The High Yield market has been in turmoil recently and many names continue to be under pressure: Altice, Atos, Grifols, Ardagh and Intrum to name but a few. The latest primary issues are marking time: Pro Group and CBR Fashion, in particular. Only FNAC is doing well.
We will not go back over the reasons for this tension, which are both macro: the postponement of the fall in interest rates, and micro: the excessive indebtedness of certain players during the period of abnormally low interest rates. Above all, we believe that the core of High Yield, the single B segment, no longer compensates for the risk taken. Below 350bp at 5 years, we are entering the discomfort zone and liquidity could rapidly diminish.
We are not turning away from the asset class. But we do think that the current situation provides an opportunity to revisit the trade-off between probability of default and recovery in the event of default. All in favour of the latter.
Specifically, we believe that it is now preferable to invest in subordinated debt rated Investment Grade (bank subordinated debt, Hybrid Corporates, often rated HY because of their position in the capital structure) rather than in senior HY-rated debt, for which the risk taken is that of a greater probability of default.