Even if Third Avenue’s recent shuttering and Stone Lion’s closing of its $400m credit fund — which was run by former Bear Stearns high-yield bond traders Gregory Hanley and Alan Mintz according to the FT — are less a signal of worse to come and more just the closing of idiosyncratic (heavily juiced up) funds, it’s still, according to Goldman, going to be the worst non-recession year for HY since 1983.
With our emphasis:
HY returns have sunk to their lowest level on the year as the pressure from lower oil prices continues to constrain risk appetite. As we go to press, the HYG ETF is down roughly 5% year-to-date. If the weakness persists until the end of the year, 2015 could become the worst non-recession year for HY (see Exhibit 1). And while last year saw a strong recovery of risk appetite in the final weeks of the year taking total returns from negative territory to finish the year up 2.5%, the prospects for a similar rebound this year seem quite low. Unlike last year, investors have withstood a longer period of levered losses after idiosyncratic risk permeated the HY market, and not just in the Energy space. Sprint—the largest capital structure and one of the most widely held names—for example, fell to all-time lows on Tuesday, further underscoring the high degree of dispersion across sectors and issuers in the market (more on this below). The heavy redemptions, rock-bottom levels of risk tolerance, and persistent downside risk for oil prices will likely continue to weigh on HY.
They DO say that the refinancing job facing HY is manageable but also say that’s not the only thing driving default risks:...MORE