The high-yield market remains a tremendous conundrum. We know there's a great deal of stress in the group because of the bedraggled energy entries. But the market, as represented by iShares' High-Yield Corporate Bond Fund (HYG), hasn't fallen apart. Sure, it's down: The index has fallen from $91 a year ago to $79, which is decent pullback. But it's pretty much in keeping with the average stock from its high.
Why isn't it worse? Simple. This index has very little energy in it. In fact, it's only at about 2% energy, and I am using a pretty expansive definition of the term "energy," including all the master limited partnerships and pipeline companies.
The biggest energy exposure isn't to the heavily indebted Chesapeake (CHK), which represents only 0.3% of the index, it's the 0.6% of Cheniere Energy (LNG) the index contains. I have never been satisfied with the decision of the board to remove former CEO Charif Souki without any real explanation other than they wanted to go in another direction. I have news for Cheniere: Souki was the company. I wouldn't want that debt on my books.
Nor is there lots of worry in this index from coal. Arch filed for bankruptcy today; big $4.5 billion deal. But you don't see that in the index. You don't see the distress of Freeport (FCX) either, which hit its 52-week low today.
Why isn't there more energy? I think the index is set up in a pretty straightforward, diversified way and is far more representative of the private equity bond issuance to float old buyouts rather than desperate paper issues by the oil companies. The dominant component in the index is health care, and almost all the companies in health care are public with plenty of opportunities for the companies to refinance. I suspect most will before rates go too high. All the paper seems pretty safe to me.
There's an outsized representation from the debt of Valeant (VRX), the serial pharma acquirer. It's 1.24% of the index and it does have plenty of cash flow to cover those bonds, even if you don't like the company.
The position that should cause the most consternation? The 1.67% of Sprint (S) and Sprint-related debt. That's so big that it could be considered truly worrisome. Without more capital, I simply don't believe that corporate structure can withstand the capital needs of a major telco company. Sprint should be followed closely by all who are concerned about non-energy debt, especially as its debt has fallen precipitously in price, in many cases down almost 30% to give unsafe yields well in excess of 10%.
Two others worth following: Navient (NAVI) and Intelsat (I), which amount to about 0.6% of the index each. I don't like the student loan portfolio management business of Navient and I think Intelsat's a troubled company, but that's pretty easy to tell from the common stock.
Now I am not minimizing the junk oil exposure to the overall market. The index has plenty of the problem names, with Laredo (LPI), Sanchez (SN), Transocean (RIG) and Halcon Resources (HK) being pretty typical.
It's just that the $300 billion debt linked to the oil patch is sorely underrepresented in the index.
So stopping looking at the HYG as an indicator of stress. It's more of a judgment of Sprint, Valeant and some errant hospital chains.
If you want to bet against oil and gas, it's simple: Chesapeake and Freeport will have to do the job. They are the perfect proxies for the moment.