Virtus Viewpoints l Seix Market Review & Outlook – Leveraged Finance
George Goudelias, Head of Leveraged Finance, Managing Director, Senior Portfolio Manager
Vincent Flanagan, Portfolio Manager, Senior High Yield Research Analyst
Michael Kirkpatrick, Managing Director, Senior Portfolio Manager
James FitzPatrick, CFA, Managing Director, Portfolio Manager, Head of Leveraged Finance Trading
The high yield sector delivered another quarter of strong performance against a backdrop of improving fundamentals. At current valuation levels, there is limited potential for spread tightening.
Leveraged loans, producing mostly coupon-clipping returns, were also supported by good fundamentals. Retail fund flows have been modestly negative but offset by strong CLO creation, and a high probability of an interest rate hike in December which should be supportive of the asset class.
The high yield sector produced solid results in the third quarter as investors continued to reach for yield in a still-low interest rate environment and against a favorable fundamental backdrop for the asset class. Though some reversal occurred intra-quarter, lower quality continued to outperform higher quality. By rating tier, CCC-rated issues posted a return of 2.74% versus the BB return of 2.05%. In terms of industries, energy, utilities, and metals & mining were the best performing industries with returns of 4.6%, 3.6%, and 3.4%, respectively. Telecommunications, food, and retail were the bottom performing sectors with returns of 0.1%, 0.3%, and 0.6%, respectively. The energy sector has
generally underperformed year to date, but rising oil prices in September have turned the sector around.