Leverage World is published weekly (Friday). It contains articles on the "Big Picture" in the high-yield markets, as well as the following regular features:

• Security Selection -- an analysis of senior vs. subordinated spreads, debt vs. equity (outperformance), OAS, risk weightings
• Sector Allocation -- tracking high yield relative value by industry
• Market timing -- default rate forecasts and charts; macro-tracker analysis relating economic variables to risk premiums/spreads
   

The periodical is delivered in PDF format. A smaller version which includes only the Big Picture articles is also available.  There are approximately 48 issues a year.
 

 

In the past year, we have worked hard to increase the value of Leverage World.  Our recent research on the high yield and leveraged loan markets included:

Ten Days That Shook the World: No previous year on record has seen the high yield risk premium increase by as much in the first 10 days as happened in 2008.  As another gauge of the sharpness of the market decline, more bonds entered the distressed zone in a week-and-a-half than in any month since that category began to expand in the second half of 2007.  There are challenges in using standard markers to match present conditions to a comparable point in the last cycle.  Even so, going through the process yields potentially valuable input into decisions about sector allocation for the coming six months.

Gentlemen's Agreement Breaks Down: The breakdown of informal agreements to maintain prices on unsold leveraged buyout loans is bad news – for the banks that committed to the financings.  Banks that break ranks help the market clear, which should hasten the resumption of credit extension.  The history of the term “gentlemen’s agreement” sheds light on the true nature of pacts that business people are reluctant to formalize.

The Significance of +800: The high yield spread-versus-Treasuries has widened to a range at which the risk-reward ratio turned favorable in previous cycles.  Unfortunately, the historical record is a bit thin, with only two previous cycles constituting relevant observations.  Furthermore, some potentially very important factors distinguish the present cycle from the past two.  Is there nevertheless an argument for boosting high yield exposures now?  Our analysis also explores the possibility that competition from historically cheap investment grade bonds will impede a high yield rebound.

Survey Still Says Sell: The most recent US Federal Reserve senior bank loan officer survey reveals a draconian pullback of lending to US corporates and other segments of the economy.  Tightening standards point to an 11% default rate; and spreads are trading too tight versus lending availability, particularly among Triple-Cs.  We test the usefulness of the survey as a market indicator.  We also break down the survey between supply and demand for lending – are firms pulling back due to the economy, or is the “credit crunch” blocking real investment opportunities?  The answer may tell us how deep and prolonged the slump may become.

Financials and Oil: The rise in oil prices and drop in financials generated the big trades of the last year.  The two moves are related – oil, US financials, and EUR-USD have moved in near lock step during the past two and a half years.  The risk in financials and oil has become more symmetric in recent weeks.  We look at similarities between oil pricing and prior asset run-ups, and the affordability of oil to the broad US economy. Overvalued HY sectors that benefitted during this oil surge / financial collapse may be due for some softening, while cheap-and-punished industries may deserve a second look in the near-term.

Leverage World now provides regular high yield strategy commentaries from both Chris Garman and Martin Fridson (through April 2009).  Garman Research LLC is hard at work developing methodologies and valuation tools that we will be rolling out in Leverage World during the coming months.
 

 

Leverage World is published weekly (Friday). It contains articles on the "Big Picture" in the high-yield markets, as well as the following regular features:

• Security Selection -- an analysis of senior vs. subordinated spreads, debt vs. equity (outperformance), OAS, risk weightings
• Sector Allocation -- tracking high yield relative value by industry
• Market timing -- default rate forecasts and charts; macro-tracker analysis relating economic variables to risk premiums/spreads
   

The periodical is delivered in PDF format. A smaller version which includes only the Big Picture articles is also available.  There are approximately 48 issues a year.
 

 

In the past year, we have worked hard to increase the value of Leverage World.  Our recent research on the high yield and leveraged loan markets included:

Ten Days That Shook the World: No previous year on record has seen the high yield risk premium increase by as much in the first 10 days as happened in 2008.  As another gauge of the sharpness of the market decline, more bonds entered the distressed zone in a week-and-a-half than in any month since that category began to expand in the second half of 2007.  There are challenges in using standard markers to match present conditions to a comparable point in the last cycle.  Even so, going through the process yields potentially valuable input into decisions about sector allocation for the coming six months.

Gentlemen's Agreement Breaks Down: The breakdown of informal agreements to maintain prices on unsold leveraged buyout loans is bad news – for the banks that committed to the financings.  Banks that break ranks help the market clear, which should hasten the resumption of credit extension.  The history of the term “gentlemen’s agreement” sheds light on the true nature of pacts that business people are reluctant to formalize.

The Significance of +800: The high yield spread-versus-Treasuries has widened to a range at which the risk-reward ratio turned favorable in previous cycles.  Unfortunately, the historical record is a bit thin, with only two previous cycles constituting relevant observations.  Furthermore, some potentially very important factors distinguish the present cycle from the past two.  Is there nevertheless an argument for boosting high yield exposures now?  Our analysis also explores the possibility that competition from historically cheap investment grade bonds will impede a high yield rebound.

Survey Still Says Sell: The most recent US Federal Reserve senior bank loan officer survey reveals a draconian pullback of lending to US corporates and other segments of the economy.  Tightening standards point to an 11% default rate; and spreads are trading too tight versus lending availability, particularly among Triple-Cs.  We test the usefulness of the survey as a market indicator.  We also break down the survey between supply and demand for lending – are firms pulling back due to the economy, or is the “credit crunch” blocking real investment opportunities?  The answer may tell us how deep and prolonged the slump may become.

Financials and Oil: The rise in oil prices and drop in financials generated the big trades of the last year.  The two moves are related – oil, US financials, and EUR-USD have moved in near lock step during the past two and a half years.  The risk in financials and oil has become more symmetric in recent weeks.  We look at similarities between oil pricing and prior asset run-ups, and the affordability of oil to the broad US economy. Overvalued HY sectors that benefitted during this oil surge / financial collapse may be due for some softening, while cheap-and-punished industries may deserve a second look in the near-term.

Leverage World now provides regular high yield strategy commentaries from both Chris Garman and Martin Fridson (through April 2009).  Garman Research LLC is hard at work developing methodologies and valuation tools that we will be rolling out in Leverage World during the coming months.