The Divergence Between High Yield and Equities

Posted on November 20, 2020

“If one is concerned about valuations and the future performance and volatility of the equity markets, from a historical perspective, high yield appears cheap relative to equities at this point in the cycle.”
-David Breazzano

The following is a summary of an excerpt from our 2020 DDJ Virtual Investment Conference. To access the video featuring David Breazzano, DDJ’s President, Chief Investment Officer and Portfolio Manager, addressing this topic, please click here.

 

In order to better understand the current state of the high yield market and where we see opportunities, let’s first take a step back and look at it from a broader market perspective by comparing high yield to equities, with equities represented by the S&P 500 index. I believe it's important to make this comparison to better understand the relative value between the two asset classes. In addition, before we look at the current environment, it is informative to get a historical perspective, so let’s review the past two major inflection points and subsequent recoveries in those markets, with the first such inflection point occurring during the 2001 to 2004 period.

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High Yield Bond & Leveraged Loan Month in Review

Posted on November 5, 2020

October 1 - October 31, 2020

Summary

  • October was a volatile month for leveraged credit markets, which produced modest gains.
  • Lower-rated credits in the high yield bond market lagged, while lower-rated leveraged loans outperformed.
  • We provide a few thoughts on the upcoming U.S. elections.

In last month’s High Yield Bond & Leveraged Loan Review, we stated that we expected October to be a volatile month for markets, and it did not disappoint. At the beginning of the month, markets were faced with the news of President Trump’s COVID-19 diagnosis and subsequent hospitalization. Since that time, COVID-19 cases have steadily risen in the U.S. and across the globe. In particular, the spread across Europe has resulted in renewed lockdowns and further restrictions, albeit to a degree far less draconian to date than those of the spring. In the U.S., rising number of infections have brought the country’s total number of cases to more than 9 million, with hospitalizations similarly increasing. Nonetheless, continued progress on how best to treat patients with the virus has increased survival rates, in particular among those hospitalized.

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The Power of Board Diversity by College Student Saamia Bukhari

Posted on October 28, 2020

A few months ago, DDJ hosted a writing contest geared towards college students. Students were tasked with submitting a paper discussing the topic of board diversity and whether it has an impact on corporate performance.

This week we are featuring the work of our first place entrant, Saamia Bukhari. Ms. Bukhari presents key thoughts and arguments as to why diversity can empower a company’s board of directors, as long as such diversity is achieved successfully under the conditions of inclusivity and sincerity. Citing powerful research from various studies, the writer presents empirical evidence that diversity can positively affect a company’s bottom-line, as well as drive innovation from within. We invite you to read her full paper below.

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High Yield Bond & Leveraged Loan Month in Review

Posted on October 8, 2020

September 1 - September 30, 2020

Summary

  • In September, leveraged loans produced a gain and outperformed high yield bonds, which experienced a loss for the first time since March.
  • CCC-rated bonds and loans generated positive performance and outperformed their higher rated peers.
  • We conduct a deeper dive into spread changes in the CCC-rated segment of the high yield market. 

In general, various indicators continue to show improvement in overall economic activity as the U.S. economy resumes its reopening. Unfortunately, such renewal in activity has coincided with a surge in COVID-19 cases. However, and thankfully, the most recent surge or “second wave” in the U.S., and abroad, has yet to result in an alarming increase in hospitalizations or mortality rates. That said, the recent announcement that President Trump has tested positive for COVID-19 will create further uncertainty and likely inject volatility into the markets.

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Important Concepts and Terminology Relating to Restructurings, Part 1

Posted on October 2, 2020

When many investors hear terms like “default” or “bankruptcy”, negativity and losses probably come to mind, and for good reason. Over the past 25 years, on average, when a high yield bond has defaulted, investors lost almost 60 cents on every dollar invested.1

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144A Bonds and Why We Buy Them

Posted on September 24, 2020

Rule 144A is therefore very valuable to issuers, as it reduced the cost of capital by improving the liquidity of the institutional secondary market for privately placed bonds.”
– Andrew Ross, CFA, Director, Portfolio Specialist

Not familiar with 144A bonds? You’re not alone. Given the growth of bonds issued via Rule 144A (“the Rule”) and their increased importance in the high yield market, we thought it would be informative to provide a brief overview of Rule 144A and the bonds issued under this rule.

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Does Board Diversity Impact Corporate Performance?

Posted on September 16, 2020

Today we are very happy to announce the winners of the DDJ Capital Management White Paper Challenge. In this contest, college students were tasked with submitting a paper discussing the topic: “Does Board Diversity Impact Corporate Performance?” Of all the contestants, we have selected the following two winners.

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High Yield Bond & Leveraged Loan Month in Review

Posted on September 10, 2020

August 1 - August 31, 2020

Summary

  • In August, high yield bond and leveraged loan markets delivered gains of 0.98% and 1.50%, respectively

  • The presidential election moved to the forefront, with increased volatility likely to occur in coming months

  • The Fed announced a change to inflation policy expected to keep interest rates “lower for longer”

  • Issuance in August was much higher than expected, driven by BB-rated issuance

Presidential politics moved to center stage in August as both political parties hosted their respective conventions, albeit somewhat unconventionally due to the ongoing pandemic. In all likelihood, the market will increasingly focus on the upcoming U.S. presidential election, with heightened volatility occurring as a result. In addition, the fragile relationship between the U.S. and China deteriorated further in August, as President Trump, citing national security concerns, issued an executive order in an effort to either try and force the sale of the popular social media app TikTok, which is owned by a Chinese company, to an American company or otherwise require it to close its U.S. operations. Furthermore, the U.S. State Department requested that U.S. colleges and universities divest Chinese holdings in their endowment portfolios. The markets will be closely monitoring for any negative developments between the two countries that could threaten the adherence to the previously agreed-upon Phase 1 trade deal.

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The State of Corporate Credit Quality

Posted on August 24, 2020

Now that the U.S. economy is officially in a recession, what is the state of corporate credit quality? During a recent discussion with the CFA Society of New York, DDJ President, Chief Investment Officer and Portfolio Manager David Breazzano offered his opinion on the subject:

It's a very interesting question. And I'd like to answer it in a couple of different ways. One, the short answer is corporate credit quality certainly has declined as a consequence of the current recession. However, to understand this, it is necessary to look “under the hood” of the high yield market and dig into some of the statistics. If one were to look at the credit quality of a broad high yield bond index, it would show that BBs have actually increased as a percentage of the overall index since the start of the year, whereas Bs and CCCs have declined. So, at a statistical first blush, one would look at it and say, "Wow, credit quality actually has improved this year."

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High Yield Bond & Leveraged Loan Month in Review

Posted on August 13, 2020

July 1 - July 31, 2020

Summary

  • In July, while leveraged loans produced a gain, they lagged the high yield bond market, which delivered its best monthly return of 2020.
  • The Bureau of Economic Analysis provided confirmation of Q2’s historic GDP decline.
  • The Fed announced an extension of its monetary support measures through year-end.
  • With BB-rated bonds producing positive returns year-to-date, inside we take a closer look at the spread compression of this Cohort in recent days.

 

At the end of July, the U.S. Bureau of Economic Analysis released its Q2 GDP estimate, which was pretty dramatic. It showed that the U.S. economy had shrunk by a record setting -32.9% annualized rate, which is more than three times the previous record of -10% set back in 1958.1 Although a decline of this magnitude was expected, and likely already priced into the market, it provides good context for the scale of the economic disruption caused by the COVID-19 pandemic. In addition, digging into the details of the release reveals that the vast majority of the decline came from a massive reduction in personal consumption.

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