The FINANCIAL — Chicago-25 July 2011: Strong activity in both the U.S. high yield and leveraged loan markets in April and May gave way to a steep pullback in June, and uncertainties in Europe and disappointing U.S. economic results caused issuers and investors to pause and re-evaluate risk, according to Fitch Ratings' 'U.S. Leveraged Finance Quarterly.'
Corporate Credit Themes: U.S. Second-Half 2011 Credit Outlook
U.S. corporations remain well-positioned to ride out the political and economic uncertainties that continue to dominate the headlines. Over the longer term, however, global imbalances and slower growth will result in numerous challenges to business models and the competitive landscape. These challenges are widely recognized and could result in an extended period of conservatism among corporates, resulting in risk-averse behavior, stronger liquidity buffers, and moderate default rates.
Sector Spotlight: Europe
The direct effects of the recent and potential further credit deterioration in the Greek, Portuguese, and Irish sovereigns and evidence that market concerns are turning ever more to Spain and Italy have reduced investor risk appetite, prejudicing the funding prospects for issuers facing refinancing risk in the near future. The high-yield bond market virtually shut down in June to all but the highest quality speculative-grade borrowers. The role of high-yield bonds remains crucial to the European market's ability to refinance maturing debt due to a lack of alternative sources of new money from the loan market.
Sector Spotlight: U.S. Homebuilding
Macroeconomic housing statistics (new and existing home sales, single-family housing starts) have been weak since the beginning of the year. Fitch has lowered its housing projections for 2011 due to the economy growing more slowly than expected and disappointing spring housing season. High inventory supply levels and negative buying psychology also continue to hamper the sector.
U.S. High-Yield Default Trends
The trailing 12-month U.S. high-yield default rate remained unchanged from the end of the first quarter at 1.1%. Only five issuers defaulted during the last three months, affecting $1.4 billion in bonds. Fitch projects that the U.S. high-yield default rate to end the year on the low end of the agency's forecast of 1.5% to 2% for 2011.
U.S. High-Yield Bond Market
High-yield bond issuance for the quarter totaled $72.9 billion, an increase of 91% versus the second quarter of 2010. Through the first six months, $146.4 billion of high-yield bonds has priced, making it the busiest first half on record. The month of May saw more than $37 billion price, surpassing the previous monthly record set in March 2010. However, heightened macroeconomic uncertainty in Europe and the U.S. caused yields to increase and high-yield issuance to slow in June.
U.S. Leveraged Loan Market
Leveraged loan issuance totaled $151.4 billion in the second quarter, an increase of 50% from the same period in 2010. Year-to-date, leveraged loan issuance totaled $305 billion. As in past quarters, refinancing issuance continued to drive loan growth. Opportunistic deals, which emerged earlier in the quarter, were either pulled or postponed in late May as investor's preferences began to shift in favor of higher rated and more liquid credits. Loan funds tapered off late in the quarter but remained positive.
U.S. CLO Market
The U.S. CLO market had a good first half of 2011. CLO performance continues to benefit from positive corporate credits trends, historically low defaults, a friendly refinancing environment, and low BWIC volume. Eight CLOs priced in the second quarter, totaling approximately $4 billion. Spread compression on new issue CLO liabilities has improved deal economics for equity investors. While the recent soft patch of economic data and proposed risk retention guidelines should have a limited impact on CLO formation today, risk retention, as presented, could undermine future CLO formation.
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