The high yield and leveraged loan markets delivered solid performances during the first quarter (Q1) of 2007 despite numerous negative economic pressures, and the markets appear to favor continued strong issuance in the near term, as discussed in Fitch Ratings' first-quarter 'High Yield and Leveraged Loan Market Review.'

Negative pressures in Q1 included a sharp correction in the Asian equity markets, considerable deterioration in the U.S. housing and subprime mortgage markets, and persistently high oil prices. None of these factors had any serious lasting effect on the leveraged finance markets, as the U.S. economy continued to expand (albeit more slowly than in previous quarters), corporate profits remained robust and inflation remained in check. The leveraged loan market was the debt market of choice during Q1, with total primary issuance reaching a record $216.9 billion, up 65.2% from the first quarter of 2006 and up 13.8% over the previous record of $190.6 billion set during the fourth quarter of 2006.

Yield-hungry investors poured more than a quarter-trillion dollars into the combined U.S. high yield and leveraged loan market, and high liquidity levels in the credit markets continue to allow weaker credits to obtain financing than has been the case historically.

The leveraged loan market will likely continue to be active in LBO (leveraged buyouts), recapitalization and M&A-related transactions, and should remain an attractive asset class, particularly given the relative absence of interest rate risk and higher recovery rate expectations in the event of default. In high yield, Fitch continues to believe that investors may at least earn their coupon over the course of 2007, particularly if economic growth continues and inflation remains benign.