By Peritus Asset Management
Equity market volatility has re-emerged so far in 2018. However, in the midst of this, the high yield market has held in fairly well. We are seeing more attention being paid to credit fundamentals, which we would certainly embrace as an active manager, but we are definitely not seeing the extent of the volatility we have seen in the equity markets.
We believe the current high yield market environment is positioned well for active managers versus passive/index-based products, as we work to continue to separate ourselves as an active manager. Default rates remain and are expected to remain below historical averages this year but have actually ticked up in the past few months.
The default rate is up nearly 1% since December to 2.36% as of the end of March and is expected to end 2018 around 2.5% according to J.P. Morgan.1 However, the increase so far this year is largely due to one issuer, iHeart Communication.
To put this in context, $17.4bn in high yield bonds have defaulted so far in 2018 and over half, or $9.4bn, of that is related to just this one issuer.2 Additionally, the entire increase in projected default rates from an actual rate of 1.45% at the end of 2017 to the expected rate of 2.5% as we close out 2018 is related to expected defaults in this one and a couple other large capital structures.(3)
Why does this matter? Because large capital structures generally mean these are well represented credits in the indexes and passive products that track them, as well as some other quasi-index products.