Corporate Credit Highlights

• J.P. Morgan Strategy recapping investment-grade new issue performance: “On average, new issues have tightened by 5.1 basis points from when they were issued until the end of August based on results from 2017 to the present, excluding 2020.This compares to the average J.P. Morgan US Liquid Index (JULI)  move over the same period of -0.1 basis points, so new issues have tended to outperform, unsurprisingly.” ¹
  
• BMO trade desk on second-quarter, investment-grade earnings: “In the investment-grade (IG) space, the second quarter marked a material improvement in fundamentals with leverage and margin ratios improving alongside a modest deterioration in interest coverage. The median IG borrower saw leverage decline 0.04% in terms of total debt to EBITDA and was unchanged in terms of net debt to EBITDA. Margins saw an outsized increase with adjusted EBITDA margin increasing 1.27% for the median IG borrower, the largest quarterly increase since 2017 and the second largest increase in our data since the beginning of 2010. The only minor nitpick was interest coverage, which declined 0.15% for the median IG borrower. The highest-rated companies remained a key driver of the outsized improvement in balance-sheet ratios with the second largest increase in EBITDA margin in our data and cash as a percentage of debt, setting a new all-time high for AA rated corporations. That said, BBB rated corporations also saw a significant improvement in fundamentals during the second quarter, with net leverage declining 0.07% (largest decline in two years) and EBITDA margin increasing 2.75% at the median level. That’s the most significant improvement in margins in our data.” ²

• Barclays Strategy on retail loan investors: “The proportion of investments in loans through retail mutual funds and ETFs have trended down after peaking in 2013-2014. At their peak, these funds held close to 25% of the Leveraged Loan Index (LLI). However, as of June 2024, they hold a much lower 10% of LLI. The proportionately lower retail participation should temper concerns regarding the impact of retail selling pressure during periods of volatility. More loans held by institutional investors such as collateralized loan obligations (CLOs)—by our estimate, CLOs hold more than two-thirds of the loan market—should act as a stabilizing force during bouts of market turmoil.” ³
• J.P. Morgan Strategy on loan issuance: “Our 2024 gross issuance forecast is $1 trillion and our net forecast is $145 billion. Further, $285 billion of refinancing volume year-to-date already surpasses 2017’s record ($275 billion in 2017), whereas $433 billion of repricing activity compares to a historic peak of $440 billion in 2017. In the details, acquisition-related issuance totals $59 billion year-to-date versus $30 billion in 2023, while leverage buyout (LBO) volume totals $38 billion year-to-date following a post-Global Financial Crisis low of $20 billion in 2023 and a post-Global Financial Crisis high of $149 billion in 2021. Also notable, $244 billion of loan issuance (or 30%) has been rated BBB or below, which compares to a decade high $285 billion in 2021 (or 34%).” ⁴
• LCD note on loan fundamentals: “Leveraged loan borrowers managed revenue and EBITDA growth for a 15th straight quarter from April to June this year, at positive 2% and 4%, respectively, according to LCD, which tracks a sample of public filers within the Morningstar LSTA US Leveraged Loan Index. What’s remarkable about the trends is the consistency. Revenue and EBITDA comps improved 2-4% in each of the last five quarters.” ⁵

• BAML Strategy on high-yield asset-class size: “High yield saw net issuance negative for most of 2022 and 2023, with it only turning positive early this year. The result has been a reduction in the size of the high-yield market from $1.5 trillion at the start of 2022 to $1.3 trillion at the start of this year, with mild reversal since. The reduction in market size over the last two years, driven in large part by rising-star activity, has been a tailwind for higher-quality secondary markets.” ⁶
• J.P. Morgan Strategy on high-yield mutual fund assets under management (AUM): “High-yield mutual funds have reported $26.3 billion of inflows since November. which follow $85.3 billion of outflows between Jan 2021 and Oct 2023. … Assets under management for the dedicated high-yield mutual fund base totaling $338.9 billion are now at a high since February 2022 and $35.5 billion below the record high at yearend 2021. … Retail high-yield funds now hold 25.8% of outstanding bonds versus 24% in 2013.” ⁷
• J.P. Morgan on high-yield ratings mix: “In 2024, the universe of BBs has expanded by 420 basis points versus a 440-basis-point contraction in single Bs and a modest 20-basis-point expansion in CCCs. As such, the ratings profile for the J.P. Morgan Domestic High Yield Index is near its most benign level on record. Specifically, 50% of the high-yield index is now upper tier (BB), 37% middle tier (B), and 13% lower tier (CCC). Notably, BBs are now 374 basis points below the historic peak (54% in June 2021), albeit remain 966 basis points above the long-term average weighting (40%). As well, the weighting of CCCs in the high-yield index is 158 basis points above the historic low in January 2023 albeit remain 451 basis points below the long-term average (18%). Note the historic peak for CCCs was 31% in September 2009. Meanwhile, single Bs are running 515 basis points below the historic average.” ⁸
  
• Goldman Sachs on default rate: “Data through July show that the pace of defaults continues to trend lower among U.S. high-yield bond issuers, reaching 2.8% on an issuer-weighted 12-month trailing basis. We previously had a yearend forecast of 3.0% but given the faster-than-expected improvement in the data, we are marking this down to 2.5% by yearend, well below the long run average level of 4.5%.” ⁹

Definitions
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• Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM is used in conjunction with management performance and management experience when evaluating a company.
• A balance-sheet ratio is determined by dividing a company's total current assets by its total current liabilities.
• Bank loans (also known as floating-rate loans or leveraged loans) invest in bonds and other fixed-income securities that have variable, as opposed to fixed, interest rates.
• A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%.
• A bond is a fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.
• ‍A collateralized loan obligation(CLO) is a single security backed by a pool of loans, collected into a marketable instrument via process known as securitization.
• EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income. Adjusted EBITDA is a measure computed for a company that takes its earnings and adds back interest expenses, taxes, and depreciation charges, plus other adjustments to the metric.
• An exchange-traded fund (ETF) is a basket of securities that trades on an exchange just like a stock does.
• The Global Financial Crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009.
• The gross margin ratio, also known as the gross profit margin ratio, is a profitability ratio that compares the gross margin of a company to its revenue.
• High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• The interest coverage ratio is calculated by dividing earnings before interest and taxes (EBIT) by the total amount of interest expenses on all of the company's outstanding debts.
• An institutional loan is made by institutional investors (such as CLOs, debt funds, pension funds, and insurance companies) instead of by banks.
• ‍Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody’s.
• An issue or issuance is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.
• The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market.
• The J.P. Morgan US Liquid Index (JULI) measures the performance of the investment grade US dollar denominated corporate bond market, with the goal of including all fixed rate bullet instruments.
• Leverage refers to using debt (borrowed funds) to amplify returns from an investment.
• A leveraged buyout (LBO) is a type of acquisition in the business world whereby the vast majority of the cost of buying a company is financed by borrowed funds.
• A leveraged loan is a type of loan made to borrowers who already have high levels of debt and/or a low credit rating. Lenders consider leveraged loans to have an above-average risk that the borrower will be unable to pay back the loan (also known as the risk of default).
• A leveraged loan index (LLI) is a financial tool used to track the performance of leveraged loans, which are loans extended to companies with high levels of debt
• The term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount.
• Margin ratios are a way to measure a company's ability to generate income in relation to its costs.
• The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option.
• The Morningstar LSTA US Leveraged Loan Index is a market-value weighted index designed to measure the performance of the US leveraged loan market.
• Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate.
• A refinance refers to the process of revising and replacing the terms of an existing credit agreement.
• A repricing opportunity is a change in the market environment that allows for a reassessment of the value of an investment.
• Rising star refers to a bond that is rated as a "junk bond" but could become investment grade because of improvements in the issuing company's credit quality.
• A secondary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.