Focus on Oyster funds – High yield is a different world to its pre-crisis form

Double-digit default rates among global high yield companies witnessed at the peak of the 2008/2009 credit crisis are unlikely to be repeated this year, according to the manager of the Oyster Global High Yield fund, despite the pessimistic daily macro headlines.

For defaults among high yield companies to reach the 11% witnessed in 2008/2009, a sharp global economic contraction would be necessary, said the manager George Goudelias, who manages the Bank Syz fund from $27bn high yield specialist Seix Investment Advisors in the US.

Despite the bad news emanating from Brussels almost each week at present, he said consensus was nowhere near that default rate. Instead, around 2% economic expansion is expected in the US, slightly less for Europe, and more for emerging markets.

“We feel defaults should remain low, which should lead to spread compression [on high yield], and good returns,” Goudelias told delegates at a recent Bank Syz gathering for its Oyster funds in Budapest.

At times since December 2008, the markets have priced significantly worse implied default rates than the rate of defaults that actually occurred. During 2009, for example, the implied default rates ballooned to 25%, which was over double the peak in actual rates, of about 11%.

At the height of that crisis, as the Western banking system almost froze in late 2008, the Seix strategy fell by 27.7% that calendar year, but it then retraced those losses – and went further – by making 61.3% in 2009.

Goudelias said high yield companies were in a different shape to their condition when Lehman Brothers’ collapse sent markets reeling.

“We feel the overall quality of the high yield market has improved dramatically, but that is not necessarily reflected in where spreads are. We feel there is a lot of spread cushion in the marketplace and as things normalise you should see a lot of spread compression, as well as good coupons,” he said.

Goudelias can invest up to 27% of the Oyster fund in low grade, CCC-rated paper, and by June he had about 8.5%. This was “toward the lower end” of his band, and was “a function of relative value and of the overall environment”.

Goudelias added about $636bn of bonds and loans maturities between 2011 and 2014 had been moved out to 2016 and later. Additionally, over twice the proportion of new issuance from companies so far this year has been used for refinancing loans compared to the proportion for this use before the crisis, in 2007.

“Even equity analysts are asking about loan maturities, which was unheard of five years ago, but that is good for us, because it means good balance sheet practices.”

Possibly in part as a result of this investor pressure, estimated leverage among about 300 high yield issuers studied by JP Morgan and CapitalIQ has continued falling from a peak of 5.2 times in the third quarter of 2009, to 3.9 times in the final quarter of 2011.

Goudelias does not necessarily see further falls, but says if the level stays flat from here – as it largely has since the end of 2010 – “that is also a relatively healthy environment for high yield.”


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