CreditSights: The Week In Credit
Although traders are already complaining of overly quiet secondary market trading conditions, the primary pipeline of corporate debt continues to deliver an array of choices for investors. A further $11.5 billion of corporate deals came to market in the latest week and once again volume was heavily bolstered by the high-yield sector. It was hit with over $5 billion of deals and that does not include a substantial number of convertible issues. There has been a notable pick up in convertible issuance in June as demand for high-yield credits continues to outstrip supply. Part of the reason for this could well be that spread compression in the investment-grade arena has been so significant that traditional investment-grade portfolios are increasingly having to cross over into the upper notches of the junk market to add some yield to their portfolios. Abitibi Consolidated was just one high-yield issuer that came to market in the latest week and saw much of their deal find its way into high-grade portfolios. That being said, there is no shortage of demand at the lower end of the junk bond spectrum either. Demand has been bolstered by two successive weeks of $1 billion plus inflows into high-yield mutual funds and it currently seems that there is no one who cannot get financing.
Despite the good time vibe that all of this demand generates, there is a notable edge of worry in the voice of many corporate debt investors. They cannot help but note that the last time spreads were at anything like these levels was in 1998, just before Russia defaulted, Long Term Capital Management imploded and credit spreads began a multi-year widening trend. And there is the nagging sense that corporates are about to do one of their infamous wipeouts that so typically come in the months of August, September and October.
The insomniacs who are being kept awake at night worrying about this can cite two factors that give the idea legitimacy. The first is that the market seems to have developed a Teflon-coated imperviousness to bad news of late. The second is that there is a disturbing lack of evidence that there has been any improvement in balance sheet health to accompany the halving of corporate spreads that has occurred over the last 12 months. In the light of these two factors, we can understand the inherent "edginess" of the market. If you regard the current level of spreads as simply an expression of credit quality then you have every reason to be concerned about the bifurcation of pricing from the underlying fundamentals. However, if you consider corporate yields as an expression of interest rate policy in a deflationary environment, you can reach a greater degree of comfort with remaining long the market at historically tight levels. At the moment the inclination seems to be: hold on and hope.
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.