A Repeat of 2009 Returns? Not. But No Disasters Either
December 10, 2009
As we here at Leveraged Finance News join you in saying goodbye to 2009 and looking ahead at the year to come, two little words spring to mind: do over? Maybe not all of it, but certainly returns.
Oh but we do know a pipe dream when we see one—returns for both leveraged loans and high yield bonds reached unprecedented levels in 2009, climbing ever higher as the year went on, 30%! 40%! 50%! Largely because we began the year in the market equivalent of Peru’ Colca Canyon.
For the 12 months to come, projections fall at much more… er… precedented levels. Analysts at Barclays Capital, for example, expect returns on unleveraged loans to be 8% to 9%, assuming the asset class normalizes as fundamentals improve, and leveraged loans to be 24% to 26%.
The Barclays analysts believe leveraged loans will provide better risk/reward than high yield bonds, given their senior position in the capital structure and high recoveries. They peg high yield bond returns at 7% to 8% unleveraged and 18% to 20% leveraged.
Meanwhile, Evergreen Investments senior portfolio manager Margaret Patel sees U.S. high yield bonds posting double-digit returns in 2010, at least during the first half of the year.
On the topic of loan returns, analysts at Cantor Fitzgerald are somewhat more downbeat than their Barclays counterparts, partially due to the expectation that Libor rates will rise only modestly, from 25 bps to about 1%, in 2010. But while a dismal Libor rate can be somewhat offset by wider spreads, Libor floors, etc., the Cantor analysts boil the 2010 leveraged loan story down to this: attractive opportunities exist, but issue selectivity may be more important in the loan market than other markets.
They also point to a notable technical factor on the high yield side that impacts the triple-C space. Over the past year, this portion of the high yield market has benefited significantly from nontraditional investors, such as equity investors, entering the market. The target returns for these investors tend to be in the 15% to 20% range, so they’ve been more than happy to jump on the junk bond bandwagon this year. However, the number of high yield bonds offering yields north of 15% now stands at 127, according to the Cantor analysts. So, not only is a fairly recent source of demand likely to exit the triple-C space, but we could see selling pressure as some of these investors take profits and re-invest in their traditional markets.
But while we can’t expect to replicate the returns of 2009, and we may see some selling pressure as the high yield market cools, there don’t appear to be disasters on the horizon for 2010. The disasters can wait for 2012.
Happy holidays from the staff of Leveraged Finance News.