Wednesday, 12 December 2018

US high-yield bond market on fire amid huge rally

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The US junk-bond market has got 2018 off to a roaring start, with investors scooping up some of the riskiest kinds of debt and spreads rallying to levels not seen in more than a decade.

The week’s high-yield issuance tally was set to top US$7bn once cable giant Altice and E&P company Moss Creek Resources get their deals priced on Friday afternoon.

Money is pouring into the asset class - last week saw a net inflow of more than US$2.65bn into high-yield bond funds - and borrowers are seeing ideal conditions to print fresh debt.

“Treasuries continue to tick up, and everyone knows there are going to be hikes later this year,” said one leveraged finance banker.

“(Borrowers) are going now while conditions are so good.”

By Thursday, the average junk bond spread was 340bp over US Treasuries.

While that was off the post-crisis tight of 333bp hit earlier in the week, that is still historically very tight, and the market has reversed the brief sell-off in November when spreads touched almost 400bp.

With conditions so bright, issuers have been testing the waters with all kinds of risky structures, while commodity companies in particular have seized the moment.

Average high-yield energy bond spreads dropped to just 374bp over US Treasuries, the lowest since September 2014 and a fraction of the 2016 wide of 1470bp, ICE BAML data shows.

Petroleum distributor Sunoco priced a bigger-than-expected US$2.2bn deal this week, and both of its tranches rallied by up to two points in secondary.

Sunoco’s US$1bn five-year priced to yield 4.875%, inside price talk of 5%-5.25%. The deal came after a rally of about 150bp in its existing bonds since early December.

Offshore drilling contractor Ensco - which is in one of the more volatile energy sectors - also priced at attractive yields for the company.

It initially looked to sell a US$500m deal to fund a tender, but doubled the size of the eight-year issue to US$1bn and priced it at 7.75%, inside guidance of 8% area.

Ensco’s existing 2025s had been trading around 8.5% in early December; they have since rallied to around 7%.

“Commodity companies have not had access for a while at these levels,” said the banker.



Packaging company Ardagh’s payment-in-kind bond, a deal that will give investors zero cash for at least the next 18 months, priced at a yield of just 8.75%. That was at least 100bp cheaper to where it first began marketing the deal.

For a public company with a long track record, the deal was not considered to be as aggressive as some holdco PIK toggles issued by private equity firms in the past - but it is still one of the riskiest forms of debt that investors can buy.

Even companies in heavily troubled sectors such as retail have raised debt at attractive rates.

L Brands - best known for its Victoria’s Secret lingerie - priced a US$500m 10-year bond at just 5.25%. That was tight to price talk of 5.25%-5.5%.

L Brand’s new issue will refinance more expensive debt.

“We’re in a market environment were we will see more opportunistic issuance,” said one high-yield syndicate banker.

“I would expect to see more come out of the woodwork.”



And more deals indeed are being readied.

Cable firm RCN Grande is holding investor calls Friday for a US$300m five-year bond to help fund its acquisition of Wave broadband.

Meredith is prepping a US$1.4bn eight-year bond to help finance its purchase of Time Inc. The notes are expected to be rated Single B.

Further down the ratings spectrum, Arby’s announced a Triple C rated US$485m eight-year non-call three to finance its acquisition of Buffalo Wild Wings.

“It’s good that there are some new-money deals, but they are not necessarily the type of sectors that we like,” one high-yield investor told IFR.

Both Arby’s and Meredith are in challenging sectors – restaurants and media. But some on the buyside believe both deals will be absorbed by a yield hungry market.

“Even in sectors that are a bit more secularly challenged, if a deal is structured well and priced appropriately, I don’t think it will have a problem,” said Greg Zappin, a portfolio manager at Penn Mutual Asset Management.


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