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With rate-hike chances slim, leveraged loan issuers turn to high yield bond market

Borrowers are issuing fixed-rate high-yield bonds to take out floating-rate leveraged loan debt at the fastest pace since the first quarter of 2017.

Through March 14, completed bond-for-loan takeout offerings in 2019 have totaled $11.9 billion, according to LCD. With the inclusion of ADT’s pending offering, expected to launch this month, this figure edges to $12.4 billion.

The renewed emphasis on the fixed-rate high-yield asset class, at the expense of floating-rate leveraged loans, is clear via retail investor activity. So far in 2019 U.S. high-yield funds have seen a net inflow of $8.2 billion, while U.S. loan funds have seen a net withdrawal of roughly the same amount, according to Lipper weekly reporters.

Notably, retail investors have pulled money from loan funds for the past 17 weeks, totaling nearly $22 billion.

Before the recent retail retreat from the U.S. leveraged loan market, interest rates had been rising, benefiting the floating rate asset class. Market observers do not expect another rate hike in 2019, according to CME group. — Jakema Lewis

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SS&C Technologies ups $750M high yield bond offering to $2B

SS&C Technologies has priced $2 billion of 8.5-year unsecured notes at the tight end of talk, sources said. The offering was upsized from $750 million, and marketed via joint bookrunners for the deal were Morgan Stanley, Credit Suisse, Citi, BAML, and Oppenheimer. Proceeds will be used to repay a portion of existing term loans under the company’s senior secured credit facilities. S&P Global Ratings views the transaction as leverage neutral. SS&C Technologies (Nasdaq: SSNC) provides software products and software-enabled services to financial services providers. Terms:

Issuer SS&C Technologies
Ratings B+/B2
Amount $2 billion
Issue Senior (144A/Reg S for life)
Coupon 5.5%
Price 100
Yield 5.5%
Spread T+291
Maturity Sept. 30, 2027
Call non-call three (first call @ par +75% coupon)
Trade March 14, 2019
Settle March 28, 2019 (T+10)
Joint bookrunners MS/CS/C/BAML/Oppenheimer
Talk 5.5-5.75%
Notes Upsized frpm $750 million; up-to-40% equity claw @ 105.5 until March 30, 2022; make-whole @ T+50; change of control put @ 101

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Frontier Communications talks pricing on $1.65B secured high yield offering

Frontier Communications (Nasdaq: FTR) has set talk for a $1.65 billion offering of eight-year (non-call three) first-lien secured notes in the 8% area, sources said. Books for the deal were set to close today.

Bookrunners for the deal are J.P. Morgan, Citi, Credit Suisse, Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Deutsche Bank, and Mizuho. Initial price thoughts circulated at 8–8.25%, sources noted. These new notes will serve as the issuer’s inaugural first-lien, fixed-rate print.

Proceeds are earmarked to repay $1.4 billion and $239 million outstanding A term loan facilities due in 2021. Additionally, the borrower also intends to extend the maturity of at least $835 million of its $850 million revolving credit facility by two years, from 2022 to 2024.

Analysts at research firm CreditSights on March 12 noted that while the refinancing will “materially improve Frontier’s runway through 2021,” the company’s interest expense could increase by $30–40 million per year pro forma for this refinancing, and the issuer’s 7.125% senior notes due 2019, which CreditSights expects will be repaid using a mix of revolver borrowings and cash on hand.

Ratings have been assigned as B/B2, with a 1 recovery rating from S&P Global Ratings. Analysts at S&P Global Ratings view the transaction as leverage-neutral, but maintain a negative outlook at the borrower on expectations it “will be unable to address its longer-dated unsecured debt maturities when they come due absent favorable business, economic, and financial conditions because of its lack of secured debt capacity, low free operating cash flow, and elevated leverage,” a March 12 report noted. Moody’s has a stable outlook for the company.

Frontier Communications is a Norwalk, Conn.–based provider of communications services, offering data, video, and voice packages for residential and business customers. As of Dec. 31, 2018, total debt at the company was $17.2 billion, according to S&P Global Market Intelligence. — Jakema Lewis/Nina Flitman

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US high yield funds see $1.9B withdrawal, snapping inflow streak

Retail investors pulled $1.9 billion from U.S. high-yield funds in the week ended March 6, putting an abrupt end to five weeks of inflows totaling $5.6 billion, according to Lipper.

With the recent activity, the four-week average dips to a $49 million outflow, from a $1.4 billion inflow last week.

ETFs took the bigger hit, with a $1.3 billion outflow, according to Lipper weekly reporters. High yield mutual funds saw $582 million of withdrawals. The change due to market conditions was positive $224 million during the week.

Since the first full week of January, net inflows to U.S. high yield funds total $7.8 billion. Assets at the funds stand at $199 billion, $43 billion of which come via ETFs. — Staff reports
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Investor Pour $698M More Into US High Yield Funds

Retail investors poured another $698 million into U.S. high yield funds for the week ended Feb. 27, the fifth straight net inflow totaling $5.64 billion, according to Lipper weekly reporters.


As in the leveraged loan segment, ETFs were the main driver, accounting for $682 million of the inflows. Mutual funds saw $15.7 million of inflows, according to Lipper.

With the recent activity the four-week average is positive $1.4 billion, up slightly from the previous week. The change due to market was positive $810 million.
Since the first full week of January U.S. high yield funds have seen net inflows of $9.7 billion. Assets at these funds now total $200 billion, of which $44.6 billion come via ETFs. — Tim Cross

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TransDigm makes quick return to US high yield bond market for $750M deal

TransDigm is back in the market with a $550 million offering of eight-year (non-call three) subordinated notes, and a $200 million add-on to the recently priced 6.25% secured notes due 2026, sources said. Pricing for the deal is expected today, Feb. 1.

Joint bookrunners for the secured debt are Morgan Stanley, Credit Suisse, Citi, Barclays, RBC Capital Markets, Credit Agricole, and KKR Capital Markets. Bookrunners for the senior subordinated paper are Morgan Stanley, Credit Suisse, KKR Capital Markets, Citi, Barclays, and RBC Capital Markets. Existing ratings are B+/Ba3 for the secured debt, and B–/B3 for the subordinated notes.

Proceeds of the new subordinated notes are earmarked to redeem the borrower’s $550 million outstanding of 5.5% notes due 2020, according to an offering memorandum. The funds raised from the tack-on secured bonds will support the company’s acquisition of Esterline Technologies.

TransDigm earlier this week placed the initial print of the 6.25% secured notes due 2026 supporting the Esterline buy, as a $3.8 billion transaction. Final terms were set at par. The offering was initially proposed to include $1 billion of senior subordinated notes, which were subsequently removed, with that amount steered to the secured tranche and an additional $100 million tacked on. These notes closed the session on Thursday, Jan. 31, at 101.75, yielding 5.85%, trade data show. Trades recorded this morning show the bonds changed hands at 101.25, for a 5.96% yield.

TransDigm is a designer, producer, and supplier of highly engineered aircraft components. – Jakema Lewis

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Free Webinar: Global High Yield Markets Opportunities, Pitfalls in 2019

webinar imageS&P Global Market Intelligence and LCD are excited to present on Tuesday, Jan. 29 a complimentary webinar on the  global high yield market: Opportunities and Pitfalls in 2019.

You can register for the event here.

Topics covered in this webinar include

  • An overview of 2018 U.S. high yield performance
  • Historical perspective on the late 2018/early 2019 downturn
  • Is the distress ratio signaling a recession? How reliable is this predictor?
  • Deal flow in the face of rising credit risk: 2019 outlook in the U.S. and European high yield markets
  • Risks and opportunities in today’s global high yield market
  • Ratings performance
  • Multi-notch downgrades
  • Fallen angel risk
  • Distressed and default outlook

Date
Jan. 29, 2019

Time
10-11 am EST

Speakers

Marty Fridson
CIO
Lehmann, Livian, Fridson Advisors LLC

Diane Vazza
Managing Director, Head of Global Fixed Income Research
S&P Global Ratings

  Nicholas Kraemer, FRM
  Senior Director, Global Fixed Income  Research
S&P Global Ratings

John Atkins
Director, Leveraged Commentary & Data
S&P Global Market Intelligence

Luke Millar
Director
S&P Global Market Intelligence

Ruth Yang
Managing Director, Leveraged Commentary & Data
S&P Global Market Intelligence

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After Deal-Free December, US High Yield Bond Issuance Takes Off

Following a rare month with no U.S. high yield debt issuance – which exacerbated a broader downturn in U.S. high-yield primary volume over the tail-end of 2018 – speculative-grade bond issuers are moving off the sidelines against a steadier financial-markets backdrop, capitalizing on pent-up investor demand for fresh prints and the resulting improvement in their pricing leverage, LCD data shows.

The week ended Jan. 25 was on track to produce the largest new-issue market weekly volume since early-August 2018, with more than $6 billion in supply slated to clear. The lion’s share—$4.2 billion—was priced in a single session, which saw each transaction upsized, and finalized with an issuer-friendly yield. A strong appetite for new debt helped reverse a wave of price widening recorded for the U.S. arm of the asset class during the final quarter of 2018, which saw buysiders and issuers alike proceed with caution among price slides in equities and crude oil, large outflows from high-yield funds, and increasing trade tensions.

Tenet Healthcare on Jan. 22 raised $1.5 billion of 6.25% secured second-lien notes due 2027 at the tight end of talk, after doubling the size of its deal, and Vistra Energy printed $1.3 billion (up from $700 million) of 5.625% notes due 2027, at the midpoint of circulated guidance. That same day, Albertsons Cos, boosted its pitch by $100 million, selling $600 million of 7.5% notes due 2026, and MGM Growth Properties placed $750 million of 5.75% notes due 2027, after upping the offering size from $500 million. Both transactions cleared at the tight end of guidance.

So far in January, no deals were printed at the wide end of price guidance or outside of the announced talk range, an indicator of healthy market demand. Six of the 10 deals were priced at the firm end of guidance, with the balance printed at the midpoint of talk.  

In contrast, in the fourth quarter, just 38% of the new issues cleared syndicate at the firm end of price talk ranges. Five issues priced at the wide end of talk or outside the announced range, accounting for nearly one-quarter of the total offerings. – Jakema Lewis/John Atkins

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S&P: Leveraged Loan Recoveries Have Dipped While High Yield Increases

Since 2010, post-default recoveries for U.S. bank debt have often been below their long-term averages, even as bonds have experienced elevated recoveries. Financing conditions have been favorable to highly leveraged companies, with investor demand for leveraged loans supporting growing issuance, tightening spreads, and debt structures with smaller debt cushions and fewer covenant protections.

These favorable conditions have helped support bond recoveries in recent years, as has the prevalence of distressed exchanges, which have tended to benefit the recoveries of bonds rather than loans. These factors could contribute to shrinking recoveries once default rates rise.

In short:

  • Average recovery rates for bank debt (which includes term loans and revolvers) have fallen by two percentage points since 2010, to 72%, as declining recovery rates for second-lien term loans have weighed on term loans overall.
  • In contrast, bonds and notes have experienced above-average recoveries of 51% over the same period as the prevalence of distressed exchanges has supported bond recoveries.
  • The long-term discounted average recovery for bank debt is 73.9%, while bonds and notes have recovered 39.2%, on average.
  • For first-lien term loans, shrinking debt cushions, an increase in covenant-lite, and rising leverage are likely hampering recoveries, and this trend could become more pronounced for recoveries of senior and subordinated debt when the cycle turns.

This analysis is courtesy LCD’s colleagues at S&P Global Fixed Income Research, Diane VazzaNick W. Kraemer, and Evan M. Gunter. The complete analysis is available here.

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Retail investors pour massive $3.3B into US high yield funds/ETFs

U.S. high yield funds and ETFs saw a $3.28 billion inflow of investor cash during the week ended Jan. 16, the largest for the investor segment since December 2016, according to Lipper weekly reporters. The gain follows up on a $1 billion inflow the previous week, bringing the YTD number to a $3.7 billion net inflow.

The activity was evenly split during the week, with funds seeing $1.57 billion of inflows while ETFs saw $1.7 billion.

With the recent surge, the trailing four-week average is a $58.3 million outflow, down considerably from $1 billion a week ago. The change due to market value was plus $475 million.

Assets at U.S. high yield funds now stand at $190.5 billion, of which $41 billion come via ETFs.

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