Azhar’s crunching credit – December follows November’s strong rally

After November's stunning moves, December continued in the same vein with spreads and rates continuing their declines leading to another month of healthy returns across fixed income markets.

Key indicators

• The US 10-year treasury yield compressed 37bps during the month to 3.88%.
• Investment grade bonds outpaced high yield bonds for a second consecutive month. Global investment grade returned +3.62% and global high yield +3.45%.
• High yield spreads tightened to 400bps, 36bps tighter on the month, spreads compressed – CCCs were 122bps tighter, Single Bs 45bps tighter and BBs 22bps tighter.
• Investment grade spreads tightened by 8bps to 117bps.
• Investment grade bonds returned +8.23% in 2023 with 98% of that return in the last two months of the year, high yield markets returned +12.46% in 2023.
• The high yield default rate was stable in the month at 2.8%, this breaks down as US 3.8%, EU 1.5% and emerging markets 6.9%.
• December saw a modest amount of high yield new issuance with $13.2bn issued. This figure was split 49% BB, 34% single B rated and 12% CCC rated companies. December marked the first month since August that CCC rated companies issued new bonds. Over the course of 2023, high yield new issuance has totalled $175bn up from $106bn in 2022.

Credit stories

Global high yield markets finally got some significant fallen angels to ‘grow’ the market in nominal terms. With the addition of Walgreens ($4.4bn) in particular, we had $10bn in fallen angel additions allowing the market to grow by $8bn to $2.18 trillion.

Walgreens is a predominantly US retail pharmacy business which has been pressured by declining reimbursement rates as well as more recent labour inflation and Covid normalisation headwinds. With management reiterating their intent to de-lever by cutting the dividend and envisaged substantial non-core asset sales (including the UK Boots business), we expect it to be a short-term visitor to the high yield market.

A UK name in the headlines was the Pub owner Stonegate, which announced a secured loan from the private debt business of Apollo. This new funding together with recent yield falls in credit markets should position the company in a much better place to refinance its substantial £2.5bn of 2025 maturities. 

We also saw Altice France issue a private bond to refinance part of its 2025 maturities. This narrowly syndicated instrument was interesting as a middle ground from the private market frenzy we have seen showing appetite for a corner of the public market which is rarely exploited. The €350m 2027 bond priced with a 11.5% coupon.

And finally, we had the announcement of the acquisition of perennial high yield issuer, US Steel, by investment grade rated Nippon Steel. US Steel, founded over a century ago, has been in high yield indices since 2001 and with its upcoming acquisition will have marked a remarkable story from the largest steelmaker in the world back in 1970 to a bit part player. As a credit, its nadir was back in 2016 when it touched a low B- rating before bouncing back. With $4bn of debt, it’s a name that is still significant in scale and with the US government looking closely at the deal, its story as a high yield credit may have a twist or two left.

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.