Important Lessons Learned in Recent Management Sessions Regarding Subprime Debt

Summary

  • The non-investment grade credit market in the United States is well-positioned to weather the present storm.
  • Issuers have mainly succeeded in passing on inflationary expenses, with a robust consumer allowing issuers to offset increased costs via price and volume increases.
  • The outlook for credit fundamentals in 2022 and 2023 is positive, with default rates significantly below historical norms.

Recent talks with issuer management teams bolster our belief that the non-investment grade credit market in the United States is well-positioned to weather the present climate.

J.P. Morgan sponsored its annual Global High Yield and Leveraged Finance conference last week, during which our team met with almost 100 issuer management teams. The seminar drew a large audience of both issuers and investors. It gave timely insights into the possible effect of current above-trend inflation on issuers and Russia’s continuing invasion of Ukraine.

Inflation, supply chains, and consumer strength have been focal points of the non-investment grade credit market for many quarters. They remained a prominent topic of conversation with management teams throughout the conference.

Because the non-investment grade credit market in the United States has minimal direct exposure to Russia and Ukraine, discussion of this subject has centered on the conflict’s indirect inflationary effect on issuers—most notably via rising energy and commodity prices. So far, issuers have mainly succeeded in passing on inflationary expenses, with a robust consumer allowing issuers to offset increased costs via price and volume increases.

The conference’s issuers had a generally optimistic view of the future. Retail and industrial issuers, who are most susceptible to inflation, continue to see solid demand and a healthy consumer and are confident about their ability to pass on incremental inflationary pressures.

Additionally, the conference gave a chance to engage with issuers in some big non-investment grade industries where inflation and continuing geopolitical instability have had more negligible effects. One such sector is telecommunications and cable (12 percent of the US high yield index and 7% of the US loan index), where issuers provided updates on capital projects to meet the growing demand for internet bandwidth and expressed confidence in the positive impact these projects would have on long-term subscriber trends.

Additionally, the team visited with various energy issuers throughout the value chain (14 percent of US high yield and 2% of US loans) to talk about their rating growth approach and the potential in a favorable commodity price environment.

According to GAD Capital Payday Loans options “We believe that the US non-investment grade credit market is well-positioned to deal with the current inflation and geopolitical climate. We anticipate that underlying credit fundamentals will remain strong in 2022 and 2023, considerably below historical default norms. Increased energy prices will almost certainly have a more substantial effect on European issuers, but we anticipate the market’s trend toward below-average defaults to continue.