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HIGH YIELD BONDS
Mark Vaselkiv
Portfolio Manager of the High Yield Fund and Institutional High Yield Strategy
2015 Global Market Outlook Press Briefing
2
High Yield Bonds: Summary
ENVIRONMENT
U.S. high yield has enjoyed an impressive multiyear run, resulting
in somewhat stretched valuations today.
An expanding high yield market into European and emerging
market regions is creating additional opportunities.
LOOKING AHEAD
A favorable credit environment remains, especially within the
context of low global interest rates.
Amid record-low yields from U.S. issuers, growing international
markets offer potentially greater value.
Potential to profit from near-term volatility and technical
dislocations, particularly within less mature markets of European
high yield and emerging corporates.
3
Today’s U.S. High Yield Market Permits
Less Compensation for Risk
0
5
10
15
20
25
Perc
en
t
BARCLAYS U.S. HIGH YIELD INDEX
As of 30 September 2014
Coupon Yield to Worst
Source: Barclays.
Post-2008, a strong market run within an improving credit environment has promoted
complacency and inappropriate pricing of risk evidenced by declining coupons.
4
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Rela
tiv
e M
ark
et
Siz
e (
%)
0
100
200
300
400
500
600
Hig
h Y
ield
Mark
et
Siz
e (€ b
illio
ns)
The high yield asset class historically had been dominated by U.S. issuers; that composition is changing.
Financial disintermediation has more than tripled the size of the European high yield market, creating more
liquidity, depth, and diversity.
Sources: UBS, Credit Suisse, and T. Rowe Price.
The Market is Expanding Globally—
European High Yield
Expected Market Size by End of 2015: €500 Billion
RELATIVE SIZE OF THE EUROPEAN HIGH
YIELD MARKET VS. U.S. HIGH YIELD MARKET
2013
Record €83 billion
new issuance
38% first-time issuers
As of 30 September 2014 As of 30 September 2014
GROWTH OF THE EUROPEAN HIGH
YIELD MARKET
5
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Mark
et
Siz
e (
$ b
illio
ns)
0
50
100
150
200
250
300
350
New
Issu
an
ce (
$ b
illio
ns)
Sources: BIS and Bank of America/Merrill Lynch.
The Market is Expanding Globally—
Emerging Market Corporate Debt
Emerging markets corporates represent another area of tremendous growth, now
comparable with the size of U.S. high yield.
EMERGING MARKET CORPORATE
DEBT GROWTH
1996 Through June 2014
EMERGING MARKET CORPORATE
NEW ISSUANCE
1996 Through August 2014
6
Expanding Global Opportunity Set
Sources: BIS and Credit Suisse.
0
1,000
2,000
3,000
4,000
5,000
6,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sept.2014
Billio
ns (
$)
MARKET GROWTH—1996 THROUGH SEPTEMBER 2014
U.S. High Yield European High Yield Emerging Market Corporate Debt
U.S. Leveraged Loans European Leveraged Loans
Credit markets have significantly grown as increasingly complex and interwoven
markets create compelling opportunities.
7
2004
North America Africa and Middle East
Europe Latin and South America
Pacific
Source: Bank of America/Merrill Lynch.
Global Benchmarks are Evolving
In recognition of broadening international markets, today’s global indices are
incorporating more exposure outside of North America (representing almost 45%),
an allocation that was approximately 15% 10 years ago.
2014
North America Africa and Middle East
Europe Latin and South America
Asia Pacific
BANK OF AMERICA/MERRILL LYNCH GLOBAL HIGH YIELD
As of 30 September 2014
8
Different Regions Produce
Divergent Results
Sources: Bank of America/Merrill Lynch, J.P. Morgan, and T. Rowe Price.
U.S. High Yield represented by the Bank of America/Merrill Lynch U.S. High Yield Index hedged to EUR, European High Yield represented by the
Bank of America/Merrill Lynch European Currency High Yield ex. Sub. Fin. 2% Constrained Index hedged to EUR, and Emerging Market Corporate
Debt represented by the J.P. Morgan CEMBI Broad Diversified Index hedged to EUR.
0
50
100
150
200
250
Gro
wth
of €100
GROWTH OF €100
As of 30 September 2014
U.S. High Yield European High Yield Emerging Market Corporate Debt
While credit markets are more interconnected today, different regional cycles
produce performance dispersion.
9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Yie
ld t
o W
ors
t (%
)
Altice 9.875 12/15/2020
CHTR 6.5 4/30/2021
Altice—CHTR
Cable operator with a diverse geographic footprint given its operations in Israel, the Caribbean,
and Western Europe
Market cap is approximately €11 billion with total debt of €20 billion
Came to the market in the second quarter with the largest-ever below investment-grade debt deal
Management continues to improve operating efficiencies to grow EBITDA and free cash flow,
targeting lower leverage
Source: Barclays, Altice, and T. Rowe Price.
Case Study #1—Altice
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
50
100
150
200
250
300
350
400
450
2011 2012 2013 LTM 6/14
FC
F in
€ M
illio
ns
FCF FCFS/Sales EBITDA %
ALTICE FREE CASH FLOW GROWTH ALTICE AND CHTR BENCHMARK BONDS—
YIELD TO WORST (%)
EB
ITD
A %
10
Partially state-owned Argentine energy company involved in the exploration, production,
and refining of Argentina’s sizable oil and gas reserves
Market cap of roughly $20 billion and outstanding debt of $5 billion
New management team has stabilized and grown oil production with a reserve base of
more than one billion barrels of oil and production of nearly 300,000 barrels of oil
equivalents a day
Sovereign-related volatility expected to moderate in 2015 with upcoming elections and
more pragmatic policymaking
Sources: J.P. Morgan and T. Rowe Price.
* Yield to Worst for YPF 8.75 due 2024 minus J.P. Morgan Domestic HY index YTW.
Case Study #2—YPF
2.0
2.5
3.0
3.5
4.0
Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14
Yie
ld t
o W
ors
t (%
)
YPF Yield Premium Relative to U.S. HY Index*
0
50
100
150
200
250
300
2009 2010 2011 2012 2013 2014(est)
2015(est)
2016(est)
Millio
ns o
f B
arr
els
of
Oil
Eq
uiv
ale
nts
a D
ay
Oil Production (Mboe/d) NGL Production (Mboe/d)
Gas Production (Mboe/d)
11
Largest bank in Russia and Eastern Europe, with a history of operations dating back to 1841
– Market cap of $40 billion with $18 billion of bonds outstanding
Strong balance sheet liquidity and capitalization with modest debt levels and large deposit base to help
manage operations in the event of a protracted sanctions environment
Dominant market share in Russia, with nearly a third of country’s banking sector assets; benefits from
domestic flight to quality during times of stress and funding advantage from low-cost retail deposits
Sources: T. Rowe Price, J.P. Morgan, and Sberbank financials.
Case Study #3—Sberbank
-150
-100
-50
0
50
100
150
200
Sp
read
Dif
fere
nce (
bp
s)
SBERBANK ’22 SENIOR BOND
VS. U.S. HY BB INDEX
Sberbank Senior Bond vs. U.S. HY BB
SBERBANK: LIQUIDITY PROFILE
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
1Q14 2014 2015 2016 2017 2018 After
RU
B m
m
Cash & Equivalents
Broad Liquidity
Bonds
Loans
12
Evolution of the High Yield Asset Class
Should Incorporate a Global Perspective
Long-term sustainable demand for income-oriented credit
strategies in a low interest rate world.
Overvalued U.S. credit markets caused by an influx of new
investors and limited supply of quality issuers.
Expanding international opportunity set from the maturation of
leveraged loan, European high yield, and emerging markets
corporate asset classes.
Meaningful potential to profit from dislocations and volatility
driven by economic and geopolitical uncertainties.
13
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