Jeremy Burton, a portfolio manager on the leveraged finance team at PineBridge Investments, shares his expertise on the high-yield and leveraged loan markets. They discuss how the upcoming election may affect new-money issuance and the rise of liability management exercises. Burton also explores the nuances between high-yield bonds and leveraged loans, shedding light on current investor appetites. Additionally, he delves into the impacts of recent bankruptcy cases and the ongoing developments in corporate restructuring.
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Quick takeaways
The strong sentiment in high-yield markets signals a growing appetite for new issues amid rising yields and post-Independence Day expectations.
The rise of liability management exercises reflects a shift in restructuring strategies, prompting investors to adapt to evolving corporate tactics.
Deep dives
Market Sentiment and Activity
The current sentiment in the leveraged finance market remains strong, particularly in the high yield segment. There is a growing appetite for new issues as market participants seek opportunities beyond re-pricing and refinancing activities. As earnings season approaches, expectations are that more new issuance will emerge, which could invigorate the market after a quiet stretch around the Independence Day holiday. Overall, the need for increased market activity remains pivotal for participants looking to capitalize on promising credit opportunities.
M&A Landscape and Economic Influences
The uncertainty surrounding the upcoming elections and potential Federal Reserve rate cuts is significantly impacting M&A activity. The Biden administration's stringent approach to blocking strategic and sponsor-side acquisitions has led to a subdued M&A environment. Market participants are particularly concerned about whether the Fed will start cutting rates before the election, as this would influence leveraged M&A opportunities. A change in monetary policy could potentially foster renewed activity, especially in sponsor-driven deals, depending on how market confidence evolves.
Dynamics of Debt Issuance Preferences
In the leveraged loan and high yield bond markets, preferences are shifting towards first lien bonds due to favorable conditions and lower yields. Asset owners have begun increasing their allocations to the high yield market as yields have risen, reflecting a greater interest in diversifying their portfolios. The competition with private credit is delineating the landscape, as both markets vie for similar opportunities, especially when the leveraged loan market is not fully operational. Issuers face a challenging environment where they must carefully assess the benefits of floating versus fixed-rate debt, resulting in varied strategies based on market conditions.
Liability Management Exercises in Focus
The rise of liability management exercises (LMEs) is becoming a noteworthy trend in the current market, signaling a shift in how companies address distress. These exercises, ranging from debt repurchases to coercive actions for creditor haircuts, reflect an increasing preference for restructuring solutions outside of traditional Chapter 11 filings. As more companies resort to LMEs, investors must adapt their strategies to engage proactively with these dynamics, as not participating in creditor groups could lead to suboptimal recovery outcomes. The trend is indicative of weaker covenants in lending agreements, pushing investors to reconsider their positions in light of rising corporate aggressiveness.
This week on The Reorg Primary View, host Katherine Schwartz sits down with Jeremy Burton, a portfolio manager on the leveraged finance team at PineBridge. Together, they delve into the current mood of the high-yield and leveraged loan markets this summer. Key topics include the impact of the upcoming election on new-money issuance, the rise of liability management exercises, and the effects of dividend recaps. Burton, who manages both high-yield bond and leveraged loan portfolios, provides valuable insights into the nuances between these two markets and current investor appetites.
Additionally, we bring you our weekly summary of notable developments in the restructuring world, along with a preview of what’s coming up this week.
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