Junk debt rout shuts hedge fund credit pods, FT reports

A sell-off in the riskiest corporate debt has turned into what one portfolio manager at a large US hedge fund called "a complete bloodbath." Credit trading pods at big multistrategy hedge funds have been forced to close, and investors with concentrated positions are taking heavy losses, the Financial Times reported on November 1. The FT said aggressive moves by companies to shift assets beyond creditors' reach have added to the sell-off.ft.com

CCC yields climb

Yields on CCC-rated debt, the lowest rung of junk, have risen above 21% in Europe and 18% in the US, up from roughly 16% and 15% at the start of the year, according to the FT report republished by Expansión. Holders often own these bonds in amounts too large to sell easily. "Everyone is scared of being in the next blow-up," the hedge fund manager said, adding that "being flat is the new up," eFinancialCareers noted.efinancialcareers.com+1

The stress had been building. Bloomberg reported on October 24 that the average US high-yield risk premium had hit a 17-month high and that primary markets had seen the year's biggest wave of pulled deals, with one fund manager woken by a 5 a.m. message reading "Total meltdown." Companies postponed more than $5 billion of US and European debt sales in October. The gap between CCC and BB spreads is the widest since the pandemic, and loans trading below 60 cents on the dollar reached their highest volume since March 2020, according to JPMorgan research cited by The Star.bloomberg.com+2

Asset-shifting deals hurt lenders

The FT pointed to so-called drop-down deals, which loose loan and bond terms allow, as a source of losses. Its examples were Aston Martin and Patrick Drahi's Altice International, both of which completed transactions that moved assets out of creditors' reach. Research firm Octus called Aston Martin's move an "aggressive drop-down". "We are now seeing a new reality," Stefan Tsonev of Sternlight Capital Partners told the FT, describing private equity owners who are "deeply out of the money" and documentation that leaves lenders exposed.expansion.com+1

London-based Arini Capital Management, which holds large positions in Aston Martin, Altice and US telecom Brightspeed, is down 26% this year in its flagship fund. The FT added that debt of Virgin Media, a large holding of London credit fund Sona, has fallen sharply, as has debt of Liberty Global's Dutch operator VodafoneZiggo.expansion.com

Forced selling feeds itself

Forced exits are now pushing prices lower. The speed of the sell-off has made several well-known specialist funds "aggressively unwind positions, which has exacerbated the negative price action," Simon Matthews of Neuberger Berman told the FT. CVC Marathon CEO Bruce Richards warned on October 26 that many CCC borrowers have "no way out" other than default. He put their three-to-five-year default probabilities at 50% to 60%.bloomberg.com+1