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SOURCE DDJ Capital Management, LLC
WALTHAM, Mass., Jan. 30, 2014 /PRNewswire/ -- In its outlook for 2014, DDJ Capital Management, LLC, an institutional manager of high yield, special situations and bank loan investments for investors worldwide, forecasts increased risk along with positive returns for investors in non-investment grade bonds and leveraged loans, which comprise the U.S. leveraged credit market.
In 2013, U.S. high yield bonds and leveraged loans were the two best-performing asset categories within the global credit markets, significantly outperforming other fixed income strategies, said David Breazzano, DDJ's president and chief investment officer, in the firm's Leveraged Credit Review and Outlook: The Tale of the Taper.
"With an improving economy and very few potential catalysts for widespread corporate defaults, we think that investors will once again be able to capture most, if not all, of the market's coupon in 2014 while not suffering much price degradation from rising interest rates," Breazzano said.
Historically, the high yield market has performed relatively well in rising interest rate environments, as economic tailwinds benefit company fundamentals, resulting in spread tightening that somewhat offsets the effects of a rate increase, Breazzano said. "Looking ahead, if rates rise in concert with an economic uptick, we expect the associated negative effect on high yield bonds' total return to be somewhat counteracted by spread compression."
As for leveraged loans, given their standard, floating-rate coupons, they are relatively well-insulated from an increase in short-term rates, Breazzano said. Additionally, their senior and oftentimes secured position in a company's capital structure can provide for better protection in adverse credit scenarios.
Still, discerning investors need to monitor the increased frequency of lax underwriting standards and the riskier use of proceeds typically seen in later stages of a credit cycle, DDJ's Breazzano said. The record new issuance in leveraged credit during 2013 was driven by consistently high and powerful investor demand. Yet eager investors more frequently accepted looser credit terms, as 2013 saw record new issuance of "covenant lite" loans, along with a proportionally high amount of second lien loans. Both of these types of financings lack certain contractual and/or structural protections traditionally embedded in high yield instruments, which may lead to larger principal losses in the event of an adverse development, such as a default or financial restructuring, Breazzano said.
To view the DDJ paper, Leveraged Credit Review and Outlook: The Tale of the Taper, please click here: http://www.ddjcap.com/page/7/news/94/Leveraged_Credit_Review_and_Outlook_The_Tale_of_the_Taper
DDJ's highlights over the past year include:
DDJ's U.S. opportunistic high yield and strategic income strategies rank in the 15th and 1st percentiles, respectively, for the three-year period ended December 31, 2013, according to eVestment, a leading source of investment performance for institutional investors.
About DDJ Capital Management, LLC
DDJ Capital Management is a high yield, special situations and bank loan investment manager based in Waltham, Massachusetts. Established in 1996, DDJ currently manages over $7 billion on behalf of corporate and public retirement funds, insurance companies, endowments, foundations and family offices worldwide. DDJ's investment team consists of 18 investment professionals highly specialized in the areas of credit research, legal analysis, bankruptcy law, portfolio management, trading and business operational improvements. For more information, please visit www.ddjcap.com.
Past performance is no guarantee of future returns.
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