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HG Bonds: Occidental Petroleum Shops $1B Deal to Refi Debt Maturity

Following a recent debt maturity, Occidental Petroleum (NYSE: OXY) is shopping $1 billion of SEC-registered, 30-year senior bonds due March 15, 2048, with early whispers out in the T+120 area to initially suggest a reoffer yield near 4.35%, sources said. Bookrunners for the A/A3/A offering are Barclays, J.P. Morgan, and Wells Fargo.

The offering is the first for the issuer since Nov. 2, 2016, when it placed a $1.5 billion, two-part offering, across $750 million each of 3% notes due Feb. 15, 2027 at T+125, and 4.1% notes due Feb. 15, 2047 at T+155. The 4.1% 2047 issue changed hands last week near T+100, trade data show.

Proceeds of today’s “no-grow” offering will be used to refinance the repayment of the issuer’s $500 million aggregate principal amount of 1.50% senior notes due 2018 that matured on February 15, 2018, and for general corporate purposes, according to regulatory filings.

The issue is subject to a make-whole call provision and a par call from six months prior to maturity.

The single-A ratings profile reflects stable outlooks at S&P Global Ratings and Moody’s, and a negative outlook at Fitch. The Fitch outlook dates to a downward revision last July, and reflects “concerns about the impact of the company’s large dividend ($2.3 billion), which Fitch anticipates will result in prolonged negative FCF over the next few years, and above average execution risk in getting back to FCF neutrality, which is less typical for ‘A’ rated entities.”

Fitch also cited “moderate increases in OXY’s gross debt levels since the downturn began (rising from around $6.8 billion in 2014 to $9.9 billion at YE 2016), and the recent move by Saudi Arabia and allies UAE, Egypt, and Bahrain, to cut diplomatic and transport ties with Qatar, which has increased political risk surrounding OXY’s Qatari production.”

S&P Global Ratings last week noted in ratings rationale that, which the dividend is “sizable,” overall financial policy at the company is “modest,” supporting a view that financial measures would “remain strong, albeit significantly weaker than historical levels, with average funds from operations (FFO) to debt in excess of 60% and debt to EBITDAX below 1.5x.”

For reference, Occidental paid out roughly $2.4 billion in dividends last year, the most in its history after a steady increase from $1.6 billion in 2013, and less than $1 billion in 2008.

Houston-based Occidental Petroleum, together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States and internationally, via its Oil and Gas, Chemical, and Midstream and Marketing segments. — John Atkins

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Riskier Leveraged Loan Issuers Load up on Cov-Lite Deals

Covenant-lite loans – the borrower-friendly debt instrument that some worry will hinder recoveries once the long-running bull-market credit cycle turns – have dominated the U.S. leveraged loan segment for several years now.

But as institutional investor appetite for higher-yielding assets continued hot throughout 2017, increasingly the cov-lite universe has become comprised of lower-rated, riskier, single-B credits.

Indeed, by the end of 2017 there was roughly $390 billion of single-B cov-lite loans outstanding, according to LCD. That’s far and away a record, and up dramatically from the $320 billion at year-end 2016 (the total had grown to $396 billion as of last week, by the way).

Just how strong has appetite been for these riskier deals, even without the investor protection that fully-covenanted loans offer?

single-B cov-lite by rating

Single-B credits accounted for 72% of U.S. cov-lite issuance last year –or $272 billion – the highest share since 2012, when these deals took up 82% of the cov-lite segment. In 2012, however, this sample totaled a paltry $52 billion, as the U.S. leveraged loan market was still proceeding cautiously after the financial crisis, a few years previous.

Cov-lite activity in the single-B segment has continued into 2018. While issuance in that ratings category had dipped to 58% of all cov-lite deals so far this year, it was as high as 82% a few weeks ago, according to LCD.

Cov-lite loans less restrictive for a debt issuers, compared to traditionally leveraged loans. Their popularity has surged over the past few years, particularly as retail investors poured money into the loan asset class in anticipation of higher interest rates. – Tim Cross

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PE Shops Look To Europe High Yield Mart for M&A, LBO Deals

europe hy PE

Private equity shops are accessing the European high yield bond market at a rapid clip so far in 2018, with an emphasis on M&A and LBO transactions, according to LCD. Through Feb. 15 there had been nearly €2.5 billion in European high yield deals backing these purposes, more than in any similar period of a year in recent memory.

Sponsors are turning to bonds in Europe largely because of that market’s considerable tolerance for risk, sources say, be it a willingness to take on storied credits or those from less-liked sectors, according to LCD’s Luke Millar.

Some of the M&A-related offerings so far this year:

  • A €1.45 billion-equivalent issue backing KKR’s Selecta, a self-serve coffee concern (there was a large refinancing component here, as well)
  • a €660 million-equivalent issue for credit-management service Lowell, backing the acquisition of a carve-out business from Intrum (Permira is the deal sponsor).

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Avolon HY Bonds Climb On Amended Guarantee Structure

Bonds backing Avolon  were climbing Thursday, across the board, after the aircraft lessor granted its unsecured noteholders long-awaited clarity, via an amended guarantee structure, over how cash from operations will be applied to unsecured debt repayment. The move comes alongside Avolon’s announcement of a $250 million dividend to immediate parent Bohai Capital while reining in the issuer’s ability to make future payments to its liquidity-strapped direct owner.

The amendment should provide long-awaited relief to unsecured noteholders worried about their subordinated status in Avalon’s existing structure, and harboring concerns that Avolon might issue new debt that would cram them down. In the wake of the investor presentation, the company’s 5.25% notes due 2022 and 5.5% notes due 2024 rose roughly 2.875 and 2.125 points, respectively, to 101.375 and 101.5, according to MarketAxess.

Avolon’s term debt, meanwhile, has largely remained unaffected from chatter surrounding potential liquidity concerns at its parent company. Its B-2 term loan due 2022 (L+225, 0.75% LIBOR floor) was at 99.875/100.125 this morning, while its B-1 term loan due September 2020 (L+175, 0% floor) was quoted at 99.5/100, virtually unchanged from the previous session. Avolon in November repriced its then $368.75 million B-1 term loan to from L+225, while in September the issuer cut pricing on its then $5 billion B-2 term loan from L+275.

Avolon bonds were buffeted in early December on reports that some HNA entities were not current on certain obligations. Avolon already had raised eyebrows last summer after it made a $365 million intracompany loan to subsidiaries of Bohai Capital. That loan was pitched to the ratings agencies as one-off in nature, but investors turned their focus to Avolon’s ability to demonstrate its touted independence from HNA and Bohai.

Fitch Ratings published an investment note Thursday, reaffirming Avolon’s corporate and unsecured bond ratings of BB. “The amendment to the existing guarantee structure seeks to ensure that Avolon’s full operations explicitly support unsecured debt repayment,” noted the agency.

Sources note that lenders have raised concerns over the structure of Avolon’s proposed shareholder payments baskets, which were briefly outlined in the slide deck of the investor presentation. Avolon indicated a $800 million general basket for shareholder payments, alongside a builder basket set at 50% of consolidated net income of Avolon from January of this year plus 100% of incremental capital contributed to Avolon. “Suffice to say, there are questions remaining on ‘strictness’ of new amendments vis-à-vis accessing the new ‘baskets,’” sources noted.

Moody’s followed up with affirmation of its Ba2 corporate and Ba1 senior secured ratings for Avolon, along with its Ba3 senior unsecured rating for the company’s debt-issuing unit, Park Aerospace Holdings. The agency noted that the credit benefits of Avolon’s plans are partially offset by the constrained liquidity and high debt levels of Bohai and its controlling shareholder, HNA Group.

The rating agencies’ focus has largely been on the new mandatory redemption covenant, which is subject to suspension if the unsecured notes (BB–/Ba3/BB) are assigned at least investment-grade ratings from at S&P Global Ratings, Moody’s, or Fitch.

Investor, meanwhile, are scouring the presentation slides for information that might shed more light on just how much protection the proposed new framework will offer them. — Staff reports

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HG Bonds: Boeing Shops $1.4B, Four-Part Deal Ahead of Two Maturities

Boeing Co. (NYSE: BA) is in the market today with a $1.4 billion, four-part public offering across five-year notes due 2023, a 10-year issue due 2028, a 20-year tranche due 2038, and 30-year notes due 2048, all with a March 1 maturity date, sources said. The “no-grow” issue is guided to an A/A2/A profile.

Goldman Sachs is a bookrunner across all the tranches. Additionally, Citigroup and J.P. Morgan are marketing the 2023 issue, Barclays and BAML are bookrunners for the 2028 notes, SMBC and Wells Fargo are bookrunners for the 2038 tranche, and Deutsche Bank and Mizuho are marketing the long bonds.

The deal will carry make-whole call provisions and par calls from one and three months prior to maturity for the five- and 10-year notes, and from six months prior to maturity for the 20- and 30-year notes.

According to regulatory filings, the proceeds from today’s offering will be used for general corporate purposes. Of note, Boeing has two long-term maturities due this year, starting with $350 million of 0.95% notes due on May 15, followed by $250 million of 2.9% notes due Aug. 15, which was issued by subsidiary Boeing Capital Corp., according to S&P Global Market Intelligence.

Initial whispers for today’s proposed offering surfaced at T+55–60 for the 2023 notes, at T+75–80 for the 2028 issue, in the T+85 area for the 2038 notes, and at T+100–105 for the long bonds, indicating reoffer yields near 3.20%, 3.64%, 4%, and 4.15%, based on the tight end of talk.

The Chicago-based company last tapped the market a year ago, when it placed a $900 million, three-part offering, evenly split across 2.125% five-year notes due March 2022 at T+42, or 2.38%; 2.8% 10-year notes due March 2027 at T+60, or 3.07%; and 3.65% 30-year notes due March 2047 at T+85, or 3.91%. For reference, the 2022 issue traded yesterday at T+18 (or at a G-spread equivalent of 30 bps), the 2027 notes changed hands last month at T+49 (at a G-spread of 51 bps), and the 2047 notes traded late last month at T+75 (or at a G-spread of 77 bps), according to MarketAxess.

Since December, Boeing and Brazilian aircraft manufacturer Embraer S.A. have been in discussions about a possible transaction involving a possible merger. According to S&P Global Ratings neither company has specified what form such a deal may take, though it could be a joint venture, a full acquisition of Embraer, or some other deal structure. The government of Brazil maintains a “golden share” in Embraer, which it could use to put pressure on or block the deal.

S&P Global Ratings said Boeing’s ratings will likely not be affected by a possible transaction between the two companies. “We believe that Boeing has flexibility at the current rating to undertake a large multi-billion dollar transaction because the company’s funds from operations (FFO)-to-debt ratio is currently well above our downgrade trigger of 40% (Boeing’s FFO-to-debt ratio was 62% for the 12 months ended Sept. 30, 2017),” the agency, which maintains an A rating and stable outlook, said on Dec. 22, 2017.

“The company currently has about $10 billion in cash and short-term investments and we expect it to generate at least $10 billion of free cash flow over the next 12 months. However, our current forecast assumes that management will use all of the company’s free cash flow and some of its cash on hand for dividends and share repurchases,” analysts added.

Last April, Fitch affirmed its A rating and stable outlook on Boeing. “Large acquisitions, although not anticipated, also could affect the ratings, as could debt-funded share repurchases. Sustained consolidated FFO-adjusted leverage approaching 2.0x could lead to a negative action,” Fitch said at the time. — Gayatri Iyer

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Rite Aid, Albertsons Bonds Jump On Merger Announcement

Debt backing Rite Aid (NYSE: RAD) jumped following news that Albertsons has agreed to acquire the drugstore chain in a bid to create a food and wellness giant.

Rite Aid was the morning’s most actively traded name in high yield. Its 6.125% notes due 2023 were up seven points on the day, to 100.25, according to MarketAxess.

 

Meanwhile Albertsons 6.625% notes due 2024 were also changing hands at a steady clip, tacking on a point, to 96.

Over in loans, Albertsons B-5 term loan was bracketing 99 this morning, while its B-6 term loan was at 98.5/98.875, both off about a quarter point from Friday’s session, sources said. The issuer’s B-4 term loan was at a 98.5/99 market today, down about an eight of a point from the last session. As of Dec. 2, $5.619 billion total was outstanding on the term loans, SEC filings show.

Albertsons announced early Tuesday that it has agreed to acquire Rite Aid to create an integrated company that will be reportedly worth about $24 billion.

Following the closing of the deal, expected in the second half of 2018, Albertsons’ shareholders will own a 70.4–72% stake in the merged entity, while Rite Aid shareholders will own a 28–29.6% stake in the combined company.

 

The merged entities shares will trade on the New York Stock Exchange following the deal closing. (Albertsons is currently a privately held company controlled by Cerberus Capital Management.)

In a statement, Albertsons said the combined business is expected to generate year one revenue of about $83 billion and year one adjusted pro forma EBITDA of $3.7 billion, with a net leverage ratio of 3.8x at transaction close.

The combined company will operate about 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, D.C.

Credit Suisse and Goldman Sachs served as lead financial advisors to Albertsons. Bank of America Merrill Lynch also served as financial advisor to Albertsons Companies and is providing committed financing for the proposed transaction together with Credit Suisse and Goldman Sachs. — Kelsey Butler/James Passeri

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Cov-Lite Deals Account for Record High 85% of Single-B Issuance YTD

The surge in U.S. leveraged loan issuance last year brought covenant-lite loan outstandings to record highs. This is not surprising, of course, as seemingly every first-lien institutional credit rushed to market in recent memory has been cov-lite, as issuers take advantage of the insatiable investor demand for paper.

Cov-lite deals in some ways are structured akin to high yield bonds and are less restrictive than fully covenanted loans. Cov-lite loans feature incurrance covenants, meaning an issuer must meet financial tests only if it wants to take particular actions (pay a dividend to its private equity owner, for instance). Read more here.

As lower-rated borrowers came to the fore in 2017—single-B issuers accounted for 66.4% of all institutional activity last year, the most since 2014—the amount of single-B cov-lite issuance skyrocketed to a whopping $273 billion, far and away a record, and marking a roughly 77% increase over 2016.

(S&P Global Ratings defines single-B rated issuers as “more vulnerable to adverse business, financial and economic conditions but currently [having] the capacity to meet financial commitments.”)

And this activity from the lower-rated-issuer category is grabbing an even larger portion of market share in 2018 (though activity is down this year, overall).

A cov-lite world
Just how much did single-B issuers dominate the cov-lite landscape last year? Roughly 72% of all cov-lite issuance in 2017 came courtesy of these lower-rated entities, the most since the 76% in 2014 (again, activity in those previous years was well short of that seen last year).

This bull credit market cov-lite frenzy from the low end of the borrower spectrum has had a predictable result on outstandings. As of year-end, some $390 billion of the $959 billion in U.S. leveraged loans outstanding were cov-lite/single-B, compared to $320 billion at the end of 2016, according to the S&P/LSTA Loan Index.

While the overall market has downshifted so far in 2018, single-B issuance (and cov-lite) continues to drive the sector. Of the $46.7 billion in institutional issuance so far this year (through Feb. 9), $32.6 billion is single-B, or a 70% share. Of that amount, $27.8 billion is cov-lite. That’s 85.2%, a record-high.—Tim Cross

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HY Funds See $6.3B Outflow, Largest in More Than Three Years

U.S. high-yield funds recorded an outflow of roughly $6.3 billion for the week ended Feb. 14, according to weekly reporters to Lipper only. This follows last week’s exit of about $2.7 billion and marks the fifth consecutive week of outflows, for a total of $15 billion over that span.

This is the second largest outflow from high-yield funds on record, second only to the week ended Aug. 6, 2014, which saw an exit of $7.1 billion.

Roughly $3.6 billion was pulled out of mutual funds this week, while $2.7 billion exited ETFs.

The year-to-date total outflow from high-yield funds is now at roughly $12.2 billion.

The four-week trailing average widened to negative $3 billion for the period, from negative $2.2 billion last week.

The change due to market conditions this past week was a decrease of $2.1 billion. Total assets at the end of the observation period were $192.95 billion, indicating the lowest point since July 2016. ETFs account for about 22.5% of the total, at $43.4 billion. — James Passeri

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Fieldwood Energy Files Ch. 11 Petition, Looks to Slash Debt By $1.6B Through Restructuring

Fieldwood Energy has filed for bankruptcy protection in Houston to implement a restructuring plan that would reduce the company’s debt by $1.6 billion.

In a statement, the company said it has secured a $60 million DIP to support its Chapter 11 case, and intends to raise about $525 million in capital through an equity rights offering.

Additionally, Fieldwood said it has agreed to acquire all the deepwater oil assets of Noble Energy, located in the Gulf of Mexico, which complement its existing asset base and operations.

Details of the company’s restructuring support agreement have yet to be filed with the court, but the company said it has secured support from key stakeholders, including those holding 75% in principal of its first-lien debt, 72% in principal of its first-lien last-out term loan, and 77% in principal of its second-lien term loan, in addition to private equity sponsor Riverstone Holdings.

Today, Fieldwood filed a number of customary motions, including requesting clearance to pay pre-petition claims and use its cash management system. A first-day hearing has been scheduled for tomorrow morning.

The company also requested that its case be designated as a complex Chapter 11 due to the fact that it has more than $10 million in liabilities and there are more than 50 parties in interest in the case.

Fieldwood reported $1–10 billion in assets and liabilities in its petition.

The company recently entered into forbearance with first-lien last-out and second-lien term loan lenders after the exploration-and-production company failed to make interest payments due Dec. 29.

Fieldwood, a portfolio company of Riverstone Holdings, focuses on the acquisition and development of conventional oil and gas assets in North America, including the Gulf of Mexico.

Weil, Gotshal & Manges LLP is debtor counsel; Opportune LLP is financial adviser; and Evercore Group LLC is investment banker. — Kelsey Butler/Rachelle Kakouris

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Fridson: The HY Spread-Widening Accompanying Recent Stock Market Plunge Not an Anomaly Demanding an Explanation

Synopsis: The modest high-yield spread-widening that accompanied the early February stock market plunge was not an anomaly demanding an explanation.

Stocks’ long period of stability came to an abrupt halt on Groundhog Day and the non-investment-grade bond market’s response quickly became a topic of interest. Barron’s “The Trader” column noted that “the high-yield bond market is refusing to act as if a crisis is at hand” (see note 1). The “Current Yield” column elaborated:

The extra yield investors demand to hold high-yield bonds instead of Treasuries widened just 0.26% in the selloff, contrasting with 2015 and 2016: The Standard & Poor’s 500 fell 12% and 11% respectively, and high-yield spreads climbed 1.5% and 2.75%, notes FundStrat’s Tom Lee.

High-yield has been relatively stable, as Lee wrote Friday. “It is extremely unusual that HY would diverge so sharply,” he said (see note 2).

Let us explore that last statement a bit more closely. How unusual, in fact, is the high-yield’s comparatively muted response to the equity market selloff? In the week-over-week period from Feb. 1 to Feb. 8, preceding the one-day rebound on Friday, Feb. 9, the change in the level of the S&P 500 was –8.54%. During that same interval, the option-adjusted spread (OAS) on the ICE BofA Merrill Lynch US High Yield Index widened by 30 bps. The table below shows how the OAS behaved during all weekly stock market declines of comparable magnitude from 1990–2017:

It is true that the high-yield risk premium increased far more than the recent 30 bps in some previous major stock market selloffs. Note, however, that the three largest spread-widenings—126, 199, and 274 bps—all occurred during the Great Recession of January 2008–June 2009. In two other instances, including the worst weekly S&P 500 change in our sample of stock selloffs of a similar magnitude to the latest one (–10.54% in the week ending April 14, 2000), the ICE BAML High Yield Index’s OAS widened by less than the 30 bps widening from February 1–8. In fact, that stock plunge was accompanied by the smallest high-yield spread-widening in the sample, a barely positive two basis points.

While the sample size for these events is small, the limited evidence indicates that barring a recession, a high-yield spread-widening of only 30 bps is not anomalous. Granted, the spread widened by more than twice as much, 72 bps, in the non-recession week ended Aug. 5, 2011. Interestingly, that stock market selloff originated in the debt market. S&P Global Ratings downgraded the U.S. Treasury from AAA to AA+, adding that further downgrading was possible, and Moody’s warned that it, too, might lower its rating. This all happened in the context to fears that the debt crisis then engulfing Portugal, Ireland, and Greece would spread to Spain and Italy.

In short, one could even argue that a widening of 30 bps in the high-yield spread from Feb. 1 to Feb. 8 was an emphatic, rather than a reserved response to the stock selloff, considering that neither a recession nor a sovereign debt crisis was underway. Again, one should not overstate the importance of these conclusions, given the small number of observations. Still, it is by no means clear that there is a puzzle in need of solving in the current divergence between the equity and high-yield markets’ views of the factors that influence the values of risky assets.

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Global Market Intelligence. His weekly leveraged finance commentary appears exclusively on LCD, an offering of S&P Global Market Intelligence. Marty can be reached at [email protected]

Research assistance by Kai Zhao and Yaxian Li.

 

Notes
1. Ben Levisohn, “After Correction Pain, More Market Gain?” Barron’s (Feb. 10, 2018).

2. Mary Childs, “Bonds Behaving Well: A Tale of Two Markets,” Barron’s (Feb. 10, 2018).

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