Fitch Leveraged Finance Annual Manual: U.S. High Yield Participants Maintain Discipline

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has not observed a significant breakdown in credit discipline among U.S. speculative-grade issuers despite elevated issuance volumes and below-historical average 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, and Fund and Asset Managers.

Leverage has crept up slightly. Operating fundamentals have been modestly positive, offset by moderate increases in debt levels. Interest coverage has been stable as issuers receive the benefit of lower coupons achieved through recent issuances. Intermittent shocks like the drop in oil prices have reminded management teams - even those unaffected by energy prices - to be cautious on economic prospects and continue cost and capex discipline. Fitch is not anticipating improvements in leverage from current levels.

A significant shift in the use of proceeds toward merger and acquisition (M&A) activity happened in the second half of 2014, but while M&A activity grew, it remained restrained compared to the market peak in 2007. The largest driver of this shift in uses was the dramatic fall off in refinancing activity. However, near-term maturities are minimal and investor demand for yield product remains solid. Fitch expects the mix of uses to remain oriented toward acquisitions, LBOs and capex in 2015 and 2016.

Deal volume has picked up, but deal size is smaller than during 2006/2007. Fitch believes the size, volume and quality of LBO transactions are collectively less risky than the previous boom-era vintage. Even the larger transactions like Gates Global and Multiplan compare favorably with boom-era deals in terms of the health of underlying business and degree of leverage. We expect fewer private equity 'club' deals, which should continue to constrain the volume of large transactions.

The full fourth edition of the '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.

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

Applicable Criteria and Related Research: Leveraged Finance Annual Manual for the Americashttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866088

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Fitch Ratings
Michael Simonton, CFA
Managing Director
+1-312-368-3138
70 W. Madison St.
Chicago, IL 60602
or
Michael Paladino, CFA
Managing Director
+1-212-908-0113
or
Christopher M. Collins, CFA
Director
+1-312-368-3196
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
[email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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