Several factors led to this exponential growth in issuance. First, the asset class gained the attention of many institutional money management consultants as the return profile from 1990-1995 had been very attractive. This demand enabled more companies to raise money in the high yield space versus bank debt or other forms of financing. This was both good and bad. It did bring in many new players on the issuance side of the market, but as the demand grew so did the ability to raise money on fictional business plans, especially in the “TMT” (telecommunications, media and technology) space as the internet and technology bubble developed. Like in the equity market, billions of dollars were raised by companies with no revenues and only a plan for the future. This ultimately led to the second “nuclear winter” in high yield which occurred in 2002, culminating with the high profile defaults of Enron and Worldcom and the collapse of the technology and telecom markets. Once again, a period of healing and consolidation began as issuance subsided. But issuance once again picked up starting in 2006 and the market now stands at about $1.5 trillion and growing rapidly, with record issuance in 2013 and near record issuance in 2014.3
As we outlined in our recent writing (“Overview of the Fixed Income Market”), high yield bonds are now a sizable and growing piece of the fixed income space, worthy of investors’ attention. For more on the history and development of the high yield asset class, a discussion the legislation and ratings methodologies that have created what we see as opportunities in the marketplace, and comparative historical risk adjusted returns with other asset classes, click here to read our updated piece, “The New Case for High Yield: A Guide to Understanding and Investing in the High Yield Market.”
1Hickman, W. Braddock, 1958. “Introduction and Summary of Findings.” Corporate Bond Quality and Investor Experience, partial text from pages 14-15. Princeton, NJ: Princeton University Press for National Bureau of Economic Research.
2Blau, Jonathan, James Esposito, and Amit Jain. “Leveraged Finance Strategy Weekly,” Credit Suisse Global Leveraged Finance. January 9, 2015, p. 4.
3Acciavatti, Peter D., Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li.. “Credit Strategy Weekly Update.” J.P. Morgan, North American High Yield and Leveraged Loan Research. January 9, 2015, p. 7.
Although information and analysis contained herein has been obtained from sources Peritus I Asset Management, LLC believes to be reliable, its accuracy and completeness cannot be guaranteed. Information on this website is for informational purposes only. As with all investments, investing in high yield corporate bonds and loans and other fixed income, equity, and fund securities involves various risk and uncertainties, as well as the potential for loss. Past performance is not an indication or guarantee of future results.
This article was written by Tim Gramatovich, CFA, CIO for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD).