HIGH YIELD BONDS Global Market Outlook Press Briefing

Transcription

1 215 Global Market Outlook Press Briefing HIGH YIELD BONDS Mark Vaselkiv Portfolio Manager of the High Yield Fund and Institutional High Yield Strategy

2 High Yield Bonds: Summary ENVIRONMENT U.S. high yield has enjoyed an impressive multiyear run, resulting in somewhat stretched valuations today. An expanding high yield market into European and emerging market regions is creating additional opportunities. LOOKING AHEAD A favorable credit environment remains, especially within the context of low global interest rates. Amid record-low yields from U.S. issuers, growing international markets offer potentially greater value. Potential to profit from near-term volatility and technical dislocations, particularly within less mature markets of European high yield and emerging corporates. 2

3 Percent Today s U.S. High Yield Market Permits Less Compensation for Risk BARCLAYS U.S. HIGH YIELD INDEX As of 3 September Coupon Yield to Worst Post-28, a strong market run within an improving credit environment has promoted complacency and inappropriate pricing of risk evidenced by declining coupons. Source: Barclays. 3

4 High Yield Market Size ( billions) Relative Market Size (%) The Market is Expanding Globally European High Yield GROWTH OF THE EUROPEAN HIGH RELATIVE SIZE OF THE EUROPEAN HIGH YIELD MARKET YIELD MARKET VS. U.S. HIGH YIELD MARKET As of 3 September 214 As of 3 September Expected Market Size by End of 215: 5 Billion 213 Record 83 billion new issuance 38% first-time issuers 45% 4% 35% 3% 25% 2% 15% 1 1% 5% % The high yield asset class historically had been dominated by U.S. issuers; that composition is changing. Financial disintermediation has more than tripled the size of the European high yield market, creating more liquidity, depth, and diversity. Sources: UBS, Credit Suisse, and T. Rowe Price. 4

5 Market Size ($ billions) New Issuance ($ billions) The Market is Expanding Globally Emerging Market Corporate Debt EMERGING MARKET CORPORATE DEBT GROWTH 1996 Through June 214 2, 1,8 1,6 EMERGING MARKET CORPORATE NEW ISSUANCE 1996 Through August ,4 1,2 1, Emerging markets corporates represent another area of tremendous growth, now comparable with the size of U.S. high yield. Sources: BIS and Bank of America/Merrill Lynch. 5

6 Billions ($) Expanding Global Opportunity Set MARKET GROWTH 1996 THROUGH SEPTEMBER 214 6, U.S. High Yield European High Yield Emerging Market Corporate Debt U.S. Leveraged Loans European Leveraged Loans 5, 4, 3, 2, 1, Sept. 214 Credit markets have significantly grown as increasingly complex and interwoven markets create compelling opportunities. Sources: BIS and Credit Suisse. 6

7 Global Benchmarks are Evolving BANK OF AMERICA/MERRILL LYNCH GLOBAL HIGH YIELD As of 3 September North America Africa and Middle East North America Africa and Middle East Europe Latin and South America Europe Latin and South America Pacific Asia Pacific In recognition of broadening international markets, today s global indices are incorporating more exposure outside of North America (representing almost 45%), an allocation that was approximately 15% 1 years ago. Source: Bank of America/Merrill Lynch. 7

8 Growth of 1 Different Regions Produce Divergent Results GROWTH OF 1 As of 3 September U.S. High Yield European High Yield Emerging Market Corporate Debt While credit markets are more interconnected today, different regional cycles produce performance dispersion. Sources: Bank of America/Merrill Lynch, J.P. Morgan, and T. Rowe Price. U.S. High Yield represented by the Bank of America/Merrill Lynch U.S. High Yield Index hedged to EUR, European High Yield represented by the Bank of America/Merrill Lynch European Currency High Yield ex. Sub. Fin. 2% Constrained Index hedged to EUR, and Emerging Market Corporate Debt represented by the J.P. Morgan CEMBI Broad Diversified Index hedged to EUR. 8

9 Yield to Worst (%) FCF in Millions Case Study #1 Altice Cable operator with a diverse geographic footprint given its operations in Israel, the Caribbean, and Western Europe Market cap is approximately 11 billion with total debt of 2 billion Came to the market in the second quarter with the largest-ever below investment-grade debt deal Management continues to improve operating efficiencies to grow EBITDA and free cash flow, targeting lower leverage ALTICE AND CHTR BENCHMARK BONDS YIELD TO WORST (%) Altice /15/22 CHTR 6.5 4/3/221 Altice CHTR ALTICE FREE CASH FLOW GROWTH FCF FCFS/Sales EBITDA % LTM 6/14 45% 4% 35% 3% 25% 2% 15% 1% 5% % EBITDA % Source: Barclays, Altice, and T. Rowe Price. 9

10 Millions of Barrels of Oil Equivalents a Day Yield to Worst (%) Case Study #2 YPF Partially state-owned Argentine energy company involved in the exploration, production, and refining of Argentina s sizable oil and gas reserves Market cap of roughly $2 billion and outstanding debt of $5 billion New management team has stabilized and grown oil production with a reserve base of more than one billion barrels of oil and production of nearly 3, barrels of oil equivalents a day Sovereign-related volatility expected to moderate in 215 with upcoming elections and more pragmatic policymaking 3 Oil Production (Mboe/d) Gas Production (Mboe/d) NGL Production (Mboe/d) 4. YPF Yield Premium Relative to U.S. HY Index* (est) 216 (est) (est) Sources: J.P. Morgan and T. Rowe Price. * Yield to Worst for YPF 8.75 due 224 minus J.P. Morgan Domestic HY index YTW. 2. Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 1

11 RUB mm Spread Difference (bps) Case Study #3 Sberbank Largest bank in Russia and Eastern Europe, with a history of operations dating back to 1841 Market cap of $4 billion with $18 billion of bonds outstanding Strong balance sheet liquidity and capitalization with modest debt levels and large deposit base to help manage operations in the event of a protracted sanctions environment Dominant market share in Russia, with nearly a third of country s banking sector assets; benefits from domestic flight to quality during times of stress and funding advantage from low-cost retail deposits SBERBANK: LIQUIDITY PROFILE Cash & Equivalents 2,5, Broad Liquidity Bonds 2,, Loans SBERBANK 22 SENIOR BOND VS. U.S. HY BB INDEX 2 15 Sberbank Senior Bond vs. U.S. HY BB 1,5, 1 5 1,, 5, 1Q After Sources: T. Rowe Price, J.P. Morgan, and Sberbank financials. 11

12 Evolution of the High Yield Asset Class Should Incorporate a Global Perspective Long-term sustainable demand for income-oriented credit strategies in a low interest rate world. Overvalued U.S. credit markets caused by an influx of new investors and limited supply of quality issuers. Expanding international opportunity set from the maturation of leveraged loan, European high yield, and emerging markets corporate asset classes. Meaningful potential to profit from dislocations and volatility driven by economic and geopolitical uncertainties. 12

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