Tuesday, 16 July 2019

Issuers follow the money as high-yield inflows soar

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US high-yield bond funds saw the fourth biggest inflow on record in the last week amid a shift in demand from investors towards fixed-rated debt away from floating-rate leveraged loans.

The buyside poured US$3.86bn into US junk funds for the week ended February 6, which was the biggest inflow since December 2016, according to Lipper data.

The US loan market, meanwhile, saw its twelfth straight week of outflows with US$742m leaving the asset class in the last week.

This change in demand has prompted borrowers to move financing away from loans and into bonds. The increase in appetite for fixed-rate debt has made it cheaper and easier to borrow in the high yield market. Average high-yield spreads have rallied 120bp since the start of the year.

“This trend has really picked up speed,” one leveraged finance banker told IFR. “We have deals that were underwritten in December when the loan market was weak, that will be financed with bonds. They are still due to come out.”

Several issuers - including telecoms equipment maker CommScope, aircraft parts manufacturer TransDigm, business analytics firm Dun & Bradstreet - have already shifted loan financing to bonds.

And more issuers could follow suit, some bankers say, including the debt financing the US$13.2bn acquisition of Johnson Controls’ battery business by Brookfield Business Partners.

Bankers are pre-marketing the debt, and it could launch as soon as late February or early March, the leveraged finance banker said. The split between loans and bonds hasn’t been decided yet, the banker said.

“The bond market seems very open to the issuance coming from loans. High-yield has benefited from a dovish Fed,” said the banker.

CommScope on Thursday downsized the loan portion of its financing for the US$7.4bn acquisition of set-top box company Arris International, while increasing the secured bonds.

The firm sold US$3.75bn of secured bonds across three tranches at the tight end of price talk on Thursday, an increase from the initial US$3bn that was originally marketed.

The company reduced its seven year loan by US$750m to US$3.2bn, according to LPC.

The private equity buyout financing for Dun & Bradstreet saw similar increases on the bond side at the expense of loans.

Aircraft parts manufacturer TransDigm sold US$4bn of secured bonds to finance its acquisition of Esterline Technologies last week - a deal that banks had originally committed to finance entirely in the loan market.

One banker involved in TransDigm deal saved about 50bp by opting for bonds rather than loans.

But if conditions firm up in the loan market, the trend might not persist for long, given sponsors’ preference for the more flexible debt available in the loan market. Loans typically have much shorter non-call periods than high yield bonds, making it easier for sponsors to refinance if markets improve.

“Sponsors would prefer bank debt when they can, but they don’t want a loan to print inefficiently,” said another syndicate banker.


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