Non-Investment Grade Credit: Takeaways From Recent Management Meetings

Summary

U.S. non-investment grade credit market is well positioned to navigate the current environment.

Issuers have been largely successful in passing through inflationary costs, with a strong consumer providing issuers with the ability to offset higher costs through pricing and volume growth.

Expect underlying credit fundamentals to remain strong, with defaults well below historical averages in 2022 and 2023.

Matteo Colombo/DigitalVision via Getty Images Recent meetings with issuer management teams support our view that the U.S. non-investment grade credit market is well positioned to navigate the current environment.

Last week, J.P. Morgan hosted its annual Global High Yield and Leveraged Finance conference, where our team participated in close to 100 meetings with issuer management teams. The conference was well attended by both issuers and investors, and provided timely insights on the potential impact that current above-trend inflation and the ongoing Russian invasion of Ukraine would have on issuers.

Inflation, supply chains and the strength of the consumer have been focus areas of the non-investment grade credit market for the past several quarters and remained a key subject of discussion with management teams during the conference.

There is limited direct exposure to Russia and Ukraine within the U.S. non-investment grade credit market, so discussion on this topic focused on the indirect inflationary impact the conflict would have on issuers—most notably through higher energy and commodity costs. To date, issuers have been largely successful in passing through inflationary costs, with a strong consumer providing issuers with the ability to offset higher costs through pricing and volume growth.

The forward outlook from issuers at the conference was broadly constructive. Issuers that are most exposed to the inflationary environment, such as retail and manufacturing, continue to observe high levels of demand and a strong consumer, and remain confident in their ability to pass through incremental inflationary pressures.

The conference also provided an opportunity to meet with issuers in some large non-investment grade sectors where inflation and the ongoing geopolitical conflict are less impactful. One example is the telecom and cable sector (12% of the U.S. high yield index and 7% of the U.S. loan index), where issuers provided updates on capital projects to meet growing demand for internet bandwidth, and expressed conviction on the positive impact these projects would have on long-term subscriber trends.

The team also met with several energy issuers (14% of U.S. high yield and 2% of U.S. loans) across the value chain to discuss their strategy and prospects for upward ratings momentum in a favorable commodity price environment.

Meetings with issuers at the conference were supportive of our view that the U.S. non-investment grade credit market is well positioned to navigate the current inflation and geopolitical environment, and we expect underlying credit fundamentals to remain strong, with defaults well below historical averages in 2022 and 2023. Increased energy costs will likely have a greater impact on European issuers, but we still expect the trend of below-average defaults within that market to continue.

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