Transcript Here

Is There More Upside in High Yield?
DC Finance Institutional Investor Conference
May 24, 2010
2
Global Credit Strategy
● Par is not a ceiling
● The key is what happens to the default rate
● Economic trend favors a lower default rate
● Diverse approaches point to a default rate decline
● “Wall of Maturities”: An overstated problem
3
Par Is Not a Ceiling
4
After This Big a Rally, Can We Expect Good
Performance?
110
Price of Global High Yield Index
A ll-Time High (28 Feb 2005)
PAR
100
90
Average (1998 - 2009)
80
70
60
A ll-Time Low ( 12 December
2008)
50
D
J
F
M
A
M
J
2009
Source: BofA Merrill Lynch Global Research.
J
A
S
O
N
D
J
F
2010
M
5
There Is Upside from 100
Total Return for the Year
13.27%
Year
U.S. High Yield
Index Beginning Price
4.15%
9.60%
2.60%
1997
99.483
9.12%
7.00%
High Yield
Government
10.39%
2.62%
7.77%
Investment Grade
Corporates
10.87%
2.41%
5.42%
Total Return
3.42%
2004
102.621
8.46%
Price Gain
4.36%
Key:
-0.94%
Income
High Yield
Government
Source: BofA Merrill Lynch Global Research.
5.95%
-0.53%
Investment Grade
Corporates
6
The Key Is What Happens to the Default Rate
7
Change in Default Rate versus High Yield Price Return
1987 – 2009, Annually
5
3.95
Mean Price Return (%)
4
3
2
1
0
-1
-2
-3
-4
-3.32
-5
Rising Default Rate
Sources; BofA Merrill Lynch Global Research, Moody’s Investors Service.
Declining Default Rate
In 17 out of 23
years, the default
rate and the high
yield index price
moved in opposite
directions
8
Economic Trend Favors a Lower Default Rate
9
Real Growth in GDP – Germany
Change over Preceding Period - Annual Rate (%)
2008 – 2010, Quarterly
6
4
Historical
Projected
2
0
-2
-4
-6
-8
1
Sources; Bloomberg.
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
10
Real Growth in GDP – U.S.
Change over Preceding Period - Annual Rate (%)
2008 – 2010, Quarterly
10
Historical
8
Projected
6
4
2
0
-2
-4
-6
-8
1
Sources; Bloomberg.
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
11
Real Growth in GDP – U.K.
Change over Preceding Period - Annual Rate (%)
2008 – 2010, Quarterly
8
6
Historical
Projected
4
2
0
-2
-4
-6
-8
1
Sources; Bloomberg.
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
12
Diverse Approaches Point to a Default Rate Decline
13
Global Default Rate
1985-2010, Quarterly
4.5
Moody;s employs a
time-tested econometric model
4.0
3.78%
Quarterly Rate (%)
3.5
3.0
2.5
2.0
1.5
Mean = 1.24%
1.0
0.5
Sources: BNP Global Credit, Moody’s Investors Service.
- - - Moody’s projection
1Q10
1Q08
1Q07
1Q06
1Q05
1Q04
1Q03
1Q02
1Q01
1Q00
1Q99
1Q98
1Q97
1Q96
1Q95
1Q94
1Q93
1Q92
1Q91
1Q90
1Q89
1Q88
1Q87
1Q86
1Q85
0.0
1Q09
Projected April
2011: 0.50 %
14
Liquidity Correlates with Default Rate
60
One-Year Default Rate (%)
March 2009 to March 2010
50
The least liquid
companies default
at a much higher rate
than the others
40
30
20
10
0
1
2
3
Speculative - Grade Liquidity Rating
Source: Moody's Investors Service.
4
15
Liquidity Improvement Points to Default Rate Decline
SGL-4 as Percent of All SGL Ratings
25
The number of highly
illiquid companies has
fallen dramatically
20
15
10
5
0
J F M AM J J A S O N D J F MA MJ J AS ON D J F M AM J J AS O N D J F M
2007
Source: Moody's Investors Service.
2008
2009
2010
16
Market-Based Default Rate Forecast
The proportion of companies
with spreads greater than +1,000
basis points has declined from a
peak of 84% in December 2008
As of May 6, 2010
Distressed
Non-distressed
Cyclical Adjustment Factor
Default Rate Forecast
Source: BofA Merrill Lynch Global Research.
+
+
Distribution
of High Yield
Universe (%)
9.87%
90.13%
x
x
Annual
Default
Rate (%)
23.53%
1.23%
-0.75%
=
=
=
=
Weighted
Average (%)
2.32%
1.11%
-0.75%
2.68%
17
“Wall of Maturities”: An Overstated Problem
18
Distribution of U.S. Debt Maturities
2010-2020, Annually
450
Maturing debt is not a
significant problem in
2010-2011
400
350
$ Billion
300
250
200
150
100
50
0
2010
2011
2012
2013
2014
2015
High Yield Bonds
Source: BofA Merrill Lynch Global Securities.
2016
2017
Leveraged Loans
2018
2019
2020
19
Projected Resolution of 2010-2014
$770 Billion Leveraged Loan Maturities
$135 Billion
Amend + Extend
Agreements
Fitch sees 90% of
maturities being
resolved before
taking into account
equity issuance or
acquisitions
$86 Billion Bondfor-Loan Takeouts
$425 Billion Loan
Refinancing
$55 Billion
Mandatory
Prepayments
$75 Billion Other
Source: Fitch Ratings.
20
Fitch’s Key Assumptions
● Loan issuance at 1998-2003 level (before CLO boom)
● Only modest CLO new issuance
● 45% of loan issuance used to refinance loan maturities
● $125 billion annual high yield issuance – below peak levels, which are
considered unsustainable
● Non-refinancing uses of high yield issuance at levels consistent with historical experience
21
Conclusion
We cannot travel backward in time to buy the high yield market at 54,
But among the opportunities available today, high yield remains attractive.
High Yield should outperform conventional fixed income over the next 12 months.