Azhar’s crunching credit – A steady, boring August

August was a relatively steady (and dare we say – boring?) month for credit, with all the volatility in government bonds.

10-year yields moved up 30 basis points (bps) before settling 10bps higher at 4.1%, whilst 30-year yields were up 44bps before settling 20bps higher at 4.2%. Spreads didn’t react to the volatility in government bond markets in a traditionally quiet holiday month although the compression trend of lower quality to higher quality bonds continued.

Key indicators

• High yield (HY) bonds outperformed investment grade (IG) bonds due to interest rate duration. Global high yield returned +0.02% and global IG -0.40%.
• HY spreads widened to 444bps, 5bps wider on the month – CCCs were 27bps tighter, Bs 4bps tighter and BBs 11bps wider.
• IG spreads nudged wider to 136bps, still close to the 129bps year to date low seen back in February.
• Year to date, high yield new issuance has totalled $110.0bn, surpassing the total new issuance in 2022 of $105.7bn with a third of the year left to go. Looking at high yield new issuance in August of 2023, a total of $10.6bn was issued, more than $2.5bn more than was issued in the same month in 2022. Of the $10.6bn that was issued in August 2023, almost 70% was rated B with most of the remainder being BB rated.

Area of focus – Defaults

• With two thirds of the year having gone, it’s worth taking a step back and noting how credit markets are behaving – contrary to consensus, high yield and leveraged loan markets are doing much better than IG or government markets and default rates continue to be very benign in public markets, running at just 2% in the US high yield market (and 1% and 3% in Europe and emerging markets, respectively). In fact, the last 12-month rate actually dropped from 2.4% to 2% as last August’s lumpy defaults fell out of the calculation.
• Size is having an impact on default with the default gap between the largest issuers (our top quartile by issuer size default rate is 3.2% whereas the bottom quartile default rate is 1.4%) starting to grow – something we last saw in the 2016 energy default wave. This also helps to explain the divergence of small company bankruptcies in the broader economy to public market corporates (and the increasing irrelevance of indicators such as the Senior Loan Officers Survey).
• I’ve talked in recent months about how liquidity and flexibility mean that defaults are being deferred and the most recent data also shows how issuers in distress are not defaulting. We define distress as an issuer’s debt trading at above 1000bps and this has been running in the range 7-10% or above for 14 months now (its currently 7%, which corresponds with the median distressed ratio over the last decade). We had forecast a default rate of around 4% for 2023 and it seems we are likely to have been pessimistic in our calculation, we are currently tracking at a sub 3% global HY default rate for 2023 and a 4-5% rate for 2024.

Credit story of the month

Altice announced it suspended several managers on suspicion of corruption, tax fraud and money laundering after its co-founder Armando Pereira was detained in Portugal.  Altice is one of the largest issuers in the high yield and leveraged loan markets and this news led to a huge repricing of its bonds, with its subordinated bonds trading as low as 30 cents at one point. 

Fraud is always the one thing we fear the most as investors – as it means our entire fundamental analysis is moot – so the first thing market participants did was scramble to find out that the fraud was done to the company, rather than by the company. The distinction is important as while this is a business with real (telephony and media) assets, it is quite difficult to assess the valuation of any bonds without having trust in the accounted numbers.

Altice is owned by Patrick Drahi, a French telecoms entrepreneur with an ex-banking background, and as a result he was on the front foot in reassuring investors about the impact of this fraud, denying any involvement and being very clear that the company had liquidity and resources to get through this period. The company subsequently held a fireside chat with investors on 6 September with Patrick Drahi attending, and he gave a strong message about refinancing and reminded investors a small number of individuals were targeted by an investigation and not the company.

Altice has been one of the most proactive issuers and earlier this year completed a multi-billion amend and extension of its 2025/2026 bank debt. The combination of strong assets and the focus on extending the tenor of its debt has helped the company going through the current negative news flow.

Altice is a salutary reminder that the HY market of today is a very distant cousin of the HY market of the early 2000s with much larger companies currently, with many more options than historically.  Whilst the Altice incident is a one-off, we find this company a fascinating microcosm of how the public leveraged market is currently structured and insulated from many of the risks that would have led to immediate defaults previously.

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