Crunching credit: March’s turbulence well founded

Market volatility persisted throughout March, which went into overdrive at the start of April, due to concerns over the potential impact of global trade tariffs.

Key indicators

• The US 10-year treasury yield was unchanged on the month to end at 4.21%.
• Investment grade bonds outperformed high yields bonds. Global investment grade returned -0.44% whilst global high yield returned -0.88%.
• High yield spreads were 52bps wider at 372bps, CCCs were 140bps wider, whilst single Bs were 71bps wider and BBs were 33bps wider.
• Investment grade spreads ended wider by 7bps at 97bps.
• The default rate was marginally (-0.1%) lower at 1.6%, this breaks down as US 1.3% (-0.1%), EU 3.5% (+0.1%) and emerging markets 1.5% (-0.2%). The gap between smaller issuers and larger issuers jumped by 1.3% to 3.3% as the large cap default rate declined to 0.9% whilst small cap default rates increased by 1.2% to 4.2%.

We had issuance of $36bn in global high yield bonds ($112bn year-to-date), $176bn in investment grade bonds ($509bn YTD) and $36bn in leveraged loans ($144bn YTD). 

The events at the beginning of April have made the final month of the first quarter feel like quite some time ago. The macroeconomic risks posed by elevated global trade tariffs have eclipsed individual credit stories within the high yield market. With that said, it is still worth discussing a key trend we observed over the course of the month: waning primary market issuance.

As has been articulated many times before, the level of primary issuance can often act as a signal for the overall health of the market, and March began in rude health. Global chemical business Celanese, which was downgraded into high yield in the prior month, issued its first round of debt in the sub investment grade space. However, it did manage to retain investment grade style covenants. This was a clear indication of the permissiveness of the market and perhaps that the company does not fully consider its new rating status a permanent one.

Another deal of note was Opella, the consumer healthcare division of French pharmaceutical company Sanofi. The high yield bond and loan markets were tapped simultaneously to fund the private equity controlling-stake acquisition of the company, in both euros and US dollars, to the tune of €7.5bn. The deal was welcomed, with investors always interested in fresh companies of such scale entering the market.

However, towards the end of March, issuers like global auto parts supplier Forvia had to offer more attractive pricing to encourage hesitant investors. The mood soured and Finastra, a financial software company, postponed a refinancing of approximately $6bn of private debt and preferred equity with senior loans. They were not alone, as other deals struggled to stimulate demand.

Ultimately the concerns of the market in March, in relation to the current US administration and the associated trade tariff risks, turned out to be well founded.

The primary market is often a tug of war between the needs of issuers and the wants of the credit investors, and we are seeing the balance shift from the former to the latter. Ultimately the concerns of the market in March, in relation to the current US administration and the associated trade tariff risks, turned out to be well founded.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. 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. 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.