/perspectives/sector-views/high-yield-and-bank-loan-outlook-january-2017

High-Yield and Bank Loan Outlook: Focus on Floating Rate

Conditions bode well for credit, but a more aggressive Fed and geopolitics could bring volatility. 

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January 13, 2017

Report Highlights

We expect an improvement in leveraged credit fundamentals on the back of an earnings recovery and macroeconomic conditions, but it appears the majority of this has already been priced into spreads. Entering 2017 with the tightest high-yield bond spreads since August 2014, we expect this will mostly be a year of clipping coupons in high yield.

  • The loan market looks appealing as LIBOR is set to move above existing LIBOR floors and the demand for floating-rate products accelerates.
  • The evolving geopolitical environment could create temporary turbulence.
  • Assessing the balance of risks, we conclude that this is not yet the time to sell credit, but another year of double-digit returns in credit is unlikely.
  • Combining measures of leverage, interest coverage, and return on capital in a single Corporate Health index allows us to estimate default rates 12 months in the future. Our work supports the view that 2017 will prove to be a more benign credit environment than 2016.
 

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