[email protected][email protected][email protected][email protected][email protected]MORGAN STANLEY & CO. LLC Srikanth Sankaran STRATEGIST +1 212 761-3910 Vishwas Patkar STRATEGIST +1 212 761-8041 Frederick T Fuchs STRATEGIST +1 212 761-4839 Felician G Stratmann STRATEGIST +1 212 761-1353 Aleksandr Nozhnitskiy, CFA STRATEGIST +1 212 761-5936 2021 US Credit Strategy Outlook 2021 US Credit Strategy Outlook | North America North America Buying Beta Recovery and reflation are central themes in our outlook for next year. We remain constructive and position for a normal 'early-cycle' environment, looking through near-term challenges. Stay down in quality, increase cyclical exposure and reduce embedded exposure to rates volatility. Banking on a return to 'normal' in 2021: Looking through near-term risks from policy and the virus, our macro narrative is for a synchronous recovery in economic growth/earnings and the rise of inflation pressures in the US. The set- up remains constructive for the performance of credit. As companies focus on balance sheet repair, we expect credit fundamentals to improve, spreads to compress, and supply to slow down. In our base case, 12M excess returns track 2.2% in IG, 5.3% in HY and 3.9% in leveraged loans. Our issuance forecasts are $1.2 trillion (-36%Y) in IG and $250-275 billion (-37%Y) in HY. We see $40-80 billion in the fallen angel pipeline for next year. Default rates are expected to peak at 9- 10% in 2Q21 before moderating to 6% by year-end. In investment grade: We prefer BBBs over As, with fallen angel volumes set to slow down as earnings rebound and highly levered companies focus on balance sheet repair. We think the long end should outperform as LDI demand picks up, but prefer off-the-run 30Y bonds for their cheaper valuations/lower duration than on-the-run 30Y bonds. We are overweight cyclical sectors especially those impacted by COVID, equal-weight Financials, and underweight defensive sectors like Utilities/Staples. In leveraged credit: Within HY, we maintain an overweight on fallen angels that offer a 75bp pickup over legacy BBs, even after adjusting for duration differences. Our down-in-quality bias also remains intact despite recent compression. By sector, we recommend a barbell of growth-sensitive Industrial and Consumer Discretionary with higher-quality Technology. We favor loans over HY bonds for the full year 2021 as rates risks weigh on HY performance in the back half of the year. In derivatives: CDX HY vs. IG index compression remains our top trade given relative valuations, improving growth, and significant vaccine- and pent-up- demand-related upside in recent fallen angels. Volatility offers some risk premium, and we like selling HY strangles and overwriting IG bond portfolios. We prefer long exposure via CDX over cash in HY, 3s-5s steepeners in CDX HY, long equity risk in legacy IG (S33), and long junior mezz risk in legacy HY series (S33). Where we could be wrong: A more choppy recovery path and/or a more complacent corporate response are risks to our constructive thesis. Our assumption of continued policy accommodation may also be tested if the recent discord on the Fed's purchase programs escalates. Alternatively, sharper-than- expected moves in bond yields could weigh on credit market technicals. Exhibit 1: 2021 US Credit Forecasts Current Bull Base Bear Spread Forecast (bp) IG 109 80 100 150 HY 422 300 350 600 Loans 477 370 400 600 Defaults - 12M (%) HY 7.9% 3.0% 6.0% 8.0% Loans 7.0% 3.0% 6.0% 8.0% Excess Return (%) IG 3.9% 2.2% -2.3% HY 8.5% 5.3% -4.9% Loans 5.0% 3.9% -1.9% Total Return (%) IG - -2.3% - HY 6.6% 4.5% -4.9% Loans 5.2% 4.1% -1.7% 2021 Full Year Gross Issuance ($Bn) IG 1,872 - 1,200 - HY 420 - 250-275 - Loans 290 - 325-350 - Source: Bloomberg, S&P LCD, Dealogic, Moody's, Morgan Stanley Research forecasts; Note: Pricing as of November 19, 2020; Current gross issuance is YTD 2020 annualized. Due to the nature of the fixed income market, the issuers or bonds of the issuers recommended or discussed in this report may not be continuously followed. Accordingly, investors must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers or bonds of the issuers. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1 November 23, 2020 02:42 PM GMT
2021 US Credit Strategy Outlook2021 US Credit Strategy Outlook || North America North America
Buying BetaRecovery and reflation are central themes in our outlook fornext year. We remain constructive and position for a normal'early-cycle' environment, looking through near-termchallenges. Stay down in quality, increase cyclical exposureand reduce embedded exposure to rates volatility.
Banking on a return to 'normal' in 2021: Looking through near-term risks from
policy and the virus, our macro narrative is for a synchronous recovery in
economic growth/earnings and the rise of inflation pressures in the US. The set-
up remains constructive for the performance of credit. As companies focus on
balance sheet repair, we expect credit fundamentals to improve, spreads to
compress, and supply to slow down. In our base case, 12M excess returns track
2.2% in IG, 5.3% in HY and 3.9% in leveraged loans. Our issuance forecasts are $1.2
trillion (-36%Y) in IG and $250-275 billion (-37%Y) in HY. We see $40-80 billion in
the fallen angel pipeline for next year. Default rates are expected to peak at 9-
10% in 2Q21 before moderating to 6% by year-end.
In investment grade: We prefer BBBs over As, with fallen angel volumes set to
slow down as earnings rebound and highly levered companies focus on balance
sheet repair. We think the long end should outperform as LDI demand picks up,
but prefer off-the-run 30Y bonds for their cheaper valuations/lower duration
than on-the-run 30Y bonds. We are overweight cyclical sectors especially those
impacted by COVID, equal-weight Financials, and underweight defensive sectors
like Utilities/Staples.
In leveraged credit: Within HY, we maintain an overweight on fallen angels that
offer a 75bp pickup over legacy BBs, even after adjusting for duration
differences. Our down-in-quality bias also remains intact despite recent
compression. By sector, we recommend a barbell of growth-sensitive Industrial
and Consumer Discretionary with higher-quality Technology. We favor loans
over HY bonds for the full year 2021 as rates risks weigh on HY performance in
the back half of the year.
In derivatives: CDX HY vs. IG index compression remains our top trade given
relative valuations, improving growth, and significant vaccine- and pent-up-
demand-related upside in recent fallen angels. Volatility offers some risk
premium, and we like selling HY strangles and overwriting IG bond portfolios. We
prefer long exposure via CDX over cash in HY, 3s-5s steepeners in CDX HY, long
equity risk in legacy IG (S33), and long junior mezz risk in legacy HY series (S33).
Where we could be wrong: A more choppy recovery path and/or a more
complacent corporate response are risks to our constructive thesis. Our
assumption of continued policy accommodation may also be tested if the recent
discord on the Fed's purchase programs escalates. Alternatively, sharper-than-
expected moves in bond yields could weigh on credit market technicals.
Exhibit 1: 2021 US Credit ForecastsCurrent Bull Base Bear
Source: Bloomberg, S&P LCD, Dealogic, Moody's, Morgan Stanley Research
forecasts; Note: Pricing as of November 19, 2020; Current gross issuance is YTD
2020 annualized.
Due to the nature of the fixed income market, the issuers orbonds of the issuers recommended or discussed in thisreport may not be continuously followed. Accordingly,investors must regard this report as providing stand-aloneanalysis and should not expect continuing analysis oradditional reports relating to such issuers or bonds of theissuers.Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As aresult, investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research. Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisreport.
The tumult and disruption of 2020 has been unprecedented. The humanitarian distress
associated with the COVID crisis will take time to heal. But the rapidity and magnitude of
policy responses have put the economic and market recovery on a fast track. Cash credit
spreads swung from cycle tights to historical wides in a matter of weeks in March before
retracing by an equally remarkable expanse in the following months. Excess returns are
still in negative territory but much healthier than prior periods. On the total return
measure, 2020 is on track to be one of the strongest years on record for US investment
grade credit. The sell-off, recovery and divergence in performance capture the aberrant
year that 2020 was.
Despite some risks created by the recent tension between the Treasury and the Fed, our
outlook for 2021 relies on a return to normalcy. This expectation extends to the
economy, corporate earnings and credit markets.
(1) The global economy. With the global economy already back at pre-COVID-19 levels
of output (i.e., 4Q19), our economists expect the recovery to gain further momentum
next year. They forecast global growth of 6.4%Y for 2021 and a return to the pre-COVID
path of growth by 2Q21 (Exhibit 2). In the US, they expect the baseline level of activity
created through the autumn to sustain the economy despite a slowdown in 1Q21. Under
the base case, US GDP growth tracks 5.9%Y and 6.0% 4Q/4Q.
Central to the economic narrative is an expectation that the recovery that begins in the
second quarter of next year will be broad based across geographies and sectors. Driving
this synchronous recovery will be a more expansive reopening of economies worldwide
as monetary and fiscal support remain in place. The recent news on the high efficacy of
Pfizer and Moderna vaccines also increases our economists' confidence in their
constructive thesis. Additionally, a key aspect of our macro outlook is the expectation
that 2021 will see a stronger reflation impulse in the US. Per our economists' forecasts,
Exhibit 2: Global Output Set to Return to Pre-COVID-19 Path by the Middle of Next Year
92
96
100
104
108
112
1Q19 3Q19 1Q20 3Q20 1Q21 3Q21 1Q22 3Q22
Global GDP Level (4Q19=100)
Pre-Covid GDP Path MS Forecast
4Q20: Return topre-Covid levels
2Q21: Return to pre-Covid GDP path
Source: Haver Analytics, IMF, national sources, Morgan Stanley Research forecasts; Note: The pre-COVID-19 GDP path refers to the trajectory that globalGDP would have followed prior to the COVID-19 shock and is calculated using Morgan Stanley Research forecasts as of January 21, 2020.
2
US inflation is set to rise above 2%Y on a sustained basis from 2022 onwards - 24
months after the start of the recession. After the GFC and in the 2000s cycle, it took 40
and 50 months, respectively.
(2) Corporate earnings… Strong nominal GDP growth next year implies a sizeable
acceleration in revenue growth forecasts, and top-line improvement is also likely to be
amplified by impressive operating leverage. As shown in Exhibit 3, our equity colleagues
pencil in 25-30% EPS growth next year for all regions, with further double-digit growth
expected in 2022 too. Our US equity team argues that evidence for the rebound has
already been mounting. Companies less directly impacted by COVID-19 are already
reporting a return to year-on-year operating profit growth as cost cuts have offset top-
line declines.
(3) ...and credit markets. The backdrop outlined above is consistent with the "repair"
phase of the cycle and bodes well for corporate credit performance. Across all regions,
we forecast tighter spreads and excess returns above historical average (Exhibit 4). In US
credit, we expect spreads to approach but not match pre-COVID-19 tights by end-2021.
Our forecasts call for 9bp tightening in IG, and 70-80bp in HY and loans, which
translates into excess return projections of 2.2%, 5.3% and 3.9%, respectively. This would
take us back to within 10-30bp of pre-COVID-19 levels in IG, HY and loans.
Our numbers imply a sharper trajectory back to the tights compared to prior post-
recession bull markets. We think this is justified given the nature of the recovery, and
the extraordinary amount of liquidity still in the system. In addition, we think that the
case for spreads in leveraged credit to approach pre-COVID-19 levels is much stronger
given a rapidly normalizing economy. On the other hand, while IG companies will benefit
fundamentally from a healthier macro environment, the market will need to face the
challenge of rising rates over the short term (potential outflows from fixed income) and
the medium term (less need to reach for yield from overseas investors). Overall, while
we predict tighter IG spreads over the forecast horizon, the compression will be more
measured compared to HY/loans on a risk-adjusted basis.
On the supply front, we expect a significant decline in primary activity next year as
corporates focus on balance sheet repair and refinancing needs are more measured.
Exhibit 3: We Forecast Broad-based Improvement Both in the Real Economy and in CorporateEarnings
-4%
-2%
0%
2%
4%
6%
Global RealGDP
US RealGDP
US HeadlineInflation
2020 vs. 2021 Forecast
-40%
-30%
-20%
-10%
0%
10%
20%
30%
S&P 500 EPSGrowth
MSCI EuropeEPS Growth
2020E 2021E
Source: Morgan Stanley Research forecasts; Note: We show real GDP and headline inflation here.
3
Similarly, while we remain wary of a latent default wave through the winter, our default
forecasts imply a significant year-on-year decline. We discuss these themes in more
detail in the following sections.
Exhibit 4: Global Credit Forecasts
Spread ForecastCurrent Bull Case Base Case Bear Case
US Investment GradeUS High YieldUS Leveraged LoansEUR IGEUR HY
Source: Markit, Bloomberg, S&P LCD, Morgan Stanley Research forecasts; Note: Pricing as of November 19, 2020; US IG and HY spreads forecast for theBloomberg Barclays US Corporate Bond and Bloomberg Barclays US Corporate High Yield Bond indices, respectively.
4
Key Themes and Debates
A "return to normalcy" would no doubt be a relief after the churns of this year. Yet, the
path to such an outcome is strewn with uncertainties. Questions remain about the
durability of the recovery and the reflation thesis is not widely held. It is also unclear
whether our early-cycle narrative will hold this time around as funding costs are
strikingly low compared to prior post-recession periods. Our constructive thesis also
makes embedded assumptions around monetary and fiscal policy being accommodative
for most of next year. The "easy policy" view is widely held but could be undermined by
the recent headlines on unused funds in the Fed's emergency purchase programs. We
discuss our stand on these themes next.
1. As economies re-open, market focus will shift from recession to reflation. The macro
discourse this year has understandably been dominated by the depth of the COVID
recession and the potential recovery path. We expect the reflation theme to become
more dominant in the coming year, particularly in the US. In our economists' forecasts,
core PCE inflation in the US approaches 2%Y by 2H21, rising above 2%Y on a sustained
basis starting in 2022 (Exhibit 5). This expectation is partly contingent on the broad-
based availability of a vaccine by the middle of next year and also on additional
(moderate) fiscal easing even under a divided government. More importantly, our
economists argue that, as inflation crosses 2.0%Y, the risk of inflation overshooting
2.5%Y becomes more real. This scenario could produce a disruptive shift in inflation
expectations and may prompt the Fed to tighten sooner than we and the market are
currently anticipating.
In keeping with the inflation outlook, our rates colleagues expect Treasury yields to
push higher over the forecast horizon. They see 10-year Treasury yields trading slightly
below 1.5% by the end of 2021, and continuing to move higher into 2022. Meanwhile,
front-end rates in the first half of 2021 remain anchored by a dovish Fed under its new
average inflation targeting approach. However, the debate around the Fed's reaction
function is likely to intensify later next year as our economists expect a move toward a
tapering of Treasury purchases as early as 1Q22.
The read-across for credit is on balance positive, particularly for growth-sensitive sectors.
The broader growth and reflation narrative is positive for credit performance (Exhibit 6),
particularly when viewed in the context of the fiscal and monetary support that is
already in place. A shift in the rates regime could pose some challenges for credit
markets, but we expect these to be temporary. With the IG index duration at record
highs, outflows from fixed income funds could pose headwinds for credit spreads during
the initial phase of the rates moves. A related concern is tempered appetite for credit
from international investors. The net effect is likely to be that lower-quality shorter-
duration assets outperform high-quality long-duration assets. We reflect these
considerations in our spread and return forecasts by factoring in a more measured
compression in IG spreads versus HY and loans on a risk-adjusted basis.
5
2. The fate of the Fed's emergency purchase programs. An essential ingredient of the
recovery and reflation thesis is that fiscal and monetary policy remains accommodative.
Given the exogenous nature of the Covid shock, there is strong incentive for
policymakers to mitigate the impact on employment by keeping their reflationary
policies in place. The recent discord between the US Treasury and the Federal Reserve
around the emergency lending programs raises the risk that our (and the market's)
conviction on policy support may be tested. While the expiry of the Treasury allocation
to these programs by December 31 this year is mentioned in the CARES Act, the
Treasury's tighter interpretation of the term "unused funds" raises questions on the path
of future policy actions.
We discuss the details of Mnuchin's letter to Fed Chair Powell and the latter's response
in a separate note (see The Fate of the Fed's 13(3) Facilities) . But we make three points
here:
First, these purchase facilities represented a fast, coordinated and proactive response
from policymakers to the Covid crisis. Should the CARES allocation to the Exchange
Stabilization Fund (ESF) and the Fed's facilities be reappropriated to the Congress after
December 31, 2020, the Fed may have to rely on legislative process to resume the
facilities. By extension, policy support could become more reactive than proactive,
despite best intentions of the Fed and the new administration.
Second, from the perspective of credit markets, actual purchases under the Corporate
Credit Facilities (CCFs) have been modest. But these facilities represented a strong
safety net for the asset class. Absent CARES funds, the next Treasury Secretary would
have "only" $85 billion in core ESF funds to cover the credit subsidy portion of the
Treasury's investments. While this amount could translate into significant (100s of
billions in) purchase capacity, it is fair to say that the safety net has been lowered and
weakened.
Third, we do not believe a "reactionary" policy backdrop warrants a change in our
constructive base case for credit. After all, our economists believe that the recovery has
now entered a more self-sustaining phase. However, we believe that downside risks are
higher – credit markets are likely to be more sensitive to disappointments on the macro
front.
Exhibit 5: The Return of Inflation Is a Key Feature of Our USEconomics Forecasts
Source: Bureau of Economic Analysis, Morgan Stanley forecasts
Exhibit 6: Below-trend and Rising Inflation Regimes Are Good forCredit Performance
Source: Source: Bloomberg, Morgan Stanley Research; Note: We use excess returns from 1970 or wheneverhistory begins. Blue dot shows median while blue bars show interquartile range.
3. We expect the early-cycle thesis to hold, but 2021 is when the rubber meets the road
on corporate and sponsor behavior. We retain our faith in the early-cycle narrative.
Periods after recessions are characterized by macro data that are below average but
improving, and credit fundamentals that are weak but beginning to heal. Skeptics could
argue that the extreme levels of leverage are at odds with the "repair" phase of the
cycle. We do not think so - as shown in Exhibit 7, credit cycles always begin with
elevated leverage that moderates over time. While the starting level this time around is
no doubt worse than in the past, our simple point here is that it is the trend in leverage
over the coming quarters that will validate or undermine our cycle narrative.
In thinking about the future path of leverage, we think it would help to frame the
debate along two dimensions - ability vs. willingness to deleverage and corporates vs.
financial sponsor behavior.
(1) Ability vs willingness. The 5.9%Y real GDP growth expected next year in the US and
earnings growth of 27% per our equity colleagues' forecast should help an organic
decline in corporate leverage. While the magnitude and breadth of the earnings tailwind
can be debated, the improved ability to de-leverage is part of the early-cycle narrative
that finds broader acceptance. The debate/ pushback tends to center on willingness.
For all our talk of a return to normalcy next year, we are acutely aware of how
remarkably "normal" corporate funding conditions already look (Exhibit 8 above). In the
past, a measured pace of policy easing and longer recession windows together
contributed to a slower return to normalcy for funding markets. By contrast, the
snapback in corporate funding costs has been much sharper this time around. It can
therefore be argued that the "repair" phase after past cycle turns was merely a
consequence of funding economics. Balance sheet discipline was enforced/incentivized in
the "early cycle" phase by still-elevated funding costs and constrained market access.
This time around, the extraneous nature of the COVID-19 shock creates the risk that
memories of recession are fleeting and learnings from it are short-lived. It is in fact this
disconnect between well-above average leverage and historically low funding yields
that makes 2021 a year of validation for our early-cycle thesis. Corporate management
has to signal commitment to balance sheet repair when earnings improve.
(2) Corporates vs financial sponsors. A second dimension that bears watching is how the
motivation to deleverage differs across corporate borrowers and financial sponsors. We
Exhibit 7: Leverage Tends to Peak Shortly After a Recession, andDeleveraging Can Last Several Years
1.30
1.70
2.10
2.50
2.90
t +2 +4 +6 +8 +10 +12 +14 +16 +18 +20 +22 +24
(x)
Quarters after Recession Start
IG Leverage: Recession Start to Following Trough
Early 90s - Recession Period Early 90s - Post RecessionEarly 00s - Recession Period Early 00s - Post RecessionGFC - Recession Period GFC - Post Recession
Current Gross Leverage
Source: Bloomberg, Morgan Stanley Research; Note: t = beginning of recession.
Exhibit 8: Normalization of Funding Costs Has Been Abnormally Rapidthis Time Around
0
100
200
300
400
500
600
700
t +2 +4 +6 +8 +10 +12 +14 +16 +18
IG Spreads Following RecessionStart
Early 90s RecessionEarly 00s Recession
(bp)
0
2
4
6
8
10
12
t +2 +4 +6 +8 +10 +12 +14 +16 +18
IG Yields Following RecessionStart
GFC2020 Recession
(%)
Source: Morgan Stanley Research, Bloomberg; Note: t = beginning of recession.
7
are confident that ratings preservation will be a strong motivator for corporates. As we
have highlighted in our latest fundamental updates (see here and here), listed corporate
issuers have enhanced their liquidity buffers sharply in recent quarters. Improved cash
ratios have enabled companies to avoid a more severe wave of downgrades. But, as we
exit the crisis window, both rating agencies and investors will focus on how these excess
cash buffers are deployed in an improving earnings environment. On balance, we believe
that companies are not oblivious to the fact that they need to improve credit metrics.
Furthermore, an organic improvement in earnings next year should also reduce the
pressure to appease equity investors through buybacks.
However, there is a credible risk that cheap funding costs may encourage an increase in
acquisition/LBO activity from PE sponsors. Historically, we have viewed M&A and LBO
activity as exuberance indicators (Exhibit 9) - with optimism around earnings outweighing
funding cost considerations late in a cycle. This time around, record-low yields and
potential persistence of policy support may encourage a modest increase in acquisition
activity even in the early-cycle phase. However, we expect this uptick to be measured
with investors and rating agencies acting as limiting agents.
Our motivation in this discussion is primarily to draw a distinction between the potential
response function of corporates (where we have a higher degree of confidence in credit-
friendly behavior) and that of financial sponsors (where low cost of funding could
encourage more transaction activity).
4. Technical backdrop to remain fairly supportive. A corollary to the above discussion
on the cycle is that post-recession environments are also associated with favorable
technicals. We believe that the contradiction of record-high corporate bond supply
amidst the tumultuous price action of 2020 will resolve itself next year. This view is
primarily informed by two considerations:
(a) Elevated cash buffers likely to translate into significantly lower refinancing supply.
Contrary to our expectations earlier in the year, the issuance volumes failed to slow
down in the second half of 2020. Overall, full-year issuance is likely to be up 50%Y in
Exhibit 9: Historically, Acquisition Activity Has Recovered Only Slowly Post-recessions, but ThisTime Could Be Different
Source: Morgan Stanley Research, Thomson Reuters, ICE
Source: Morgan Stanley Research Estimates, Dealogic, Bloomberg, S&P LCD;Note: 2020 shown assuming annualized supply based off estimates at the end of October 2020; Maturities, calls, tenders estimated based on Bloombergdata for bonds with IG ratings at Moody's or S&P at maturity/call/tender date
Exhibit 18: IG gross and net issuance spiked in 2020, but we expect asharp drop in 2021
Source: Bloomberg Morgan Stanley Research; Note: To be included on the list, an issuer must have index-eligible debt with a low-BBB ratings mix combined with negative outlooks or watches on thoseratings that would imply removal from the index if 1 or 2 agencies follow through; Issuer spreads highlighted where they exceed the BB index OAS
Exhibit 25: Buybacks Have Fallen Sharply in 2020, but Are Likely toMake a Comeback, as They Did After 2009
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
-100
0
100
200
300
400
500
600
700
85 88 91 94 97 00 03 06 09 12 15 18
($bn) LTM Top 500 Net Buybacks (Ex-Financials)
Net Buybacks Net Buybacks, % of S&P 500 Ex-Fins Mkt Val (RS)
Source: ClariFi, Morgan Stanley Research
Exhibit 26: Non-financials Have Sharply Reduced Their Reliance onCommercial Paper and May Continue to Term It Out with Debt
0
50
100
150
200
250
300
350
92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
($bn) Domestic Non-Financial Commercial Paper Outstanding
Source: Federal Reserve, Bloomberg, Morgan Stanley Research
18
been elevated, the A to BBB downgrade rate of the last twelve months is below prior
cycle turns and has seen less of a spike than fallen angel rates (see Exhibit 23,
previously). A to BBB downgrades of $125-150 billion in the context of the ICE BAML
index would represent a return to slightly above-average downgrade rates for the prior
cycle.
To assess the potential volume of A to BBB downgrades in 2021, we again looked at
bonds in the IG index that had low-A ratings with a negative watch or outlook, where an
action by one or two rating agencies would mean the bonds fall to BBB. $269 billion of
par met this categorization, with Disney's $42 billion debt stack topping the list, followed
by UPS and Honda in the non-financial space. Several large Financial issuers are also
near the top of the list, including Lloyds Bank ($18.8 billion at risk) and American
Express ($15.5 billion at risk), as well as some subordinated debt from banks. However,
unlike BBBs where we think this can be a relatively good gauge of potential
downgrades, we think the downgrade potential for A-rated issuers stems more from the
possibility that they do not follow an early-cycle playbook, and instead continue with
shareholder friendly behavior motivated by the low cost of debt - which may not yet be
reflected in ratings watches and outlooks.
Positioning Recommendations
1. Stay Down in Quality
Within IG, we maintain a preference for BBBs over As as part of our early-cycle thesis.
Rating agencies remain focused on liquidity and are likely to be patient while earnings
recover. Both A and BBB rated issuers have raised significant amounts of liquidity YTD
(see Exhibit 28), as have lower-rated sectors sensitive to COVID such as Materials,
Consumer Discretionary, and Industrials (see Exhibit 31 in the next section). However, we
think incentives point to cyclicals and BBBs as most likely to de-lever.
From a valuation standpoint, the BBB vs A spread differential at 57bp remains well off
prior cycle tights of 35bp, as does the ratio of BBB to A spreads, at 1.69x. While index
Exhibit 27: The Volume of A to BBB Downgrades Has Risen, but the Rate Relative to OutstandingDebt Remains Low
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
98 00 02 04 06 08 10 12 14 16 18 20
($bn) T12M A to BBB Downgrades
US Recession Non-Fin A DowngradesAll A Downgrades All A Rate (RS)Non-Fin A Rate (RS)
Source: ICE, Morgan Stanley Research
19
spreads can be skewed by sector biases, we looked at the BBB vs. A relationship after
controlling for sub-sector exposure. We found that the spread differential is at wide
levels vs. history in the most cyclical and COVID-exposed sectors (Materials, Energy,
Industrials). On the other hand, the BBB-A spread basis is at relatively normal levels,
looking at some of the more defensive sectors (Consumer Staples, Healthcare, Tech).
Considering the strong nature of the recovery, we are projecting, the breakdown of the
spread basis across sectors to us is encouraging. It suggests that there is lingering
uncertainty about the most levered/high-beta credit, and this should provide an
attractive investment opportunity as the recovery plays out. On the other hand, the
relatively tight spread differential in low-beta sectors is likely for good reason.
Coming into the pandemic, BBBs already had record-high levels of leverage and the
subsequent earnings shock and issuance wave has exacerbated the extent to which the
BBB space is leverage-constrained. We believe issuers in the BBB space have a strong
incentive to use excess cash to de-lever and maintain their IG ratings. The WACC curve
for US credit continues to show a relatively steep cost of downgrade from IG to HY,
while the cost of capital is relatively flat from A to BBB (see Exhibit 29). In line with our
expectation of more moderate fallen angels in 2021, we are comfortable reaching for
yield in BBBs.
For companies in the A-rated space, we believe incentives point less obviously to credit-
friendly behavior. A-rated companies might be quick to restore share buybacks and M&A
activity given the continued record-low cost of debt, although at the margin higher
interest rates (as called for by our interest rate strategists) may temper some
opportunistic issuance.
Risks to our view include a less robust economic or earnings recovery than expected,
leading to underperformance of higher-beta names and fallen angel rates that exceed
our expectations.
Exhibit 28: A-rated Issuers Bulked Up on Cash Balances, as Did Low-BBBs
15
-15
27 1373 73 73 57 64 8210%
-7%
20%11%
32%
49% 52%
24%32%
72%
-40
0
40
80
120
160
-20%
0%
20%
40%
60%
80%($bn)Change in Cash Balance vs 4Q19
US Non-Financial, Non-Utility
Absolute (RS) % Change
Source: Bloomberg, Morgan Stanley ResearchNote: Current constituents of Bloomberg Barclays US Corporate index, excluding Yankee issuers, financialsand utilities; Based on ratings as of November 2020
Exhibit 29: The WACC Curve Continues to Show a Steep Cost ofDowngrade from IG to HY, but A to BBB Is Relatively Flat Again
3.5%4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%
AAA/AA A BBB BB B
Median WACC by Rating
Current Median WACC May 2020 Median WACCNov 2019 Median WACC
Source: Morning Stanley Research, Bloomberg, FTSE Fixed Income Note: As of September 2020
20
2. Overweight Cyclicals, Equal-weight Banks, Underweight Utilities,Healthcare, Tech, and Staples
Our ratings preference plays into our sector preferences as well, as we favor COVID-
sensitive sectors and cyclicals (which tend to be skewed to BBBs) over more defensive
sectors. Specifically, we see value in Industrial sectors such as Capital Goods and
Transportation, in-line with our equity analysts' view on these sectors. The picture for
Energy and Materials remains challenged, with supply still well-outstripping demand for
most commodities, even as economies recovers (see the Commodities Outlook within
the 2021 Global Strategy Outlook). However, these spaces still provide some value and
most IG names should be positioned well enough to cope with near-term
supply/demand imbalances and ultimately benefit from the early cycle environment.
However, we would note that Energy and Materials sectors remain challenged by ESG
concerns, and as a long-term play we would look for names proactive about ESG issues.
Utilities exposed to renewable energy (whether as Green bonds or regular) could also
be attractive in the long-run over Energy names exposed to fossil fuels (while noting
that Utilities are not within our overall sector preference given their defensive nature).
Exhibit 30: The BBB vs A Spread Differential Is at the Long-term Average, While the Ratio IsElevated Compared to History
We remain equal-weight the Financials sector overall. While spreads have normalized
significantly, we still view the sector as having good credit quality/low downgrade risks,
and it should benefit from reduced uncertainty around loan losses as corporate
earnings bounce back and higher interest rates boost revenues. Finance/leasing
companies hit hardest by COVID-19 should also benefit from the V-shaped recovery and
recovery in related industries (such as Capital Goods, Airlines, etc.). These sectors also
display relatively more attractive valuations, as we show in Exhibit 32 where we compare
spread per unit of duration across the sectors of the Bloomberg Barclays US Corporate
index.
On the margin, we underweight Technology and Health Care, where valuations are
relatively rich and companies skew to A-rated issuers which might boost buybacks and
M&A rather than de-lever. Consumer Staples and Utilities fall within our underweight to
less cyclical sectors. Furthermore, valuations are quite rich for Consumer Staples, and
Utilities could be hit by the rising rate environment as well.
Risks to our view again center around a less robust economic or earnings recovery that
leads to underperformance of cyclical sectors in favor of more defensive sectors.
Exhibit 31: Sectors Hardest Hit by the Pandemic Have Raised the Most Cash
2452
139103
19 49
59
19
94%78%
63%52%
31% 29%
9%7%
020406080100120140160
0%
20%
40%
60%
80%
100%($bn)Change in Cash Balance vs 4Q19
US Non-Financial, Non-Utility
Absolute (RS) % Change
Source: Bloomberg, Morgan Stanley ResearchNote: Current constituents of Bloomberg Barclays US Corporate index, excluding Yankee issuers, financials and utilities
22
Looking specifically at COVID-sensitive subsectors of the Bloomberg Barclays index,
spreads remain about 20bp wide to the rest of IG, and we continue to see value here as
economies normalize. Compared to the peak of the crisis, however, there are some
notable changes in constituents of these sub-indices given the concentration of fallen
angels in these sectors. For example, Autos, which was among the most dislocated
sectors at the height of the crisis, has now tightened to levels well through the
beginning of the year on the downgrade of Ford, leaving GM as the largest BBB in the
space among higher-quality foreign issuers. Similarly, the Leisure sector is now devoid of
constituents after the downgrade of Royal Caribbean. The most dislocated subsectors
remain Airlines at 207bp wider YTD, Lodging at 119bp wider YTD, Finance Companies at
97bp wider YTD, Gaming at 97bp wider YTD, Aerospace/Defense at 65bp wider YTD
(skewed by Boeing), and REITs at 35bp wider YTD (all compared to an IG index now
about 16bp wider YTD).
Exhibit 32: Relative Value Across Subsectors of the Bloomberg Barclays US Corporate Index bySpread per Unit of Duration
3. Extend Out the Curve, Off-the-run High-dollar-price Bonds Look Attractive
Across the credit curve, we think the best source of value for spread-focused investors
is at the long end. With the front end almost back to pre-COVID tights, investors should
look to extend duration to capture incremental spread tightening. While we previously
had a preference for the intermediate tenors, given the stronger growth impulse/bigger
potential for rates to reprice, we see better value at the very long end of the curve.
While 10s-30s curves have flattened a bit in recent weeks, we think there is potential for
further flattening as the Treasury curve bear steepens. In particular, we think domestic
LDI demand should pick up quite strongly, considering the recent improvement in
funding levels. Our simple linear regression of 10s-30s spread curve vs. the level and
shape of the Treasury curve suggests that curves could flatten by ~8bp next year.
Within the large swath of the long end (10Y+), we see the most compelling compression
opportunity in the universe of old off-the-run bonds. We like this universe for a few
reasons. First, while many old long bonds are trading at record high-dollar prices, as
rates rise, these prices should normalize to levels slightly above par, which should make
them attractive for life insurance investors. Second, in a rising-rate environment, high-
dollar-price bonds have outperformed low-dollar-price bonds, given the duration
cushion. Third, we think that high-coupon bonds will remain a target for continued
liability management exercises from companies. While we have seen some high-dollar-
price bond takeouts this year, there has been some resistance to this given the excess
cash required (which would mean higher leverage). However, as prices normalize, we
would expect these bonds to become attractive take-out candidates.
This risk to this view is that rates fall and demand from yield-based buyers does not pan
out, which can drive steeper long-end curves.
Exhibit 33: COVID-sensitive Sectors Remain Wide of Broader IG, but Fallen Angels Leaving theIndex Have Narrowed the Gap
-500
50100150200250300350400450
1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1
(bp) IG COVID-Sensitive Sectors
COVID-Sensitive vs Rest of IG COVID-Sensitive SectorsIG IG ex-COVID
Source: Bloomberg, Morgan Stanley Research
24
4. Long US IG vs. Agency MBS
While not a pure credit play, for fixed income investors we maintain conviction on being
overweight IG corporate credit relative to agency MBS as the portfolio balance channel
plays out next year. While valuations have richened across the board this year, spreads
are still a fair bit more compelling in corporates vs Agencies. Our Agency MBS
colleagues are projecting an uptick in supply next year on the back of our housing
strategists' bullish forecast of new and existing home sales, as well as continued
incentive to refinance (see 2021 Global Securitized Products Outlook: Don't Change the
Channel, 2020.11.19), which is in contrast to our expectations of a substantial decline in
corporate supply. In addition, rising rates and rate volatility is likely to have a more
explicit impact on the mortgage market than corporates, further bolstering the corp vs.
MBS trade.
The main risk to this view is growth rolls over in the bear case economic scenario, in
which the credit risk premium widens to reflect prolonged uncertainty and downgrade
risks. With rates not rising in this scenario, negative convexity becomes less of a issue for
Agency MBS.
Exhibit 34: The Long End Should Outperform on an Excess-return Basis as Back-end Rates Riseand the Yield Curve Steepens; the "Rolled Down" 30Y Sector Looks Cheaper than on-the-Run 30Y
Source: Morgan Stanley Research estimates, Moody's, S&P LCD, Bloomberg. Note: Interest rate forecasts are from Morgan Stanley's Interest RatesStrategy team. Assumes loan excess returns are total returns less the 1-year swap rate
28
trajectory, the rally will broaden to include lower quality issuers and those in COVID
impacted sectors. In this environment, we expect lower quality to outperform, with
scope for 30bp of B spread compression and excess return outperformance vs BBs. We
envision this B outperformance despite BBs now having a 1.4 higher duration than Bs, a
record difference, and which points to scope for additional B total return
outperformance should rates rise more quickly than envisioned in our base case.
However, leverage will remain well above pre-COVID levels or equivalent leverage
levels from the beginning of prior credit cycles. As a result, our forecast for 70-80bp of
spread tightening will still leave HY wider than and loans flat to pre-COVID spread
levels (of 315 and 408 respectively).
In the bull case, we see a less severe second wave of COVID this winter, an accelerated
broad-based vaccine rollout, and a larger more proactive US fiscal stimulus, compared
to our base case expectations. As a result, US growth comes in at 8.7% next year.
Inflation starts to rise more quickly in 2022 to 2.5%, leading to the first Fed rate hike
earlier, in mid-2023. As a result, markets begin to price this outcome next year, and rates
rise more quickly in this scenario, with the 10 yr UST yield rising 87bp to 1.75% at year-
end 2021. Under this scenario, we expect compression themes in credit to be amplified
and front-loaded. Index spreads are likely to breach the prior cycle tights.
In the bear case, we expect a more severe second wave of COVID this winter, and the
potential for a smaller, delayed, or completely absent second round of fiscal stimulus,
compared to our expectations for the base case. As a result, US growth disappoints at
only 3.1% growth next year. The economic recover under this adverse scenario would
take much longer, with risks of a more permanent damage to employment prospects
and consumer sentiment. This setup may result in credit spreads moving rapidly to the
wides set earlier this year, with accompanying tightening in financial conditions triggering
a sizeable second wave of defaults. For the full year, our bear case forecasts pencil in a
partial retracement from the wides as policy response eventually kicks in.
Supply Forecasts
HY Bond Issuance: We forecast $250-$275 billion of USD high yield bond supply for
2021, down ~37% y/y.
HY Refinancing: We expect refinancing activity to decrease in 2021 to about $159
billion, down 44% year over year as issuers settle into longer-dated liability profiles.
Exhibit 38: Our HY Bond and Loan Issuance Forecasts
HY and Loan Issuance Forecasts 2018 2019 2020* 2021 EstHigh Yield
Gross Institutional Loan Issuance ($Bn) 435 310 290 325-350Source: Morgan Stanley Research forecasts, Bloomberg, S&P LCD, FTSE Fixed Income LLC; Note: 2020 data are annualized for the full year.
29
With markets open for much of 2020, issuers have been opportunistic in terming out
their near-term maturities and seizing a lower cost of capital as spreads tightened
following the March and April doldrums. Year-to-date, 2020 has seen about $271 billion
of refinancing activity, 48% above the prior full-year level and not far off from total
2019 gross issuance of $273 billion. In that sense, we see the majority of recapitalization
as having been completed this year and expect a degree of 'mean-reversion' next year
despite our call for even tighter spreads. Bond maturities total a modest $50 billion in
2021, and while $356 billion of HY debt will be callable, only about $129 billion of that
will be in the higher-priced BB bucket - even if exercise ratios continue at a similar clip,
we expect a greater share of called debt simply being repaid with balance sheet cash
shored up this year.
HY Non-Refinancing: We forecast $105 billion of non-refinancing HY volume in 2021,
down slightly year-over-year. There will be two opposing forces acting on non-
refinancing volumes next year: increased appetites for deal-making and M&A, and
decreased necessity for liquidity building as the economic recovery continues to improve
throughout the year. 2020 saw record issuance marked for 'general corporate purposes'
or 'other,' representing nearly 20% of all supply volume. This is well above the usual
~7.5% run rate, reflecting an acute rush to shore up cash in response to the developing
pandemic. Meanwhile, issuance intended for risk-taking was clearly de-prioritized with
M&A/LBO supply amounting to only 11% of volumes YTD, compared to 20-35% in prior
years. Given that cash-to-debt ratios are at historical highs (see 2Q20 Leveraged Credit
Fundamentals) we expect 2021 to be the start of a reversal of the trends above,
ultimately translating into non-refinance volumes slightly below this year's level.
Adding up the above contributions, we arrive at a gross supply estimate of $250-$275
billion, down ~37% year-over-year. Adjusting for our expectation of call activity and
maturities, our net supply estimate comes in at around $50-$60 billion (Exhibit 40).
Exhibit 39: $143 Billion of Par Will Lose Their Call Protection in 2021, 10% of the High YieldUniverse
0
50
100
150
200
250
300
CallableNow
2020 2021 2022 2023 2024 2025
High Yield Par Callable and Maturing
Par Exiting Call Protection Maturities
($bn)
Source: Morgan Stanley Research, Bloomberg, S&P LCD, FTSE Fixed Income LLC
Callable BB Price-Yield CombinationsPar-Weighted Average
0.61
-1.06
Source: Morgan Stanley Research, Bloomberg, FTSE Fixed Income LLC
Exhibit 53: Single-Bs Offer a Relatively Advantageous ConvexityProfile
8687888990919293949596979899
-5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0
Calcu
late
d Pr
ice
Yield Change (%)
Callable B Price-Yield CombinationsPar-Weighted Average
1.15
-1.64
Source: Morgan Stanley Research, Bloomberg, FTSE Fixed Income LLC
35
3. For the leveraged loan market, it's finally 'game time' for the Libor to SOFRtransition
Several key dates and milestones in the Libor to SOFR transition loom next year.
Notably, (1) Loans issued after 6/30/2021 will need to reference SOFR from issuance,
and (2) At 12/31/2021, Libor publication is scheduled to cease, triggering existing fallback
mechanisms to switch over to a variant of SOFR.
Background: As we’ve written about in the past, there is a street-wide initiative to
transition away from the usage of Libor as a reference rate and towards what industry
and regulatory bodies have designated as the preferred replacement rate, SOFR.
Regulators have signaled that Libor will no longer be published after 12/31/2021, leaving
market participants the task of transitioning new instruments and contracts to use a
variety of SOFR (or at least contain language to facilitate the switch to SOFR in the
future). SOFR transition also needs to be handled for legacy instruments which mature
after 12/31/2021 and currently reference Libor.
We won’t deal with SOFR 101 here, but would direct you to a comprehensive study of
SOFR from September 2019, see US Rates, Credit & SPG Strategy; Banks: USD LIBOR
Reform (20 Sep 2019). However, from a practical standpoint, SOFR differs from Libor in
two key ways: (1) it is a secured lending rate, whereas Libor is unsecured, and (2) it is a
daily rate, whereas Libor is a term rate available in a variety of tenors, with 3m being the
most common. As a result, daily SOFR is 14bp lower than 3m Libor currently, and has
averaged 32bp lower than Libor over the past 5 years. If daily SOFR were compounded
to a 3m tenor, that average difference would fall to 26bp. Different varieties of SOFR
are currently published on the New York Fed website and on Bloomberg.
Fallback language: In the leveraged loan and CLO markets (both of which currently
reference Libor as a reference rate), the transition has been spearheaded by the LSTA as
part of the Fed’s “Alternative Reference Rates Committee” (ARRC). Deadlines are fast
approaching, and it is important to consider how existing loans that reference Libor will
behave once Libor is discontinued. Prior to 2018, leveraged loans didn’t have any
practical fallback language dealing with the transition from Libor to SOFR. The language
they did have generally suggested that loans fall back to the prime rate if Libor wasn’t
Exhibit 54: Daily SOFR Has Averaged 32bp Lower than 3m USD Libor over the Last 5 Years
0%
1%
1%
2%
2%
3%
3%
4%
2015 2016 2017 2018 2019 2020
Daily SOFR vs Libor
USD 3m Libor Daily SOFR
Source: Morgan Stanley Research, Federal Reserve Bank of New York, Bloomberg. Note: For clarity of comparison, excludes September 2019 1 day SOFR spike.
market. Generally speaking, for both HY and loans, a rate-hiking environment is better
for flows than a cutting environment. The obvious justification – that the market
typically prices no hikes or outright cuts when growth is weak. However, the relationship
of loan fund flows to the degree of hikes priced is much stronger than for HY, as one
would expect, given the floating rate nature of the loan market.
Digging into the differences between HY bond and loan flows is instructive. First, the
relative fund flow dynamics between HY and loans begin to normalize once the rates
market stops pricing cuts. Both happened in 3Q20, and provide a more balanced
technical environment for loans over the near term. Second, loan flows begin to
outpace HY flows once the rates market begins to price a rate hike one year out. This
consideration becomes more important toward the end of 2021. Finally, while the
foregoing data only captures the mutual fund/ETF flow dynamic, we also expect
demand from CLOs to improve next year. Our CLO strategists expect $90 billion of US
Broadly Syndicated Loan (BSL) CLO issuance in 2021, compared with $66 billion so far in
2020, an increase of 20-30% y/y.
Valuation considerations are balanced. In spread terms, loans are not simply trading
wide because of the quality differential between the two markets. Adjusting for ratings,
BB loans trade 18bp wide of comparable HY bonds, with the basis increasing to 37bp in
the single-B bucket (Exhibit 59). We acknowledge that the pickup is at the tighter end of
recent ranges. On our composition adjusted measure (based on issuers with both
instruments outstanding), HY bonds on average trade 98bp wider than loans (Exhibit
60). This premium is far less generous than it was in March, but it does not weigh in
favor of loans either.
Overall, our preference for loans is primarily a reflection of managing down rates risk as
we believe rates volatility could propagate to the front end by late 2021. At a more
micro level, the valuation comparisons are evenly balanced.
Exhibit 57: Loan flows improve once the market is no longer pricingcuts, outpace HY once pricing a rate hike 1 year out
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
>= 4 3 to 4 2 to 3 1 to 2 0 to 1 Cuts
(%)
# of Fed Rate Hikes Priced into Rates Markets Over Next 1yr
Loan Market Median Weekly Fund Flows as % of AUMby # of Rate Hikes Priced Over Next 1yr
Loans HY
Source: Morgan Stanley Research, Bloomberg, EPFR Global; Note: The EPFR data and charts displayed heremust not be extracted and republished (whether internally or externally). Such use will violate the terms ofMorgan Stanley's contract with EPFR which only covers named users.
Exhibit 58: Loan flows improve once the market is no longer pricingcuts, outpace HY once pricing a rate hike 1 year out
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
-4
-2
0
2
4
6
8
2004 2006 2008 2010 2012 2014 2016 2018 2020
(#) Loan Fund Flows vs Rate Hike Expectations
12m # of Rate Hikes in Market Pricing (MSP0KE Index)12wk Cum Loan Fund Flows % of AUM (RS)
Source: Morgan Stanley Research, Bloomberg, EPFR Global
39
2. Fallen Angels Over Legacy BBs in HY
A relatively defensive way to play for the V-shaped economic recovery in HY is to
maintain an overweight on fallen angel names versus legacy BBs. When we initiated this
recommendation back in July (see Parsing the Recent Rally), the basket of fallen angels
(2020 vintage) was trading 125bp wider than legacy BBs. Since then, this basis has
narrowed to 75bp. While we acknowledge that part of this premium is on account of the
longer duration, the relative value comparison is favorable even on a duration-adjusted
basis (Exhibit 61).
The high concentration of fallen angels in cyclical COVID-impacted sectors (Exhibit 62) is
another factor contributing to the above basis. This sector skew has also meant that the
median leverage of the names in this basket has deteriorated at a much faster pace than
BB rated HY companies through recent quarters (Exhibit 63). We believe that the sector
exposure in the fallen angel cohort will work in its favor under the economic re-opening
scenario. As earnings recover, we also expect these companies to be more motivated to
regain their IG rating. While the path back will take time, we expect more creditor-
friendly activity in these names.
Exhibit 59: Within a ratings bucket, loans are beginning to trade widerthan bonds again
Exhibit 82: HY33 junior mezz tranche is an attractive high beta long, with some cushion against amodest pace of defaults going forward
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
0 2 4 6 8 10 12 14 16 18 20 22 24
Terminal Payout of HY33 15-25% vs. Number of Defaults
Source: Morgan Stanley Research. Note: Assumes that defaults happen half way between today and index expiry
52
Endnotes1 According to an October 2020 analysis of the CS Loan Index by Covenant Review.
53
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