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High Yield Issuance Down, Protection Levels Up

We have noticed a decline in high yield issuance in Q4 2014 vs Q3 2014. As markets were on edge about global growth concerns and dropping oil prices, the riskiest spectrum of the fixed income markets felt the effects the most. In the chart below we can see that all rating categories in the high yield space declined with CCC and BB and B issuance slowing by 51%, 22%, and 14% respectively. 

The next chart shows high yield issuance quarter-over-quarter across sectors. We notice the largest declines in Telecom in part due to companies such as T-Mobile and MetroPCS issuing large amounts of debt in Q3 of 2014 as well as very few deals overall happening in the space in Q4 2014. Other sectors that slowed down were Information Technology and Financials. Energy issuance did go down by 22% to $13bn from $17bn but surprisingly this was not as drastic a change as other sectors, considering the oil price drops. 

Decreased issuance coupled with high yield bond market declines have led to an increase in certain financial covenants. The last few years have been very friendly to issuers with many cov-lite deals coming to market. However, over the past two quarters, the percentage of high yield issuance with indebtedness, fixed charge coverage, and dividend related payments is trending upwards. We may see this trend continue as global market volatility and uncertainty linger in the first half of 2015. 

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