History Does Repeat itself

Just this morning, I read an article from Bloomberg that highlighted the narrowing spreads available on high yield debt. In fact, they are so narrow that we are at historic lows! Here is a chart reflecting that fact:

Yes, the economy is once again opening up as Covid-19 becomes less of an impact and yes, this will positively impact businesses, but how much of the “good” news is already reflected in the prices? Are you really getting compensated for the additional risk?

Then I read a WSJ article, titled “Issuance of Bundles of Risky Loans Jumps to 16-year High”, which referred to CLOs (collateralized loan obligations) seeing a significant renaissance. These securities “buy up loans to companies with junk credit ratings and package them into securities, totaled over $59 billion as of May 20, according to data from S&P Global Market Intelligence’s LCD.” This is a record amount since data was first kept in 2005. The CLO market is now $760 billion. Market participants, BofA and Citigroup, anticipate CLO sales to be anywhere from $290 billion to $360 billion this year, which if realized, would shatter previous annual sales records.

I don’t know what the future will bring for either high yield or CLOs, but I do know that history repeats itself and after 40 years in this business, I’ve seen a lot of history. It isn’t always pretty. Haven’t we lived through previous blow-ups in both high yield and leveraged loans?

Last thought: anytime I hear someone talk about a new paradigm, I cringe, as I remember the late-90s being the start of a “new paradigm” reflecting the dawn of technology and the death of value investing. Oh, yeah, and then there is this beauty of a quote in that WSJ article: “The default environment has been very benign and will be (my emphasis) because the capital markets are open to companies that may be struggling a little bit”. Caveat emptor!

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