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Fixed-Income: Reverse-Yankee High Yield Bond Issuance Soars

reverse yankee

Speculative-grade debt issuers from the U.S. tapped the European high yield bond market at a record pace in 2018’s first half, taking advantage of decidedly cheaper financing costs in that market.

During the first six months of the year there was €8.2 billion of this ‘reverse-Yankee’ activity, an increase from €5.6 billion in 2017’s second half, and well up from levels seen in 2010 through 2014, according to LCD.

Why the surge in reverse-Yankee activity?

single b yields

Simply put, the European high-yield market, via euro-denominated deals, is a less-expensive financing option for U.S. issuers. For lower-rated companies, for instance – issuers rated single B – Europe has during the first half of the year offered financing that averages 156 bps cheaper than in the U.S., according to LCD. That’s up from a 125 bps difference in 2017’s first half.

This analysis was excerpted from a story on LCD News by Luke Millar.

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After 19 Weeks and $8B, US Investors Take Pause from Leveraged Loan mart

US loan funds

U.S. loan funds recorded an outflow of $184 million for the week ended July 4, according to Lipper weekly reporters only. This exit snaps a 19-week inflow streak totaling roughly $7.9 billion.

Last week’s exit was driven by a $198.5 million outflow from ETFs, while $14 million flowed into mutual funds.

The year-to-date inflow total dipped modestly to $8.4 billion.

The four-week trailing average narrowed to $198 million, from $349 million last week, marking its twenty-fourth consecutive week in positive territory.

Total assets edged up slightly to $104.45 billion at the end of the observation period, indicating the highest level since the week ended Aug. 20, 2014, when total assets were $104.6 billion.

The change due to market conditions this past week was an increase of $201 million. ETFs represent about 12.6% of total assets, at $13.2 billion. — James Passeri

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High Yield: US Bond Issuance Hits June Swoon as Borrowers Eye Loan Market

US high yield issuance

With issuers continuing to flock to the floating-rate leveraged loan market, U.S. issuance of fixed-rate high yield bonds slid to $14.5 billion in June, the third straight monthly decline and the lowest level for this time period in five years, according to LCD.

During 2018’s first half, U.S. high yield issuance was $110.6 billion, down 23% from the same period in 2017.

Would-be high yield investors and issuers have turned to the leveraged loan market amid expectations of continued interest rate hikes by the Fed and as LIBOR – the rate over which leveraged loan borrowing costs are based – has climbed throughout much of 2018. Both of these factors have boosted investor interest the floating rate class.

This story was excerpted from analysis by LCD’s Jakema Lewis

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Fridson: High Yield Covenant Quality Hits New Low

Covenant quality in the U.S. high yield market last month hit its highest level since 2011, according to bond market expert Martin Fridson, per his FridsonVision analysis.

According to FridsonVision, U.S. high yield covenant quality (where 1 = strongest, 5 = weakest) hit 4.65 last month, the lowest it’s been since the inception of that analysis (in 2011).

The previous record for weakest covenants, according to FridsonVision, was 4.61, recorded in June 2015.

For the record, Moody’s covenant quality in May exactly matched that of FridsonVision, at 4.65. Moody’s series’ worst-ever score, however, was 4.68 in June 2017. By either measure, issuers gained in the terms of trade at the expense of investors during May.

Like FridsonVision, Moody’s reported a sharp month-over-month deterioration in May. Its series moved by 0.22, from 4.43 in April to 4.65 in May.  The FridsonVision calculation of the weakening was even more severe, a move of 0.38, from 4.27 to 4.65. This difference reflects different approaches to weighting the rating-category scores.

The degradation in covenant quality between April and May was particularly pronounced in the B rating category, where the average score went from 3.80, to 4.47. Note, however, that the April score for the B category was anomalously strong. It was better than both Ba’s 4.98 and Caa/Ca’s 4.56, whereas the usual pattern is for covenant quality to weaken with each step down the rating scale.

Even though the B score experienced the most severe weakening among the three ratings categories during May, it ended at a substantially better level, 4.47, than its worst-ever 4.61. In contrast, the Ba category’s May score of 4.97 was just 0.03 shy of its all-time worst of 5.00. The Caa/Ca score of 4.56 was also 0.03 away from its worst-ever reading, which is 4.59.

This information was excerpted from Marty’s weekly analysis, available in full to LCD News subscribers.

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US High Yield Bond Market Stumbles Through Uninspiring May

US high yield issuance

In what is typically an active period for the U.S. high-yield market, just $15.3 billion of deals were issued in May, making it the lightest volume for that month since the paltry $9.5 billion in recession-era May 2010, according to LCD. Muted issuance came amid the noisy breach of the 3% threshold by the 10-year Treasury, political issues in Italy, simmering geopolitical concerns, and a relatively early Memorial Day.

May’s supply was spread across 33 tranches, up slightly from the 29 tranches finalized in April, though April’s volume was higher, at $16.7 billion.

After gaining in April, following two consecutive monthly declines, the average yield for new issues again fell, dropping 22 bps, to 7.12% in May. This figure, though, is 27 bps higher than the year-to-date average for new issue yields, according to LCD.

YTD, U.S. high yield issuance totals $96.55 billion, down 21% from the $123 billion at this point last year, according to LCD. In contrast, the floating-rate leveraged loan market has seen $237 billion of institutional issuance. That’s down 10% from 2017 (which was a record year for loan issuance, at $503 billion). – Jakema Lewis

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European High Yield Market Struggles through Grim Month of May

europe high yield issuance

May was arguably the most difficult month for the high-yield market in over a year and half, with choppy secondary conditions and rising new-issue pricing resulting in three deal postponements and a drop in volume.

There haven’t been three pulled deals in a month in recent memory, and while a slew of opportunistic borrowers also decided not to launch, such issuance was still the backbone of supply. Nevertheless, while the Italy-induced volatility curtailed supply in May, and might continue to do so until it subsides, a sizable event-driven pipeline continues to build.

This backdrop has been set during a month that started with a flurry of opportunistic activity, but ultimately saw total volume drop to €4.4 billion, down from the bumper months of March and April, when 21 and 29 bonds priced, respectively, for a total of €9.7 billion and €10.5 billion. Encouragingly though, year-to-date volume and deal count are running roughly even with the same period last year. – Taron Wade/Luke Millar

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With Defaults Low and Oil Prices Rising, Distressed Debt Continues to Disappear

Thanks to a decade-long stretch of low interest rates, which has made it easier for troubled companies to kick the debt can further down the road, the already-scant opportunity for funds looking to buy up paper at distressed levels continues to shrink.

A seventh consecutive decline in the U.S. distress ratio has pushed the share of bonds trading in excess of 1,000 bps over the risk-free Treasury rate—the common measure of distress—to its lowest level in 3.5 years. At just 5.2%, it is significantly below the post-crisis high of 33.9% from February 2016, according to S&P Global Fixed Income Research.

In dollar terms, that equates to just $48 billion, merely a hair’s breadth from the near-four year low of $46 billion reached last month, and just 15% of the February 2016 high of $328 billion.

The dearth of opportunities is even more stark in leveraged loans, where the share of performing loans in the S&P/LSTA Leveraged Loan Index trading below 70 cents on the dollar (a level normally associated with deep distress and significantly high default risk) fell to just 0.56% as of May 30, the lowest it has been since December 2014. –

us loan distress ratio

One area where this is distress, of course, is retail, where the rate recently hit 24%, and in cosmetics/toiletries (32%, though that’s entirely driven by one loan issuer: Revlon). Both of these numbers are post-crisis highs, according to LCD.

While those numbers are eye-catching, the retail segment does not constitute a significant segment of outstanding leveraged loans, so the amount of paper involved is not large. – Rachelle Kakouris

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Atotech Tests US High Yield Bond Mart with PIK Toggle Deal

Metals concern Atotech this week brought to the U.S. high yield bond market a $300 million unsecured PIK toggle offering, the first such deal since November, according to LCD.

A  PIK toggle offering affords the issuer the option of repaying interest with additional notes, as opposed to cash. The last unsecured PIK toggle offering was for Sotera Healthcare.

Ardagh Packaging placed a $350 million PIK toggle offering in January of this year, though that undertaking was secured.

PIK toggle issuance

Marketing efforts for Atotech are being run via J.P. Morgan and Barclays. Pricing is expected on Thursday, May 24. The notes will be printed through indirect parent company Alpha 2 B.V.

The issuer today also launched a $200 million add-on to its 2024 TLB. Proceeds of both the add-on loan and new unsecured bonds will be used to finance a dividend to shareholders. According to sources, the PIK toggle notes will offer a yield of 75 bps above the cash interest.

Atotech in January 2017 printed $425 million of 6.25% notes due 2025. Those bonds closed on Friday at 101.7, for a 5.73% yield, trade data show. – Jakema LewisNina Flitman

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Tesla High Yield Debt Slides on 1Q Update, and as Musk Dodges Model 3 Questions

Tesla’s debut bonds fell this morning after the company released mixed first-quarter results after the closing bell yesterday. CEO Elon Musk, on the post-earnings call with analysts late yesterday, also raised eyebrows with his evasion of analyst inquiries into developments surrounding the electric car manufacturer’s critical Model 3 sedan.

The 5.3% notes due 2025 were changing hands as low as 87 today, indicating a roughly 2.25-point decline on the day, according to MarketAxess. The notes priced at par in August 2017 and plumbed lows of 86 in early April following a March 27 ratings cut by Moody’s, which at that time also lowered the issuer’s outlook to negative, from stable, citing negative free cash flow, liquidity pressures, and a “significant shortfall in the production rate of the company’s Model 3 electric vehicle.”

Tesla now says it will become cash flow positive in the second half of 2018 as the company ramps up production and deliveries of the Model 3 sedan, which the issuer said yesterday is “already on the cusp of becoming the best-selling mid-sized premium sedan in the U.S.”

Bruce Clark, lead auto analyst and Moody’s senior vice president, said today that Tesla “showed important progress by sustaining Model 3 weekly production above 2,000 units for three consecutive weeks.”

“Nevertheless, the company remains in an intense ‘learn-as-they-go’ process while attempting to reach production efficiencies necessary for a Model 3 production rate of 5,000 per week, a Model 3 gross margin of 25% and breakeven cash flow,” Clark added. “We continue to expect that Tesla will need to raise new capital approximating $2 billion—in the form of equity, convertible notes, or debt—in order cover a cash burn during 2018, and to refund a total of $1.3 billion of convertible debt that matures in late 2018 and early 2019.”

On yesterday’s conference call with analysts, discussing the subject of Model 3 reservations and capital requirements, Musk proved evasive, declining to answer and making the statements: “These questions are so dry,” “they’re killing me,” and “Boring questions are not cool. Next.”

Musk also said on the call that he is “quite confident about achieving GAAP net income and positive cash flow in 3Q,” highlighting that Model 3 gross margins should approach a range of about 20% by the end of 2018, as part of a steady trajectory toward a 25% target.

Tesla said first-quarter revenue totaled $3.4 billion, topping analyst expectations by roughly 3.3%, based on consensus data compiled by S&P Global Market Intelligence. The company booked a pretax loss of roughly $779 million for the quarter, slightly wider than the consensus estimate of $764 million.

Tesla also reduced its expectations for 2018 capital expenditures to less than $3 billion, from guidance of more than $3.4 billion previously. “Ultimately, our capex guidance will develop in line with Model 3 production and profitability,” the company said. “We will be able to adjust our capital expenditures significantly depending on our operating cash generation.”

On the liquidity front, Tesla reported $2.7 billion in cash at the end of March, down $700 million from a $3.4 billion cash balance at the end of 2017.

Tesla bonds have been pressured over the past several months as adjusted EBITDA and free cash flow for the past two quarters fell shy of analyst estimates. The company placed its debut 2025 offering in August to bolster its balance sheet and for general corporate purposes ahead of the launch of the Model 3, its first electric car designed for the mass market. The $1.8 billion tranche size was upsized from $1.5 billion.

Corporate and bond ratings are B–/B3 and B–/Caa1, respectively, with negative outlooks by S&P Global Ratings and Moody’s, and 3 recovery rating on the unsecured notes by S&P Global.

Tesla is a Palo Alto, Calif.–based manufacturer of electric vehicles as well as energy storage and solar products. — James Passeri/Jakema Lewis

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April Performance by Industry, US High Yield Bond Market

High yield expert Martin Fridson, on industry performance in the U.S. bond market (part of Marty’s weekly commentary for LCD):

Telecommunications led the 20 major high-yield industries in return in April, doubling the performance of the second-place finisher, Energy. Notwithstanding the outsized returns on Sprint issues (word emerged last month that Spring and T-Mobile were discussing a merger), the Telecom rally was quite broad-based. The non-Sprint portion of the ICE BofA Merrill Lynch High Yield Telecommunications Index returned 2.26%, still well ahead of runner-up Energy. As usual, Energy’s performance was closely tied to crude oil prices. As measured by West Texas Intermediate futures, the price surged from $64.87/bbl., to $68.57/bbl. in April.

Automotive & Auto Parts finished dead last, as it did in March. This time the industry’s return was strongly skewed by a single issuer, American Tire Distributors, which lost distribution rights for the Goodyear, Dunlop, and Kelly tire brands. The ATD 10.25% notes due 2022 accounted for just 2.3% of the ICE BofA Merrill Lynch High Yield Automotive & Auto Parts Industry’s market value, but its –47.12% return dragged down the –0.60% return for the rest of the group all the way to –1.69%. That being said, Automotive & Auto Parts was the only major industry to post a negative return in April. 

Mary’s full weekly analysis is available to LCD News subscribers here. 

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