Fitch: Wary High Yield & Leveraged Loan Markets Stall in 3Q Amid US & European Economic Uncertainty

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CHICAGO--(BUSINESS WIRE)-- The U.S. economy and financial markets have entered a period of increased uncertainty, with consumers, companies, and investors reacting strongly to each new report of deterioration in economic or financial prospects. These uncertainties and anxieties have been building over the summer and fall and are having predictable effects on issuance and yields, according to Fitch Ratings' 'U.S. Leveraged Finance Market Quarterly.'

However, the weakening economy has not yet had a material impact on ratings. Downgrades were slightly ahead of upgrades in the rated high-yield portfolio for the first time in six quarters (eight downgrades compared with six upgrades). Despite the economic backdrop and reversal in rating actions, the pace of defaults remains moderate this year. The trailing 12-month U.S. high yield default rate inched up to 1.4% at the end of the third quarter.

U.S. High yield bond issuance shrunk to $22.9 billion in the third quarter, a drop off of 68.5% from the second quarter. Only $1.0 billion of high yield issuance priced during the month of August. Global volatility caused spreads to widen out and issuance to slow. Fund flows turned negative mid-way through the quarter but reversed course in September as the Federal Reserve reassured the market it would keep long-term rates low through 2013. Negative returns during the month of August have now pushed the year-to-date return on the Master II Index to -1.7%.

Leveraged loan issuance totaled $96.3 billion in the third quarter, up 13.0% from the third quarter of 2010 but down 40.3% from the prior quarter. Institutional loan issuance decreased 65.2% in the third quarter versus the second quarter. Spreads increased which caused refinancing activity to slow. Secondary loan bids dropped dramatically in August but later stabilized in September. Flows into bank loan retail funds turned sharply negative in August, including the largest outflow on record totaling $2.1 billion during the week of Aug. 17, 2011.

Six broadly syndicated collateralized loan obligations (CLO) totaling more than $2.4 billion were priced during the third quarter. Only two transactions have priced since the markets began their jittery streak in early August, and each has seen its 'AAA' notes pricing 20 bps-30 bps wider than similar CLOs that closed during the second quarter.

Fitch's 'U.S. Leveraged Market Quarterly' features a section on the U.S. Airlines sector.

The full report 'U.S. Leveraged Finance Quarterly' is available at www.fitchratings.com/sectors/Corporate Finance/Leveraged Finance.

For more information, visit: www.fitchratings.com/usleveragedfinance.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: U.S. Leveraged Finance Market Quarterly: Third-Quarter Synopsis and Fourth-Quarter Preview

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=653178

U.S. Corporates in the Great Recession (2007 to 2010)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=652479

Liquidity and Covenant Analysis for Large U.S. Leveraged Issuers -- U.S. Companies Sufficiently Positioned Despite Market Turmoil

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=652310

U.S. Leveraged Finance Stats Quarterly -- Second Quarter 2011

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651353

U.S. Leveraged Finance Multiples EV-Aluator -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651260

Fitch 50 -- Structural Profiles of 50 Leveraged Credits

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646322

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