In an analysis of US credit fundamentals for high yield (HY) debt, investment banking giant, UBS, via its HOLT valuation service acquired from Credit Suisse in 2024, has assessed whether US credit fundamentals are ‘exceptional’.
It notes that US high yield default rates have been trending lower since 2008, supporting tighter spreads; while the composition of the sector has moved towards higher graded HY debt as rating agencies see lower perceived default risk.
“A deeper dive into HY and B/CCC credit ratios provides partial support for the higher quality thesis, mainly due to stronger cash flow and interest coverage metrics,” it reports. “The HOLT Cash Flow Return on Investment (CFROI) has hit a record level, driven by a few sectors; the HY maturity wall and refi risks appear quite manageable.
The bank also notes that the US tax cuts under the ‘Big Beautiful Bill’ will support a small cash flow tailwind for firms in the HY space and that HY credit fundamentals are somewhat exceptional this cycle.
“Industrials, tech and utilities stronger while communications and basic materials appear weaker,” it notes.
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