Tony Linares
(1-212) 270-3285 tony.linares@jpmorgan.com
Alisa Meyers
(1-212) 834-9151 alisa.meyers@jpmchase.com
Rahul Sharma
J.P. Morgan India Private Ltd rahul.z.sharma@jpmorgan.com
Featured topics
Credit strategy update (p.3) Despite record retail inflows, cash balances move lower q/q reflecting better conditions (p.7) Credit highlights (p.9) Revising primary US CLO supply and spread forecasts (p.10) Economic summary (p.18) Credit derivatives summary and outlook (p.20) See page 48 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
www.morganmarkets.com
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Table of contents
Credit strategy update
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Despite record retail inflows, cash balances move lower q/q reflecting better conditions . . .7 Credit Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Revising primary US CLO supply and spread forecasts . . . . . . . . . . . . . . . . . . . . . . .10
Economic summary
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Credit derivatives
Credit derivatives summary and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Week in review
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Bond spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Loan spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Gainers & Losers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Market technicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 High yield new issue activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 Institutional loan new issue activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 High yield supply and demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 High yield defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Leveraged loan defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 Credit trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Rising stars and fallen angels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Index profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Italy
Spain
10-year Gov't Bond Yields Current: Spain: 5.94%; Italy: 5.48% November Peak: Spain: 6.70%; Italy: 7.26%
Oct-10
Source: Bloomberg.
Rather than focusing on Europe, the chief concern for high-yield investors has always been the US economic outlook, and the weaker than expected payroll report on Friday is what really provided the fuel for the latest setback to prices. Of course fundamentally the market is sound, with credit metrics fine and defaults very low. And the biggest theme of early 2012 has certainly been the positive feedback loop between robust demand for the asset class and record new-issuance, of which the majority has gone toward extending maturities and shoring up liquidity. With a default rate half its long-term average at 2% and little need for companies to access capital (total maturities across bonds and loans through 2013 about match 1Qs bond activity alone), spreads of 670bp certainly look attractive in that context. But as October taught us when high-yield bond yields rose to as high as 10%, the economic outlook will continue to hold the key for performance, much as it did on the positive side when yields collapsed to nearly 7% by early March amid sharply firmer global economic sentiment. Over the next nine months, we view an economic backdrop consisting of modest growth as ideal for high-yield investors because it provides upside to current prices by placing a cap on Treasury yields. For context, incorporating our economists forecast for 2.2% US
Oct-11
Jul-10
Jul-11
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
GDP growth in 2012 we are forecasting high-yield bond yields to end the year at 7%, 63bp below current levels. But until the US economic data firms and reassures investors the YTD improvement wasnt due to either seasonal adjustments or the warm winter, the asset class is unlikely to make headway with the market now seeing outflows. On that note, this weeks -$1.29bn outflow was the first outflow for the asset class since late November, and reverses a stretch where $25.6bn moved into the asset class (11% of AUM). In Europe, the recent focus has been on Spain where bond yields are rising. The wheels began to come off the bus when the Prime Minister announced at the European Summit meeting on March 2nd that his government had abandoned its deficit-reduction targets for 2012. And where trust is everything, Spanish 10-year bond yields have subsequently increased 103bp in response. And the mid-week catalyst for stabilization in Spanish and Italian bond yields and improvement in overall risk appetites, investors seem to be focusing on options available to officials, including SMP buys, EFSF/ESM activity, and IMF fund raising. Another catalyst for the markets recovery has been the better data out of China, including PMIs, auto sales, retail sales, and overall loan activity. While 1Q12 GDP of 8.1% released Thursday night was shy of expectations, trends in March have been better, and speculation continues to build that Chinas PBOC will soon ease policy. And whereas the S&P 500 has fallen 2.0% in April, Chinese shares have rebounded sharply, 4.3% higher MTD in response. Our economists continue to expect 1Q to represent the trough for Chinese growth and for activity to rebound sharply in 2H12. And finally, as for US economic data, initial jobless claims were weaker (+13K to 380K) following last Fridays disappointing labor market report (+120K actual versus +205K consensus), but with the trade deficit coming in much narrower than expected (-$46bn in February versus -$52bn in January), our economists upwardly revised their 1Q12 US GDP forecast for a second time to 2.5%, from 1.5% a week ago. At the same time, the early read on 1Q12 earnings has been decent, particularly for industrials (AA, CP, PPG, and WAB). Earnings season risk is now being viewed to the upside. As per our chief equity strategist Tom Lee, he has established a 1Q12 EPS estimate of $24.25, which is about 1% above the current bottoms-up consensus estimate of $24.07. The fact that 1Q12 EPS grew at only 1% y/y on top-line growth of 4% seems well telegraphed as there have been fewer negative revisions q/q. This is setting the stage for companies to beat estimates, and so far in 1Q (28 companies reported), 82% are exceeding estimates compared to 60-70% seen in past 4 quarters. And composite overall beat is coming in at 4.6%, well ahead of the 2.6% seen in 4Q11 results at this exact time. And there is a case for top-line accelerating later in the year when considering the combined impact of China policy easing, Euro-area boost from weaker Euro, and steady demand recovery in the US as fueling better comparisons in 2H12. Many important cyclicals are still seeing solid demand growthAerospace, Construction, Machinery, Road and Rail, IT services, and PCs are seeing solid gains while weakness is not surprisingly seen in Mining, Autos and Airlines. But really, after two back-to-back double-digit quarterly returns for the S&P 500, the short-term risk/reward certainly seemed less asymmetrically favorable coming into April with momentum ebbing, expectations realigned, and
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
macro challenges emerging such as China, Europe, and gasoline prices. And there seems to be concern developing that 2012s spring is shaping up to be a carbon copy of the spring of 2011 and 2010. In terms of performance, the S&P 500 initially sold off 2.8% between Thursday and Tuesday, but recovered 2.1% on Wednesday and Thursday to conclude the week down modestly, -0.7%. Meanwhile, high-yield bonds and loans posted modest declines of -0.26% and -0.01%, respectively, bringing their YTD returns to 5.5% and 4.0%. High-yield bond yields increased 11bp week-over-week to 7.63%, whereas the yield to maturity for our recently launched J.P Morgan Leveraged Loan Index decreased 4bp to 6.66%. As for other asset classes this week, 10-year Treasuries, emerging markets, and high-grade bonds returned +1.2%, +0.5%, and +0.5%, respectively. And for spreads, high-yield finished 20bp wider at T+670bp and loan spreads (to maturity) finished 7bp wider at L+561bp. The HY CDX, LCDX, and IG CDX finished flat, 33bp wider, and flat at 597bp, 322bp and 97bp, respectively.
High-yield bond and loan yields continue to slowly drift higher
10.0% 9.8% 9.5% 9.3% 9.0% 8.8% 8.5% 8.3% 8.0% 7.8% 7.5% 7.3% 7.0% 6.8% 6.5% 6.3% 6.0% High-yield Leveraged Loan VIX Index (10-day average) 40 38 36 34 32 30 28 26 24 22 20 18 16 14
Yields (%)
VIX
5
Note: Yields for high-yield bonds are represented by the yield to worst on our J.P Morgan Global High Yield Index. Yields for leveraged loans are represented by the yield to maturity on our J.P Morgan Leveraged Loan Index. Source: J.P. Morgan.
In terms of new-issuance, activity moderated as the week progressed amid mutual fund outflows. For the shortened week 8 bonds priced for $5.5bn, versus 17 deals for $7.6bn last week. But including five weeks when volumes exceeded $10bn, YTD activity has risen to $118.9bn and for context, the current pace of activity is consistent with annualized volume of $430bn (versus our recently raised forecast for $300bn), but we attribute some transitory factors (seasonal boost, very low volatility, lower need to refinance) and do not expect this pace to sustain over the balance of the year. But the more important takeaway from all of this supply is the continued focus on refinancing bond and loan facilities, which continues to keep net supply within the confines of demand while also serving to anchor medium term default expectations. As for institutional loans, primary activity also decreased over the shortened week. Specifically, 10 loans priced for $2.4bn, versus last weeks 17 loans totaling $10.0bn. YTD volume of $59.4bn remains fairly modest versus $104.6bn over the comparable period last year.
Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
High-yield bond and loan flows High-yield bond funds reported outflows totaling -$1.29bn this week (-0.9% of AUM, 37% ETFs), versus inflows totaling +$286mn last week. It was also the first outflow for the asset class in 19 weeks (last outflow in November), a period which saw a record $25.6bn move into the asset class (11% of AUM). After recording +$8.75bn, +$7.11bn, and +$4.55bn of inflows for January, February, and March, Aprils month-to-date outflows totals -$1.1bn. The breakdown for this weeks number is an outflow of -$481mn for the HY ETFs (37%) and -$812mn for actively managed funds, versus inflows of +$71mn (25%) and +$215mn last week. The HY ETFs now account for $6.1bn, or 32% of the $19.3bn moving into HY in 2012. The $6.1bn for the ETFs exceeds inflows for all of 2011, whereas $13.2bn of inflows YTD for actively managed funds also exceeds the $9.9bn for all of last year. Despite outflows from bond funds, loan funds reported their largest inflow in 43 weeks. Leveraged loan funds had inflows of +$281mn this week, comparable to last weeks +$149mn inflow. This weeks inflow for loan funds was also the 11th in the years first 15 weeks, after seeing outflows in almost every week between August and December. After taking in $47mn last week, bank loan ETFs took in a more modest $2mn over the past 5 days. And after seeing outflows totaling 94mn in January and 339mn in February, loan funds recorded inflows totaling $910mn for March and $370mn MTD. Marchs inflow was the asset classes largest since June 2011. Year-to-date, inflows into high-yield bond funds are +$19.3bn, versus $15.6bn for all of 2011, while inflows for leveraged loan funds are +$847mn, versus +$13.9bn of inflows for all of 2011. High-yield bond and loan new-issuance Leveraged loan new issue activity moderated on the back of less favorable market sentiment and given slower activity around the Easter weekend. For high-yield, 8 bonds priced for $5.5bn, compared to a prior 4-week average of $8.1bn. We recently upped our 2012 HY bond issuance forecast by $75bn to $300bn which is in line with 2010s record. And annualized issuance pace is currently tracking over $400bn, but we temper our expectations due to seasonal factors and potentially less conductive macro conditions as the year progresses. For loans, 10 loans priced for $2.4bn this week, compared to a prior 4-week average of $6.5bn. Thus, YTD leveraged loan new issuance volume totals $59.4bn, 43% lower than activity over the same time last year. In terms of the details, Tuesday activity kicked off the week on a strong note as 4 deals priced across 5 issues for $4.0bn, but activity subsequently moderated. Tuesdays activity included El Paso Energys dual tranche deal totaling $2.75bn and funding the buyout of the exploration and production business. The upsized $750mm 7NC-3 Sr Sec 2nd-lien Notes (Ba3/BB-) priced at the tight end of their 7% area guidance at 6.875% while the downsized $2bn 8NC-4 Sr Notes (B2/B) printed at the low end of their 9.5% area talk at 9.375%. Accompanied by a $750mm Sr Sec 2nd-lien TL and an equity check of $3.2bn, the transaction marks just the third sizeable LBO of 2012 (Taminco in January and Samson Investment Co. in February). With the pricing of this sizeable deal, acquisition financing made up close to 50% of all activity this week, bringing YTD acquisition deal activity to 15.6% of
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
all issuance, which is somewhat ahead of 12.2% over the same time period last year. The other sizeable deal to price this week was Intelsat Jackson Holdings $1.2bn add-on to its existing $1bn 7.25% 10NC-5 Sr Notes (B3/B) with proceeds aimed at the tender offers for up to $310mm of its $702mm 9.5% Sr Notes due 2016 and up to $470mm of its $1.05bn 11.25% Sr Notes due 2016. The deal received strong demand, upsizing by $400mn. Looking ahead, the forward calendar holds only 3 deals for $420mm suggesting modest issuance volumes in the coming week. As for institutional leveraged loans, activity remained focused on refinancing this week, which made up 59% of activity, with only 3 of 10 loans priced aimed at nonrefinancing purposes. Specifically EP Energy priced their $750mm covenant-lite term loan, after increasing the size from $500mm, with the proceeds helping back the $7.1bn LBO of El Pasos exploration and production business. Both the loans and bonds were well oversubscribed, highlighting the current demand for new money. The other two non-refinancing deals were $100mm covenant-lite add-on TL acquisition financing for Sprouts Farmers Market and $125mn add-on TLB dividend financing for Preferred Sands. The launched in-market institutional calendar now stands at 34 deals totaling $14.1bn while the full forward calendar including announced deals holds 42 loans for $15.1bn.
Despite record retail inflows, cash balances move lower q/q reflecting better conditions
Despite record retail inflows ($20.4bn in 1Q), cash balances among high-yield funds ended 1Q12 down 1.1% q/q due to a number of reasons, including record-new issuance ($107.7bn gross, $42.5bn non-refinancing), improving global macro economic conditions, diminishing tail risks surrounding European sovereigns and banks, and an increase in exposure by HY funds to the loan asset class (+70bp q/q to 3.2%). And arguably, high-yield funds came into the year too defensive carrying cash balances at their highest level since the credit crisis (approximately 2% above the historical average and 3-4% above levels of the past couple of years), and the sharp turn in broader macro economic sentiment, rightly so, provided managers incentive to deploy that cash over the balance of the quarter. And the q/q decline came despite inflows in 1Q that equated to approximately 7.5% of AUM for actively managed funds. We estimate cash balances among high-yield fund managers concluded 1Q12 at a still elevated 4.6%, versus 5.7% in December 2011 and 3.2% in March 2011. For context, we estimate the historic norm for cash is around 4-5%, but record newissuance conditions and few high yielding alternatives left cash balances well below these levels over the past few years.
Asset breakdown for high-yield mutual funds
31-Dec-08 Bonds Cash Loans Stocks Other1 85.2% 6.6% 4.5% 0.3% 3.3% 31-Dec-09 90.9% 2.4% 3.8% 0.6% 2.3% High Yield Mutual Funds 31-Dec-10 31-Mar-11 30-Dec-11 89.1% 3.2% 3.8% 1.1% 2.8% 89.3% 3.2% 3.6% 1.0% 2.9% 89.1% 5.7% 2.5% 0.8% 1.8% 30-Mar-12 89.8% 4.6% 3.2% 0.6% 1.8% Q/Q change 0.7% -1.1% 0.7% -0.2% 0.0% Y/Y change 0.5% 1.4% -0.4% -0.4% -1.1%
Note: Other assets include convertible and non-convertible preferred stock, convertible bonds, credit derivatives, emerging market corporates and sovereigns, and structured notes. Source: J.P. Morgan. 7
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Note: Cash balances are as of March 30th, 2012. Source: J.P. Morgan.
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Credit Highlights
Gaming & Lodging
Susan BerlinerAC (1-212) 270-3085 susan.berliner@jpmorgan.com Richard DeGaetani (1-212) 834-9524 richard.j.degaetani@jpmorgan.com
CZR Recent Stock Performance: We believe the most positive factor for CZR has been the performance of its stock, which is now up +68% since it priced its IPO on 2/7/2012 vs. an 11% gain in the S&P 500 for the same period.. CZR now has a market capitalization of $1.9 billion (with 125.3 million shares outstanding) with a 11.8x EV multiple based on 2012 EBITDA versus MGM at 10.3x and its regional peer average of 7.8x (please see Table 1). Part of the reason for this impressive performance is attributed to CZR's stock being included to the Russell 2000 and 3000 on 3/30/12. These indices typically add companies that had IPOs at quarter end. Relative Value: We continue to like CZRs 1st lien debt with our preference still being its B-4 term loan due 10/16 offered at $103.750 (YTM of 8.80%), while we think the longer dated term loans (due 1/18) are also attractive with the B-5 offered at $87.75 (YTM of 8.69%) and the B-6 offered at $91.000 (YTM of 9.01%). We also continue to prefer CZRs 11.25% 1st lien bonds which are now offered at $109.000 or a YTW of 7.66%. For those that cant own bank debt, the 1st lien bonds still have a decent yield of 7.66% (offered at $109.000). Full report: Caesars Entertainment Corp.: Update on Recent Flurry of Headlines Healthcare
David Common, CFA (1-212) 270-5260 david.common@jpmorgan.com Jared Feeney (212) 270-0699 jared.a.feeney@jpmorgan.com
On Tuesday, BMET announced that it had made a binding offer to acquire the global trauma business of DePuy Orthopedics, a unit of Johnson & Johnson, for $280 million in cash. JNJ expects the divestiture of this business will satisfy regulatory concerns associated with its $21 billion purchase of Synthes, which would make JNJ the global leader in the trauma device market. On Thursday, Moodys commented that LifeCells new competitor (Allergan's SeriScaffold product) is a credit negative. Allergan believes that its new mesh product, introduced at its R&D Day on March 28, the only silkderived bioresorbable scaffold, can achieve $100 to $250 million in peak year revenues within the $1.6 billion global market for soft tissue repair. Well be hosting our 2012 Healthcare Credit Workshop on Tuesday, April 17 in New York. See inside for the agenda. High yield healthcare has underperformed the broader HY market YTD (4.9% vs. 5.2%). Since our last publication on April 2, HY healthcare has underperformed the broader HY market by 5 bps. Full report: HY Healthcare Weekly: BMET, CONVAT, IAS, KCI Technology/Telecom
Thomas Egan, CFAAC (1-212) 270-2149 thomas.j.egan@jpmorgan.com Lina Kabaria, CFA (1 212) 834-5669 lina.p.kabaria@jpmorgan.com
Yields in high yield technology rose over the month of March but were fairly flat in the last week. Issuance and capital structure activities were light, despite a strong start to the stock market early in the week. Some technology companies, notably semi-conductors, that pre-announced earnings reported lower estimates. Telecommunications yields were fairly flat for the week, but slightly higher since the beginning of March, in line with the broader market. Overall, yields in the high yield telecommunications space are still ~90 bps tighter since 2011. Full report: Technology & Telecom Weekly: High Yield
9
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
AC
Neutral Spread to Libor or Euribor (bp) for originally-rated categories Source: J.P. Morgan. Note: 1. Between November 21, 2008 and December 9, 2010, AA to BB spreads are estimated using simplified duration and other assumptions; thereafter, indicative spread levels are used. 2. AAA is weighted average pass-through spreads. 3. Our series represents mid-quality pricing in secondary trading. 4. WAL at issuance.
Exhibit 2: US CLO annual supply since 2001 including J.P. Morgan estimate for 2012 ($bn)
100 90 80 70 60 50 40 30 20 10 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: J.P. Morgan.
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
AC
Exhibit 3: Selected AAA-rated global securitized product spread to Libor / Swap (bp)
Recent vintage CMBS (2010/2011) 220
200 180 160 140 120 100 80 60 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11
Secondary CLO
UK RMBS
Primary CLO
Primary CMBS
Jul-11
Source: J.P. Morgan. Secondary CLO based on generic super senior spread series from Exhibit 1.
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Secondary flows
A term curve has emerged in CLO secondary, with short AAAs (delevering/out of reinvestment/ <= 1.5yr WAL) inside L+125bp, or 15bp tighter than generic super senior. Short CLO AAAs offer relative value to comparable ABS and may offer potential upside, if amortization ends up quicker than expected (see our March 9th article).
At L+130bp, US CLO AAA primary spreads have met our L+125bp target. We revise our target to L+100bp, which we think will be met by early 2013. The path to tighter spreads will not be smooth. Risks include funding pressures out of Europe, macro concerns, capital regimes and regulation. That said, we believe our L+100bp target provides value cushion, though its possible very short duration AAAs in secondary end up tighter. Macro data has been mixed, but our economists believe China will experience a soft landing, and, have upgraded their Q1 US GDP projection from +1.5% to +2.5%. We analyze relative value, bank risk capital, and new issue economics to consider the primary CLO AAA outlook. Relative value Exhibit 3 illustrates CLO, CMBS and UK RMBS AAA spreads. These sectors have different risk/return profiles, but we make a simple consideration. US CMBS has been a good comp to US CLOs, with similar pricing, WAL and other factors. Late 2010/early 2011 vintage CMBS AAAs (144a, 20% par subordination) with WAL of just under four years trades at S+120, from as wide as S+200bp last fall. In fact, CMBS and CLOs tracked each other reasonably well in the 2011 sell-off, but CLOs are lagging more recently. In addition to collateral and stuctural differences, there are fixed/floating issues. Primary CLOs currently price 40bp wider than primary CMBS (public, 30% subordination, S+90bp) and 20bp than 2010/2011 CMBS (S+120bp), but the circa 20bp differential between 3M Libor and 4Y Swaps must be taken into account.
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
AC
Exhibit 4: Hypothetical bank annualized ROE (y axis) vs. primary CLO AAA spread (bp, x axis) (Basel IRB)
60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% 1.0% funding 1.3% funding
Finally, CLOs price 10-20bp tight to UK RMBS. Our European ABS strategy team sees dollar UK RMBS spreads tightening to L+100-110bp over the next six months based on the lack of supply, strong demand from end accounts, and barring any significant pickup in sovereign or systemic risks out of Europe. A question of capital We consider a simplified bank ROE model based on funding cost, risk based capital, and other factors to evaluate bank buying in CLO AAAs. For all-in funding, we use 1.0% or 1.3% based on our US Bank analysts estimate of deposits, Fed Fund purchases, debt (etc). For capital, we use risk weights of 7% or 20%, the former based on the IRB approach (does not change under Basel III) and the latter on the risk weight floor proposed by the SSFA. Finally, we assume a 10% Tier 1 capital ratio, which fits within longer term Basel III guidance. Spread tightening may be limited given the demise of the shadow banking system and changes in regulatory capital, but CLO spreads down to L+100-110bp may make sense for some banks depending on funding and capital (Exhibits 4 to 5). For example, at a L+100bp CLO spread and a 1.0% bank funding cost, the ROE is 14% in IRB to 5% in the SSFA, all else equal. Other issues include Basel IIIs Liquidity Coverage Ratio (LCR, excludes CLOs). Our analysis is representative. Banks can achieve ROE targets by a number of means, such as buying assets with very low risk weight/high yield (e.g. sovereign debt), making more loans, reducing costs, etc but CLO AAAs would fit within a broader strategy. We doubt European banks and insurance will be a major player, given risk retention requirements and capital issues (CRD 122a, Solvency II). US insurance may play a part in CLO AAA spread evolution, though anecdotally we observe more interest in AAs and single-As at current levels. Our CMBS analysts observe demand from US insurance for CMBS super senior inside S+100bp to achieve double-digit ROE, depending on specific capital charges, funding costs, whether rate risk is hedged, etc. New issue equity economics CLO spreads are famously sticky to loans, but on a decade-long basis the relationship does seem pretty strong, apart from periods of extreme volatility when credit spreads in general trade at very distressed levels (top right corners of Exhibit 6). We expect that the general direction of loan spreads will continue to influence CLO spreads. We note our High Yield strategists maintain their J.P. Morgan Leveraged Loan Index spread will tighten another 20bp or so to L+575bp by the end of the year.
80 90 100 110 120 130 Source: J.P. Morgan. Assumes 7% risk weight, 10% core Tier 1 ratio, Libor (etc). ROE = net spread / capital charge (assuming 1,000 notional investment).
Exhibit 5: Hypothetical bank annualized ROE (y axis) vs. primary CLO AAA spread (bp, x axis) (proposed SSFA)
20% 15%
10%
1.0% funding
1.3% funding
5%
0%
-5% -10% -15% -20% 80 90 100 110 120 130 Source: J.P. Morgan. Assumes 20% risk weight, 10% core Tier 1 ratio, Libor (etc). ROE = net spread / capital charge (assuming 1,000 notional investment).
Exhibit 6: 2001 to the present: Regression of CLO AAA (top) and CLO BBB (bottom) to Leveraged loan spreads
1,000 900 800 700 600 500 400 300 200 100 0
0 250 500
R = 0.59
2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0 0 400
R = 0.74
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
AC
As a twist in considering future CLO spreads, even if this doesnt mean spreads will gravitate here we try to see if our L+100bp spread target is economical for CLO creation at tighter loan spreads. Based on a generic CLO 2.0 structure (equity about 9.5x levered) and a 2% default rate assumption, we take our Funding Gap and project annualized equity return. We use a grid of AAA and asset spreads, as shown in Exhibit 7. Our current projection is 14.8%, assuming AAA spread of L+130bp and asset spread of L+425bp (the shaded box). To the extent asset spreads tighten by say 25bp, then our target of L+100bp implies a return that is still in the 14% handle (the outlined box). We may well be understating the return, as we did not adjust AA to BB spreads tighter, but the point is CLO issuance around our L+100bp target seems a decent balance between providing spread to debt investors, and creating a reasonable return to equity, if loan spreads do indeed tighten along the lines of our strategists predictions. Of course, investors may not buy CLO AAAs at L+100bp, but this will depend on alternatives in the future (Exhibit 3). Conclusion With primary CLO AAA spreads at L+130bp, our L+125bp target has effectively been met. We have discussed our revised L+100bp spread target based on relative value, risk capital, and the arbitrage to loans. One risk is a broader market selloff, another is if capital regimes make tighter spreads less economical.
Exhibit 7: Hypothetical annualized primary CLO ROE vs. asset spread (x axis) & AAA spread (y axis)
Asset spread (bp) AAA spread (bp) 80 90 100 110 120 130 140 150 350 10.8% 10.2% 9.5% 8.9% 8.3% 7.6% 7.0% 6.4% 375 13.2% 12.5% 11.9% 11.3% 10.7% 10.0% 9.4% 8.8% 400 15.6% 14.9% 14.3% 13.7% 13.0% 12.4% 11.8% 11.2% 425 17.9% 17.3% 16.7% 16.0% 15.4% 14.8% 14.2% 13.5% 450 20.3% 19.7% 19.1% 18.4% 17.8% 17.2% 16.5% 15.9%
Source: J.P. Morgan CLO Funding Gap. Assumes 2% CDR, 75% assets floored at 1.25% Libor, deal fees, expected losses and recent AA to BB primary spreads and generic CLO 2.0 structure.
1.0
0.5
0.7
0.0
0.03
Jan
Feb
Mar
Apr MTD
Source: http://www.newyorkfed.org/markets/maidenlane.html
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
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investors considering opportunities must recognize this technical risk when considering trade horizon. From a collateral performance perspective, our US RMBS analysts generally think home prices at a national level are at or very near the bottom. The risk to this view is if existing home sales decline even more from alreadydepressed levels. In this note, we lay out the fundamental risks and trends and provide a case-study of Net Asset Value (NAV) of SF CDO bonds. We also compare the return and structural differences in SF CDOs with CLO equity, as both offer double digit return potential, high risk, high leverage, and no (or very low) credit rating. SF CDO market update The SF CDO sector includes High Grade (HG) and Mezzanine SF CDOs, depending on whether the underlying structured finance was originally rated high-IG (AAA to AA) to mid-IG or sub-IG (Single-A to BB). About $778bn was issued between 1998 and 2009, with 62% HG and 38% Mezz (Exhibit 8). The majority of the underlying collateral is US RMBS, mostly Subprime and Alt-A, with some exposure to Prime MBS, CMBS, CDOs, and other sectors. We estimate the current outstanding market is about $340bn after considering paydowns and liquidations. About one-third ($110bn) of currently-outstanding SF CDOs are in Event of Default (EOD) (see S&Ps ABS CDO Event of Default reports). Specifically, the total outstanding of original AAA-rated bonds is about $230bn, most of which is now sub-investment grade. During the peak of issuance, we estimate the vast majority (c. 75%) of AAAs were bought by banks in both the US and Europe and by insurers/monolines. Home price forecast The fundamental rationale for considering SF CDOs after the extreme distress involves taking a view on home prices, as this drives valuations. Our RMBS analysts generally think we are at or are very near the bottom in home prices at a national level. They continue to project a 3% drop in national home prices from 2011Q4, or a 36% decline from the peak, to a bottom by first half 2012. Home prices are expected to drop 1.6% in 2012, consistent with net housing demand of roughly 1.6 million. Our base case forecasts national home prices to bottom in 2H and to increase 1.4% next year (Exhibit 11). A key risk to this view is if existing home sales fail to revive, while we are less concerned about immediate
Exhibit 10: Non-agency cash RMBS yields versus SF CDO first pay bond yields
25 ABX.HE.07-1.AAA ALT-A.HYBRID.FLT OPTIONARM PRIMEX.ARM Coupon
20
15
10
0
Apr-09 Apr-10 Feb-10 Feb-11 Apr-11 Dec-09 Dec-10 Aug-09 Aug-10 Aug-11 Dec-11
2.2
Base forecast assumptions Ex isting Home Sales (NAR, mm) Housing Inv entory (NAR, mm) Liquidations (mm) Net Housing Demand (mm)
Source: Case-Shiller Fiserv, J.P. Morgan, NAR. Note: Current is as of 11Q4. 2011-15 HPA is projected yoy % change of Q4 HPIs.
supply pressures as several government initiatives continue to chip away at shadow inventory. It is worthwhile noting that housing affordability reached a record high and rents keep rising. For example, buying at the end of 2011 is cheaper than renting for 135 of 257 largest metros, which has not been true for over a decade. Tight credit is still a hurdle. Non-agency market outlook The current outstanding stock of US RMBS is about $540bn for Alt-As and $390bn for subprime, including those packaged into SF CDOs ($340bn in outstanding). Secondary market activity remains vibrant with solid price
Feb-12
Jun-09
Jun-10
Oct-09
Oct-10
Jun-11
Oct-11
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
AC
performance in the first quarter (Alt-A returned 3-5% YTD, ABX 7-9%). The most successful recovery trade in US RMBS has been Option ARM bonds, due to the potential of lower default rates in the economy recovery (note: Option ARM represents about $160 or 28% of Alt-A sector). Nearly 70% of investors that our RMBS analyst surveyed in March 2012 believed non-agency spreads would likely grind tighter. Yet we expect tightening from current levels to be gradual, as yields have already hit 7-8% range. While RMBS assets are shifting into stronger, real-money hands from fast-money accounts, many investors are using this period of strength to lock in gains and prune portfolios. Moreover, it has become increasingly difficult to find double digit loss-adjusted yields. In terms of severity and delinquency, while 90+ day delinquency rates are declining, foreclosure rates are still at the highest since 2006. Also, the number of months in foreclosure increased dramatically, from 5-10 months before the financial crisis, to a record of nearly 25 months at this time. Meanwhile, loss severity has been rising for both Subprime and Alt-A, reaching 80% and 70%, respectively, as of April 2012. Strong home price appreciation (HPA) could bring down loss severities, but this is a secondary factor, as the most important determinant is still time in delinquency/foreclosure. Our view is severities should continue to rise as timelines extend further on loans that are difficult to liquidate. Many loans, especially in judicial states, have been through several unsuccessful rounds of mediations, and absent a short sale possibility, will see high liquidation severities. Case study: Collateral loss and NAV analysis for sample SF CDO first-pay bonds We present example loss and returns modeling for two sample 2005 vintage SF CDO first-pay bonds that recently traded (Exhibits 13 and 14). Bond A is in a SF CDO with a mix of HG and Mezz RMBS, while Bond B is in a HG SF CDO of poor collateral quality. For both portfolios, we model collateral default, loss and tranche writedowns of each underlying RMBS asset using three different HPA scenarios. Our Base HPA case projects -1.6% home price decline in 2012, with 1.4% growth next year, and the Severe HPA case assumes 6.8% home price decline in 2012 with another -1.3% drop in 2013, as shown in Exhibit 11.
Exhibit 12: Annual non-agency RMBS total returns Sector 2010 Return 2011 Return 2012 Return YTD Prime Fixed 29% 1% 2% Prime Hybrid 21% -3% 6% Alt-A Fixed 34% 1% 3% Alt-A Hybrid PT 15% -1% 4% Alt-A Hybrid Floater 27% -4% 5% Option ARM 20% -2% 7% Subprime LCF 23% -19% 5%
Source: J.P. Morgan
Exhibit 13: Collateral and NAV analysis of a sample SF CDO first-pay bond (A) under different HPA scenarios
Default Loss Writedown Market Value (% of portfolio) First Pay Bond Tranche NAV Discount to NAV (assuming $42 price) Discount to NAV (assuming $43 price) Collateral Severe HPA Base HPA Bullish HPA 18.9% 17.7% 16.6% 15.2% 13.6% 11.8% 61.0% 54.8% 48.5% 42.5% 48.2% 14.9% 12.2% 43.8% 49.7% 18.4% 15.7% 45.5% 51.8% 23.4% 20.5%
Exhibit 14: Collateral and NAV analysis of a sample HG SF CDO first-pay bond (B) under different HPA scenarios
Default Loss Writedown Market Value (% of portfolio) First Pay Bond NAV Discount to NAV (assuming $14 price) Discount to NAV (assuming $15 price) Collateral Severe HPA Base HPA Bullish HPA 35.5% 33.3% 30.8% 26.8% 24.1% 21.2% 65.1% 62.1% 58.4% 25.7% 16.3% 16.1% 8.4% 26.7% 17.1% 21.9% 13.7% 28.1% 18.1% 29.6% 20.9%
We also price each underlying RMBS under different HPA scenarios, assuming a theoretical 8% yield for Alt-A and subprime senior bonds, and a 16% yield for Alt-A and subprime subordinate bonds. 1) Principal Recovery: Both A and B portfolios will experience significant loss, 13.7% and 24.9%, under the Base HPA scenario (Exhibits 13 and 14). Generally, many Alt-A and subprime subordinates took over a 90% writedown and are now priced at a few cents on the dollar. Across all underlying RMBS bonds, Bond As portfolio will take a 32%-48% writedown depending on HPA scenario (Exhibit 13). This compares to 40% subordination beneath the first pay tranche,
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
AC
which indicates the tranche may get principal back under the Base and Bullish HPA scenarios. Bond Bs portfolio is modeled to experience a 58%-65% writedown, versus about 15% subordination. This means 41% to 49% principal recovery for bond B, versus mid-teens price trading currently. 2) Discount to NAV: We take the underlying prices to calculate portfolio market value and then determine NAV of the bonds after considering both leakage to senior collateral management fees and IO leakages of non-piking class A notes. For the first pay, unsurprisingly the discount to NAV or Yield is highly sensitive to the price and NAV, as both are relatively low to begin with. But based on our NAV analysis and trade color, both tranches traded between 14%-18% discount to the tranche NAV, under the Base HPA scenario. Even under a Severe HPA, both bonds A and B offer high single-digit to low teen discount to NAV. 3) Yield: Yield depends on trade strategy (as discussed below) and whether and when the discount to NAV can be realized, or the EOD or liquidation language of SF CDOs (Please refer to our October 19, 2007 note, Event of Default Language in SF CDOs). Take Bond B for example, if an investor can call the CDO to realize the discount to NAV in two years, the yield is c. 7.7% in the Severe case and up to 13.8% in the Bullish case. Over a three year period, the yield is 6% to 10%. But if the investor is willing to sit on the position and wait for recovery in the assets, the principal payback outlook based on our writedown and HPA scenarios will turn to approximately 17-20% yield over a seven-yield duration or 11-13% yield over a ten-year duration. These are only simple scenarios and investors should pick their own HPA outlook and model accordingly. Also, whether and when the discount to NAV can be realized will depend on trade strategy and the EOD or liquidation language (Please refer to our October 19, 2007 note, Event of Default Language in SF CDOs). Trading Strategies There are a few trading strategies that investors can consider in the current SF CDO market.
AAA HG SF CDOs
2005
2006
2007
1) Front-pay bonds: Buy the senior tranche outright at a discount to NAV for a high single-digit to mid doubledigit yield. This will be a short-term trade, if investors are not holding to recover or call/liquidation. 2) Recovery trade in RMBS exposure: Gain access to portfolios, predominantly of RMBS risk (Alt-A and Subprime). Take a macro view on housing and do bottomup analytics on the underlying mortgage credits. 3) Liquidation: If the CDO is in EOD and the senior class can liquidate, direct sale and purchase the RMBS portfolio at bid side. Then hold the collateral of interest and sell the rest. If liquidation is not directly a right of the senior note, there may be strategic ways to unwind and gain access to the underlying by accumulating votes of the mezzanine notes. Liquidation usually requires 66.667% of each class voting separately, but documentation varies. 4) Call Strategy: If the CDO is not in an EOD and a majority vote is needed to call the CDO, acquire supersenior risk, and accumulate PIK-ing mezzanine and equity notes at steep discounts, to exercise the call. ABS CDO versus CLO Equity While of utterly different underlying collateral type and seniority, both SF CDO first-pay bonds and CLO equity offer little or no rating support, double-digit yields, high leverage, and an illiquid exposure. We explore risk and return profiles in our concluding thoughts. First, the underlying risks are very different. Simply, the crisis demonstrated that overleverage and other aspects
Rishad Ahluwalia (44-207) 777-1045 Maggie Wang (1-212) 270-7255 J.P. Morgan Securities LLC.
AC
(fraud) in a pool of individual risky borrowers turned out much worse as a whole than in corporates, especially as many loans in CLOs were issued by companies whose business were ultimately able to recover and were able to refinance/gain liquidity in the loan or bond market. Unlike the leveraged loan market, where default rates have declined from the peak to near zero levels today, the housing market hasnt bottomed and carries more uncertainty in both the strength of the recovery and its timing (though as mentioned, we believe it will bottom this year). Moreover, cashflow uncertainty is high in subprime and Alt-A floaters. Risks are not just tied to a housing recovery but also specific servicer behavior and advancing policies. Second, in terms of returns, CLO equity will likely offer higher and more stable carry (27% cash return in 2011, 16% 2005 to 2011), but potentially less price appreciation, as the current average price is already in the $70s, with strong bonds at par or above. On the other hand, SF CDO first-pay bonds rely on paydown as SF CDO structure unwinds and ultimately the recovery value of the underlying US RMBS assets. Third, structural difference can change the return profile. CLO equity captures the excess return of managed loan portfolios, thus equity cash return are certainly affected by manager trading and decision-making throughout the reinvestment period and even beyond (post-reinvestment period extension risk, etc). In contrast, SF CDOs are static portfolios and the recovery value depends on when and whether the senior note holders are able to liquidate. As a result, there is also significant vintage risk in SF CDOs and their underlying collateral, which is not as big an issue as in managed corporate CLOs. Finally, while we observed more real money investors coming into the CLO market in recent years, this trend is not likely for SF CDOs anytime soon. Unlike in the underlying RMBS bonds, there is probably a lower chance that real money will come in and buy SF CDOs at higher prices in the near future given headline risk around the sector and the very low credit ratings. Again, fast money buyers of SF CDOs should be wary of only viewing this trade as a short term price play.
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Economic summary
Last Fridays disappointingly small gain in March nonfarm jobs, combined with weaker March results for auto sales and the ISM surveys raised questions about the economys momentum. Nevertheless, our economists keep 2Q growth forecast at 2.5%, as previously. However, they did raise their 1Q GDP growth forecast from 2.0% to 2.5% as a result of the trade deficit coming in much narrower than anticipated in February. Other reports this week were lackluster. Specifically, initial jobless claims disappointed (+13,000 to 380,000 with a larger-than-normal 10,000 upward revision to the prior week), consumer confidence came in below expectations (University of Michigan sentiment declined from76.2 to 75.7, below consensus estimate of 76.5), and the NIFB index declined from a twelve month high (-1.8pts to 92.5). The February trade report showed the trade balance narrowing from -$52.5bn in January to -$46.0bn in February. There was a large drop off in imports during the month, with overall nominal imports down 2.7% and real goods imports falling 3.9%. Exports were somewhat tamer, with overall exports edging up 0.1% and real goods exports declining 1.0%. Even anticipating a bounce back in imports in March, it looks like trade will now be only a slight drag on overall GDP growth during the first quarter. Initial jobless claims for the week ending April 7 increased 13,000 to 380,000 and there was a larger-than-normal upward revision (+10,000) to the data reported for the prior week. Claims have now increased 17,000 over the latest two weeks, and the four-week moving average increased 4,000 to 369,000 in the latest week. The recent continuing claims data looked more upbeat, with a sizable 98,000 decline in claims (to 3.251mn) reported for the week ending March 31. The four-week moving average for the same week reached a new best for the expansion of 3.334mn. The NFIB small business optimism index fell 1.8pts from a twelve-month high to 92.5 last month. The employment components softened, one of the few independent indicators that is consistent with the reported slowdown in job growth last month. Nearly all other NFIB indicators, including capital outlay plans and sales expectations, eased modestly as well. The University of Michigan sentiment index cooled from 76.2 in March to 75.7 in the preliminary April report, breaking the streak of seven straight monthly increases that ran through March. The decline in the headline was driven by the current conditions index which fell 5.4 points to 80.6. But the expectations index (which is a more reliable indicator of upcoming consumption) looked better, rising 2.7 points in April to 72.5, the highest reading since late in 2009. The separate Rasmussen Consumer Index has similarly showed some deterioration in sentiment lately. It has declined nine of the past thirteen days, and the average daily value reported so far in April was about 0.7 points below the average reported for March. The latest few data points (which reflect some data collected after the Michigan survey period) showed declines intensifying very recently, but the daily data can be very choppy so this weakness might be reversed in upcoming reports.
18
JPMorgan Chase Bank N.A., New York Daniel Silver (1-212) 622-6039 daniel.a.silver@jpmorgan.com
US economic calendar
Monday 9 Apr
Chairman Bernanke speaks on financial stability at conference in Georgia (7:15pm)
Tuesday 10 Apr
NFIB survey (7:30am) Mar Wholesale trade (10:00am) Feb JOLTS (10:00am) Feb
Auction 3-year note $32 bn
Wednesday 11 Apr
Import prices (8:30am) Mar 1.0% Federal budget (2:00pm) Mar Beige book (2:00pm)
Auction 10-year note (r) $21 bn Atlanta Fed President Lockhart speaks at conference in Georgia (8:20am) Kansas City Fed President George speaks at conference in NY (9:30am) Boston Fed President Rosengren speaks at conference in Georgia (10:30am) St. Louis Fed President Bullard speaks in St. Louis (5:00pm) Fed Vice Chair Yellen speaks on the economy in New York City (5:30pm)
Thursday 12 Apr
Initial claims (8:30am) w/e prior Sat 360,000 PPI (8:30am) Mar -0.1% Core 0.2% International trade (8:30am) Feb -$51.3bn
Auction 30-year bond (r) $13 bn Announce 5-year TIPS $16 bn New York Fed President Dudley speaks on economy in Syracuse, NY (7:15am) New York Fed President Dudley speaks on economy in Syracuse, NY (11:00am) Philadelphia Fed President Plosser speaks in Washington, D.C. (12:30pm) Minneapolis Fed President Kocherlakota speaks in Minnesota (1:00pm) Fed Governor Raskin speaks on the economy in Los Angeles (3:30pm)
Friday 13 Apr
CPI (8:30am) Mar 0.2% Core 0.14% Consumer sentiment (9:55am) Apr preliminary 76.0
New York Fed President Dudley speaks on economy in Buffalo, NY (8:00am) Chairman Bernanke speaks on financial crisis in New York City (1:00pm)
Dallas Fed President Fisher speaks on economy in Oklahoma (12:30pm) Atlanta Fed President Lockhart speaks at conference in Georgia (12:45pm) Minneapolis Fed President Kocherlakota speaks in Minnesota (2:30pm)
16 Apr
Retail sales (8:30am) Mar Empire State survey (8:30am) Apr TIC data (9:00am) Feb NAHB survey (10:00am) Apr Business inventories (10:00am) Feb
St. Louis Fed President Bullard speaks on the economy in St. Louis (3:30pm)
17 Apr
Housing starts (8:30am) Mar Industrial production (9:15am) Mar
18 Apr
19 Apr
Initial claims (8:30am) w/e prior Sat Existing home sales (10:00am) Mar Philadelphia Fed survey (10:00am) Apr Leading indicators (10:00am) Mar
Auction 5-year TIPS $16 bn Announce 2-year note $35 bn Announce 5-year note $35 bn Announce 7-year note $29 bn
20 Apr
23 Apr
24 Apr
S&P/Case-Shiller HPI (9:00am) Feb New home sales (10:00am) Mar Consumer confidence (10:00am) Apr FHFA HPI (10:00am) Feb Richmond Fed survey (10:00am) Apr FOMC meeting
Auction 2-year note $35 bn
25 Apr
Durable goods (8:30am) Mar FOMC statement (12:30pm) and press conference (2:15pm)
Auction 5-year note $35 bn
26 Apr
Initial claims (8:30am) w/e prior Sat Pending home sales (10:00am) Mar KC Fed survey (11:00am) Apr
Auction 7-year note $29 bn
27 Apr
Real GDP (8:30am) 1Q advance Employment cost index (8:30am) 1Q Consumer sentiment (9:55am) Apr final
30 Apr
Personal income (8:30am) Mar Chicago PMI (9:45am) Apr Housing vacancies (10:00am) 1Q Dallas Fed survey (10:30am) Apr Senior loan office survey (2:00pm) 2Q
1 May
ISM manufacturing (10:00am) Apr Construction spending (10:00am) Mar Light vehicle sales Apr
2 May
ADP employment (8:15am) Apr Factory orders (10:00am) Mar
Announce 3-year note $32 bn Announce 10-year note $24 bn Announce 30-year bond $16 bn
3 May
Initial claims (8:30am) w/e prior Sat Productivity and costs (8:30am) 1Q preliminary ISM nonmanufacturing (10:00am) Apr Chain store sales Apr
4 May
Employment (8:30am) Apr
19
Pages 20-25 are as published in Credit Market Outlook & Strategy dated April 13, 2012
Credit Derivatives
CDX Indices (bp)
IG HY LCDX IG HY LCDX IG HY LCDX Spread 102 631 325 1w change 10 44 37
As discussed in the HG strategy part above, we are turning neutral on the HG corporate market. The current 200bp JULI level corresponds to CDX.IG trading at about 105bp according to the last 6m or 1y trading patterns. Investors have turned more cautious over the last couple of weeks. The moves in bonds, single name CDS, CDX indices and CDX index options all show that the first quarter optimism has faded and that hedging activity has increased. Both CDX.IG and CDX.HY are trading above their last 3m trailing average level for the first time since late last year. CDX.HY outperformed CDX.IG in the first part of the sell-off last week, but it underperformed this week. At the same time, IG implied volatility has increased by more than HYs and the volatility gap has not been that large since the beginning of the year. We believe that this situation makes it attractive to implement the HY/IG compression trade through call options. The sharp market sell off has driven CDS and CDX to underperform bonds, as usual in such market conditions as the credit derivatives are more liquid and tend to move first. Therefore, we expect CDS and CDX to outperform bonds as bonds catch up, unless the sell-off accelerates. However, the correction should be limited for CDX indices as their outperformance vs the bond indices was overdone at the end of March. An attractive way to trade CDX indices vs their corresponding bond indices is to use the iBoxx Total Return Swaps for the bond index leg. European spreads widened more than US spreads and implied volatility increased more in Europe. However, this is in line with their recent trading patterns and makes sense as the recent increase in risk is asymmetric across the Atlantic. CDX.IG and SP500 have traded about in line with each other in this volatile period. CDX.HY is thus obviously lagging equities.
Exhibit 1: CDX.IG has sold off significantly since the beginning of the Exhibit 2: The situation is similar for CDX.HY, but its recent moves month and is now trading above its last 3m average spread have been less marked than CDX.IGs
(bp) 140 120
600 (bp)
CDX.IG spread 3m av g
800
CDX.HY spread 3m av g
100 80 Oct-10
400 Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
CDX options trading volumes have significantly increased over the past couple of weeks as some investors buy options to hedge. Implied volatility naturally increased as the market sold off this week and realized volatility increased. However, while the HY index has underperformed IG in the last couple of days, HY implied volatility has not increased by as much as IGs and the HY/IG implied volatility gap has increased back to levels not seen since the beginning of the year. On the week, IG implied volatility is up by 3% at 57% and in line with its trading pattern with the index (Note that this 3% increase in implied volatility for a June at-the-money put increases its price by 2.5c to 48.5c). HY implied volatility is up by 1% at 49% and is about 6% too low compared to its recent relationship with the index. Furthermore, realized volatility is 30% in IG and 35% in HY (up 2% and 1% on the week, respectively). Therefore, we find HY implied volatility to be too low compared to IG's.
Exhibit 3: CDX implied volatility increased as some investor have bought options to hedge, but HY volatility is quite lower than IGs
CDX.HY 3m Implied Vo l CDX.IG 3m Implied Vo l
Exhibit 4: HY implied volatility also looks low compared to the CDX.HY index level
80% 70% 60%
75%
55%
50% 40% Jul-11 Sep-11 Nov -11 Jan-12 Mar-12 500 550 600 650 700
750
800
21
Surprisingly, at the same time that IG implied volatility has increased more than HYs, the HY index has underperformed IG. CDX.HY has been underperforming for some time so far this year. However, HY outperformed IG last week during the first part of the sell-off as investors reestablished their hedges in IG. However, this week was different, with HY underperforming on both strong and weak days. Altogether, HY still looks cheap vs IG by about 35bp compared to the last 6m trading pattern (as of Wednesdays close).
Exhibit 5: CDX.IG underperformed HY in the first past of the sell-off, but outperformed again this week
CDX.IG RnR, lhs (bp) CDX.HY RnR, rhs (bp) 140 120 100 80 Mar-11
Source: J.P. Morgan
Exhibit 6: HY spreads look about 35bp too wide relative to its last 6m trading pattern vs IG
800 CDX.HY 5Y Spreads
900 800 700 600 500 400 Jun-11 Sep-11 Dec-11 Mar-12
700 y = 5.01x + 85.57 600 500 80 100 R 2 = 0.94 CDX.IG 5Y Spreads 120 140
Therefore, given HY spread underperformance and its lower implied volatility relative to CDX.IG, we find that an attractive way to express the HY/IG compression trade given the HY index underperformance vs IG and the increasing gap in implied volatilities is to buy HY calls and sell IG calls. For investors who want to solely trade the volatilities, we believe that trading strangles in IG vs strangles in HY is the most attractive.
The performance across different credit products has followed the usual pattern seen in sharp sell-offs
Since the beginning of the month and the start of the sell-off, CDX indices have underperformed single name CDS which have underperformed bonds. First, CDX indices have underperformed cash bond indices in the last two weeks. However, this comes on the back of a strong Q1 outperformance of the CDX indices and is thus more a correction than anything else. It is thus not surprising that the softness in the credit derivatives has been more pronounced than on the cash side. Investors who have a view on the relative performance of CDX indices compared to cash indices might find iBoxx TRS an attractive way to implement the cash leg (see CMOS for more details on the TRS). As we discussed in past CMOS, CDX.IG outperformed the HG bond market quite significantly in the first quarter. This was essentially due to many structurally longcash bond investors reducing their hedges in CDX and some other investors going long risk using the most liquid credit instrument, i.e. CDX.IG. This trend was in place until the end of Q1. However, the momentum changed as soon as we entered Q2. As shown in the Exhibit below, CDX.IG has significantly underperformed JULI over the last two weeks (as of Wednesday close). Nevertheless, CDX.IG still looks
22
about 5bp tight compared to its recent trading pattern vs bonds (recall that we use our Risk n Roll index to perform such comparisons as it allows comparing levels through the CDX rolls). Therefore, our neutral view on the market and JULI at 200bp corresponds to CDX.IG at about 105bp.
Exhibit 7: CDX.IG had strongly outperformed JULI in Q1, but the momentum has changed in Q2
275 250 225 200 175 150 125 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 75 100 JULI spread (lhs) CDX.IG spread (rhs) 125 150
Exhibit 8: However, CDX.IG still looks about 5bp too tight compared to JULI
CDX.IG 5y Spread . 150 125 y = 0.45x + 22.23 R = 0.78
2
100 75 125
The situation is relatively similar for the HY market. CDX.HY outperformed bonds in the first quarter and has underperformed more recently. However, the relative performance of the two indices was not has dramatically out of line compared to what was observed in the HG market. We believe that this is partly due to the strong HY bond market issuance in the first part of the year, as investors did not need to use CDX.HY as a tactically long risk investment while waiting to find bonds, the ultimate place where they want to put their money at work. Actually, a one-year regression implies that the CDX.HY and JPMHY indices are now about in line with each other as shown in the Exhibits below (again as of Wednesdays close).
Exhibit 9: CDX.IG had strongly outperformed JULI in Q1, but the momentum has changed in Q2
JPMHY spread (lhs) 900 800 700 600 500 400 Jan-11
Source: J.P. Morgan
Exhibit 10: However, CDX.IG still looks about 5bp too tight compared to JULI
900 CDX.HY 5y Spread 800 700 600 500 400 y = 1.09x - 95.55 R = 0.90
2
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Comparing single name CDS to bonds, CDS underperformed bonds in the selloff, both in IG and HY. In IG, bonds currently are trading just 11bp wider than their CDS on average, as compared to 19bp wider at the start of the month. During that time, bonds widened by 3bp, while CDS widened by 12bp. The basis in IG has been range bound between -10bp and -30bp in the last six months and is currently closer to the tights of this range.
23
The basis in HY was trading in a narrow range over the past month until recently. In HY, bonds are on average trading 35bp wider than their CDS from 49bp wider at the start of the month. The HY basis reached -30bp earlier this week which was the tightest level since the first week of August last year when basis had turned positive for a very short span of time. The tightening of CDS bond basis is typical during the start of a selloff as CDS are more liquid than cash bonds and thus react faster to market volatility. The trend has been similar over the last few years, where CDS have underperformed bonds in the beginning of the selloff and bonds catching up later as the basis returns close to its normal levels of -20bp in IG and -50bp in HY. This is what we expect this time again. However, if the conditions were to deteriorate further it would likely result in bonds underperforming CDS in the second leg of the sell off, driving the basis wider or more negative as compared its fair value.
Exhibit 11: CDS underperformed bond in HG since the beginning of the month Exhibit 12: The same pattern was repeated in HY. This behavior is quite usual in a sharp sell-off
24
Exhibit 13: The gap between iTraxx Main and CDX.IG has increased Exhibit 14: but the two indices remain in line with each other
Diff erence (rhs) CDX.IG
200
iTraxx M ain
80
Jun-11
Sep-11
Dec-11
Mar-12
1050 1150 1250 CDX.IG (bp - lhs) SP500 (pts - rhs inv ) 7/8/11 10/8/11 1/8/12 4/8/12 1350 1450
CDX.IG 140 120 100 80 1050 1150 1250 1350 SP500 1450 y = -0.23x + 410.71 R 2 = 0.96
25
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Week in review
High yield and leveraged loan summary
l
Spreads and yields High-yield bond yields increased 11bp to 7.63%, while spreads rose 20bp to T+670bp. Leveraged loan yields decreased 4bp to 6.66% and spreads increased 7bp to L+561bp. Five-year and 10-year Treasury yields decreased 12bp each to 0.89% and 2.05%, respectively. Performance For the week, high-yield bonds and leveraged loans returned -0.26% and -0.01%, respectively, while equities, as measured by the S&P 500, returned -0.73%. Treasuries and investment-grade bonds returned +1.15% and +0.45%, respectively. Year-to-date, high-yield bonds and loans have returned +5.51% and +3.98%, while 10-year Treasuries, high-grade bonds, and the S&P 500 have returned -0.70%, +2.62%, and +11.01%, respectively. New-issue activity Leveraged credit new issue activity moderated in this holiday shortened week. For high-yield, 8 bonds priced for $5.5bn, following 17 new issues totaling $7.6bn last week. Loan new issue volumes also decreased this week as 10 loans priced totaling $2.4bn, following last weeks 17 loans for $10.0bn. Year-to-date, high-yield bond and leveraged loan new issuance totals $118.9bn and $59.4bn. Fund Flows High-yield bond funds reported outflows totaling -$1.29bn this week (-0.9% of AUM, 37% ETFs), versus inflows totaling +$286mn last week. It was also the first outflow for the asset class in 19 weeks (last outflow in November), a period which saw a record $25.6bn move into the asset class (11% of AUM). After recording +$8.75bn, +$7.11bn, and +$4.55bn of inflows for January, February, and March, Aprils month-to-date outflows totals -$1.1bn. Despite outflows from bond funds, loan funds reported their largest inflow in 43 weeks. Leveraged loan funds had inflows of +$281mn this week, comparable to last weeks +$149mn inflow. This weeks inflow for loan funds was also the 11th in the years first 15 weeks, after seeing outflows in almost every week between August and December. Year-to-date, inflows into high-yield bond funds are +$19.3bn, versus $15.6bn for all of 2011, while inflows for leveraged loan funds are +$847mn, versus +$13.9bn of inflows for all of 2011. Default activity There was one new leveraged credit default this week. Reddy Ice filed Chapter 11 affecting $451mn in high-yield bonds. Year-to-date, 12 companies defaulted6 bond-only issuers, 4 loan-only borrowers, and 2 companies with bonds and loans outstandingaffecting $3.9bn in bonds and $2.8bn in institutional loans. The par-weighted high-yield default rate is 2.00% and the par-weighted loan default rate is 0.77%. The combined default rate for leveraged credit is now 1.61%, compared with 1.27% at the end of last year.
26
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
High-yield bond yields increased 11bp to 7.63%, while spreads rose 20bp to T+670bp. Five-year and 10-year Treasury yields decreased 12bp each to 0.89% and 2.05%, respectively. By rating, CCC-rated bond spreads increased 35bp to 1154bp, while B-rated bond spreads increased 19bp to 703bp and BB-rated spreads increased 17bp to 487bp. The spread between the yields of bonds rated CCC and B is now 446bp, compared with the long term average of 676bp. The spread difference between bonds rated BBB and BB is now 141bp, compared with the long term average of 120bp.
Spread to worst
JPM Global HY 30-Dec-11 12-Apr-12 Change 1Q11 MTD YTD Week
Source: J.P. Morgan.
Spread to worst
2000bp 1800bp 1600bp 1400bp 1200bp 1000bp 800bp 600bp 400bp 200bp
20-year average= 587bp 20-year median= 523bp Dec-90 1096bp Sep-02 1070bp Dec-08 1925bp
Yield to worst
21.0% Oct-90 19.0% 19.12% 17.0% Yield to worst 15.0% 13.0% 11.0% 9.0% 7.0% 5.0%
12-Apr-12 7.63% 12-Apr-12 670 bp
Dec-08 20.92%
Spread to worst
Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
High-yield spreads
Spread between investment-grade and high-yield bonds
1400 bp 1200 bp Difference in yields 1000 bp 800 bp 600 bp 400 bp 200 bp 0 bp
12-Apr-12 352 bp
Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Difference in yields
12-Apr-12 -205 bp
Spread to worst
Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11
Note: Emerging-market bonds are measured by the JPMorgan EMBI-Global Index. Source: J.P. Morgan.
Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
12-Apr-12 670 bp 12-Apr-12 326.74%
Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
20-year average= 676bp 20-year median= 508bp 12-Apr-12 446 bp
935.0% 835.0% 735.0% 635.0% 535.0% 435.0% 335.0% 235.0% 135.0% 35.0%
Premium to Treasury
28
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Leveraged loan yields decreased 4bp to 6.66% and spreads increased 7bp to L+561bp. Five-year and 10-year Treasury yields decreased 12bp each to 0.89% and 2.05%, respectively. Split B/CCC-rated loan spreads increased 36bp to 1219bp, while B-rated loan spreads increased 7bp to 640bp and BB-rated loan spreads rose 4bp to 388bp. The spread between the yields of loans rated Split-B/CCC and B is now 568bp, compared with the 3-year average of 455bp.
Spread to maturity
JPM Loan Index 30-Dec-11 12-Apr-12 Change 1Q11 MTD YTD Week
Source: J.P. Morgan.
Spread to maturity
1400bp Spread to maturity 1200bp 1000bp 800bp 600bp 400bp Jul-09 Jul-10 Jul-11 Apr-09 Apr-10 Apr-11 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Apr-12
3-year average= 609bp 3-year median= 590bp 12-Apr-12 561bp
Yield to maturity
17.0% 15.0% Yield to maturity 13.0% 11.0% 9.0% 7.0% 5.0% Jul-09 Jul-10 Apr-09 Apr-10 Apr-11 Jul-11 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12
Jan-12
3-year average= 7.85% 3-year median= 7.38% 12-Apr-12 6.66%
BB B Split B/CCC
40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Jul-09 Jul-10 Apr-09 Apr-10 Apr-11
BB B Split B/CCC
Jul-11
Jan-09
Oct-09
Jan-10
Oct-10
Jan-11
Source: J.P. Morgan. Note: Leveraged loan spread and yield analytics are calculated using a forward curve. 29
Oct-11
Apr-12
Apr-12
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Note: Leveraged loan spread and yield analytics are calculated using a forward curve.
Apr-12
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Performance
Returns of various assets Year to date 2012
MSCI EM S&P 500 Russell 2000 JPM Euro HY JPM Global HY JPM EMBIG JPM Leveraged Loan FTSE 100 JPM Maggie IG JPM JULI IG 10-yr Treasury -0.70% 12.26% 11.01%
For the week, high-yield bonds and leveraged loans returned -0.26% and -0.01%, respectively, while equities, as measured by the S&P 500, returned -0.73%. Treasuries and investment-grade bonds returned +1.15% and +0.45%, respectively. Year-to-date, high-yield bonds and loans have returned +5.51% and +3.98% while 10-year Treasuries, high-grade bonds, and the S&P 500 have returned -0.70%, +2.62%, and +11.01%, respectively. By rating, CCC-rated bonds returned -0.55%, Bs returned -0.28%, and BBs returned -0.17%. Year to date, CCC-rated bonds have garnered a +10.02% return, compared with +5.62% for Bs and +4.43% for BBs. For loans, Split B/CCCs returned -0.82%, while Bs returned +0.02% and BBs returned +0.02%. Year to date, Split B/CCC rated loans have garnered a +9.92% return, compared with +4.30% for Bs and +2.81% for BBs. All but one of the twenty one industries in the J.P. Morgan Global High-Yield Index provided negative returns. Returns ranged from -0.52% for Diversified Media to +0.04% for Consumer Products. Year-to-date, Housing is the best performing industry, up 10.32%, while Utility is the worst performer, up 0.90%. For loans, eleven of the twenty one industries in the J.P. Morgan Leveraged Loan Index provided negative returns. Returns ranged from -0.51% for Broadcasting to +0.51% for Utility. Year-to-date, Diversified Media is the best performing industry, up 7.96%, while Utlity is the worst performer, -5.08%.
10-yr Trsy 16.96% -2.22% 1.56% -0.70% 1.15% JPM EMBI-Glbl 8.47% 4.86% 0.39% 5.27% 0.49% S&P 500 2.11% 12.59% -1.40% 11.01% -0.73% Russell 2000 -4.17% 12.44% -2.57% 9.54% -1.15% FTSE 100 -1.54% 4.78% -0.96% 3.78% -0.21% MSCI EM -18.37% 13.99% -1.52% 12.26% -1.15% CDXHY -1.91% 5.73% -0.54% 5.15% 0.10% CDXIG 0.38% 0.08% -0.22% 1.60% 0.03%
l
9.54% 9.46% 5.51% 5.27% 3.98% 3.78% 3.51%
l
2.62%
Source: J.P. Morgan. Notes: The European Currency Index includes euro- and sterling-denominated corporate bonds and returns are stated in local currency. The European Aggregate Index includes euro-, sterling-, and US dollar-denominated corporate bonds and returns are stated in local currency.
31
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
High-yield performance
Returns by industry and rating
Automotive 4.05% 6.33% -0.34% 5.97% -0.34% Housing -1.36% 10.91% -0.54% 10.32% -0.44% Broadcasting 6.43% 6.12% -0.28% 5.82% -0.23% Cable Satellite Chemicals 9.63% 5.90% 4.82% 6.30% -0.51% -0.29% 4.29% 6.00% -0.44% -0.20% Paper/Pack. 2.64% 4.59% -0.44% 4.12% -0.21% BB 6.56% 4.68% -0.24% 4.43% -0.17% Consumer Diversified Products Media 5.00% 0.64% 5.13% 5.67% 0.03% -0.37% 5.16% 5.28% 0.04% -0.52% Retail 5.26% 5.92% -0.19% 5.72% -0.22% Split BB 7.53% 4.57% -0.36% 4.20% -0.27% Services 4.89% 7.29% 0.03% 7.33% -0.10% B 6.12% 5.99% -0.35% 5.62% -0.28% Energy 9.68% 3.45% -0.33% 3.10% -0.29% Food & Financial Beverages 3.71% 6.83% 7.89% 6.77% -0.24% -0.37% 7.63% 6.37% -0.17% -0.31% Telecom. 4.09% 6.57% -0.57% 5.96% -0.49% CCC 0.26% 10.70% -0.61% 10.02% -0.55% Gaming Leisure Healthcare 6.52% 8.57% 6.69% 5.12% -0.23% -0.48% 6.44% 4.61% -0.16% -0.35% Trans. -3.58% 9.70% 0.01% 9.70% -0.11% Not rated 7.42% 4.68% 1.10% 5.83% -0.13% Utility 8.97% 1.51% -0.60% 0.90% -0.22% Defaulted -3.43% 3.47% -1.58% 1.84% -0.18% 2011 1Q12 MTD YTD Week
Industrials Metals/Min. 6.76% 4.36% 4.61% 3.90% -0.31% -0.34% 4.29% 3.54% -0.26% -0.11% Split BBB 8.27% 4.79% 0.06% 4.85% 0.06%
Technology 9.32% 8.17% -0.35% 7.80% -0.20% Split B 3.43% 8.05% -0.51% 7.49% -0.40%
Week
Consumer Products Services Transportation Metals and Mining Gaming Lodging and Leisure Financial Technology Chemicals Paper and Packaging Utility Retail Broadcasting Industrials JPM Global HY Energy Food and Beverages Automotive Healthcare Cable and Satellite Housing Telecommunications Diversified Media -0.10% -0.11% -0.11% -0.16% -0.17% -0.20% -0.20% -0.21% -0.22% -0.22% -0.23% -0.26% -0.26% -0.29% -0.31% -0.34% -0.35% -0.44% -0.44% -0.49% -0.52% 0.04%
Year-to-date 2012
Housing Transportation Technology Financial Services Gaming Lodging and Leisure Food and Beverages Chemicals Automotive Telecommunications Broadcasting Retail JPM Global HY Diversified Media Consumer Products Healthcare Industrials Cable and Satellite Paper and Packaging Metals and Mining Energy Utility 0.90% 7.80% 7.63% 7.33% 6.44% 6.37% 6.00% 10.32% 9.70%
Week
Split BBB Not Rated BB JPM Global HY Split BB B Split B
5.97% 5.96% 5.82% 5.72% 5.51% 5.28% 5.16% 4.61% 4.29%
CCC/Split CCC
Year-to-date 2012
CCC/Split CCC Split B Not Rated B 5.83% 5.62% 5.51% 4.85% 4.43% 4.20% 7.49% 10.02%
32
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Industrials Metals/Min. 2.18% 4.10% 3.35% 2.29% -0.46% 0.04% 2.87% 2.33% -0.18% -0.04% BBB 1.51% 1.83% 0.47% 2.30% 0.07%
Week
Utility Transportation Consumer Products Food and Beverages Telecommunications Technology Paper and Packaging Healthcare Retail Services Chemicals JPM Leveraged Loan Cable and Satellite Financial Housing Metals and Mining Energy Gaming Lodging and Leisure Diversified Media Industrials Automotive Broadcasting -0.51% -0.01% -0.01% -0.02% -0.03% -0.03% -0.04% -0.06% -0.08% -0.09% -0.18% -0.18% 0.23% 0.15% 0.07% 0.05% 0.04% 0.04% 0.03% 0.03% 0.00% 0.51%
Year-to-date 2012
Diversified Media Broadcasting Technology Financial Services Housing Gaming Lodging and Leisure Transportation Automotive JPM Leveraged Loan Retail Cable and Satellite Healthcare Paper and Packaging Telecommunications Consumer Products Food and Beverages Industrials Chemicals Metals and Mining Energy Utility -5.08% 7.96% 6.80% 5.93% 5.24% 5.16% 4.93% 4.84% 4.52%
Week
BBB Split BBB BB Split BB B JPM Leveraged Loan Not Rated
4.30% 3.98% 3.95% 3.82% 3.63% 3.45% 3.36% 3.26% 3.23%
Year-to-date 2012
Split B/CCC Not Rated B JPM Leveraged Loan 5.62% 4.30% 3.98% 3.73% 2.81% 2.30% 1.64% 9.92%
33
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
RJO Holdings Corp. L+675 New HoldCo TL 2015 75.00 Hawker Beechcraft L+200 Term Loan 2014 65.14 Technicolor L+600 Term B2 Facility 2017 83.75 Advanstar Communications L+225 TL (1st) 2014 79.20 Kion Group GMBH L+250 Facility C (USD) 2015 91.36 Kion Group GMBH L+250 Facility C (USD) 2015 91.36 Consolidated Comm L+375 Intial Term-2 Loan 2017 94.50 Consolidated Comm L+375 Intial Term-2 Loan (Ext) 201794.50
-2.00 Financial -1.96 Industrials -1.72 Consumer Products -1.60 Diversified Media -1.52 Industrials -1.52 Industrials -1.50 Telecomm. -1.50 Telecomm. Change 1.44 3.35 1.88 0.75 1.63 2.37 0.51 0.80 Change -0.89 -7.10 -1.16 -0.48 -0.45 -0.27 -0.31 -1.01 % change 28.1% 14.7% 13.2% 11.4% 11.1% 9.7% 8.9% 8.4% % chang -19.3% -14.0% -10.0% -9.9% -9.4% -8.7% -8.4% -7.6%
High-yield equities
Weekly Gainers SUPERVALU Inc Penn Virginia Resource Partners Alpha Natural Resources Great Wolf Resorts Operating Comstock Resources Hexcel Patriot Coal MBIA Weekly Losers Media General Centene Corp Commercial Vehicle MGIC Investment Corp Quicksilver Resources Cenveo Inc GFI Group Inc Lions Gate Ticker SVU PVR ANR WOLF CRK HXL PCX MBI Ticker MEG CNC CVGI MTG KWK CVO GFIG LGF Price 6.57 26.09 16.08 7.33 16.28 26.70 6.21 10.28 Price 3.73 43.70 10.39 4.35 4.36 2.82 3.40 12.21 Change 2.90 4.43 4.34 2.54 27.07 7.01 1.79 4.35 Change -15.02 -4.26 -4.89 -3.60 -5.39 -2.35 -11.75 -8.26
Note: Based on issuers within the JPMorgan Global High-Yield Index that have public equity.
Note: Based on issuers within the JPMorgan Global High-Yield Index that have public equity. 34
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Amt. Security Coupon $1,200.0 Sr Nts 7.25 $250.0 Sr Sec Nts (3rd) 7.88 $125.0 Sr Nts 9.13 $400.0 Sr Nts 6.75 $200.0 Sr Sec Nts (1st) 11.00 $600.0 Sr Nts 6.00 $750.0 Sr Sec Nts (2nd) 6.88 $2,000.0 Sr Nts 9.38
None
Coupon Maturity Issuance Yield Spread Rating Sector Use of proceeds
None
Rating Sector Use of proceeds Underwriter
19-Jan 26-Jan
2-Feb 9-Feb
16-Feb 23-Feb
15-Dec 22-Dec
22-Mar 29-Mar
5-Apr 12-Apr
1-Dec 8-Dec
22- 29- 5- 12- 19- 26- 2- 9- 16- 23- 1- 8- 15- 22- 29- 5- 12Dec Dec Jan Jan Jan Jan Feb Feb Feb Feb Mar Mar Mar Mar Mar Apr Apr
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
2006 $149.1 335 1.4% 29.3% 9.6% 38.8% 11.2% 9.0% 0.7% 44.4% 16.1% 38.4% 92.3% 4.8% 3.0% 9.0% 0.4% 6.3% 5.4% 1.7% 5.5% 9.5% 2.1% 2.5% 5.6% 7.1% 2.0% 3.4% 3.7% 3.3% 3.5% 5.0% 11.0% 6.9% 1.1% 5.2%
2007 $147.9 321 6.5% 16.0% 7.9% 33.4% 21.1% 14.0% 1.1% 51.5% 12.0% 35.2% 87.7% 1.8% 10.5% 3.1% 1.6% 1.2% 2.3% 0.5% 3.4% 12.1% 5.0% 4.2% 3.7% 9.5% 2.5% 5.0% 8.3% 1.1% 4.5% 4.6% 4.9% 6.0% 1.1% 15.5%
2008 2009 $52.9 $180.7 115 408 2.5% 26.1% 13.1% 32.4% 7.5% 15.9% 2.7% 46.3% 10.9% 40.5% 88.5% 2.6% 8.9% 2.5% 1.2% 27.5% 0.9% 0.5% 1.5% 18.6% 0.0% 0.5% 9.7% 1.2% 5.4% 3.3% 3.3% 2.4% 3.4% 7.5% 4.1% 1.6% 0.9% 3.8% 9.3% 25.9% 19.8% 34.4% 6.9% 3.5% 0.3% 5.3% 15.9% 76.2% 99.0% 0.5% 0.4% 3.6% 2.5% 8.0% 2.8% 1.7% 2.1% 12.2% 1.7% 4.4% 7.4% 7.4% 4.0% 3.1% 4.5% 7.2% 4.1% 2.5% 2.0% 11.6% 2.8% 4.5%
2010 2011 1Q11 $302.0 $245.6 $107.7 653 510 214 8.5% 20.0% 14.8% 38.7% 10.0% 6.8% 1.3% 15.6% 15.0% 66.5% 99.6% 0.3% 0.1% 4.1% 1.6% 3.0% 4.2% 2.4% 1.9% 13.4% 8.7% 3.9% 4.0% 8.9% 5.0% 5.6% 5.9% 4.5% 2.6% 3.8% 4.5% 6.3% 2.4% 3.1% 4.2% 28.2% 11.6% 38.4% 5.6% 10.4% 1.6% 22.1% 18.0% 55.3% 98.1% 0.5% 1.4% 5.6% 1.6% 6.3% 1.2% 0.8% 1.3% 14.7% 6.6% 2.5% 3.3% 11.1% 4.9% 3.7% 7.4% 4.3% 3.1% 3.1% 4.5% 6.9% 2.4% 4.5% 6.4% 30.8% 11.4% 35.9% 6.8% 6.1% 2.7% 13.1% 19.0% 60.6%
MTD YTD11 YTD $11.1 $99.0 $118.9 19 224 233 0.0% 23.8% 2.7% 62.7% 4.8% 6.1% 0.0% 40.7% 7.2% 52.2%
Last Current week week $7.6 $5.5 17 8 0.0% 31.7% 0.0% 68.3% 0.0% 0.0% 0.0% 49.8% 10.9% 39.4%
5.2% 5.8% 0.0% 17.7% 30.1% 22.5% 13.0% 10.6% 11.3% 46.0% 38.4% 46.3% 7.0% 6.6% 11.0% 9.5% 6.1% 8.9% 1.8% 2.4% 0.0% 12.2% 15.6% 23.5% 18.1% 17.9% 3.1% 63.0% 59.8% 73.4%
99.0% 100.0% 0.2% 0.0% 0.8% 0.0% 4.4% 3.6% 3.5% 4.8% 1.7% 1.1% 17.9% 13.1% 2.4% 6.1% 0.0% 6.3% 2.0% 4.3% 2.6% 2.1% 5.3% 3.2% 6.8% 0.4% 2.0% 0.0% 0.0% 10.8% 0.0% 2.2% 6.5% 39.5% 0.0% 5.4% 0.0% 0.0% 14.6% 2.7% 2.7% 0.0% 0.0% 10.2% 0.0% 5.4% 0.0% 0.0%
97.5% 99.1% 100.0% 100.0% 1.1% 0.2% 0.0% 0.0% 1.4% 0.7% 0.0% 0.0% 3.6% 4.0% 0.0% 1.6% 3.2% 3.5% 6.6% 4.2% 0.5% 0.8% 4.4% 0.0% 1.6% 1.8% 0.0% 0.7% 1.6% 9.6% 12.6% 20.0% 24.2% 8.8% 11.9% 10.6% 3.2% 2.7% 0.0% 4.8% 5.5% 0.0% 7.3% 5.8% 0.0% 7.3% 7.1% 28.8% 3.9% 2.1% 4.0% 5.2% 4.1% 4.0% 5.2% 2.4% 0.0% 5.6% 1.9% 0.0% 4.7% 5.8% 7.0% 5.4% 2.9% 0.0% 4.3% 6.6% 7.9% 4.5% 0.4% 0.0% 2.4% 1.9% 0.0% 0.0% 0.0% 21.7% 0.0% 4.5% 0.0% 52.0% 0.0% 10.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 10.9% 0.0% 0.0% 0.0% 0.0%
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
LIBOR Facility Coupon floor TLB 300 0.75% TLB 475 1.25% Add-on TLB 225 0.00% 1st ov-liteTL 400 1.50% Add-on TLB 375 0.00% TL (Cov-lite) 525 1.25% TL (Cov-lite) 475 1.25% Add-on TLB 600 1.50% Incr. TLB 425 1.25% TLB 475 1.25%
2.5
29- 5- 12- 19- 26- 2- 9- 16- 23- 1- 8- 15- 22- 29- 5- 12Dec Jan Jan Jan Jan Feb Feb Feb Feb Mar Mar Mar Mar Mar Apr Apr
37
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
2002 2003 2004 2005 Volume (billion) $57.7 $90.1 $154.3 $184.0 Number of issues 242 376 648 733 By rating (as a percent of total volume) Split BBB 7.2% 2.0% 0.7% 1.2% BB 51.7% 39.2% 27.0% 20.9% Split BB 12.5% 19.5% 11.7% 15.3% B 10.5% 23.8% 42.6% 37.9% Split B 0.2% 0.0% 1.5% 1.0% CCC 0.0% 2.0% 0.3% 0.9% NR 13.4% 12.0% 16.0% 22.7% Default 0.0% 0.0% 0.0% 0.0% By use of proceeds (as a percent of total volume) Recapitalization 5.2% 12.5% 17.9% 19.9% Refinancing 51.8% 50.2% 35.3% 26.8% Acquisition 32.5% 29.4% 41.0% 46.8% General Corporate 5.1% 2.9% 3.0% 2.8% Exit 3.9% 4.0% 0.4% 1.4% DIP 1.5% 0.3% 0.8% 1.9% Other 0.2% 0.8% 1.7% 0.4% Unknown 0.0% 0.0% 0.0% 0.0% By industry (as a percent of total volume) Automotive 1.3% 5.0% 0.4% 3.0% Broadcasting 2.9% 2.0% 1.8% 2.2% Cable and Satellite 0.6% 3.0% 4.1% 2.6% Chemicals 5.4% 6.7% 7.6% 6.2% Consumer Products 2.5% 3.1% 4.5% 3.1% Diversified Media 7.1% 4.8% 3.6% 3.5% Energy 2.5% 4.4% 4.0% 8.1% Financial 0.5% 1.1% 1.0% 1.0% Food and Beverages 8.3% 7.6% 5.1% 4.2% Gaming Lodging and Leisure 6.9% 4.6% 7.6% 7.9% Healthcare 8.8% 8.6% 6.7% 7.5% Housing 4.9% 5.2% 5.7% 8.5% Industrials 8.1% 2.4% 4.3% 3.1% Metals and Mining 2.8% 3.3% 2.9% 2.1% Paper and Packaging 4.8% 2.8% 4.4% 1.0% Retail 4.8% 5.3% 3.3% 4.6% Services 5.6% 7.8% 6.7% 10.8% Technology 5.1% 5.5% 4.5% 8.7% Telecommunications 5.3% 4.9% 7.4% 6.5% Transportation 2.5% 2.9% 7.5% 2.0% Utility 9.3% 8.9% 7.0% 3.5%
Sources: J.P. Morgan; S&P LCD.
0.7% 0.0% 0.0% 16.2% 21.4% 9.5% 12.9% 8.3% 0.0% 61.2% 62.0% 68.2% 2.7% 2.8% 16.8% 0.0% 0.5% 0.0% 6.2% 5.0% 5.5% 0.0% 0.0% 0.0% 0.3% 1.0% 0.0% 72.2% 55.2% 38.0% 17.7% 27.0% 41.8% 1.8% 0.0% 0.0% 0.3% 0.0% 0.0% 0.0% 1.6% 0.0% 7.7% 15.2% 20.1% 0.0% 0.0% 0.0% 2.1% 3.1% 0.0% 1.4% 1.4% 0.0% 4.0% 4.1% 0.0% 6.6% 3.1% 0.0% 5.7% 1.6% 0.0% 1.4% 5.4% 0.0% 2.6% 7.2% 0.0% 5.8% 3.2% 0.0% 9.0% 2.8% 0.0% 6.5% 2.2% 0.0% 12.7% 8.9% 1.0% 0.6% 3.1% 9.2% 5.0% 2.6% 8.0% 4.3% 0.4% 0.0% 1.2% 0.0% 0.0% 8.7% 7.1% 22.3% 6.0% 8.1% 6.8% 11.4% 17.9% 35.1% 2.4% 12.2% 17.6% 1.1% 3.3% 0.0% 1.6% 1.4% 0.0%
350 300 250 200 150 100 50 0 1997 1998 1999 2000 2001 2002 2003 2004 2005
28.3 56.7 59.8 90.1 43.5 34.1 57.7 184.0 154.3
324.6
59.4
2006
2007
2008
2009
2010
2011
YTD
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
15.9
1.8
0.0 -12.0
($bn)
16.3 13.2
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD
39
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Sources: J.P. Morgan; S&P LCD; Lipper FMI. *Note: Paydowns include amortizations, unscheduled paydowns, and bond-for-loan issuance.
-100.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD
2009
2010
2008
CLO issuance
100 80 ($bn) 60 40 20 0
19.0 15.0 20.0 31.0 53.0
93.0
94.0
$ bn
2011
YTD
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
YTD
20.0
40
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
High-yield defaults
l l l l
There was one new leveraged credit default this week. Reddy Ice filed Chapter 11 affecting $451mn in high-yield bonds. Year-to-date, eight high-yield issuers defaulted affecting $3.9bn in bonds. In 2011, 21 high-yield companies defaulted for $18.5bn. The par- and issuer weighted high-yield default rates are 2.00% and 2.46%. Going forward, we continue to expect high-yield bond default rates to remain below their 4.2% long-term average over the next two years. Specifically, we forecast the default rate to end 2012 and 2013 at 1.5% and 2.0%.
April defaults
Date 12-Apr-12 Issuer Reddy Ice Debt ($ mn) 451.3 Industry Food and Beverages Rating at last issuance B1
Source: J.P. Morgan Note: Includes only US dollar-denominated debt from domestic high-yield issuers. * Indicates an issuer that has missed an interest payment and is currently in a 30-day grace period.
14.0% 12.0% 10.0% Default rate 8.0% 6.0% 4.0% 2.0% 0.0% Jan-94 Jan-95 Jan-96 Jan-97
12-Apr-12 2.00%
Mar-02 12.24%
Jan-02 10.24%
Nov-09 10.98%
12-Apr-12 2.46%
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
42
Jan-11 2010
Default volume
94.6 100 90 80 70 56.0 55.6 60 50 28.3 40 22.0 24.9 22.9 22.922.0 30 19.4 18.5 15.1 20 8.6 7.3 10.3 8.2 7.24.85.28.0 7.9 5.0 4.73.4 3.2 10 2.5 3.6 3.9 0.30.11.10.61.0 0
Number of defaults
160 140 120 100 80 60 40 20 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 YTD
8 10 23 17 18 23 27 28 33 49 51 62 31 37 20 16 18 47 26 29 21 18 11 86
138 116 87 61 70
($bn)
21 21 8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
YTD
41
Jan-12
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
There were no new defaults in the institutional loan market this week. Year-todate, six loan issuers defaulted affecting $2.8bn in institutiona loans. In 2011, ten bank loan borrowers defaulted on $2.8bn in institutional banks loans. The par- and issuer weighted default rates for institutional loans are 0.77% and 1.10%. Going forward, we continue to expect loan default rates to remain below their 3.9% long-term average over the next two years. Specifically, we forecast default rates to end both 2012 and 2013 at 2.0%.
April defaults
Date None
Sources: J.P. Morgan, S&P LCD Note: Includes only US dollar-denominated debt from domestic high-yield issuers. * Indicates an issuer that has missed an interest payment and is currently in a 30-day grace period.
Issuer
Debt ($ mn)
Industry
9.0% Issuer-weighted default rate 7.5% 6.0% 4.5% 3.0% 1.5% 0.0% Dec-98
Dec-00 8.23%
Nov-09 14.18%
12-Apr-12 1.10%
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
10
Default volume
100 90 80 70 60 50 40 30 20 10 0
90.1
Number of defaults
100 90 80 70 60 50 40 30 20 10 0
93
60
($bn)
33
26
31 23 12 6 11 5 3 6
0.6
3.2
3.0
1.5
5.9
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
YTD
YTD
42
Dec-11
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Upgrades Downgrades
425 446
Downgrades
73
259 237 230 223 194 214 147 135 139 114 95 93 72
238 212
125116
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
YTD
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
12-Apr-12 1.41
Dec-10
Dec-11
Dec-10
2011
12-Apr-12 1.12
43
Dec-11
YTD
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
58
113
40 37 38 3030 29 31 27 25 24 24 19 16 15 16 16 13 14 11 10 13 12 6 3
Fallen angel bonds to be added to the J.P. Morgan Global High Yield Index
Approx. Glb Index weight 0.10% 0.11% lnclusion date 1-May-12 1-May-12
SP BB+ BB+
Note: If a bond is downgraded to high yield (fallen angel) it is added to the index subject to a seasoning periodit is added to index the first business day of the month closest to 90-days following the downgrade to high-yield. If a bond is upgraded to investment grade (rising star), it is immediately removed from the index. Sources: J.P. Morgan; Moodys Investors Service; S&P.
44
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Devel. Domestic $718.7 1,464 1,031 7.46% 654 bp 8.21% 8.29% 7.94% 6.47 yrs 5.08 yrs 3.79 yrs 102.82% 103.10% $662.8 1,365 960 7.44% 652 bp 8.24% 8.33% 7.94% 6.48 yrs 5.05 yrs 3.77 yrs 103.15% 103.41%
Dev. BB $339.0 595 397 5.77% 476 bp 6.99% 7.35% 6.21% 7.12 yrs 5.76 yrs 4.25 yrs 105.65% 105.65%
Instl $509.8 976 697 6.37% 544 bp 7.62% 7.97% 6.90% 6.76 yrs 5.22 yrs 3.91 yrs 105.43% 105.43%
HY 100 $159.6 100 100 7.77% 668 bp 8.14% 8.12% 8.00% 7.05 yrs 6.10 yrs 4.42 yrs 102.06% 102.06%
Liquid $231.2 200 200 7.43% 647 bp 8.16% 8.26% 7.88% 6.71 yrs 5.36 yrs 4.01 yrs 102.95% 102.95%
Euro 93.6 202 154 7.89% 734 bp 7.80% 7.60% 8.07% 4.69 yrs 4.12 yrs 3.26 yrs 98.67% 99.43%
Sterling US$ Euro. Euro. Curr. Euro. Agg. 12.6 51 43 9.36% 812 bp 8.97% 8.38% 9.43% 6.13 yrs 5.97 yrs 4.31 yrs 95.81% 96.79% $68.4 116 81 7.71% 674 bp 7.92% 7.84% 7.89% 6.17 yrs 5.52 yrs 4.05 yrs 98.95% 99.42% 139.2 246 189 8.21% 755 bp 8.01% 7.76% 8.37% 4.96 yrs 4.43 yrs 3.44 yrs 98.33% 98.93% 185.0 324 231 8.05% 732 bp 7.97% 7.77% 8.23% 5.14 yrs 4.60 yrs 3.52 yrs 98.39% 99.01%
Market value $28.2 $15.3 $34.6 $23.2 $16.4 $15.2 $108.6 $78.6 $30.6 $37.8 $60.6 $43.9 $37.8 $47.8 $34.3 $28.2 $36.9 $39.9 $47.6 $18.9 $29.0 $66.8 $213.3 $113.1 $256.6 $72.2 $73.7 $6.5
No. of issues 52 30 41 50 51 42 217 143 80 86 117 95 101 83 83 64 97 68 58 53 53 104 381 210 546 157 187 29
STW 546 bp 748 bp 598 bp 554 bp 603 bp 962 bp 615 bp 665 bp 630 bp 720 bp 672 bp 764 bp 619 bp 695 bp 627 bp 618 bp 742 bp 731 bp 679 bp 783 bp 726 bp 396 bp 487 bp 573 bp 703 bp 854 bp 1154 bp 1199 bp
YTW 6.38% 8.40% 6.85% 6.39% 6.78% 10.26% 7.23% 7.73% 7.07% 7.88% 7.59% 8.63% 6.95% 7.89% 7.29% 7.15% 8.16% 8.12% 7.76% 8.83% 8.58% 5.22% 5.91% 6.57% 7.84% 9.41% 12.30% 12.70%
YTM 6.61% 8.87% 7.38% 7.54% 7.76% 10.88% 7.50% 7.94% 7.65% 8.72% 8.15% 8.71% 7.47% 8.07% 7.75% 7.94% 8.95% 8.68% 8.13% 9.15% 8.75% 5.48% 6.32% 7.07% 8.38% 9.88% 12.65% 12.92%
Current yield 7.46% 8.83% 8.16% 7.95% 8.23% 10.09% 7.82% 7.62% 8.65% 9.06% 8.46% 8.68% 8.00% 8.14% 7.93% 8.27% 8.81% 9.00% 8.42% 8.75% 8.50% 6.59% 6.98% 7.66% 8.76% 9.61% 11.00% 10.52%
YTW date 4.97 yrs 4.92 yrs 4.69 yrs 4.60 yrs 4.19 yrs 3.68 yrs 5.91 yrs 5.70 yrs 4.20 yrs 3.76 yrs 4.71 yrs 5.53 yrs 3.98 yrs 5.10 yrs 5.84 yrs 6.33 yrs 4.05 yrs 4.59 yrs 5.20 yrs 6.46 yrs 7.41 yrs 7.84 yrs 5.79 yrs 4.67 yrs 4.52 yrs 4.73 yrs 4.26 yrs 4.10 yrs
Duration 3.91 yrs 3.64 yrs 3.71 yrs 3.64 yrs 3.18 yrs 2.86 yrs 4.44 yrs 3.93 yrs 3.28 yrs 2.87 yrs 3.64 yrs 4.12 yrs 3.22 yrs 3.94 yrs 4.26 yrs 3.79 yrs 3.18 yrs 3.39 yrs 3.96 yrs 4.24 yrs 5.15 yrs 5.23 yrs 4.29 yrs 3.69 yrs 3.45 yrs 3.53 yrs 3.09 yrs 3.13 yrs
Average rating Split BB B B Split BB B B Split BB Split BB B B B Split BB Split BB Split BB Split BB B B B Split BB Split BB Split BB
45
Peter D. Acciavatti (1-212) 270-9633 peter.acciavatti@jpmorgan.com Tony Linares (1-212) 270-3285 tony.linares@jpmorgan.com Nelson Jantzen, CFA (1-212) 270-1169 nelson.r.jantzen@jpmorgan.com Alisa Meyers (1-212) 834-9151 alisa.meyers@jpmchase.com
High Yield and Leveraged Loan Research Credit Strategy Weekly Update April 13, 2012
Note: Yield, spread, DM, and duration are to maturity and based on forward curve analytics. Source: J.P. Morgan.
Margin L+360 L+393 L+356 L+331 L+408 L+394 L+391 L+408 L+323 L+379 L+379 L+418 L+335 L+360 L+420 L+372 L+386 L+402 L+399 L+356 L+438 L+234 L+280 L+351 L+373 L+412 L+396 L+425
Current yield 4.51% 5.21% 5.01% 4.36% 5.30% 6.49% 4.85% 5.55% 4.37% 4.98% 4.88% 5.57% 4.36% 4.66% 5.26% 4.80% 5.12% 5.09% 4.95% 4.85% 7.34% 3.05% 3.59% 4.47% 5.02% 5.47% 6.02% 6.07%
Maturity 4.66 yrs 4.53 yrs 4.80 yrs 4.67 yrs 4.45 yrs 3.82 yrs 4.32 yrs 4.33 yrs 4.47 yrs 4.31 yrs 4.93 yrs 4.85 yrs 4.49 yrs 5.29 yrs 5.15 yrs 4.86 yrs 4.15 yrs 4.94 yrs 4.96 yrs 3.81 yrs 5.12 yrs 4.37 yrs 4.95 yrs 4.95 yrs 5.11 yrs 4.34 yrs 3.75 yrs 3.93 yrs
Avg. price 99.03 88.74 95.47 98.88 97.10 81.61 98.20 91.97 99.31 95.06 98.83 96.35 97.18 99.85 99.56 99.13 96.35 97.67 99.07 95.82 69.42 99.62 99.87 99.44 98.96 91.97 77.78 89.50
To maturity (Forward curve) Yield Spread DM 5.30% 8.26% 6.49% 4.93% 6.33% 12.03% 5.76% 7.58% 4.81% 6.47% 5.50% 6.66% 5.73% 5.06% 5.84% 5.35% 6.36% 5.99% 5.58% 6.69% 14.18% 3.51% 4.10% 5.00% 5.54% 7.39% 13.07% 9.05% 424bp 726bp 539bp 388bp 529bp 1105bp 477bp 657bp 377bp 547bp 439bp 557bp 472bp 389bp 469bp 425bp 540bp 489bp 445bp 578bp 1304bp 255bp 296bp 388bp 440bp 640bp 1219bp 805bp 442bp 757bp 554bp 394bp 524bp 1091bp 491bp 662bp 369bp 553bp 448bp 546bp 483bp 399bp 479bp 432bp 535bp 504bp 467bp 567bp 1332bp 282bp 331bp 407bp 431bp 645bp 1232bp 806bp
46
JOYCE CHANG Head of Global Credit and Emerging Markets Research (212) 834-4203
AND
L E V E R A G E D L O A N S T R AT E G Y
PETER D. ACCIAVATTI
peter.acciavatti@jpmorgan.com . . . (212) 270-9633, tony.linares@jpmorgan.com . . . . . . (212) 270-3285 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . nelson.r.jantzen@jpmorgan.com . . . (212) 270-1169 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . alisa.meyers@jpmorgan.com . . . . . (212) 834-9151
ARUN N. KUMAR
Head of High Grade Research
DAVID COMMON
Head of High Yield Research
BANKS, FINANCE AND SECURITIES COMPANIES kabir.x.caprihan@jpmorgan.com . . . (212) 834-5613, matthew.hughart@jpmorgan.com . . (212) 270-4584 CONSUMER PRODUCTS virginia.chambless@jpmorgan.com . (212) 834-5481, crutcher.reiss@jpmorgan.com . . . . . (212) 270-1682 ELECTRIC UTILITIES AND POWER GENERATION susan.voorhees@jpmorgan.com . . . (212) 834-5200, larry.liou@jpmorgan.com . . . . . . . . . (212) 834-9455 ENERGY, PIPELINES, MLPS robin.levine@jpmorgan.com . . . . . . (212) 270-1536, svetlana.x.goldenberg@jpmorgan.com . (212) 270-9453 HEALTHCARE arun.n.kumar@jpmorgan.com . . . . . (212) 834-5423, brett.g.gibson@jpmorgan.com . . . . . (212) 270-7484 INSURANCE arun.n.kumar@jpmorgan.com . . . . . (212) 834-5423, brett.g.gibson@jpmorgan.com . . . . . (212) 270-7484 MANUFACTURING, SERVICES Aerospace/Defense virginia.chambless@jpmorgan.com . (212) 834-5481, crutcher.reiss@jpmorgan.com . . . . . (212) 270-1682 Manufacturing and Industrials virginia.chambless@jpmorgan.com . (212) 834-5481, crutcher.reiss@jpmorgan.com . . . . . (212) 270-1682 REITS mark.streeter@jpmorgan.com . . . . . (212) 834-5086,, nicholas.j.northington@jpmorgan.com .(212) 834-5237 RETAIL virginia.chambless@jpmorgan.com . (212) 834-5481, crutcher.reiss@jpmorgan.com . . . . . (212) 270-1682 TECHNOLOGY/TELECOMMUNICATION, CABLE AND MEDIA Technology brian.m.turner@jpmorgan.com . . . . .(212) 834-4035, monish.m.desai@jpmorgan.com . . . (212) 834-4079 Telecommunication Services brian.m.turner@jpmorgan.com . . . . .(212) 834-4035, monish.m.desai@jpmorgan.com . . . (212) 834-4079 Media & Entertainment michael.pace@jpmorgan.com . . . . . (212) 270-6530, arjun.c.chandar@jpmorgan.com . . . (212) 270-6797 TRANSPORTATION Airlines/EETCs/Aircraft/Rails/Freight mark.streeter@jpmorgan.com . . . . . (212) 834-5086, nicholas.j.northington@jpmorgan.com .(212) 834-5237
FINANCE AND SECURITIES COMPANIES dave.adam.katz@jpmorgan.com . . . (212) 270-4593, bayina.bashtaeva@jpmorgan.com . (212) 270-1372 CONSUMER PRODUCTS, FOOD AND RESTAURANTS carla.casella@jpmorgan.com . . . . . . (212) 270-6798, paul.a.simenauer@jpmorgan.com . . (212) 270-6861 ELECTRIC UTILITIES AND POWER GENERATION dave.adam.katz@jpmorgan.com . . . (212) 270-4593, bayina.bashtaeva@jpmorgan.com . (212) 270-1372 ENERGY gregg.w.brody@jpmorgan.com . . . . (212) 834-5997, jason.homler@jpmorgan.com . . . . . (212) 834-9405 HEALTHCARE david.common@jpmorgan.com . . . . (212) 270-5260, jared.a.feeney@jpmorgan.com . . . . .(212) 270-0699
MANUFACTURING, SERVICES Aerospace/Defense, Industrials, Services yilma.abebe@jpmorgan.com . . . . . . (212) 270-3265, ryan.p.dean@jpmorgan.com . . . . . . (212) 270-9566 GAMING, LODGING, LEISURE Gaming, Lodging susan.berliner@jpmorgan.com . . . . .(212) 270-3085, richard.j.degaetani@jpmorgan.com . (212) 834-9524 Leisure michael.pace@jpmorgan.com . . . . . (212) 270-6530, arjun.c.chandar@jpmorgan.com . . . (212) 270-6797 RETAIL carla.casella@jpmorgan.com . . . . . . (212) 270-6798, paul.a.simenauer@jpmorgan.com . . (212) 270-6861 TECHNOLOGY/TELECOMMUNICATION, CABLE AND MEDIA Technology/Telecommunication Services thomas.j.egan@jpmorgan.com . . . . . (212) 270-2149, lina.p.kabaria@jpmorgan.com . . . . . (212) 834-5669 Cable/Media michael.pace@jpmorgan.com . . . . . (212) 270-6530, arjun.c.chandar@jpmorgan.com . . . (212) 270-6797 Broadcasting/Publishing avi.a.steiner@jpmorgan.com . . . . . . (212) 270-5512, kenneth.r.norden@jpmorgan.com . . (212) 270-1564 TRANSPORTATION Airlines/EETCs/Aircraft/Rails/Freight mark.streeter@jpmorgan.com . . . . . (212) 834-5086, nicholas.j.northington@jpmorgan.com .(212) 834-5237
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