CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.0 billion and year to date flows stand at -$24.9 billion.  New issuance for the week was zero and year to date issuance is at $71.5 billion.

 (Bloomberg)  High Yield Market Highlights 

• U.S. junk bonds are off the lows after this week’s strong gains but may struggle as equity markets falter. Spreads have backed off from the 1,000 bps distressed level where they started the week, and robust ETF inflows help boost sentiment.
• Investors pulled $2b from retail funds in the week. This was the sixth straight week of outflows from U.S. high-yield funds
• Junk yields dropped below 11% to close at 10.33%, down 67bps, the biggest decline in percentage terms since June 2000
• Spreads closed at 959bps after the biggest drop in nine months
• Returns were up for three consecutive sessions
• BB yields fell 44bps to close at 8.31% and spreads tightened 45bps at +746
• Single-B yields fell 84bps to 10.01%, the biggest drop since 2008, and spreads tightened the most in nine months, to 937bps
• Energy sector yields dropped 63bps to 22.38%, the third day of decline and the longest declining streak in 10 weeks
• Spreads tightened for a foruth straight session closing at +2,161, down 54bps, the longest declining streak in 11 weeks

(Bloomberg)  What’s in Congress’s $2 Trillion Coronavirus Stimulus Package

• The bill provides direct help to citizens, businesses, hospitals and state and local governments.
• Big Businesses: About $500 billion can be used to back loans and assistance to companies, including $50 billion for loans to U.S. airlines, as well as state and local governments.
• Small Businesses: More than $350 billion to aid small businesses.
• Hospitals: A $150 billion boost for hospitals and other health-care providers for equipment and supplies.
• Individuals: Direct payments to lower- and middle-income Americans of $1,200 for each adult, as well as $500 for each child. Senate Minority Leader Chuck Schumer said checks would be cut April 6.
• Unemployed: Unemployment insurance extension to four months, bolstered by $600 weekly. Eligibility would be expanded to cover more workers.
• Restrictions on Business Aid: Any company receiving a government loan would be subject to a ban on stock buybacks through the term of the loan plus one additional year. They also would have to limit executive bonuses and take steps to protect workers.
• Transparency: The Treasury Department would have to disclose the terms of loans or other aid to companies, and a new Treasury inspector general would oversee the lending program.

(Bloomberg)   Distressed Debt Balloons to Almost $1 Trillion, Nears 2008 Peak

• The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion, reaching levels not seen since 2008 as the collapse of oil prices and fallout from the coronavirus shutters entire industries across the globe.
• In total, the tally has ballooned to $934 billion of U.S. corporate bonds that yield at least 10 percentage points above Treasuries and loans that trade for less than 80 cents on the dollar, according to data compiled by Bloomberg.
• The coronavirus pandemic has caused the worst sell-off since the global financial crisis and deepened stress in credit markets. Driven by some of the lowest oil prices since the early 2000s, the amount of distressed bonds has surged to the highest level since April 2009.
• Most of the distressed debt outstanding stems from U.S. energy companies battered by less travel demand and an all-out price war between Saudi Arabia and Russia. The capital-intensive industry, which financed its shale production largely through debt, suddenly faces the prospect of deeper losses after oil plunged below $20 a barrel. Last month, it traded above $50.
• The amount of distressed debt tied to the oil and gas sector stands at over $161 billion, up from $128 billion a week ago. One of the biggest casualties has been Occidental Petroleum Corp., which has seen its funding costs skyrocket and its credit rating cut to make it the biggest fallen angel in the current downgrade cycle. Oxy’s bonds led the list of high-yield losers on Wednesday, with four of its issues among the top 10 decliners.
• Energy isn’t alone. Every sector except utilities is under stress, with distressed ratios growing by double or triple digits. Telecommunications, retail, entertainment and healthcare industries make up the bulk of distressed debt. Retailers such as Neiman Marcus Group Inc. and theater chains such as AMC Entertainment Holdings Inc. have been hit hard as companies are forced to close and customers are told to stay home.
• S. junk bonds entered distressed territory for the first time since the global financial crisis after spreads on the securities topped 1,000 basis points at the end of last week. The index move marks a period of turmoil in the credit markets as investors flee funds that buy all types of corporate debt.

(Bloomberg)  Ford Becomes Largest Fallen Angel After S&P Downgrade to Junk

• Ford Motor Co. was cut to junk by S&P Global Ratings as the coronavirus pandemic delivers a shock to the global auto industry and renders the carmaker the largest fallen angel to date.
• S&P downgraded Ford’s credit rating one notch to BB+ and may cut it further, according to a statement. The move follows Moody’s Investors Service, which dropped its rating Ford for the second time in sixth months earlier Wednesday. Its two high-yield ratings will remove its $35.8 billion of debt from the Bloomberg Barclays investment-grade index at the end of the month.
• Ford is one of many auto companies facing what Moody’s calls an unprecedented “credit shock,” with the coronavirus outbreak also posing a major threat to peers including General Motors Co. and Volkswagen AG. But Ford is particularly at risk because of the problems it’s been having with executing an $11billion restructuring that’s yet to improve performance.
• “Ford is managing through the coronavirus crisis in a way that safeguards our business, our workforce, our customers and our dealers,” the company said in an emailed statement. “We plan to emerge from this crisis as a stronger company.”

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.