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Extra Credit*

  • Positive rating momentum continued in 3Q23 with upgrades exceeding downgrades by 2.3x. $100 billion of investment grade bonds were upgraded while $44 billion were downgraded in the quarter. Of the $100 billion, $99 billion were upgraded within investment grade and $1 billion migrated from high yield to investment grade. Conversely, $41 billion of downgrades occurred within investment grade while $3 billion of bonds fell to high.
  • Year to date, total upgrades stand at $737 billion ($693 billion within investment grade + $45 billion of Rising Stars), while downgrades total $205 billion ($188 billion within investment grade + $17 billion of Fallen Angels). The upward ratings momentum is losing a little steam with the upgrade/downgrade ratio at 3.6x versus 3.9x in FY22.
  • The relationship between defaults and recovery rates is particularly unusual in this cycle, particularly for unsecured bonds. Their recovery rates have fallen in nearly a straight line fashion, despite default rates for the senior unsecured cohort remaining relative range-bound. First-lien loan recoveries, however, have trended more in line with what the longer-term relationship with default rates would imply. Still, recoveries for both senior unsecured bonds and first-lien loans sit meaningfully below their medians since 2001 at 26% (vs. median since 2001 of 42%) and 58% (vs. 65%), respectively. 
  • The precipitous decline in recoveries for secured and unsecured bonds is also concerning in light of the growing proportion of the high yield bond index that is secured — now above 30% of index notional. The evolution has been particularly stark for single Bs, for which nearly half are secured, up from <20% as little as five years ago. This trend has been spurred in large part because of year-to-date issuance, where 60% of supply has been secured, well above the 2010-19 annual average of 23%. 
  • The trailing 12-month default rates for bank loans and high-yield bonds, excluding distressed exchanges, finished the month at 1.90% and 1.32%, respectively, down from 2.24% and marginally higher from 1.29% from August. The long-term historical default rate for loans and high yield bonds is 3.1% and 3.2%, respectively.

Sources: Bloomberg and JP Morgan as of 10/9/23.

Yield as of:
Oct 13, 2023
High-Yield Bonds
Investment-Grade Corporates
Last Week
Prior Week
Start of the Year
Option Adjusted Spread as of:
Oct 13, 2023
High-Yield Bonds
Investment-Grade Corporates
Last Week
412 bps
525 bps
114 bps
Prior Week
422 bps
530 bps
115 bps
Start of the Year
469 bps
592 bps
121 bps
Prices as of:
Oct 13, 2023
High-Yield Bonds
Investment-Grade Corporates
Last Week
Prior Week
Start of the Year

*Source: Morningstar®, Bloomberg, Credit Suisse. OAS is Options Adjusted Spread. 4-year discount margin is used for spread for bank loans. Yield quoted is yield-to-worst or equivalent calculation. YTD Low / High for yields are based on end of week and not intraday movements. Indexes and sub-indexes: Investment-grade corporates represented by Bloomberg US Corporate Bond Index. High-yield bonds represented by Bloomberg US Corporate High Yield Index. Bank loans represented by Credit Suisse Leverage Loan Index. The red and green arrows depicted under Yields, Option Adjusted Spreads, and Prices indicate a higher or lower value from the previous week.

Past performance does not guarantee future results. Index performance is not indicative of fund performance. Indexes are unmanaged and it is not possible to invest directly in an index.

Any discussion of individual companies is not intended as recommendation to buy, hold or sell securities issued by those companies. Aristotle Fund holdings can be found on the fund pages linked above.

Investors should consider a fund’s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the Fund and are available from AristotleFunds.com. The prospectus and/or summary prospectus should be read carefully before investing.

Investing involves risk. Principal loss is possible.

Foreside Financial Services, LLC, distributor.

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