billion and
well below the pace seen in the beginning of the year.
(source: JP Morgan)
 Higher quality and sectors outside of commodities outperform
− BBs returned 0.38%, while Single Bs lost 2.49%, and CCCs
tumbled 9.85%; the largest quarterly return difference
between BBs and CCCs since Q3 2011.
− Energy (-12.45%) and Metals/Minerals (-9.51%) once again
declined precipitously on concerns over China and lower
commodity and energy prices.
− Media/Telecom performed well with Telecommunications
companies up 2.46% and Cable/Wireless Video higher by
1.81%. Food/Tobacco increased by 0.95%.
The portfolio’s higher quality positioning contributed to relative
performance as CCC bonds continued to significantly
underperform in the fourth quarter. The duration positioning of
the portfolio did not impact relative returns.
An underweight and security selection to Energy – Service &
Equipment companies was the largest contributor to relative
performance as the portfolio avoided many bonds that had large
price declines.
An overweight to the Cable/Wireless Video sector was positive for performance due to an overweight to one security, which rebounded up several points earlier in the quarter. The portfolio’s overweight to a particular holding added to both absolute and relative performance in the Wireless Communications sector as the company outperformed. Within Other Metal/Minerals, the portfolio’s overweight to select gold mining companies added to relative returns. Detracting from performance was the portfolio’s slight overweight and security selection in the Energy - Exploration & Production sector.
Security selection in the Packaging sector also subtracted from performance. An underweight to Telecommunication companies subtracted from performance as the sector outperformed, however, this effect was partially offset by positive security selection. Outlook The Credit Suisse High Yield Index fell 2.58% in the fourth quarter, increasing its 2015 loss to 4.93%. This represents the US high yield market’s first losing year since 2008 and only the third in the last 20 years. Investor sentiment toward high yield bonds worsened during the fourth quarter and ended 2015 at the most bearish levels since 2009.
High yield has continued to sell off due to the steep decline in global equity markets and further sharp decreases in commodity prices (oil prices recently broke below $30 to their lowest nominal levels in twelve years). Nonetheless, underlying market fundamentals remain positive. Most issuers in the $1.8 trillion US high yield market are large publicly traded US companies (62 of the 100 largest high yield issuers are in the Russell 1000 Index). In addition, the overall credit quality of the market has improved in recent years.
From 2013-2015, more than one-half of high yield new issuance has been rated BB and higher (by comparison, in 2007, less than one-third of new issuance was rated BB and LONDON | NEW YORK | PRINCETON • MacKayShields.com . FLEXIBLE BOND HIGH YIELD STRATEGY higher). (source: JP Morgan). Credit profiles for the bulk of high yield issuers continue to be resilient. According to JP Morgan, leverage ratios in high yield have remained stable over the last several years, while interest coverage has improved. Low energy and commodity prices are an issue.
However, these sectors need to be viewed in proper perspective. First, the Energy and Metals/Minerals sectors comprise only 16.4% of the Credit Suisse High Yield Index. Second, valuations of commodity-related bonds already reflect extreme financial distress.
At the end of December, the average Energy bond traded at price of $61 and a yield of over 16.0%. That is, about 56% of the energy sector trades at distressed levels (trading at a spread of over 1,000 basis points). Likewise, the average metals/minerals bond traded at a price of $63 and a yield of 16.5%, with 60% of the sector trading at distressed levels.
Investors are avoiding commodities today much like they did financials in 2008-09 - without considering value, price and optionality (at a recent high yield conference, many portfolio managers declared that the sector is “uninvestable”). Both the absolute and relative value of high yield is quite strong. As of January 15, the BofA Merrill Lynch High Yield Index had a yield 9.4%; its spread of 789 basis points over Treasuries is significantly wider than the median of 556 basis points since the start of 2000. Meanwhile, US and global interest rates remain extremely low. With the recent sharp selloff in equity markets, the relative value of high yield has lessened somewhat.
And there are, of course, risks for the US high yield market – e.g., a US recession and/or a sharp increase in interest rates. Nevertheless, with big coupons and short maturities, the risk adjusted case for the high yield market remains compelling. Availability of this document and products and services provided by MacKay Shields may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only.
It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction. Note to European Investors: This document is intended for the use of professional and qualifying investors (as defined in the Alternative Investment Fund Manager’s Directive) only. Where applicable, this document has been issued by MacKay Shields UK LLP, 200 Aldersgate Street, 13th Floor, London EC1A 4HD, which is authorised and regulated by the UK Financial Conduct Authority (FRN594166). Please note that security specific disclosures are representative and may not be included in your portfolio. This material contains the opinions of the High Yield team of MacKay Shields LLC but not necessarily those of MacKay Shields LLC.
The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.
©2015, MacKay Shields LLC. Past performance is not indicative of future results. LONDON | NEW YORK | PRINCETON • MacKayShields.com .
An overweight to the Cable/Wireless Video sector was positive for performance due to an overweight to one security, which rebounded up several points earlier in the quarter. The portfolio’s overweight to a particular holding added to both absolute and relative performance in the Wireless Communications sector as the company outperformed. Within Other Metal/Minerals, the portfolio’s overweight to select gold mining companies added to relative returns. Detracting from performance was the portfolio’s slight overweight and security selection in the Energy - Exploration & Production sector.
Security selection in the Packaging sector also subtracted from performance. An underweight to Telecommunication companies subtracted from performance as the sector outperformed, however, this effect was partially offset by positive security selection. Outlook The Credit Suisse High Yield Index fell 2.58% in the fourth quarter, increasing its 2015 loss to 4.93%. This represents the US high yield market’s first losing year since 2008 and only the third in the last 20 years. Investor sentiment toward high yield bonds worsened during the fourth quarter and ended 2015 at the most bearish levels since 2009.
High yield has continued to sell off due to the steep decline in global equity markets and further sharp decreases in commodity prices (oil prices recently broke below $30 to their lowest nominal levels in twelve years). Nonetheless, underlying market fundamentals remain positive. Most issuers in the $1.8 trillion US high yield market are large publicly traded US companies (62 of the 100 largest high yield issuers are in the Russell 1000 Index). In addition, the overall credit quality of the market has improved in recent years.
From 2013-2015, more than one-half of high yield new issuance has been rated BB and higher (by comparison, in 2007, less than one-third of new issuance was rated BB and LONDON | NEW YORK | PRINCETON • MacKayShields.com . FLEXIBLE BOND HIGH YIELD STRATEGY higher). (source: JP Morgan). Credit profiles for the bulk of high yield issuers continue to be resilient. According to JP Morgan, leverage ratios in high yield have remained stable over the last several years, while interest coverage has improved. Low energy and commodity prices are an issue.
However, these sectors need to be viewed in proper perspective. First, the Energy and Metals/Minerals sectors comprise only 16.4% of the Credit Suisse High Yield Index. Second, valuations of commodity-related bonds already reflect extreme financial distress.
At the end of December, the average Energy bond traded at price of $61 and a yield of over 16.0%. That is, about 56% of the energy sector trades at distressed levels (trading at a spread of over 1,000 basis points). Likewise, the average metals/minerals bond traded at a price of $63 and a yield of 16.5%, with 60% of the sector trading at distressed levels.
Investors are avoiding commodities today much like they did financials in 2008-09 - without considering value, price and optionality (at a recent high yield conference, many portfolio managers declared that the sector is “uninvestable”). Both the absolute and relative value of high yield is quite strong. As of January 15, the BofA Merrill Lynch High Yield Index had a yield 9.4%; its spread of 789 basis points over Treasuries is significantly wider than the median of 556 basis points since the start of 2000. Meanwhile, US and global interest rates remain extremely low. With the recent sharp selloff in equity markets, the relative value of high yield has lessened somewhat.
And there are, of course, risks for the US high yield market – e.g., a US recession and/or a sharp increase in interest rates. Nevertheless, with big coupons and short maturities, the risk adjusted case for the high yield market remains compelling. Availability of this document and products and services provided by MacKay Shields may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only.
It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction. Note to European Investors: This document is intended for the use of professional and qualifying investors (as defined in the Alternative Investment Fund Manager’s Directive) only. Where applicable, this document has been issued by MacKay Shields UK LLP, 200 Aldersgate Street, 13th Floor, London EC1A 4HD, which is authorised and regulated by the UK Financial Conduct Authority (FRN594166). Please note that security specific disclosures are representative and may not be included in your portfolio. This material contains the opinions of the High Yield team of MacKay Shields LLC but not necessarily those of MacKay Shields LLC.
The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.
©2015, MacKay Shields LLC. Past performance is not indicative of future results. LONDON | NEW YORK | PRINCETON • MacKayShields.com .
