Three high-yield bond deals have been pulled from the market in the space of a week, but investors insist it’s not yet panic time for the asset class.
Resolute Energy, NRG Energy and Canyon Consolidated Resources have all yanked deals since Thursday in the face of investor push-back.
But rather than sound the alarm, many investors believe this is actually a perfect time to buy, with cash prices falling even for higher-rated bonds.
“It’s the first weakness we’ve seen in a while of this magnitude,” Ken Monaghan, co-head of high yield at Amundi Pioneer, told IFR.
“But if you look at how high-yield has performed, it’s outpaced many people’s expectations. Some people are booking the gains they’ve generated.”
Junk bonds returned an average 7.64% for the year up to October 24, when spreads hit a 2017 low of 338bp over US Treasuries, according to the ICE BAML US high-yield index.
Following a roughly 46bp widening since then, returns have slipped back to about 6.3%.
But that’s still better than what many on Wall Street had been expecting this year. In January, BAML strategists predicted a full-year return of 4%-5%. nL1N1E224Y
HUNKERED DOWN
There have been some bumps in the road, of course.
Mobile phone giant Sprint, which has more outstanding US junk-rated debt than any other company, has seen its bonds plummet after merger talks with rival T-Mobile were called off.
Weak earnings hit the bonds of companies such as Altice, while the debt of other companies with large capital structures, such as Windstream and Frontier, has also fallen sharply.
And the dismal outlook for retail has certainly not helped sentiment.
“We had a lot of weakness across retail,” said Peter Schwab, a portfolio manager at Pax World.
“The (bankruptcy) filing by Toys ‘R’ US happened sooner than people were expecting … and healthcare has been kind of messy, with some weakness in lower-quality hospital operators.”
Some borrowers have been impacted by the general mood.
Talen Energy and Navios Maritime Holdings on Tuesday were forced to cough up double-digit yields of 11.25% and 12.113%, respectively, to push their trades over the line.
For other issuers, however, market conditions are still very attractive.
Homebuilder Lennar, for example, priced a US$300m three-year at 2.95% and a US$900m 10-year at 4.75% on Tuesday - a deal that will finance its merger with CalAtlantic.
Another investor described those yields as “shockingly low”, based on his views that Lennar paid too much for CalAtlantic.
The recent volatility may result in more outflows from the asset class. More than US$1.8bn of cash has left the asset class in the two weeks ended November 8, according to Lipper data.
But many say fundamentals remain strong with low defaults, decent earnings growth in general and a solid economy.
“The market is still getting deals done,” said Monaghan.
“The fact that new issues are still pricing is a sign of health. People are not jumping off cliffs - they’re just a bit more hunkered down.”
TAKING THE PIK
There are still plenty of high-yield deals to work through; at least nine deals are in the pipeline and expected to price before Thanksgiving.
“The pipeline built before the market tanked,” said John Yovanovic, head of high-yield portfolio management at PineBridge Investments.
“They’re now trying to bring these deals as the market is moving around. That is surprising to me, but we’re in the final push of the year for new issues.”
On the roster of offerings is an aggressively structured US$1.3bn PIK toggle dividend deal for healthcare services provider MultiPlan, which is owned by private equity firm Hellman & Friedman.
The deal has come under scrutiny for several reasons, not least because it is such a large dividend - and coming so soon after the buyout of the business in the summer of 2016.
“It is exactly the kind of instrument we saw before the last series of bad deals that resulted in defaults and the financial crisis,” another portfolio manager said.