Azhar’s crunching credit – Issuers enjoying strong markets

May proved to be benevolent for issuers as yields snapped tighter and record issuance was rapidly absorbed.

Key indicators

• The US 10-year Treasury yield tightened by 17 basis points (bps) during the month to end at 4.50%.
• Investment grade bonds outperformed high yield bonds. Global investment grade returned 1.34% (-0.4% year-to-date) and global high yield returned +1.2% (+2.47% year-to-date).
• High yield spreads were 5bps tighter at 350bps (9bps of tightening less 4bps of rebalancing), CCCs were 20bps tighter, whilst single Bs were 7bps tighter and BB’s were 6bps tighter.
• Investment grade spreads tightened by 3bps to 97bps.
• The default rate fell by 0.1% to 2.8%, this breaks down as US 2.0% (-0.3%), EU 2.1% (+0.1%) and emerging market 8.0% (+0.3%). The gap between smaller issuers and larger issuers fell to 1.4% from 2.1% as the small cap default rate was down 0.6% at 2.7% whilst large cap default rates were up 0.1% to 1.3%.

With spreads tightening it was a strong month for issuance with $59bn in global high yield bonds, $128bn in investment grade bonds and $48bn in leveraged loans. This takes high yield volume to $229bn year-to-date, not far shy of last year’s $285bn full year number. Investment grade is currently tracking at $745bn (vs $1.1trillion last year) and loans at $231bn (vs $233bn last year).

Credit stories

With such a busy market we had lots of activity across all regions. Notably in emerging markets, we saw African telecom tower operator, Helios Towers, print an upsized $850m 2029 maturity at 7.5%. Helios was using the proceeds to retire its 7% 2025 bonds issued back in 2020. A pretty impressive achievement given the five-year risk free is over 4% higher than it was back in 2020.

In Europe we had beauty products company, Coty, issue a three-year deal. We are always wary of such short-dated issuances as they are such unusual deals but the argument by the issuer here is they are aspiring to be investment grade and so don’t want such a high coupon for too long. At 4.5% in euros, the company raised €500m. 

In the US, we had the Paramount saga – the studio and entertainment company entertained investors as tussling over its ownership turned its credit quality into a guessing game. With the recent decline in operations, the investment grade issuer is teetering on the brink of a downgrade to high yield and the declining stock price has thus attracted new suitors in the shape of a combined bid from Apollo and Sony, as well as a separate bid from television production firm Skydance Media. Both bidders were seen as more credit positive than the status quo as they both involved monetisation of the company’s studio assets (the status quo has been a huge bet on streaming offsetting the linear tv business advertising decline). Like all blockbusters, it seems this saga has several twists and with a dual class shareholding and the US Federal Trade Commission looking carefully at any Sony involvement, this may run and run for some time.

And finally, with the return of meme stock speculation, we had old favourite AMC Entertainment (the cinema chain) use the bounce in its equity to come with a repeat – it issued $250m and redeemed debt – extending its less than charmed life, although with its 2026 debt trading at a 17% yield (and a $9bn debt pile compared to a $1.2bn EBITDA) they need many more miracles. Given many of us expected this company to have filed for bankruptcy back in 2021, but for the equity market to come to its rescue, maybe this isn’t one for financial market commentators but one for YouTube streamers to comment on.

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