Over the past 12 months, high yield-to-maturity has reverted to historically compelling levels. At 7.9% today, it is the most attractive in over a decade. Only during the Global Financial Crisis in 2008/09 and the European Sovereign Debt Crisis in 2011/12 has greater all-in return been offered. Macro uncertainty has influenced both levers:

• Spread has widened more than 100 basis points, compensating investors for increasing earnings volatility driven by post-COVID inflation and supply chain disruption, and higher default risk; and

• Rates have re-priced as the European Central Bank (ECB) raised the base rate by 350 basis points – an unprecedented move both in timing and magnitude. On top of that, ECB corporate purchasing actively – which supported low yields in investment grade and high yield – will unwind from March 2023.

This dynamic has abruptly stalled the long-running trend of declining high yield coupons. In early 2022, European high yield coupon bottomed at 3.6% (3.1% for BBs and 4.5% for Single-B); rising incrementally to 3.8% today.

Adding perspective, in July 2012 – when the market last offered 7.9% yield – the average coupon was nearly double at 7.3% (price 98). Today, most high yield securities trade at a deep discount to par in order to solve for yield; the index average price is 87.

Gradually, average price should normalise. Newly issued high yield bonds carry larger coupons and as capital markets activity increases, this refinancing activity will overtake the trend in a higher rates environment. As Exhibit 3 shows, a steep upward trajectory in coupons is already evident. 8% Extrapolating this trend, JP Morgan 6% estimate the market average may hit 5% as early as next year’.

In the interim, high yield investors have an opportunity to weigh up:

• (older vintage) lower coupon 2015 2016 2017 2019 2020 2021 bonds offering upward price ®BB and above @Single B convexity, with lower relative current income;

• (newer issue) high coupon bonds ’ ’ offering higher relative coupon but more limited price appreciation potential – depending on non-call features.

Price bifurcation is prevalent. Exhibit 5 illustrates low and high coupon bonds within single issuer capital structures, i.e. for similar credit risk? and yield, there is a contrasting balance on offer between (1) a mix of current yield and par appreciation and (2) predominately current yield. Exhibit 6 shows this decomposition.

Many considerations influence Hayfin’s preference for low price (lower coupon) versus high coupon (higher price). Some of these are portfolio preferences, while others are security and issuer-specific.

In a high yielding environment, this market phenomenon provides an additional element of dynamic opportunity for Hayfin. It allows us to evaluate security-by-security, across each of our portfolios, how much value we place on positive price convexity, i.e. low dollar price — and, conversely, how much current income resilience we want to build via exposure to higher coupon securities in a higher-for-longer rates environment. Whilst we identify themes at the macro, portfolio level, we seek to implement these themes at the security level based on our fundamental credit investing process.

Disclaimer

Hayfin refers to Hayfin Capital Management LLP and its affiliates. This presentation is being provided to you for informational purposes only and is not a recommendation of, or solicitation for, the subscription, purchase, or sale of any security. The information contained in this presentation is not intended to provide professional, investment, legal or tax advice and should not be relied upon in that regard. The contents of this presentation are for general information only and are not provided with regard to your specific investment objectives, financial situation, tax exposure or particular needs. The contents hereof are not a recommendation of, or solicitation for, the subscription, purchase, or sale of any security. Nothing contained herein should be used as the basis for making any specific investment, business, or commercial decision. You should read the final offering documents, limited liability company agreement and/or other supplemental and controlling documents before making an investment decision regarding any particular security carefully before investing in any security.

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