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KPMG Corporate Finance LLC's Q4 Credit Markets update
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Trends in the credit markets
Economic activity in Q4 2019
Economic prospects improved in Q4 since mid-October when the Trump administration indicated it was nearing a phase-one trade deal with Beijing
- U.S. jobless claims are near multi-year lows, and the IMF expects that global GDP will expand by 3.3% in 2020, up from 2.9% in 2019
- Positive economic data eased fears about a manufacturing slowdown spreading into the broader economy - prompting the Fed to take a dovish stance on rate policy, trickling-down for high yield bonds
Key observations
- High yield issuance volume increased. Volume increased by 407.2% to $75 billion in Q4’2019 from $15 billion for the same period last year.
- Leveraged loan volume declined. Volume decreased by 13.3% to $103 billion in Q4’2019, compared with $119 billion for the same period last year.
- The yield spread between quality and risky asset classes (e.g., double-B and single-B) continued to widened for most of 2019, but started to narrow late in Q4’2019.
- In light of flight to quality, banks gained share of pro rata deals, with loans from that segment accounting for 36% of overall issuance in 2019 (vs. 30% in 2018).
- Although many commercial bank deals have removed Libor floors, they are routinely found in non-bank deals.
- The abundance of liquidity continues to drive deal volume and attractive pricing, however late cycle concerns have increased lender scrutiny on non-sponsor, cyclical and sub-$10 million EBITDA credits.
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