Savvy investors have long
since learned to put something away for a rainy day, because things will not always be so rosy. Usually, investors tend to have a bias towards being long the market. Even when investing in a
diversified portfolio of long/short alternative investments – typically the net
exposure will be a moderately long position. Today, it is becoming increasingly more difficult for informed investors to ignore certain warning signs, particularly in the US high yield market. By all
signs, this sector appears to be well overextended and we expect it may be the
first to fall in the months and years ahead.
A) Loan Issuance is Heavily Cov-Lite This Time Around
As
we have written previously, the underwriting standards for the alarmingly high
percentage of Cov-Lite loans being originated have raised concerns among
regulators and industry practitioners alike.
B) Academic Studies Show that Nearly 50% of CCC-rated
Issues Default Within 4 Years of Issuance
With
the information from the table below, we note that the record
pace of high yield issuance has been ongoing for 5 years now.
C) Next Year (2014) Begins the First of 5 Consecutive
Years of Very Heavy Leveraged Loan and High Yield Bond Maturities Confronting
Issuers
The
maturities rolling over in 2014 are more than 2.5x greater than what occurred
in 2013. This pace of refinancing does not abate for the next 5 years.
Conclusion:
While no investors are capable of timing the market perfectly, 2014 is
shaping up to be the beginning of a very difficult period for marginal high
yield investors. As is always the case, the greatest gains will be
available to those investors who get in the trade early. Today’s data set may predict the future, and we think
that there is a certain sense of inevitability in the current HY irrational
exuberance.
The above charts were
compiled from data provided by www.bankruptcydata.com, JP Morgan, Thomson Reuters and the Edward I.
Altman-NYU Salomon Center.
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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