Fixed Income Discussion A Look Into The Leveraged Credit Markets. August 15, 2013

Transcription

1 Fixed Income Dicuion A Look Into The Leveraged Credit Market Augut 15, 2013

2 Theme of the Day- Interet Rate! adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 1 Quetion of the day: Where are interet rate going from here? UP?...But When?...and How Fat? Remember! GDP growth i guetimated to be ~1-2%, while inflation remain ~1% 1

3 Fed Taper? gdgdg ddddddddddd 2 dddddddddddddddddddddddddddddddddddddddadadadddd dddddddddddddddddddddddddddddddddddddd To Taper or Not To Taper..That i the quetion for Ben Bernanke and hi ucceor! $85B/month going to? Exhibit 3: We Expect Rate To Move Gradually Higher In Coming Month J.P. Morgan Interet Rate Forecat, % Actual 8/9/2013 3Q /30/2013 4Q2013 December 31, Q2014 March Q 2014 June Rate Effective Fund Rate 0.09% 0.10% 0.10% 0.10% 0.10% 3-Mo LIBOR 0.26% 0.26% 0.26% 0.28% 0.32% 2 Year Treaury 0.30% 0.38% 0.41% 0.47% 0.59% 5 Year Treaury 1.36% 1.60% 1.70% 1.84% 2.06% 10 Year Treaury 2.58% 2.75% 2.85% 3.00% 3.25% 30 Year Treaury 3.64% 3.70% 3.80% 3.90% 4.10% Source: J.P. Morgan 2

4 Yield (%) Hitorical 10-Year Treaury adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 3 End of the 30 Year Bull Market in Bond? Year Treaury Yield (7/1/ ) Current 10-Year Treaury Yield 2.71% Year Treaury Mid Yield 10-year Average Hitorical Average 10 Year 20 Year 30 Year 40 Year 50 Year Yield 3.57% 4.66% 6.04% 6.92% 6.66% Source: Where Credit I Due -Blacktone, Federal Reerve.. Hitorical yield are no aurance of future yield 3

5 10- Treaury Yield (%) Recent 10-Year Treaury Yield Movement gdgdg dd 4 ddddddddddddddddddddddddddddddddddddddddddddddddd dadadadddddddddddddddddddddddddddddddddddddddddd The 10-Year Treaury yield ha increaed by ~ 108 bp ince May 1, Year Treaury Yield Change from to

6 What Riing Rate Have Meant For Credit Return gdgdg dd 5 ddddddddddddddddddddddddddddddddddddddddddddddddd dadadadddddddddddddddddddddddddddddddddddddddddd In the period of riing rate a depicted below, High Yield Bond were up 67% of the time, and Leveraged Loan increaed 100% of the time! Corporate Bond Performance When 5-Year Treaury Yield Roe 70+bp 3 Month Period Ending Change in 5Y Treaury Yield (bp) Inv. Grade Fixed Income (IGR) High Yield Total Return Credit Suie Bank Loan Index High Yield-Bank Loan Difference High Yield-IGR Difference Apr % -4.70% 1.92% -6.62% -0.90% Nov % -1.00% 1.58% -2.58% 1.90% Apr % 0.20% 1.84% -1.64% 1.40% Feb % 1.00% 0.81% 0.19% -0.40% Jan % 1.90% 2.32% -0.42% 1.30% Jan % 3.90% 3.19% 0.71% 3.70% Aug % 2.90% 2.32% 0.58% 5.10% Jun % -1.00% 1.33% -2.33% 0.90% May % 4.30% 3.70% 0.60% 1.80% Jun % 23.10% 18.60% 4.50% 22.40% Jan % 2.80% 3.82% -1.02% 4.80% Jul % -1.09% 0.75% -1.84% 2.88% Average % 2.69% 3.52% -0.82% 3.74% Average w/o Apr % 3.36% 3.66% -0.30% 4.16% % of Time Poitive - 42% 67% 100% 42% 83% Original Source: Invetment Strategy Group, Datatream, Barclay, Credit Suie Loan Index Publication Cited: "The Invetment Conundrum What are Attractive Invetment in a Low Return", Goldman Sach 5

7 Major Aet Return adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 6 Aet Return Aet Jun-13 Jul-13 YTD 2013 (July) *YTD Annualized Standard Deviation JPM Dometic High Yield Index Credit Suie Leveraged Loan Index JPM High Grade Global Index 10 Year Treaury (Barclay') S&P500 Ruell 2000 Gold** -2.52% 2.07% 3.89% 5.63% -0.55% 1.07% 3.91% 2.03% -2.60% 0.86% -2.13% 5.73% -2.66% -0.76% -5.61% 7.35% -1.34% 5.09% 19.63% 7.97% -0.51% 7.00% 23.97% 10.71% % 7.35% % 19.66% *Calculated uing monthly return **Ued the SPDR Gold ETF (11/12/2004 inception) for the tandard deviation Source: Credit Suie, JP Morgan, Barclay and Bloomberg 6

8 Major Aet Return adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 7 Aet Return Including 5 and 10 Year Cumulative Return Aet YTD 2013 (July) 5 Year (Year End 2012) *5 Year Annualized Standard Deviation 10 Year (Year End 2012) *10 Year Annualized Standard Deviation JPM Dometic High Yield Index Credit Suie Leveraged Loan Index JPM High Grade Global Index 10 Year Treaury (Barclay') S&P500 Ruell 2000 Gold** 3.89% 64.52% 13.27% % 9.99% 3.91% 26.48% 10.15% 71.36% 7.54% -2.13% 55.49% 7.09% 98.89% 5.78% -5.61% 42.77% 7.82% 72.15% 6.75% 19.63% 8.58% 18.52% 98.57% 14.71% 23.97% 19.65% 24.18% % 19.80% % % 22.12% % 19.82% *Calculated uing monthly return **Ued the SPDR Gold ETF (11/12/2004 inception) for the tandard deviation Source: Credit Suie, JP Morgan, Barclay and Bloomberg 7

9 Typical Fixed Income Allocation Model gdgdg dd 8 ddddddddddddddddddddddddddddddddddddddddddddddddd dadadadddddddddddddddddddddddddddddddddddddddddd We Believe Invetor Are Re-Thinking the Fixed Income Opportunity Set Traditional Fixed Income Treaurie, Invetment Grade Credit and Municipal Bond Extended Credit Sector Emerging Market Debt and High Yield The Opportunity in Alternative Credit Leveraged Loan, Long/Short and Event Driven Credit Hedge Fund, Mezzanine and Ditreed debt Source: Blacktone- Where Credit I Due

10 What i a Junk Bond?! adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 9 Bond that are rated junk are called High Yield Bond becaue the credit quality of the iuer i called into quetion, thereby demanding a higher interet rate for invetment in that company. Thee companie have a higher rik of default than typical invetment grade bond like Apple or GE. Source: 9

11 What i a Junk Bond?! adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 10 High Yield bond are typically fixed interet rate bond iued by companie with lower interet coverage and higher leverage than companie that are invetment grade. See the return comparion between Invetment Grade and High Yield Below: Characteritic of the JPM High Yield Index v. the JPM Invetment Grade Index 1/1/2000-8/1/2013 JPM High Yield Index JPM Invetment Grade Index Hitorical Average Spread to Wort bp bp Current Spread bp bp Hitorical Yield to Wort 9.70% 5.69% Current Yield to Wort 6.10% 4.21% 5 Year Return 69.21% 53.49% 3 Year Return 35.60% 17.89% YTD Return 3.08% -2.13% Source: JP Morgan 10

12 Hitorical Yield Comparion adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 11 Yield today for mot of the major fixed income clae are below their twenty year average. Average Yield For The Major Fixed Income Aet Clae Over a Twenty Year Period 10-Year Treaury High Yield ** Invetment Grade** Leveraged Loan* Municipal Bond*** 20 Year Average 4.66% 9.99% 5.64% 8.67% 5.02% 8/8/ % 6.20% 4.01% 5.36% 4.32% Difference -2.08% -3.79% -1.63% -3.31% -0.70% *Aume a Three Year Life **Yield to Wort ***Moody' Muni Bond Yield Average Compoite (General Obligation only), return are tax free Source: JP Morgan and Credit Suie 11

13 High Yield Bond Pricing Metric adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 12 What happen when interet rate rie? Tenet Healthcare 4.75% note maturing in 2020 $100 (or par) $94.44 $89.23 $ bp in pread +200 bp in pread +300 bp in pread 12

14 13 Example of High Yield Companie adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 13

15 What About Leveraged Loan? adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 14 Leveraged loan are very imilar to High Yield bond in that they are debt for companie with lower credit quality However, the main difference are that they are priced uing LIBOR and are floating rate. Thi mean that the interet payment to the loan holder can change depending upon what the London Interbank Offering Rate i Importantly, loan are generally more enior and ecured in the capital tructure than high yield bond Source: 14

16 Major Aet Fund Flow adaadddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddadad 15 Bank loan are the only aet cla that have had net poitive flow for each of the period depicted below Rotation out of traditional fixed income and into alternative credit uch a bank loan and equity Major Aet Fund Flow, 5 Year, Year to Date, June and July $ In Billion Invetment Grade High Yield Dometic Equitie Municipal Bond Treaurie Bank Loan 5 Year $534.2 $82.1 $-22.7 $89.8 $46.6 $77.9 YTD $45.6 $-9.4 $113 $-19.1 $-9.8 $33.4 June $-16.9 $-15.6 $-2.3 $-16.8 $-4.7 $4.8 July $4.2 $5.4 $36.5 $-7.9 $0.6 $6.7 15