Furthermore in the Momentive situation, it appears to be a case of an LBO that was done in 2006 leaving the company with an elevated debt load complicated by the fact that earnings/EBITDA have fallen in recent periods. In this case, an over-levered LBO and company specific issue, not an industry wide problem.
Barring TXU because of its massive size, we certainly don’t see any significant move up in default rates or systemic issues on the horizon. J.P. Morgan continues to project that high yield bond default rates (excluding TXU) will stay below 2% through 2015, well under the historical average near 4%.3 So a very benign default environment will remain for the foreseeable future.
However, investors need to make sure this does not make them complacent. Weaker players exist in a variety of industries and thorough analysis is needed to determine which are the solid companies, potentially set to benefit at the expense of others.
This is one of the dangers we see of passive, index-based investing: nothing is done to make these identifications, and we believe investors are left to face the consequences all in their effort to save a little on fees. If you could spend the time doing the work to differentiate the marginal players versus the stronger industry participants, and make your investment decisions accordingly, wouldn’t you do it? We certainly see this as the best approach to investing and view active management as absolutely essential in the high yield bond and bank loan markets.
By: Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD)
1 Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li.. “High-Yield Default Monitor.” J.P. Morgan, North American High Yield and Leveraged Loan Research. April 1, 2014, p. 2.
2 Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li.. “High-Yield Default Monitor.” J.P. Morgan, North American High Yield and Leveraged Loan Research. April 1, 2014, p. 2.
3 Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li.. “High-Yield Default Monitor.” J.P. Morgan, North American High Yield and Leveraged Loan Research. April 1, 2014, p. 4.