Back to the old school: high yield corporates not a stranger to high yields
Historically, high yield corporates have successfully navigated relatively high financing costs, with their success driven by the health of the wider economy rather than the rate they are paying for their debt.
For the past two decades, corporates have enjoyed relatively low financing costs, with coupon rates consistently lower than the historic average since 1998. This year, the relationship of yield versus the average coupon has flipped from the current yield being lower than the current coupon to being close to equal. In the future it will likely move higher – which means when these companies come to refinance the cost will be higher. However, this is not yet material, so when companies refinance there should not be a noticeable change in cash interest costs.
Above the line
We may be re-entering a period when yields move above coupons across different ratings of debt, but this is not a new phenomenon – this has happened many times before, as the chart shows when the light blue line is above the dark blue line. History shows this does not necessarily indicate an immediate rise in defaults, and the cause of the rise in yield is paramount.
In this case, rising inflation will not necessarily make rising yields unsustainable if top lines are also growing, especially given companies have time to refinance their existing debt so they don’t face an immediate step change in their financing costs.
When looking at history and the default rate in the few years following an instance when yield moved above coupon there is no consistent pattern. This again supports the thesis that the cause of the rise of yield rather than the rise itself is the driver. This likely makes sense because rising yields could reflect a growing economy and beneficial inflationary growth.