Azhar’s crunching credit – November sees healthy returns after quick US election result

November brought us a surprisingly rapid US election result, with the lack of any delay reassuring markets leading to a relief rally. Both government bonds and credit spreads tightened, resulting in healthy fixed income returns.

Key indicators

• The US 10-year treasury yield tightened by 12 basis points (bps) during the month to end at 4.17%.
• Investment grade bonds outperformed high yield bonds. Global investment grade returned +1.31% (+4.76% year-to-date) and global high yield returned +0.93% (+9.14% YTD).
• High yield spreads were 5bps tighter at 320bps, CCCs were 13bps tighter, whilst single Bs were 4bps tighter and BBs were 2bps tighter.
• Investment grade spreads ended tighter by 2bps at 91bps.
• The default rate was unchanged at 1.7%, this breaks down as US 1.4% (+0.1%), EU 2.7% (+0.2%) and emerging markets 2.5% (-0.4%). The gap between smaller issuers and larger issuers increased to 2.3% as the large cap default rate was static at 0.5% whilst small cap default rates increased by 0.5% to 2.8%.

Issuance was muted in the month and despite expected election volatility restraining the calendar we still had issuance of $26bn in global high yield bonds, $114bn in investment grade bonds and $31bn in leveraged loans. This takes high yield volume to $449bn year to date. Investment grade is currently tracking at $1.4 trillion and loans at $470bn.

It’s never quiet in credit and November did bring some significant news for a few names – a bankruptcy, a possible extension of maturities and a rising star.

Let’s start in the US with troubled US airline, Spirit Airlines, which filed for bankruptcy in November.  Spirit is a low-cost airline based in Miami which has struggled post Covid but had found a suitor in Jet Blue Airlines, with an acquisition announced in 2022. Unfortunately, after a long-running court case, the merger was blocked on anti-trust grounds earlier this year – despite warnings that this would lead to bankruptcy. With $1.1bn of index eligible debt, it’s a large significant bankruptcy and interestingly the bonds appreciated on the news trading up from cash prices in the 40s to around 80 as the reorganisation plan envisages the secured note holders taking control of the company. 

Moving on to iHeart radio where a plan emerged from long-running negotiations between the company and its creditors. iHeart radio is the largest radio station group in the US, with around 850 stations as well as a podcast and music streaming platform. iHeart, which was rebranded from the ‘Clear Channel’ brand has been over-leveraged since an ill-timed leveraged buyout pre-financial crisis and filed for bankruptcy back in 2018 to cut its $20bn debt load. With radio revenues in slow decline, the company (with just over $5bn in debt currently) remains over-levered and has upcoming maturities in 2026 acting as the catalyst for a discussion between the company and its creditors to cut its debt burden outside of the bankruptcy process. In November, an accord seems to have been reached with most of its creditors and this is currently being put to a vote of all its creditors to extend maturities by three years and reduce debt voluntarily through creditors accepting a reduction in their nominal exposures. Bonds reacted positively to the news with debt trading up to the high 70s and 80s cash prices.

Ending with a well-known company on this side of the pond, the staple of the UK high street Marks & Spencer got upgraded to investment grade by Moody’s, following on from S&P’s upgrade last year. This means that it leaves high yield indices and enters investment grade indices. Marks & Spencer has languished in the high yield indices since the Covid period and the upgrade affirms the good momentum in the business as it has returned to growth, reducing debt.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.