RPT-Fitch Leveraged Finance Annual Manual: U.S. High Yield Issuers Maintain Discipline in Uneven Market

Thu Apr 24, 2014 10:03am EDT

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April 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings expects no significant breakdown in credit discipline among U.S. speculative grade issuers despite current high issuance volumes and diminishing returns, as discussed in Fitch's 'Annual Manual' published today.

Fitch's 'Annual Manual' seeks to quantify and summarize the major factors driving risk and opportunities for market participants in the leveraged finance sector. The report combines analysis across Fitch's U.S. Corporates, Financial Institution, Structured Credit, Fund and Asset Manager and Credit Market Research groups.

Leverage among high yield issuers has risen slightly. Issuer operating fundamentals have been modestly positive, offset by the moderate increases in debt. Management teams continue to show discipline with respect to capex and cost containment, reflecting their cautious outlook on economic prospects. Fitch does not anticipate improvements in leverage from current levels.

Fitch notes the majority of the record level of high yield issuance continues to be used to take out maturing loans and to refinance bonds. This activity has generally been good for credit as it is solving the problems created in the last upswing. Also, CLO issuance has surged, but net new issuance is more subdued as outstanding CLOs go static.

Deal volume has picked up, but overall deal size is smaller compared to the 2006-2007 LBO boom. Fitch believes the size, volume, and quality of LBO transactions are collectively less risky than the previous boom era vintage. Even the large transactions like Heinz and Dell compare favorably with boom-era deals in terms of the health of underlying business and degree of leverage. Fitch expects fewer private equity 'club' deals, which will constrain the volume of large transactions.

The full 'Annual Manual' is available at 'www.fitchratings.com.' Fitch's Leveraged Finance team will continue to publish this report in the first half of the year and welcomes market feedback.

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