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November 2019 Marketing & Portfolio Commentary

23.12.2019

We continued to see positive headlines during November about a potential phase one trade deal between the US and China. Moreover, some of the economic data seem to be bottoming out with manufacturing PMIs recovering from the lows we saw over the summer. Finally, Q3 earnings season was better than anticipated, helping support risk assets during the month.

European Sub Investment Grade Highlights

There was €4.99bn issuance in the European leveraged loans market in November, below the €6.69bn that was issued in November 2018. This brings YTD issuance to €79.49bn, which is 16.8% below Last Year (“LY”). In the European High Yield (“HY”) space, there was €11.55bn issuance during the month, well ahead of the €2.25bn that was issued in November last year. This brings YTD issuance to €70.64bn, 11.3% ahead of last year. We have seen a material pick-up in HY issuance in the last three months, since the ECB provided details about its latest round of Quantitative Easing.a

  • November leverage issuance was €16.54bn, well ahead of the market-driven weak new issuance of €8.94bn LY. For context, the size of new issue in November 2017 was €24.51bn.a
  • 2019 loan volumes have been 54% acquisition and 45% refinancing, with the balance for general corporate purposes. Euro denominated issuance comprised 94% of the volumes for the month, GBP 5% and 1% others. Deal volume has been 20% France, 17% UK, 11% Spain and 11% United States.a
  • 2019 bond volumes have been 68% refinancing and 16% M&A, with the balance for general corporate purposes. Sources of funding were 50% secured and 49% unsecured, with the balance being subordinated bonds. Composition was 92% Euro, 7% GBP, with the balance being others. YTD issuance has been 56% BB, 32% B and 7% split, with the balance being others. Deal volume has been 18% UK, 14% France, 11% Germany, 9% United States and 9% Netherlands.a
  • TL B new issue spreads in November were E+386bps, in a similar range to what has been seen throughout 2019. Average net leverage was stable at 5.05x, which is 0.46x lower than LY and compares with 5.0-5.8x which we have seen during the year through to October 2019.a
  • In the HY space, single B debt issued in the last 3 months priced at 4.27% yield, which compares with 6.74% for Q4 2018 (247bps tighter) and 4.82% for Q3 2019. For the BB space the YTM on a rolling 3-month basis was 2.94%, 101bps tighter than the new issue for Q4 2018 of 3.95%. The spread between BB and B new issue has come in from 279bps in Q4 2018, to 194bps in Q3 2019 and now just 133bps at November 2019.a The Credit Suisse Western European Leveraged Loan Index hedged to Euro was up with a return of 0.41% in November, bringing YTD returns to 4.25%. The Credit Suisse Western European High Yield Index hedged to Euro returned 0.55% for the month, bringing YTD returns to 9.71%.

Across the performing segment of the credit portfolio, as we head into year-end, activity remains opportunistically focussed at the primary flow as well as positioning the portfolio in the secondary markets, which remain well supported. In addition, with duration in fixed income continuing to compress, the portfolio has continued to hold performing HY issuers in the single B range where we expect to see positive performance into yearend, as this segment of the ratings spectrum catches up to the BB index.

Within the credit opportunities portfolio, focus for the month was to close out hedges where the thesis has played out, as well as allocate to the European single B and BB CLO primary markets which remain wide versus the liquid HY market. The expectation is that, with economic outlook improving in Europe, these assets will perform well in 2020. In addition, some of the assets which have been repositioned through a restructuring processes are now expected to contribute positive returns to the book, some of which has already been seen within the year end performance.

As of November close, performing credit (including cash) was at 60.4% of the portfolio with a weighted average price of 99.6, trading at a YTM of 4.6%, delivering 4.3% cash yield to the portfolio. Credit opportunities was at 39.6%, closing the month at a weighted average price of 85.8, trading at a YTM of 9.7%, and delivering 6.9% cash yield to the portfolio. Floating rate instruments comprised 85.6% of the portfolio. Senior Secured 79.2%. The current yield is 5.9% (gross) with a weighted average market price of the portfolio of 93.4 versus 90.4 as at 31 December 2018. The cash position was at 8.3% compared to 15.3% as of the start of the year.

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