27.01.2016, 08:32
Fitch: Repricing of Risk Evident in 2015 for U.S. Leveraged Finance Markets
OREANDA-NEWS. Mounting liquidity fears, slowing global growth concerns, falling commodity prices, and equity market volatility have resulted in a repricing of risk in the high-yield bond and leveraged loan markets, particularly at the lower end of the rating spectrum, according to Fitch Ratings' new 'U.S. Leveraged Market Quarterly (Fourth-Quarter 2015)' report.
The repricing of risk stunted activity in the second-half of 2015 as high-yield bond issuance totaled only $78 billion compared to $174 billion in the first half of 2015. High-yield bond issuance was pressured in particular by the decline in deals from riskier credits. 'CCC' debt only represented 5% of issuance in fourth-quarter 2015 compared to 20% in fourth-quarter 2014.
The option-adjusted spread (OAS) on the BofAML U.S. High Yield 'CCC & Lower' Index (CCC Index) has widened to levels not seen since June 2009 as investors have exited the riskiest tranches of debt while spreads for the BofAML U.S. High Yield 'BB' Index (BB Index) are only marginally wider. As of Friday, Jan. 22, 2016, the OAS for the CCC Index was 1,812 bps compared to an average of 981 bps the last six years. The OAS for the BB Index was 497 bps Friday, compared to an average of 388 bps the last six years.
Leveraged loan issuance has seen similar pressure in the fourth-quarter. Fitch identified 23 deals that were pulled from the primary during syndication as issuers reacted negatively to investors demanding higher pricing and larger issue discounts. October and November alone saw 10 deals, totaling approximately $5 billion in institutional loan volume, pulled from the market. Pricing at the lower end of the rating spectrum has lacked investor interest at current levels. Thirty-nine upward flexes were seen in the fourth quarter compared to only nine downward flexes. For 'B' credits, the average pricing on newly issued institutional term loans increased 82 bps throughout the second half of 2015 to 487 bps.
As the market adjusts to increased risk premiums, we believe leveraged credit fundamentals will remain largely unchanged from what is currently reflected in our ratings and default expectations. While high-yield bond and leveraged loan defaults are forecasted to rise, pockets of risk remain mostly isolated to the energy and metals/mining sectors.
This quarter's report also highlights Fitch's 2016 U.S. Corporates Outlook. Industry fundamentals are broadly stable with 26 of 34 sectors assigned a Stable Outlook. However, with commodity prices hovering around recent historical lows, four of the six negative sector outlooks are in commodities-related areas: Oil & Gas, Midstream Services, Oilfield Services & Mining.
For more information, visit: www.fitchratings.com/usleveragedfinance.
The repricing of risk stunted activity in the second-half of 2015 as high-yield bond issuance totaled only $78 billion compared to $174 billion in the first half of 2015. High-yield bond issuance was pressured in particular by the decline in deals from riskier credits. 'CCC' debt only represented 5% of issuance in fourth-quarter 2015 compared to 20% in fourth-quarter 2014.
The option-adjusted spread (OAS) on the BofAML U.S. High Yield 'CCC & Lower' Index (CCC Index) has widened to levels not seen since June 2009 as investors have exited the riskiest tranches of debt while spreads for the BofAML U.S. High Yield 'BB' Index (BB Index) are only marginally wider. As of Friday, Jan. 22, 2016, the OAS for the CCC Index was 1,812 bps compared to an average of 981 bps the last six years. The OAS for the BB Index was 497 bps Friday, compared to an average of 388 bps the last six years.
Leveraged loan issuance has seen similar pressure in the fourth-quarter. Fitch identified 23 deals that were pulled from the primary during syndication as issuers reacted negatively to investors demanding higher pricing and larger issue discounts. October and November alone saw 10 deals, totaling approximately $5 billion in institutional loan volume, pulled from the market. Pricing at the lower end of the rating spectrum has lacked investor interest at current levels. Thirty-nine upward flexes were seen in the fourth quarter compared to only nine downward flexes. For 'B' credits, the average pricing on newly issued institutional term loans increased 82 bps throughout the second half of 2015 to 487 bps.
As the market adjusts to increased risk premiums, we believe leveraged credit fundamentals will remain largely unchanged from what is currently reflected in our ratings and default expectations. While high-yield bond and leveraged loan defaults are forecasted to rise, pockets of risk remain mostly isolated to the energy and metals/mining sectors.
This quarter's report also highlights Fitch's 2016 U.S. Corporates Outlook. Industry fundamentals are broadly stable with 26 of 34 sectors assigned a Stable Outlook. However, with commodity prices hovering around recent historical lows, four of the six negative sector outlooks are in commodities-related areas: Oil & Gas, Midstream Services, Oilfield Services & Mining.
For more information, visit: www.fitchratings.com/usleveragedfinance.
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