Corporate Credit Highlights

• J.P. Morgan Strategy on new-issue average coupon compared to the average coupon of maturing bonds: “The year-to-date coupon gap is 166 basis points (bps), as the average coupon of new issues (5.22%) was higher than the average coupon of maturing bonds (3.56%). In 2024 this gap was 200 bps. It was 225 bps in 2023 and 91 bps in 2022.” ¹‍
• J.P. Morgan Research review of second quarter earnings: “A review of high-grade (HG) bond credit metrics as of the second quarter keeps us comfortable that credit risk remains very low. Revenue and EBITDA growth are quite strong, especially ex-commodities. EBITDA margins improved year-over-year as strong earnings growth offset potential margin impact from tariffs. Debt growth continued to be moderate as high yields and light M&A activity limited issuance. This slow debt growth helped keep leverage moderate. Interest coverage remains a weaker point with higher coupons, but the rate of deterioration is slowing. Capex growth was very strong, but over 60% of this came from the technology sector. Overall, HG bond credit metrics are not stellar, but strong EBITDA growth and the likelihood of lower rates ahead suggest that these metrics are not going to get worse and may well improve in coming quarters. Also, the slow rate of debt growth, as well as low dividends and share buybacks relative to EBITDA, should give comfort to bond holders that corporate treasurers are being conservative with their credit profiles.” ²‍
• BAML Strategy on investment-grade (IG) supply: “We note that August was mildly busier than expected with $105 billion in deals versus our initial expectation of $100 billion. We expect September to be busy, with our estimate for the month sitting at $165 billion. The pace of IG issuance this year has been roughly in-line with that of 2024 so far (-0.7% year-over-year).” ³

• J.P. Morgan Strategy on loan fundamentals: “EBITDA coverage continued to improve. As of the first quarter, the median interest coverage was at 3.99x, marking the second consecutive quarter of improvement after a persistently declining trend since mid-2022. Deterioration in cash-flow coverage stalled. Net of capex, cash-flow coverage is tracking 2.7x, up marginally on a sequential basis. Throughout 2024, cash-flow coverage stayed flat around the current level. The improvement in coverage was primarily driven by a continued decline in interest expense, as the strong wave of repricing transactions enabled borrowers to save 50-75 basis points in coupon margin.” ⁴‍
• BAML Strategy thoughts on high yield (HY) vs. loans: “Improved credit conditions and still strong technicals now signal a fair-value spread of 325 basis points (bps) for HY and 420bps for loans. As usual, we leave room for a +/- 50 bps move around our base case. We expect a next-12-months’ return of 4.7% for HY and 5.8% for loans and shift to a tactical Loans over weight (despite rate cuts) given the large valuation gap and improved return prospects. Risks to our call are higher than expected new-money issuance, potentially a function of increased M&A activity, or a large fundamental decline, both of which currently are not in our base case.” ⁵

• J.P. Morgan Research on high-yield (HY) earnings: “As the second quarter wraps up, this remains the strongest earnings season for high-yield companies in two years. The market is broadly in agreement: since the unofficial start of earnings season on July 15, high-yield spreads are essentially unchanged, yields are 28 basis points tighter, and the S&P 500 Index is 2.3%. Guidance has been very strong in aggregate with industrials and services remaining the positive outliers. On the negative side, consumer, media and chemicals have provided the weakest overall guidance. 2.7x as many high-yield companies (37%) have beaten EBITDA expectations as missed (14%). 1.6x as many high-yield companies (30%) have provided guidance our analysts interpreted as positive (30%) as negative (19%). 29% of companies have warned that they are experiencing inflationary pressures (down from 41% in the first quarter and 18% in fourth quarter, 2024). 23% of companies (75 out of 323 so far) are warning about tariffs.” ⁶
• ^‍J.P. Morgan Strategy on distressed bonds: “The distressed-bond universe contracted to a six-month low during August driven by strength in the cable/satellite sector. Specifically, the volume of bonds trading 1,000 basis points plus decreased $6.1 billion month-over-month to $62.6 billion or 4.6% of the universe. For reference, 6.6% of the HY universe traded 1,000 basis points plus a year ago. Down $48 billion (44%) from its peak on April 7, the distressed universe is down $24 billion year-over-year and is $86 billion below June 2022’s peak. There are now 69 HY issuers trading 1,000 basis points plus, down eight issuers month-over-month and 12 issuers year-over-year. Cable/satellite bonds account for 19% of bonds trading 1,000 basis points plus, which is followed by retail (11%) and chemicals (8%). Meanwhile, the sub-$50 universe declined to a four-month low $19 billion (or 1.4%), while the sub-$70 universe also contracted (-$6.5bn month-over-month) to a six-month low of $40.5 billion (or 3.0%).” ⁷

Definitions
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• Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors.
• 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 isa 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 corporate bond isa debt security that is issued by a company to raise capital.
• A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity.
• The credit market refers to the marketplace through which companies and governments issue debt to investors in exchange for regular interest payments. ‍
• Credit rating is when bond ratings are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard &Poor's, Moody's and Fitch. These firms evaluate a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from `AAA', which is the highest grade, to `D', which is the lowest grade.
• Credit spread is the difference in yield between two debt securities with the same maturity but different credit quality.
• Derivative is a type of financial contract whose value is dependent on an underlying asset, a group of assets, or a benchmark. It's an agreement set between two or more parties that can be traded on an exchange or over the counter.
• ‍Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk.
• Distressed Exchange is a negotiation process between a financially troubled company and its creditors where the company seeks to restructure its debt without filing for bankruptcy.
• ‍High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• The ICE BofA US Corporate Index isa benchmark index that tracks the performance of investment grade corporate debt in the United States.
• 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.
• Investment Grade (IG) Index refers to the ICE BofA US Corporate Index.
• 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.
• Implied default rate is a measure of the market's perception of the likelihood that a borrower will default on their debt obligations.
• ‍Leverage refers to using debt (borrowed funds) to amplify returns from an investment. 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).
• ‍Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
• Maturity (or maturity wall) is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist.
• Morningstar LSTA US Leveraged Loan Index is a market-value weighted index designed to measure the performance of the US leveraged loan market.
• Mortgage-backed securities (MBS) are investment products backed by a pool of mortgage loans.
• ‍Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.
• Par-weighted refers to a method of calculating averages where the individual values are weighted by their par (face) value. This means that larger holdings or transactions have a greater influence on the final average.
• Post-GFC refers to the period following the Global Financial Crisis (GFC), which began in 2007-2008. This period is characterized by economic recovery, changes in financial regulation, and evolving global financial systems.
• A refinance (ReFies) refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.
• ‍Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by Treasury bonds. Spread income refers to the additional income from this difference.
• The 10-year treasury bond yield is the interest rate the U.S. government pays to borrow money for a decade, serving as a benchmark for other interest rates and a key indicator of investor sentiment about economic conditions.
• Total Return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period.‍
• Weighted Average Coupon is the average gross interest rate of the underlying mortgages in a mortgage-backed security at the time it was issued.
• Yield isa measure of the profit that an investor will be paid for investing in a stock or a bond. It is usually computed on an annual basis.
• Yield to worst (YTW) estimates the lowest possible return on a bond without the issuer defaulting.