September 2011 was a time of fear in the markets. For Anne Popkin, president of $9.9 billion Symphony Asset Management in San Francisco, the fear signaled a sell-off in levered credit instruments. Though prices were nowhere near the lows of 2008, they were still very attractive, said Popkin when she presented levered credit as her Best Idea at last year’s Delivering Alpha conference.
Aside from the sell-off, levered credit, which allows a company to take on more debt than usual through levered loans or high-yield bonds, was showing healthy fundamentals. “Default rates have been below 2 percent,” said Popkin. “If you also look at the balance sheets of companies, these too have improved significantly. They’re holding a significant amount of cash.” A wave of reissues meant that companies were in good shape to refinance loans that were close to reaching their maturity dates. Popkin said Symphony was looking mostly at higher-quality levered credit; BBB grade, a notch above the high-yield rating, was particularly inexpensive.
Symphony did indeed pick a winner. Levered credit tends to perform well in periods of modest growth, and it rallied in the first quarter of 2012 as the market began to recover from the sell-offs. The rally softened in the second quarter; the Credit Suisse High Yield index returned 1.6 percent while the Credit Suisse Leveraged Loan index returned 1.0 percent. Higher rated loans and debts continued to outperform, however, though the yield on BBB bonds slipped from 5.17 percent in December to 4.7 percent in June, according to Credit Suisse data.
“After taking risk late last year, we started taking down risk in this strategy in March and April, so that risk levels were reduced significantly,” says Gunther Stein, CEO and chief investment officer of Symphony. “We’re waiting for the prices to go down again, though we’ve added holdings selectively on the margin. Our outlook now is that we’re somewhat more favorably inclined toward levered loans than high yield. Both have a lot of value, but high yield has volatility.”
Companies continue to refinance, to the point that the supply of new issues dropped in the second quarter of 2012. A July 2012 report on the high-yield and bank loan outlook from Guggenheim Partners says that in the second quarter the pace of high-yield-bond issuance fell significantly from the record-setting level of $95 billion in the first quarter of 2012. “Since 2009, the capital markets have enabled issuers to refinance nearly $500 billion of high-yield bonds and bank loans. With diminished need for capital, high-yield-bond issuance fell to $51 billion during the second quarter,” the report says. “The rapid pace of new issuance slowed in the second quarter, dropping 46 percent from the record-setting $95 billion in the first quarter. A moderation in issuance combined with continued investor demand should lead to spread tightening.”
