Highland Capital Management
June 19, 2019
A pioneer in alternative asset management.

Are credit fundamentals in high yield cause for concern?

Recent credit market reports show some deterioration in credit fundamentals for high-yield companies. Among the reasons cited are trends in the first quarter including slowing revenue growth, decreasing EBITDA, and an increase in leverage ratios. As the credit cycle drags on, investors are on the lookout for any cracks that could spread across the market.

With that in mind, is the state of credit fundamentals in high yield cause for concern?

Not much encouragement in economic data

Recent economic data don’t help the case. The latest readings showed a decline in U.S. manufacturing, with the May Purchasing Managers Index (PMI) coming in at 50.6, the lowest level since September 2009, according to IHS Markit. On top of that, the latest employment figures showed jobs added at a rate lower than expected.

Despite the unemployment rate remaining well below 4% and the May PMI still showing expansion, many found these recent indicators to be worrisome.

Waiting to worry...for now

While all these factors are indeed worth watching, they are not unexpected and in our view, don’t merit serious concern at the moment. Given growth trends and general late-cycle dynamics, not to mention current trade tensions, some weakness in credit fundamentals is normal. Therefore, the latest data on high-yield companies are not showing weakness at a level that is concerning.

We will certainly continue to monitor these trends in leveraged credit, but are not sounding the alarm just yet. That said, the macro backdrop could change things quickly, so those factors are likewise worth watching closely. For instance, if the trade feud continues longer than expected or if we see a near-term Fed policy error—though after today’s meeting that at least appears less likely—our level of concern may rise.

Disclaimers & Disclosureskeyboard_arrow_up

This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this document. It should not be assumed that any securities discussed in this commentary will increase in value. Highland Capital Management, L.P. (“Highland”) will not accept liability for any loss or damage, including, without limitation, any loss of profit that may arise directly or indirectly from use of or reliance on such information. 
Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed herein are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Highland disclaims any obligation to update or revise any statements or views expressed herein. In considering any performance information included in this commentary, it should be noted that past performance is not a guarantee of future results and there can be no assurance that future results will be realized. Nothing contained herein should be deemed to be a prediction, projection or guarantee of future performance. No representation or warranty is made concerning the completeness or accuracy of the information contained herein. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which information, although believed to be accurate, has not been independently verified. Highland and/or certain of its affiliates and/or clients hold and may, in the future, hold a financial interest in securities that are the same as or substantially similar to the securities discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Highland and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities. This commentary has not been reviewed or approved by any regulatory authority and has been prepared without regard to the individual financial circumstances or objectives of persons who may receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Highland encourages any person considering any action relating to the securities discussed herein to seek the advice of a financial advisor. Includes Highland Capital Management, L.P. and its affiliated advisers.


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