Although we are clearly starting to see some dispersion amongst
specific credits, it is precisely the lack of dispersion that has created the
asymmetry of the short high yield opportunity.
Today, well over 90% of the high yield market is trading over par. On average, BB’s and B’s are trading approximately
at 105 and CCC’s are trading approximately at par. The spread between Investment Grade and High
Yield according to JP Morgan is near 20-year tights at 185 bps versus the 20-year
average of 371 bps.
Generally, in the context of this fully heated credit market,
there has not been a true differentiation between single names within a sector
or within the entire HY universe. Post-2008,
there of course was an all-out effort to recapitalize and stabilize the US and
global economy. QE (and its derivatives
& successors) were the confidence boosters that the economy needed to get
going. Banks were mandated to lend, and
eventually succumbed to the pressures to do so.
Capital markets were open for business and, as we have said before, all
companies, good and bad, were able to go out and issue debt. US HY Issuance peaked out in 2007, with
$132.7 B of bonds being brought to market.
This dropped to $50.7 B in 2008, but was followed by $127.4 B in 2009,
$229.3 B in 2010, $184.6 B in 2011, $280.5 B in 2012, $270 B in 2013, and
$153.6 B this year through 8/31.
Obviously issuance has been off the charts, and CCCs as a percent of the
total HY issuance has been growing steadily, to what is now 21.5%.
To illustrate the lack of dispersion, we have shown a
summary of financials of four companies that operate in a similarly challenged
sector, all with very disparate fundamentals and all trading at or near par:
We think that company fundamentals will very soon start to matter
for challenged high yield companies, and we are observing some pockets of
dispersion within specific sectors.
Retail shorts have been significant drivers of performance this month, a
trend that we think will continue.
Please reach out if you’d like to discuss the opportunity to be short in
the high yield space today. Also, on
Wednesday at 11:30AM EST we will be hosting a webinar on the current bubble in
high yield credit with Dr. Ed Altman.
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global 
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