We’ve talked a lot [9] lately about HY in general and about the HY energy space more specifically. Recapping, periods of QE in the US saw US HY supply surge 50% above normal levels as issuers sought to take advantage of lower borrowing costs and investors clamored for the relatively higher yields they could get by taking on more credit risk. More recently, struggling oil producers have tapped the market in an effort to stave off insolvency as crude prices plummet, leading directly to a situation where outstanding HY energy bonds account for a disproportionate share of all outstanding debt in the space. With rates set to rise later this year, with crude prices likely to stay depressed for the foreseeable future, and with suppressed liquidity in the secondary market for corporate credit poised to bring heightened volatility, the stage may be set for a high yield meltdown.
$91 billion in Q1 issuance…
[10]
...with energy companies tapping investors...
[11]
[12]
[13]
...and higher default rates for issuers who now account for a higher percentage of the market...
[14]
...amid rising volatility...
[15]
...and falling dealer inventories...
[16]
Charts: Citi, TPL, Barclays
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What could go wrong?