Technical Support Remains Strong but Fundamental Pressures to Grow in 2024
High-Yield and Bank Loan Outlook
Fourth Quarter 2023
Here are the key takeaways from our latest High-Yield and Bank Loan Outlook report:
- Despite some challenges in the credit environment this year, high-yield corporate bonds posted solid year-to-date total returns of 6 percent while bank loans delivered a 10 percent total return, with a fraction of the volatility seen in other markets.
- Strong demand for leveraged credit from institutional investors clashed with a shortage of primary issuance. These technical dynamics continue to support credit risk premiums.
- The emergence of private credit over the last couple of years will be an especially important trend to watch for syndicated bank loans. Private credit channels have seen twice as many transactions as the syndicated market in the first two quarters of 2023 combined.
- While it is important to closely monitor the influence of technical trends such as these, we maintain our perspective that over a long-term horizon, technical dynamics assume a secondary role to fundamentals.
Important Notices and Disclosures
Fixed-income investments are subject to credit, liquidity, interest rate and, depending on the instrument, counter-party risk. These risks may be increased to the extent fixed-income investments are concentrated in any one issuer, industry, region, or country. The market value of fixed-income investments generally will fluctuate with, among other things, the financial condition of the obligors on the underlying debt obligations or, with respect to synthetic securities, of the obligors on or issuers of the reference obligations, general economic conditions, the condition of certain financial markets, political events, developments, or trends in any particular industry. Fixed-income investments are subject to the possibility that interest rates could rise, causing their values to decline.
Bank loans are generally below investment grade and may become nonperforming or impaired for a variety of reasons. Nonperforming or impaired loans may require substantial workout negotiations or restructuring that may entail, among other things, a substantial reduction in the interest rate and/or a substantial write down of the principal of the loan. In addition, certain bank loans are highly customized and, thus, may not be purchased or sold as easily as publicly-traded securities. Any secondary trading market also may be limited, and there can be no assurance that an adequate degree of liquidity will be maintained. The transferability of certain bank loans may be restricted. Risks associated with bank loans include the fact that prepayments may generally occur at any time without premium or penalty. High-yield debt securities have greater credit and liquidity risk than investment grade obligations.
High-yield debt securities are generally unsecured and may be subordinated to certain other obligations of the issuer thereof. The lower rating of high-yield debt securities and below investment grade loans reflects a greater possibility that adverse changes in the financial condition of an issuer or in general economic conditions, or both, may impair the ability of the issuer thereof to make payments of principal or interest. Securities rated below investment grade are commonly referred to as “junk bonds.” Risks of high-yield debt securities may include (among others): (i) limited liquidity and secondary market support, (ii) substantial market place volatility resulting from changes in prevailing interest rates, (iii) the possibility that earnings of the high-yield debt security issuer may be insufficient to meet its debt service, and (iv) the declining creditworthiness and potential for insolvency of the issuer of such high-yield debt securities during periods of rising interest rates and/ or economic downturn. An economic downturn or an increase in interest rates could severely disrupt the market for high-yield debt securities and adversely affect the value of outstanding high-yield debt securities and the ability of the issuers thereof to repay principal and interest. Issuers of high-yield debt securities may be highly leveraged and may not have available to them more traditional methods of financing.
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