Three US high-yield bonds have been pulled from market in the past week following the worst monthly returns for the asset class in almost two years and whipsawing market volatility.
Debut high-yield issuers E&P company GEP Haynesville and financial services firm INTL FCStone called off trades this week, while waste recycling company GFL Environmental dropped an M&A bond last Thursday.
That brings the total of pulled US junk bond deals to 11 this year, according to IFR data.
“High-yield is very challenging right now, but the pipeline isn’t overwhelming so that should help,” one senior leveraged finance banker told IFR.
Average US junk bond spreads have widened 73bp to T+389bp since October 3 when they hit a post-financial crisis low of Treasuries plus 316bp, according to ICE BAML data.
That had made some investors cautious that the market was overvalued, and ripe for a correction. A sell-off in stocks turned out to be the trigger.
“I’m not overly concerned about it yet as the underlying fundamentals are still pretty solid, but the moves have probably been more violent than some people were expecting,” said Doug Lopez, a portfolio manager at Aristotle Credit Partners.
The sell-off has hit returns. Average returns were running at 2.483% in the year up to the end of September, but that has dwindled to just 0.57% after this month’s widening, ICE BAML data shows.
“The sell-off in October is going to leave monthly excess returns with the worst performance since the January 2016 pummeling,” CreditSights analysts said on Wednesday.
“There is no question that January 2016 was a much uglier month, but this month could keep rattling market makers and some investors near term given the batch of issues ahead from elections to China to the Fed.”
IS IT OVER?
FCStone, rated Ba3/BB-, cited market volatility as the reason for dropping its US$350m senior secured issue. It had set price talk at 8.5-8.75%, including a discount.
GEP Haynesville, meanwhile, had widened talk on its trade to 8.75-9% from 8.5%-8.75% after it struggled to gain traction.
The question on many people’s minds now is whether there is worse to come.
Yields are looking more attractive: the average yield to worst on junk bonds is now 6.9%, and 10.847% on Triple C.
But Lopez said he was waiting for a while to see if markets settled down before going bargain hunting, and that valuations in secondary looked more attractive than the new issue market.
Up until last week the riskier Triple C market had held up pretty well - helping ease concerns that the sell-off might reflect more worrisome problems. But that segment is now bearing the brunt with spreads widening 86bp in the last ten days.
One banker said the leveraged loan market is also feeling some pressure.
“Momentum has been hard to achieve in some syndications because of market volatility. We’re seeing investors retreat from cyclicals, and pricing on a few deals have widened.”
“It’s a recalibration of risk.”
One of the things that may help stem further weakness, however, is a limited supply pipeline.
A US$1.25bn refinancing trade was announced Wednesday for Dubai Aerospace Enterprise, and is expected to price Thursday, while HC2 Holdings, rated Caa1/B-, is also expected to price a US$535m five-year non-call two this week.
The other known deal in the pipeline is a Triple C rated bond that will help finance the buyout of hospital operator LifePoint Health by private equity Apollo.
In times of market volatility, investors tend to have more luck demanding higher yields on acquisition financings as issuers have less flexibility on timing.
It remains to be seen how LifePoint fares, though a large part of that bond has already been pre-placed, bankers said.
But recent leveraged buyout bond financings, though off their highs are holding up reasonably - which is helping keep fears contained. The recently issued bonds of Refinitiv (which now owns IFR) are trading at 97.25 and 99.625, according to MarketAxess. They had priced at par in September.
“I’m not panicking over this market. Treasuries are not rallying aggressively, so that tells you it’s not the end of the world,” said Andrew Feltus, co-director of high yield at Amundi Pioneer Asset Management.
“But I’m nervous - I’m a bond guy. I’m nervous this cycle might play out differently.”
