Description
HIGH YIELD
COMMENTARY
JANUARY 2016
Market Overview
Portfolio Overview
 High Yield weakness spilled over into the New Year
− The Credit Suisse High Yield Index declined 1.66% in
January. Seasonally, January is typically a strong month due
to new allocations to high yield and cash build up over the
slow holiday period.
− Spreads increased 79 basis points to 826; the last time
spreads crossed 800 basis points was in the third quarter
of 2011.
 Modest retail outflows continued, while new issue supply was
dampened
− US high yield mutual funds and ETFs recorded an outflow of
$3.6 billion in January, a slowdown from the $11.5 billion in
December 2015. (source: JP Morgan)
− The primary market remained fairly subdued with only 13
deals pricing for a total of $8.9 billion. By contrast, January
2014 and January 2015 witnessed $32.2 billion and $22.0
billion of new issuance, respectively.
(source: JP Morgan)  Higher rated bonds outperformed, while energy and commodities fell further − BBs lost 0.86%, Single Bs decreased 1.36%, and CCC credits were lower by 4.00%. − Retail led all sectors, up 1.22%, Consumer Products gained 0.46%, and Healthcare increased by 0.33%. − Energy and Metals/Mining were bottom performers, losing 8.24% and 3.70%, respectively. WTI oil fell 9.2% in January. An underweight to CCC-rated bonds added to relative returns as the riskier segments of the market continued to lag into 2016. The portfolio’s performance within Energy was mixed in January, as the sector followed oil prices sharply lower. An underweight to Energy - Service & Equipment benefitted returns, however this was more than offset by an overweight to Exploration & Production companies and credit selection.
Our investment process has always taken a long-term view of energy prices when analyzing asset value. The most recent drop in energy prices has stressed even the bond prices of credits with substantial asset coverage. We believe that the high yield market is pricing in $3040 per barrel oil prices over the next several years. Security selection within Diversified Media was positive for absolute performance due to an overweight to a large consumer data and analytics provider.
Exposure to an aluminum packaging manufacturer was positive for performance as their first lien notes rebounded. An overweight to the Cable/Wireless Video sector, which posted positive returns for the month, also contributed to performance. Detracting from performance was the portfolio’s investment in a diversified specialty products and fuel refiner. An underweight to Telecommunications, specifically wireline companies, also detracted from performance as the sector performed well over the month.
Credit selection in the Building Materials sector was negative due to an overweight to in one firm. Outlook Investor sentiment towards high yield ended 2015 at the most bearish levels since 2009 (2015 was the market’s first losing year since 2008 and only the third in the past 20 years). Nonetheless, the Credit Suisse High Yield Index fell 1.66% in January as global equity markets sold off and commodity prices continued to decline (oil prices broke below $30 to their lowest nominal levels in twelve years). Within the high yield market, the level of risk aversion is also extremely high. The spread between BB-rated bonds and CCCrated bonds is more than double its 20-year median of 612. Even excluding Energy and Commodities, 19% of the Credit Suisse High Yield Index was trading at distressed levels as of January 31 (spread of over 1,000 basis points). Nonetheless, underlying market fundamentals remain positive. Of the 20 largest issuers in the BofA Merrill Lynch High Yield Bond Index, all are publicly traded, with 18 having multi- LONDON | NEW YORK | PRINCETON • MacKayShields.com .
FLEXIBLE BOND HIGH YIELD STRATEGY billion equity market values. For example, Charter Communications recently issued a $1.7 billion 8-year senior unsecured note offering at 5.875% to help finance its acquisition of Time Warner Cable, which will make Charter the nation’s second largest cable company. Low energy and commodity prices are an issue. However, these sectors need to be viewed in proper perspective. First, the Energy and Metals/Minerals sectors comprise only 15.4% of the Credit Suisse High Yield Index.
Second, valuations of commodity-related bonds already reflect extreme financial distress. At the end of January, the average Energy bond traded at a price of $56 and a yield of over 18.0%. Likewise, the average metals/minerals bond traded at a price of $60 and a yield of 17%.
In other words, about two-thirds of the energy and metals/mineral sectors trade at distressed levels. Investors are avoiding commodities today much like they did financials in 2008-09 - without considering value, price and optionality. Both the absolute and relative value of high yield is strong. As of February 9, the BofA Merrill Lynch High Yield Index had a yield 9.9%; its spread of 862 basis points over Treasuries is significantly wider than the median of 556 basis points since the start of 2000.
Meanwhile, US and global interest rates remain extremely low (Investors now pay to lend money to Japan over 10 years and German 10-year bonds now offer a paltry 25 basis points in annual yield). There are, of course, risks for the US high yield market (a US recession, a sharp increase in interest rates, or some exogenous event). Nevertheless, with big coupons and short maturities, the risk adjusted case for the high yield market remains compelling. Availability of this document and products and services provided by MacKay Shields may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only.
It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction. Note to European Investors: This document is intended for the use of professional and qualifying investors (as defined in the Alternative Investment Fund Manager’s Directive) only. Where applicable, this document has been issued by MacKay Shields UK LLP, 200 Aldersgate Street, 13th Floor, London EC1A 4HD, which is authorised and regulated by the UK Financial Conduct Authority (FRN594166). Please note that security specific disclosures are representative and may not be included in your portfolio. This material contains the opinions of the High Yield team of MacKay Shields LLC but not necessarily those of MacKay Shields LLC.
The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.
©2015, MacKay Shields LLC. Past performance is not indicative of future results. LONDON | NEW YORK | PRINCETON • MacKayShields.com .
(source: JP Morgan)  Higher rated bonds outperformed, while energy and commodities fell further − BBs lost 0.86%, Single Bs decreased 1.36%, and CCC credits were lower by 4.00%. − Retail led all sectors, up 1.22%, Consumer Products gained 0.46%, and Healthcare increased by 0.33%. − Energy and Metals/Mining were bottom performers, losing 8.24% and 3.70%, respectively. WTI oil fell 9.2% in January. An underweight to CCC-rated bonds added to relative returns as the riskier segments of the market continued to lag into 2016. The portfolio’s performance within Energy was mixed in January, as the sector followed oil prices sharply lower. An underweight to Energy - Service & Equipment benefitted returns, however this was more than offset by an overweight to Exploration & Production companies and credit selection.
Our investment process has always taken a long-term view of energy prices when analyzing asset value. The most recent drop in energy prices has stressed even the bond prices of credits with substantial asset coverage. We believe that the high yield market is pricing in $3040 per barrel oil prices over the next several years. Security selection within Diversified Media was positive for absolute performance due to an overweight to a large consumer data and analytics provider.
Exposure to an aluminum packaging manufacturer was positive for performance as their first lien notes rebounded. An overweight to the Cable/Wireless Video sector, which posted positive returns for the month, also contributed to performance. Detracting from performance was the portfolio’s investment in a diversified specialty products and fuel refiner. An underweight to Telecommunications, specifically wireline companies, also detracted from performance as the sector performed well over the month.
Credit selection in the Building Materials sector was negative due to an overweight to in one firm. Outlook Investor sentiment towards high yield ended 2015 at the most bearish levels since 2009 (2015 was the market’s first losing year since 2008 and only the third in the past 20 years). Nonetheless, the Credit Suisse High Yield Index fell 1.66% in January as global equity markets sold off and commodity prices continued to decline (oil prices broke below $30 to their lowest nominal levels in twelve years). Within the high yield market, the level of risk aversion is also extremely high. The spread between BB-rated bonds and CCCrated bonds is more than double its 20-year median of 612. Even excluding Energy and Commodities, 19% of the Credit Suisse High Yield Index was trading at distressed levels as of January 31 (spread of over 1,000 basis points). Nonetheless, underlying market fundamentals remain positive. Of the 20 largest issuers in the BofA Merrill Lynch High Yield Bond Index, all are publicly traded, with 18 having multi- LONDON | NEW YORK | PRINCETON • MacKayShields.com .
FLEXIBLE BOND HIGH YIELD STRATEGY billion equity market values. For example, Charter Communications recently issued a $1.7 billion 8-year senior unsecured note offering at 5.875% to help finance its acquisition of Time Warner Cable, which will make Charter the nation’s second largest cable company. Low energy and commodity prices are an issue. However, these sectors need to be viewed in proper perspective. First, the Energy and Metals/Minerals sectors comprise only 15.4% of the Credit Suisse High Yield Index.
Second, valuations of commodity-related bonds already reflect extreme financial distress. At the end of January, the average Energy bond traded at a price of $56 and a yield of over 18.0%. Likewise, the average metals/minerals bond traded at a price of $60 and a yield of 17%.
In other words, about two-thirds of the energy and metals/mineral sectors trade at distressed levels. Investors are avoiding commodities today much like they did financials in 2008-09 - without considering value, price and optionality. Both the absolute and relative value of high yield is strong. As of February 9, the BofA Merrill Lynch High Yield Index had a yield 9.9%; its spread of 862 basis points over Treasuries is significantly wider than the median of 556 basis points since the start of 2000.
Meanwhile, US and global interest rates remain extremely low (Investors now pay to lend money to Japan over 10 years and German 10-year bonds now offer a paltry 25 basis points in annual yield). There are, of course, risks for the US high yield market (a US recession, a sharp increase in interest rates, or some exogenous event). Nevertheless, with big coupons and short maturities, the risk adjusted case for the high yield market remains compelling. Availability of this document and products and services provided by MacKay Shields may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only.
It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction. Note to European Investors: This document is intended for the use of professional and qualifying investors (as defined in the Alternative Investment Fund Manager’s Directive) only. Where applicable, this document has been issued by MacKay Shields UK LLP, 200 Aldersgate Street, 13th Floor, London EC1A 4HD, which is authorised and regulated by the UK Financial Conduct Authority (FRN594166). Please note that security specific disclosures are representative and may not be included in your portfolio. This material contains the opinions of the High Yield team of MacKay Shields LLC but not necessarily those of MacKay Shields LLC.
The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC.
©2015, MacKay Shields LLC. Past performance is not indicative of future results. LONDON | NEW YORK | PRINCETON • MacKayShields.com .
