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Paul Karpers, Portfolio Manager – Fixed Income_T. Rowe Price
Michael Della Vedova, Portfolio Manager/Analyst, Europe High Yield Bond Strategy, T. Rowe Price
Samy Muaddi, Portfolio Manager/Analyst, Emerging Market Financials, T. Rowe Price
The Future of High
Yield Investing
Agenda
High Yield After the Financial Crisis
Current US High Yield and Bank Loan Markets
• “Casting a Wider Net”
European High Yield
Emerging Markets Corporates
Outlook
High Yield Investing Has Been Very Rewarding Post 2008 Case Study – Univision
Peer Group: BLC, CBS, DISCA, DIS, EVC, LIN, NXST, SBGI, and VIAB.
Sources: FactSet, Barclays, and TRP Estimates/Analysis.
0.0x
2.5x
5.0x
7.5x
10.0x
12.5x
15.0x
Levera
ge o
r E
nte
rprise V
alu
e M
ultip
le
LBO Case Study – Univision and Broadcasting Peers
UVN Debt/EBITDA Avg Peer EV/EBITDA
Peer Group: BLC, CBS, DISCA, DIS, EVC, LIN, NXST, SBGI, VIAB.
Sources: FactSet, Barclays, and TRP Estimates/Analysis.
Leveraged Buyouts – A Transformation of Good Companies with Bad Balance Sheets
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
0.0x
2.5x
5.0x
7.5x
10.0x
12.5x
15.0x
Bond P
rice
Levera
ge o
r E
nte
rprise V
alu
e M
ultip
le
LBO Case Study – Univision and Broadcasting Peers
UVN Debt/EBITDA Avg Peer EV/EBITDA UVN Sr Notes Price
Fallen Angels Contribute to the Growth of High Yield, and Have Altered Its Composition
0
20
40
60
80
100
120
140
160
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
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03
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04
20
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20
08
20
09
20
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20
11
20
12
20
13
YT
D
US
D,
bill
ions
Fallen Angels – by par amount
0
20
40
60
80
100
120
140
160
Bond p
rice
Ford 7.45% of 2031
Sources: JPMorgan and Barclays
As of March 31, 2014
Current Market Performance – Lower Quality and Shorter Duration Outperforms
Sources: US Treasuries Bellwethers 10 Year Index, US Investment Grade Corporate Bonds, and Bank Loans are represented by S&P/LSTA Performing Loan Index. Emerging Markets Debt represented by JPMorgan EMBI Global Diversified Index. Emerging Markets High Yield Debt represented by the High Yield segment of the JPMorgan CEMBI Broad Diversified Index. High Yield represented by JPMorgan Global High Yield Index. Euro High Yield represented by BofA ML Euro HY Constrained ex Sub Financials index (returns in USD)Past performance cannot guarantee future results
2.8% 3.0%1.1%
2.9% 2.3% 3.7% 3.4%1.8%
18.6%
7.4%
4.3%
1.5% 1.4%0.6%
-4.4%
21.9%
-10%
-5%
0%
5%
10%
15%
20%
25%
Euro HighYield
High Yield Bank Loans InvestmentGrade
EM Corp.HY Debt
EmergingMtk. Debt
10-YearTreasuries
S&P 500
Total Return 1Q & 1-YearAs of March 31, 2014
Q1 1-Year
10-Year Treasuries
IG Corporate Bonds
High Yield
Emerging Mkt. DebtBank Loans
EM Corporate HY Debt
Euro High Yield
0
2
4
6
8
0 1 2 3 4 5 6 7 8 9 10
Yie
ld t
o W
ors
t (%
)
Option-Adjusted Duration (years)
Risk and Return for Fixed Income SectorsAs of March 31, 2014
The higher yields and lower duration profiles afforded by below investment-grade asset classes left high yield and
bank loans well positioned, as they outperformed most alternative fixed income sectors in this environment.
Leveraged Credit Outperforms Fixed Income Alternatives
During a year when the 10-Yr Treasury rose over 100bps, high yield and bank loans posted positive results
unlike most other fixed income sectors.
Source: Barclays and T. Rowe PricePast performance cannot guarantee future results.
-0.10
0.04 0.201.47
3.24 4.26
7.54
20.35
-202468
10121416182022
Perc
ent
Fixed Income Total Returns12 Months Ended March 31, 2014
1.86%
1.66%
3.04%
2.73%
1.50%
1.70%
1.90%
2.10%
2.30%
2.50%
2.70%
2.90%
3.10%
10 Treasury Rate MovementsJanuary 2013 Through March 2014
Dec. 31
Jan. 2
May 1
Mar. 31
Benefits of a Low Duration Profile Afforded by Bank Loans
Sources: JPMorgan, Barclays, and S&P/LSTA. Past performance cannot guarantee future results..
During historical periods of rising Treasury rates, leveraged loans performed well relative to other fixed income asset classes.
Time Periods When Treasury Yields Rose 100 bps or more
Total Returns – 1 Year
12 Months Ended
10-Year
Treasury Yield
Move
S&P/LSTA
Performing
Loan Index
Barclays U.S.
Aggregate Index
Barclays U.S.
Treasury Index
Barclays U.S.
10 Year
Treasury
Bellwethers
Index
Barclays U.S.
Corporate
Investment
Grade Index
JP Morgan
Global High
Yield Index
JP Morgan CEMBI
Broad Index
JP Morgan
Emerging Market
Bond Global Index
12/31/1999 +179 bps 3.58% -0.82% -2.56% -8.43% -1.96% 3.38% ---- 24.18%
5/31/2004 +130 bps 7.50% -0.44% -2.64% -5.23% -0.44% 13.23% 3.13% 3.14%
6/30/2006 +120 bps 6.15% -0.81% -1.68% -5.78% -2.22% 5.06% 0.96% 4.63%
12/31/2009 +162 bps 52.53% 5.93% -3.57% -9.76% 18.68% 58.90% 37.49% 28.18%
9/30/2013 +124 bps 5.07% -1.68% -2.09% -5.71% -1.58% 7.08% -0.12% -4.34%
Total Returns – (April 30, 2013 – August 31, 2013)
April 30, 2013 –
August 31, 2013+112 bps 0.50% -3.67% -3.37% -8.14% -4.92% -2.09% -6.31% -10.25%
Yields Today are Historically Low Prompting Our Managers to Expand the Traditional Opportunity Set
Mar 31, 2014 5.60%
0%
5%
10%
15%
20%
25%
Yie
ld t
o W
ors
t (%
)
JP Morgan Global High Yield Index
Average of 9.72%
Source: JPMorgan
“Casting a Wider Net” – European and Emerging Markets High Yield Issuers are More Mainstream Than You Might Think
All trademarks are the property of their respective owners.
0
200
400
600
800
1000
1200
1400
1600
US
D,
bill
ions
US High Yield
European High Yield
Emerging Mkt. HY Debt
Sources: Credit Suisse, and BofA Merrill Lynch.
European High Yield and Emerging Markets High Yield Represent Growing Markets
with ScaleAs of March 31, 2014
European high yield is now significant in scale, depth and diversity.
3-5 Year German Government Bond
7-10 Year German Government Bond
European High Grade
US High Yield
Emerging Markets DebtEuropean Equities
Euro Pfandbriefe
European High YieldEM Corporate HY Debt
2
4
6
8
10
0 2 4 6 8 10 12 14 16
Ann
ualiz
ed R
etur
n (%
)
Annualized Standard Deviation (%)
Risk and Return for Fixed Income SectorsTen Years Ending March 31, 2014
Why Invest Now? Global Relative Value
Source: BofA/Merrill Lynch Indices: European Currency High Yield Constrained Excluding Subordinated Financials, US High Yield Master II, European High Grade Corporate, 3-5 Year German Government, 7-10 Year German Government and Euro Pfandbriefe, Emerging Markets High Yield Debt represented by the High Yield segment of the JPMorgan CEMBI Broad Diversified Index, and JPMorgan Emerging Markets Bond Index Global and MSCI Europe, all in Euro.
Emerging Markets Corporates
Source: JPM as of 3/31/2014
CEMBI Broad Diversified Index – High Yield Portion
Regional Breakdown
EM Corporate HY
Sector Diversification
EM Corporate HY
Financial 19.8%
TMT 19.1%
Metals & Mining 11.0%
Oil & Gas 10.0%
Consumer 9.6%
Industrial 8.8%
Real Estate 8.2%
Utilities 5.2% Other, 8.2%
Africa 5.4%
Asia 35.7%
Europe 20.7%
Latin America 32.4%
Middle East 5.7%
As of March 31, 2014
Lower leverage, higher credit quality
Sources: JPM, Credit Suisse, and BAML as of 3/31/2014.
Index Credit Quality Leverage
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Net
Levera
ge (
Net
Debt/LT
M
EB
ITD
A,
x
EM HY Leverage US HY Leverage
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
BB B CCC & Below NR
EM HY US HY
As of March 31, 2014
Default Migration & Recoveries
0
5
10
15
20
25
30
35
40
45
EMEA LatAm Europe US Asia
EMEA LatAm Europe US Asia
2%
27%
12%
67%
29%
4%
59%
0%
10%
20%
30%
40%
50%
60%
70%
EM Corporate Defaults - S&P US HY 18 Yr Avg
BBB
BB
B
CCC/Below
EM vs. US HY: Contribution to Default by Rating At Issuance Senior Unsecured Recovery Rates by Region
Sources: JPM, S&P, and BAML.
As of March 31, 2014
EM Sr. Unsecured Recovery Rates Dev. Sr. Unsecured Recovery Rates
High Yield Outlook
From a fundamentals perspective, high yield and bank loans remain solid:
− Moderate US economic growth (GDP 2-3%) is ideal for below investment-grade companies.
− Many companies are generating healthy free cash flow, and a substantial portion of new issuance in the current cycle has been refinancing related, leading to lower debt costs and a significant reduction in near-term maturities.
− As a result, defaults (outside of TXU) are expected to remain low throughout 2014.
• Technicals for high yield and bank loans (strong demand with refinancing supply) have created an issuer-friendly environment impacting deal structures including an increase in cov-lite loans leading to less attractive valuations.
• European high yield remains attractive enjoying less volatility this year than its US counterparts with opportunity for more robust first time issuance given bank balance sheet deleveraging.
Emerging markets corporates offer diversification and attractive relative value but credit selection is paramount.
This information is provided for informational and educational purposes only and is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for clients, and no assumptions should be made that the securities identified and discussed were or will be profitable. The views contained herein are as of May 2014 and may have changed since that time.
High-yield bonds carry a greater default risk than higher-rated bonds. Yield and share price will vary with interest rate changes but to a lesser extent than a portfolio of high-quality bonds. There is also a liquidity risk, the chance that the fund may not be able to buy or sell bonds at desired prices without causing substantial price swings.
Past performance cannot guarantee future results. All charts and tables shown are for illustrative purposes only.
2014-US-224
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