DDJ Capital Management Blog

In Part 1 of of our series on 144A bonds (144A Bonds and Why We Buy Them), we discussed what these securities are, their increased importance in the high yield market, and why DDJ believes investors seeking exposure to high yield should embrace investing in Rule 144A issuances.

In this edition, we discuss an important trend in the high yield bond market: the prevalence of 144A-for-life bond issuance (i.e., those issued without registration rights) relative to 144A high yield bonds issued with registration rights.

Interested in reading about privately placed 144A high yield bonds trading on the secondary market? Did you catch our popular audiocasts on topics such as the impact of fallen angels and the factors that led to negative oil prices? Below, check out our top-three blogs of 2020.

Are you exploring high yield? Watch these videos to learn more about the challenges and opportunities our Senior Research Analysts are seeing within their respective high yield sectors.  

During our DDJ Virtual Investment Conference held in October 2020, our analysts provided in-depth video updates on the high yield sectors they cover.

Interested in learning about the challenges and opportunities our senior research analysts are seeing within their respective high yield sectors? 

During our DDJ Virtual Investment Conference held in October 2020, our Senior Research Analysts provided in-depth video updates on the high yield sectors they cover. 

During DDJ's Virtual Investment Conference held in October 2020, Portfolio Manager and Director of Research Roman Rjanikov, discussed DDJ’s Environmental Sustainability High Yield Strategy that DDJ recently launched via a simulated portfolio¹.

In this video, Mr. Rjanikov also explains how DDJ has incorporated ESG analysis into its investment process.

November 1 - November 30, 2020

Summary

• Leveraged credit markets produced impressive gains in November.
• Lower-rated credits in the high yield bond and leveraged loan markets meaningfully outperformed higher-rated peers.
• Prospects of continued political gridlock in the U.S. and positive COVID-19 vaccine news drove performance, with COVID-sensitive sectors outperforming.
• Strong returns occurred while daily coronavirus infections, hospitalizations, and ICU patients all hit record highs during the month.

As many expected, the outcome of the U.S. presidential election and a number of Congressional races remained too close to call on election night, with the prospect at the time that it could take days or even weeks until all votes were counted. However, election night did not result in a “Blue Wave” as many had predicted, with a continued divided government appearing to be the most likely outcome. Despite the uncertainty with who would be the next president in the immediate aftermath of the election, risk markets, including leveraged credit markets, rallied on the prospects that more gridlock in Washington would decrease the likelihood of any significant legislative changes being implemented. Less than a week after the election, media channels began to announce Democrat Joe Biden as President-elect and that the Democrats had retained control of the House of Representatives, albeit by a diminished margin. In the Senate, Republicans will hold 50 seats to 48 for Democrats, with the remaining two outstanding Senate seats in Georgia headed to a runoff election on January 5^th.

“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.

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.

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.

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.