Industry voice: High yield investors are on notice for a jumbo financing package off the back of a flurry of M&A activity, particularly in the telecoms space. Fidelity's Peter Khan discusses the outlook for one the largest and most widely-held high yield sectors
So far this year, lower-rated credits, which tend to exhibit positive correlation to economic growth and inflation, have strongly outperformed their higher quality, more interest rate sensitive cohorts. This is a natural reaction to a strong economy, gently increasing government bond yields and healthy earnings generation. Despite a steady stream of investor outflows since the second half of 2017, high yield returns have been bolstered by one of the slowest issuance years for some time. Illustrative of this is the negative US$55bn of net issuance in US high yield this year - roughly 4.5% of the market!
This source of strength masks a growing number of underlying weaknesses, including increasingly negative creditor documentation and creatively generated financial projections. The Thomson Reuters deal (FINRSK) jumps to mind as an example of pushing the boundaries on weak documentation. With an excess of liquidity relative to allocation opportunities (namely opportunities which are positively correlated to growth), investors have begrudgingly overlooked stretched metrics for newly leveraged entities, carefully finding their way through the capital markets pipeline.
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