Tim Leary, Managing Director and BlueBay Senior Portfolio Manager for RBC Global Asset Management (U.S.), joined Anne Greenwood, Institutional Portfolio Manager of U.S. Fixed Income for RBC Global Asset Management (U.S.), for a discussion on navigating the evolving high-yield market amid changing credit dynamics and AI-driven disruption.
While credit spreads remain historically tight, Leary notes the importance of looking at underlying market quality, particularly within the high-yield market. He explains that the quality of the asset class is stronger than prior cycles, pointing to a significant concentration of about 60% in BB-rated issuers, fewer CCC-rated companies, and increased market liquidity. Leary attributes much of this improvement to direct lending, private debt, and leveraged loan markets taking a significant portion of lower-rated leveraged buyout financing.
As credit markets continue to evolve, Leary highlights the opportunities and risks created by the AI disruption. He emphasizes that around 3% of the high-yield market is in software, much of which is tied to hardware and corporate security. He notes that as investment-grade technology companies in the Magnificent Seven expand their AI services, they are driving capital spending on data centers and computing infrastructure to support AI development. As the industry increasingly focuses on identifying the winners and losers of AI adoption, Leary cautions that niche software companies, particularly within the leveraged loan market, face the growing risk of AI disintermediating their business models.
Leary also discusses the implications of higher interest rates. While issuers of fixed-rate high-yield bonds are less directly affected by rising borrowing costs, floating-rate payers are experiencing higher interest expense as rates remain above last year’s levels. Looking ahead, he notes that lower-rated issuers may face refinancing challenges as significant debt maturities approach later this decade. Regarding software in the leveraged loan market, Leary notes that the exogenous business shock from AI, higher interest rates, and a refinancing wall expected in 2028 presents a challenging technical backdrop.
To navigate this environment, Leary highlights RBC BlueBay’s differentiated approach. Rather than replicating benchmark exposures, he and his team can invest selectively while avoiding certain names based on end-market trends and the trajectory of company fundamentals.
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