Bangkok--12 Jun--Standard & Poor's
The high-yield market had another strong month in May as spreads tightened and new issuance surged, said an article published today by Standard & Poor's.
Recent economic data were mixed but generally supported the idea that the U.S. economy may reach a bottom sometime in the second half of the year, which appears to be discounted in the high-yield bond market, according to the article, titled "U.S. High-Yield Prospects: Primary And Secondary Markets Rally In May (Premium)." On the credit quality front, downgrades continued to outpace upgrades by a wide margin in May, though the number of credit actions has tempered slightly from the rate seen over the past six months.
Standard & Poor's speculative-grade option adjusted spread index tightened 171 basis points (bps) between June 1 and the end of April and 618 bps since the end of 2008. Both inflows into the asset class and a backup in Treasury yields pushed spreads down to 966 bps as of June 5, the lowest level since Oct. 1, 2008.
"Another sign of improvement can be seen in the high-yield primary bond market," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "New issuance surged $18.1 billion in May, the best month since June 2007. However, the large headline number does not represent a substantial increase in new demand for credit or an increase in the supply of new money, because a bulk of the recent issuance has been used to refinance bonds and loans." Nevertheless, deals are getting done, albeit at a higher price.
Standard & Poor's downgraded 395 speculative-grade companies and upgraded 30 entities so far this year. The downgrade ratio rose to 88% in May from 81.5% in January 2009 and 70.5% a year ago.
The preliminary 12-month-trailing default rate rose to 8.13% in May from 6.75% in February and 5.42% in March. We expect that the number of defaults will rise substantially over the next few quarters and that the default rate will hit 14.3% by the end of first-quarter 2010.
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Media Contact:
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Analyst Contacts:
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