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The Future of High
Yield Investing
Paul Karpers, Portfolio Manager – Fixed Income_T. Rowe Price
Michael Della Vedova, Portfolio Manager/Analyst, Europe High Yield
Bond Strategy, T. Rowe Price
Samy Muaddi, Portfolio Manager/Analyst, Emerging Market
Financials, T. Rowe Price
Agenda
 High Yield After the Financial Crisis
 Current US High Yield and Bank Loan Markets
• “Casting a Wider Net”
 European High Yield
 Emerging Markets Corporates
 Outlook
High Yield Investing Has Been Very Rewarding Post 2008 Case Study – Univision
LBO Case Study – Univision and Broadcasting Peers
Leverage or Enterprise Value Multiple
15.0x
12.5x
10.0x
7.5x
5.0x
2.5x
0.0x
UVN Debt/EBITDA
Peer Group: BLC, CBS, DISCA, DIS, EVC, LIN, NXST, SBGI, and VIAB.
Sources: FactSet, Barclays, and TRP Estimates/Analysis.
Avg Peer EV/EBITDA
Leveraged Buyouts – A Transformation of Good Companies with Bad Balance Sheets
15.0x
$120.0
12.5x
$100.0
10.0x
$80.0
7.5x
$60.0
5.0x
$40.0
2.5x
$20.0
0.0x
$0.0
UVN Debt/EBITDA
Peer Group: BLC, CBS, DISCA, DIS, EVC, LIN, NXST, SBGI, VIAB.
Sources: FactSet, Barclays, and TRP Estimates/Analysis.
Avg Peer EV/EBITDA
UVN Sr Notes Price
Bond Price
Leverage or Enterprise Value Multiple
LBO Case Study – Univision and Broadcasting Peers
Fallen Angels Contribute to the Growth of High Yield, and Have Altered Its Composition
As of March 31, 2014
Fallen Angels – by par amount
Ford 7.45% of 2031
160
140
120
120
Bond price
140
100
80
60
100
80
60
40
40
20
20
0
Sources: JPMorgan and Barclays
YTD
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
0
1995
USD, billions
160
Current Market Performance – Lower Quality and Shorter Duration Outperforms
Total Return 1Q & 1-Year
Risk and Return for Fixed Income Sectors
As of March 31, 2014
As of March 31, 2014
Q1
25%
20%
1-Year
21.9%
8
18.6%
EM Corporate
HY Debt
10%
5%
7.4%
2.8%
3.0%
4.3%
1.1%
3.7%
2.3%
2.9%
1.5%
1.4%
0%
-5%
3.4%
1.8%
0.6%
-4.4%
Yield to Worst (%)
15%
High Yield
6
Bank Loans
Emerging Mkt. Debt
Euro High Yield
4
10-Year Treasuries
IG Corporate Bonds
2
-10%
Euro High High Yield Bank Loans Investment EM Corp.
Yield
Grade
HY Debt
Emerging 10-Year
Mtk. Debt Treasuries
S&P 500
0
0
1
2
3
4
5
6
7
8
Option-Adjusted Duration (years)
The higher yields and lower duration profiles afforded by below investment-grade asset classes left high yield and
bank loans well positioned, as they outperformed most alternative fixed income sectors in this environment.
Sources: US Treasuries Bellwethers 10 Year Index, US Investment Grade Corporate Bonds, and Bank Loans are represented by S&P/LSTA Performing Loan Index. Emerging Markets Debt represented by
JPMorgan EMBI Global Diversified Index. Emerging Markets High Yield Debt represented by the High Yield segment of the JPMorgan CEMBI Broad Diversified Index. High Yield represented by JPMorgan
Global High Yield Index. Euro High Yield represented by BofA ML Euro HY Constrained ex Sub Financials index (returns in USD)
Past performance cannot guarantee future results
9
10
Leveraged Credit Outperforms Fixed Income Alternatives
10 Treasury Rate Movements
Fixed Income Total Returns
January 2013 Through March 2014
12 Months Ended March 31, 2014
Dec. 31
3.04%
3.10%
2.70%
Mar. 31
2.73%
2.50%
2.30%
2.10%
Jan. 2
1.86%
Percent
2.90%
22
20
18
16
14
12
10
8
6
4
2
0
-2
20.35
7.54
0.04
0.20
1.47
3.24
4.26
-0.10
1.90%
1.70%
May 1
1.66%
1.50%
During a year when the 10-Yr Treasury rose over 100bps, high yield and bank loans posted positive results
unlike most other fixed income sectors.
Source: Barclays and T. Rowe Price
Past performance cannot guarantee future results.
Benefits of a Low Duration Profile Afforded by Bank Loans
Time Periods When Treasury Yields Rose 100 bps or more
Total Returns – 1 Year
Barclays U.S.
Treasury Index
Barclays U.S.
10 Year
Treasury
Bellwethers
Index
Barclays U.S.
Corporate
Investment
Grade Index
JP Morgan
Global High
Yield Index
JP Morgan CEMBI
Broad Index
JP Morgan
Emerging Market
Bond Global Index
-0.82%
-2.56%
-8.43%
-1.96%
3.38%
----
24.18%
7.50%
-0.44%
-2.64%
-5.23%
-0.44%
13.23%
3.13%
3.14%
+120 bps
6.15%
-0.81%
-1.68%
-5.78%
-2.22%
5.06%
0.96%
4.63%
12/31/2009
+162 bps
52.53%
5.93%
-3.57%
-9.76%
18.68%
58.90%
37.49%
28.18%
9/30/2013
+124 bps
5.07%
-1.68%
-2.09%
-5.71%
-1.58%
7.08%
-0.12%
-4.34%
-2.09%
-6.31%
-10.25%
12 Months Ended
10-Year
Treasury Yield
Move
S&P/LSTA
Performing
Loan Index
Barclays U.S.
Aggregate Index
12/31/1999
+179 bps
3.58%
5/31/2004
+130 bps
6/30/2006
Total Returns – (April 30, 2013 – August 31, 2013)
April 30, 2013 –
August 31, 2013
+112 bps
0.50%
-3.67%
-3.37%
-8.14%
-4.92%
During historical periods of rising Treasury rates, leveraged loans performed well relative to other fixed income asset classes.
Sources: JPMorgan, Barclays, and S&P/LSTA.
Past performance cannot guarantee future results..
Yields Today are Historically Low Prompting Our Managers to Expand the Traditional
Opportunity Set
JP Morgan Global High Yield Index
25%
Yield to Worst (%)
20%
15%
10%
5%
0%
Source: JPMorgan
Average of 9.72%
Mar 31, 2014 5.60%
“Casting a Wider Net” – European and Emerging Markets High Yield Issuers are
More Mainstream Than You Might Think
All trademarks are the property of their respective owners.
European High Yield and Emerging Markets High Yield Represent Growing Markets
with Scale
As of March 31, 2014
1600
1400
US High Yield
European High Yield
Emerging Mkt. HY Debt
USD, billions
1200
1000
800
600
400
200
0
European high yield is now significant in scale, depth and diversity.
Sources: Credit Suisse, and BofA Merrill Lynch.
Why Invest Now? Global Relative Value
Risk and Return for Fixed Income Sectors
Ten Years Ending March 31, 2014
Annualized Return (%)
10
European High Yield
EM Corporate HY Debt
8
US High Yield
Emerging Markets Debt
6
European Equities
7-10 Year German
Government Bond
3-5 Year German
Government Bond
European High Grade
4
Euro Pfandbriefe
2
0
2
4
6
8
10
12
14
16
Annualized Standard Deviation (%)
Source: BofA/Merrill Lynch Indices: European Currency High Yield Constrained Excluding Subordinated Financials, US High Yield Master II, European High Grade Corporate, 3-5 Year German Government, 7-10 Year German
Government and Euro Pfandbriefe, Emerging Markets High Yield Debt represented by the High Yield segment of the JPMorgan CEMBI Broad Diversified Index, and JPMorgan Emerging Markets Bond Index Global and MSCI
Europe, all in Euro.
Emerging Markets Corporates
As of March 31, 2014
Regional Breakdown
EM Corporate HY
Middle East 5.7%
Sector Diversification
EM Corporate HY
Africa 5.4%
Utilities 5.2%
Other,
8.2%
Real
Estate
8.2%
Latin America
32.4%
Asia 35.7%
Financial 19.8%
Industrial 8.8%
TMT 19.1%
Consumer
9.6%
Europe 20.7%
Source: JPM as of 3/31/2014
CEMBI Broad Diversified Index – High Yield Portion
Oil & Gas
10.0%
Metals &
Mining
11.0%
Lower leverage, higher credit quality
As of March 31, 2014
Leverage
Index Credit Quality
5.5
US HY
Net Leverage (Net Debt/LTM
EBITDA, x
EM HY
50%
45%
40%
35%
30%
25%
20%
15%
10%
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Mar-07
5%
0%
BB
B
CCC & Below
Sources: JPM, Credit Suisse, and BAML as of 3/31/2014.
NR
Mar-08
Mar-09
Mar-10
EM HY Leverage
Mar-11
Mar-12
US HY Leverage
Mar-13
Mar-14
Default Migration & Recoveries
As of March 31, 2014
EM vs. US HY: Contribution to Default by Rating At Issuance
67%
70%
Senior Unsecured Recovery Rates by Region
45
59%
60%
40
35
50%
30
BBB
40%
29%
27%
30%
BB
B
CCC/Below
20%
12%
10%
2%
15
10
0
0%
Sources: JPM, S&P, and BAML.
20
5
4%
EM Corporate Defaults - S&P
25
US HY 18 Yr Avg
EMEA
LatAm
Europe
EMEA
Europe
EM Sr. Unsecured LatAm
Recovery Rates
US
Asia
US
Asia Recovery Rates
Dev. Sr. Unsecured
High Yield Outlook
 From a fundamentals perspective, high yield and bank loans remain solid:
− Moderate US economic growth (GDP 2-3%) is ideal for below investment-grade companies.
− Many companies are generating healthy free cash flow, and a substantial portion of new
issuance in the current cycle has been refinancing related, leading to lower debt costs and a
significant reduction in near-term maturities.
− As a result, defaults (outside of TXU) are expected to remain low throughout 2014.
• Technicals for high yield and bank loans (strong demand with refinancing supply) have created
an issuer-friendly environment impacting deal structures including an increase in cov-lite loans
leading to less attractive valuations.
• European high yield remains attractive enjoying less volatility this year than its US counterparts
with opportunity for more robust first time issuance given bank balance sheet deleveraging.
 Emerging markets corporates offer diversification and attractive relative value but credit selection
is paramount.
This information is provided for informational and educational purposes only and is not intended to reflect a current or past
recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The
specific securities identified and described do not represent all of the securities purchased, sold, or recommended for clients, and
no assumptions should be made that the securities identified and discussed were or will be profitable. The views contained herein
are as of May 2014 and may have changed since that time.
High-yield bonds carry a greater default risk than higher-rated bonds. Yield and share price will vary with interest rate changes but
to a lesser extent than a portfolio of high-quality bonds. There is also a liquidity risk, the chance that the fund may not be able to buy
or sell bonds at desired prices without causing substantial price swings.
Past performance cannot guarantee future results. All charts and tables shown are for illustrative purposes only.
2014-US-224

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