High Yield Credit Fundamentals Starting To Crack

Tyler Durden's picture

We have been warning of the uncomfortable current similarities to last year's (and for that matter cycle after cycle) high-yield credit underperformance / lagging behavior 'canary-in-the-coalmine' relative to the exuberant equity market for a month now. The price action has been summarily dismissed by the bulls as negative convexity-based, low-rate based, or apples-to-oranges comparisons - despite all of these throw-away lines being shown to be irrelevant when considered correctly with bottom-up comparisons showing just what we have been seeing - a much more concerned and less sanguine credit market than equity market. Now, Bank of America provides - in two succinct charts - the fundamental underpinning of this grave concern as across the high-yield credit universe revenues are not catching up with costs - creating significant margin pressures - and at the end of the day, a market that cares more for cash flow sustainability than the latest headline or quarter EPS upgrade from some sell-side pen-pusher is waving a red-flag as margins are the lowest they have been since March 2009 and is falling at a much faster clip than in the fall of 2008 as the reality of money-printing comes home to roost. And just to add salt to this fundamental wound, technicals are starting to hurt as supply picks up and 'opportunistic' issuance turns notably heavy - perhaps helping to explain how the ongoing inflows have been unable to push prices further up in the US. Lastly European high yield is trading tick-for-tick with sovereign risk still - as it has since the middle of last year and so as LTRO-funded carry fades, we would expect it to underperform - especially as austerity slows growth.

Warning Sign: revenues not catching up with costs...


...creating significant margin pressures...

And technical supply pressure is building...

While European High Yield remains joined at the hip with European Sovereign risks...


Source: BAML

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Catullus's picture

Goodnight, Dynegy. Casualty of the nat gas price collapse.

You're next TCEH/TXU aka the worst LBO in history.

GeezerGeek's picture

Love that last bit about "as austerity slows growth". Living within one's means is such a bummer.

Fluffybunny's picture

It does slow it in the short run though. That's just an economic reality.

SheepDog-One's picture

They printed like mad scientists and built a debt and austerity monster that is now tearing thru the village maiming and pillaging everything and theyre somehow surprised by that? 

mayhem_korner's picture



If it keeps on raining, the levee's going to break

If it keeps on raining, the levee's going to break

And when the levee breaks, we'll have no place to stay.

SheepDog-One's picture

'High yield credit revenues not catching up with 'costs'....huh, imagine that! And I thought printing money and shoving it into banks at 0% and sitting on it solved all problems.

scatterbrains's picture

Well to be fair it did manage to pump fuel prices by rougly twice the amount of stawks...


Nathan Hale's picture

Any suckers here trade eurodollar short-term interest rates? Some interesting action in the U3U4 spread, large seller in the face of fairly robust buying into it. Permanent reload of 250, looking at 20000+ spreads traded at 2 prices, ordinarily @5000 go through it a day. Any theories? Similar to event last week, but prices were 47.5 and 47, as opposed to 45 and 44.5's. For the unwashed, that size of a position works out to be about $500,000 per basis point move, so its gotta be someoone with deep pockets, particularly as it closed at 50.5 last night

Greater Fool's picture

I see a U3U4 spread of size 250 from yesterday which was...canceled. I see a trade today for 100 at 44.5...nothing much else.

How does the shorter expiry line up with banks having to roll their LTRO funding? Or it could be purely a hedge for some cash FI guy who's trying to kill two birds with one stone on his key rate duration.

Dealer's picture

Nothing to see here, move along.

WonderDawg's picture

Original. Don't forget "wash, rinse, repeat" and "hedge accordingly".

Schmuck Raker's picture

Although "Hey Bernanke, FUCK YOU!" never goes out of style.

nasdaq99's picture

Anybody get this email overnight from Anonymous titled "Declaration of Revolution"?


Dear Anonymous,

The purpose of this message is to inform you about the Revolution:



Please, watch the "Nazi Banksters Crimes Ripple Effect" movie to find out why, how, and to have sound arguments to persuade others. The movie can be easily found with a search engine.

Please, print the flyers at 2012jubilee.info and distribute them.

Please, spread this message and the movie to everyone you know.


toadold's picture

The thing that makes me really nervous is that feeling we'll be tip toeing along trying not to talk too loud and then someone in Germany will sneeze and the 'bots will take everything and everybody down in seconds.  "I say Jenny, my ATM card doesn't seem to be working."

q99x2's picture

Well eventually the FED and other central bankers will own most if not all of the stock market shares. So, if they have to they can purchase any extra shares that are being sold. I mean if they have infinite money and their action of buying shares is not inflationary since the shares are only being shelved temporarily who cares. They will lie if they have to. Nobody is allowed to see what they are doing so what the heck. Why not?

SheepDog-One's picture

Well thats the situation they already face, theyve been buying all the stocks and bonds all along, banks crammed full of toxic stocks, and are now demanding to know why 'retail' is not piling in to buy all their 'assets' off their hands at the top.

Funny_Money's picture

Ahhh, nothin like coffee and charts =)

JW n FL's picture



especially as austerity slows growth.


Wall Street needs more Freedom and Stimulus and Tax Credits and Tax Loop Holes and Subsidies and Hookers and Cocaine and Legislative Ability and...

AIPAC The Israeli Lobby pt 1 of 5


Israel.. with its $70 Billion in Aide from America.. is now going to buy U.S. Equities.. with the Federal Reserve Funding the purchases.. to continue the Spending Spree!


The Largest Lobby in America is Wall Street..

The Second Largest Lobby in America is the Jewish Lobby!

The Largest Lobby’s receive the Largest bailouts, Subsidies and Foreign Aide..

All while American Children go Hungry.

Of course this behavior.. these NUMERICAL FACTS! will somehow will be twisted or SPUN! gotta LOVE the Spin Machine! to a personal attack on myself.

Thusly the Worst Kept Secret in the World.. stays out of public discussion and out of the public’s eye.. for that much longer.

The Truth can NOT be discussed! in America! Anywhere!

Only Lies and Corruption will be Celebrated on High!

chunkylover42's picture

Meh.  I see 10 consecutive quarters of margin expansion prior to these last couple quarters of margin compression, allowing companies to build up enormous cash reserves on the balance sheet.  Meanwhile, existing debt has been rolled over extensively into lower rates reducing the cost of carrying debt.  I'd be interested to see a chart on interest coverage ratios over this same period (EBITDA and EBITDA-CapEx). 

Will there be a tick up in defaults if the economy slows?  Sure but I don't think we're staring down double digit default rates or a collapse in the asset class.