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Executive Summary:

  • We provide an update to our US HY vs Leveraged Loan comparison for 4Q23 using leverage metrics for constituents in the US HY ICE/BAML index and leveraged loan data from Bixby Research and Analytics to assess net and gross leverage, EBITDA margins, and interest coverage in aggregate and at the rating level. Due to the difference in reporting timelines and fundamental metrics for public and private loan issuers, we breakout the leveraged loan universe into two separate cohorts with data from ~330 public issuers and over 75% of the ~750 issuers within the private loan universe.
  • HY bond issuers improved net leverage metrics QoQ across-the-board, led by the top quartile (those issuers with the highest leverage), which decreased by 0.23x to 5.11x in 4Q23. Median net leverage ticked down by 0.11x to 3.33x while leverage in the bottom quartile remained essentially unchanged with a nominal decline of 0.01x to 1.85x. YoY changes followed a similar trend, with the top quartile leading deleveraging efforts with a 0.73x decline followed by the median (-0.20x) while the bottom quartile increased net leverage by 0.10x.
  • Following a spike in median net leverage to a peak of 7.17x in 3Q20 and ensuing recovery through 2021, median net leverage in the public loan market has plateaued over recent quarters, with just a 0.05x move lower to 4.23x. Issuers in the bottom quartile deleveraged by a larger extent with a 0.15x QoQ decline to 2.41x while those in the top quartile increased leverage by roughly half a turn to 7.57x. YoY changes were mixed across the distribution with the median inching down by 0.04x and the bottom deleveraging by 0.19x while the top quartile reported a material 1.86x decrease.
  • Net leverage metrics for private loans have historically stood elevated relative to HY bond and public loan levels with 4Q23 median net leverage remaining materially higher at 6.98x after deleveraging 0.19x QoQ. The bottom quartile continued to move sideways QoQ with a -0.03x move to 4.90x while the top quartile downshifted by nearly three-quarters of a turn to 10.05x. Current leverage metrics remain below the historical median dating back to 1Q19 with the top quartile standing materially below by 2.85x.
  • Deleveraging efforts were broad-based across ratings in the HY bond and leveraged loan universes, led by lower-rated tranches. In the HY bond and private loan space, <=CCCs drove deleveraging with material QoQ downshifts of 0.43x to 5.02x for HY bonds and 0.69x to 8.75x for private loans. We omitted the <=CCC public loan rating bucket from our analysis due to the small sample pool of just eight issuers. For public loans, single-Bs, the lowest-rated tranche within our dataset, deleveraged by 0.29x to 5.08x. QoQ leverage changes were more modest among higher-rated tranches, particularly for HY bonds and public loans. In the HY bond market, BBs and single-Bs declined nominally, by 0.03x and 0.01x to 2.79x and 3.93x, respectively, while BB public loan issuers similarly inched sideways with a minute 0.01x decrease to 4.18x. Private loan issuers experienced greater changes to net leverage with BBs falling 0.26x to 5.10x as single-Bs declined 0.11x to 7.02x.
  • Profitability among higher-rated tranches decreased QoQ across HY bond and leveraged loan markets with BBs reporting the greatest EBITDA margin compression. Within the HY bond market, BB EBITDA margins compressed 13 bp QoQ to 17.4% while single-B margins expanded 13 bp to 19.2% and <=CCC margins expanded a whopping 92 bp to 15.6%. Similarly, in the public loan space, BB margins compressed 24 bp to 14.88% while single-B margins expanded 110 bp to 9.88%. However, despite the strong margin recovery, single-B margins for public loans currently remain below the recent median dating back to 1Q20 following a continued period of elevated double-digit margins between 1Q21-1Q23. EBITDA margin trends were mixed among private loan issuers with BB profitability declining 65 bp to 17.55%; single-B margins expanding 26 bp to 15.39%; and <=CCC margins compressing 20 bp to 14.53%.
  • Interest coverage trends varied among HY bonds and leveraged loans with moderate QoQ changes across the loan universe while HY bonds experienced greater changes, particularly among <=CCCs, which increased 0.30x to 2.61x on the back of strong QoQ deleveraging and improving profitability. BB-rated HY issuers decreased interest coverage by 0.12x to 5.66x while single-Bs decreased 0.24x to 3.53x, both standing below the historical median dating back to 1Q19 by 0.40x and 0.25x, respectively. In contrast, interest coverage improved among higher-rated leveraged loan issuers with BB-rated private loan issuers increasing coverage by 0.08x to 2.22x while BB-rated public loan issuers increased by 0.14x to 3.54x. Interest coverage declined across single-B-rated tranches with HY falling nearly a quarter turn to 3.53x while coverage for public (0.06x QoQ change) and private loans (0.08x) decreased by a smaller extent to 1.74x and 1.36x, respectively.
  • HY issuers built up their cash balances across the rating spectrum with <=CCCs adding $44.2 mn QoQ to $248.1 mn. BB cash balances increased $24.5 mn to $379.5 mn while single-Bs reported a modest $5.4 mn increase to $229.0 mn. Across the loan universe, BBs decreased cash to over $40 mn below historical medians following a material $54.5 mn QoQ decline among private issuers to $134.0 mn and smaller $3.0 mn QoQ decline among public issuers to $273.0 mn. Lower-rated loan issuers increased cash balances with B-rated public issuers increasing cash by $11.4 mn to $137.7 mn. Cash balances are materially lower among private issuers compared to public loan and HY bond issuers. Single-B-rated private issuers increased cash modestly by $6.7 mn to $59.3 mn while <=CCCs nominally increased by $0.8 mn to $36.4 mn.

The Fed held its policy rate steady at 5.25-5.50%, as widely expected. The market had priced in virtually no chance of a cut at this meeting as inflation indicators have generally surprised to the upside, including yesterday’s Employment Cost Index (ECI) report that was above all economist estimates.

Fed policymakers acknowledge they have not grown more confident that inflation is moving sustainably back to 2%. The following sentence was added to the first paragraph of the policy statement: In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective. The sentence on risks to achieving its inflation and labor market mandates was also tweaked and now indicate the Fed believes risks have moved in better balance on net over the past year. The sentence previously read: The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. In our view this is another way the Fed acknowledged the economic data have not broke their way on net in terms of the labor market and inflation since the January meeting.

The big news of the report was the Fed’s decision to reduce the pace of quantitative tightening (QT) beginning in June. It cut the monthly cap on Treasury runoff to $25 billion from $60 billion. The consensus view was the Fed would cut the cap to $30 billion per month. The MBS runoff cap remains unchanged at $35 billion. As we noted in our preview piece, only about half of that has actually been rolling off the portfolio per month over the past year. The Fed is clearly trying to separate balance sheet from interest rate policy as it focuses on approaching “ample” reserves more slowly than it did in 2019. In Chairman Powell’s own words, “The active tool of monetary policy is of course interest rates.”

During Chairman Powell’s press conference he continued to make clear the Fed has no intention of hiking rates further at this time. He noted, “We think policy is well positioned to address different paths the policy might take.” Better balance in the labor market was a key point he made in terms of signs that the policy rate is currently restrictive. Chairman Powell refrained from opining on whether or not the policy rate is ‘sufficiently’ restrictive. Instead, he commented the data will reveal whether it is or not going forward.


Net Leverage by Distribution


Net Leverage by Rating


EBITDA Margin by Rating


Interest Coverage by Rating


Cash ($MM) by Rating

For more about 4Q23 HY leverage metrics, please see: US Strategy: HY Leverage Report (4Q23)


Zachary Griffiths, CFA
Head of IG & Macro Strategy

Winnie Cisar
Global Head of Strategy

Logan Miller
Head of European Strategy

Brian Perez
Analyst, Credit Strategy

Kathleen Tang
Analyst, Strategy



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