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Fridson: The Incredible Expanding High-Yield Overvaluation

Only on the brink of the massive price collapse of the Great Recession in 2008 has the high-yield market ever been as overvalued as it currently is, according to our Fair Value Model.

As of Sept. 30, the option-adjusted spread (OAS) on the BofA Merrill Lynch US High Yield Index was 497 bps. That amounted to a gap of negative 265 bps versus our fair value estimate of 762 bps, a difference of –2.1 standard deviations, where one standard deviation equals 126.3 bps. (Grantham, Mayo, Van Otterloo has proposed a general definition of a bubble in financial markets as a divergence of –2 standard deviations from intrinsic value.)

By Oct. 14, the OAS on the BAML High Yield Index was down to 472 bps, a gap of –290 bps or –2.3 standard deviations.
fridson spread

As detailed above, the present shortfall from fair value was greater only in April 2008 (–300 bps or –2.4 standard deviations) and May 2008 (–321 bps or –2.5 standard deviations).

Following the record overvaluation of the spring of 2008, the high-yield market did not return to fair value until October 2008, when the BAML High Yield Index’s OAS widened by an astounding 521 bps in a single month. Ominously, from April 30 to Oct. 31, 2008, the BAML High Yield Index returned –25.94% while the BofA Merrill Lynch US Treasury Index returned 1.79%. We do not foresee conditions comparable to those of 2008 any time soon, but high-yield’s currently extreme overvaluation nevertheless sounds a loud cautionary note.

By way of background, our basis for determining whether the U.S. high-yield market is fairly valued is the methodology introduced in “Determining fair value for the high-yield market.” We are now using an updated analysis to reflect revisions to originally reported economic data, based on a historical observation period of December 1996 to December 2012. – Martin Fridson

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This story is part of Marty’s weekly high yield analysis, available to subscribers at www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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With Adieu to TCEH, US Leveraged Loan Index Sees Huge Jump

The S&P/LSTA Leveraged Loan Index recorded its second highest jump ever after an index rebalancing that removed three Texas Competitive Electric Holdings (TCEH) debt facilities following the parent company’s exit from bankruptcy.

TXU 1

The bid for the Index jumped by 154 bps, to 96.85 from 95.31.

TXU 2

The S&P/LSTA Loan 100 Index, with the largest facilities in the Index, advanced by 523 bps to 97.67 from 92.44, which was the largest move of the Loan 100 Index of all time.

The pre-petition loans totaled approximately $22.655 billion when parent Energy Future Holdings filed for bankruptcy in April 2014, court documents showed. TCEH is the largest issuer in the Index of all time. The EFH bankruptcy filing triggered a jump in Index loan default rates to a nearly four-year high of 4.64% by amount, from 1.21%. Thus began dual-track default-rate reporting for the leveraged loan market. Excluding EFH, the rate dropped to an 18-month low at the time of 1.14%, from 1.21%.

TXU 3

TCEH, itself the parent of TXU and Luminant, exited bankruptcy on Oct. 4. The plan for Energy Future Holdings’ so-called T-side provides for a tax-free spin-off of TCEH, the company’s energy-generation and retail businesses. Under the plan, confirmed by the Wilmington, Del., bankruptcy court in August, TCEH first-lien creditors received 100% of the equity of the reorganized company and 100% of TCEH’s cash.

The reorganization process for the company’s E-side, made up of Energy Future Holdings (EFH) and intermediate holding company Energy Future Intermediate Holdings (EFIH), and premised on the sale of Oncor, is moving forward separately. NextEra Energy agreed to buy Oncor in a deal valued at $18.7 billion this summer, months after an earlier deal with Hunt Consolidated fell apart. A confirmation hearing for the E-side is set to begin on Dec. 1.

The Index will see another massive repayment when the E-Side completes its restructuring and exits from Chapter 11. Under the terms of the NextEra-Oncor deal, lenders to EFIH’s $5.4 billion DIP loan will be repaid in full, in cash. That deal is expected to close early next year.

Husker Du?
The largest move of the Index was on Jan. 6, 2009, when the bid for the Index jumped to 63.66, from 62.11, a 155 bps gain. The S&P/LSTA Loan 100 Index gained 214 bps on that day, from 62.83 to 64.96.

On that day, Lyondell Chemical Company filed for bankruptcy for its U.S. units in New York after missing debt-service payments on $8 billion of LBO bridge loans. LyondellBasell term debt was active and higher, but many names contributed to the significant move. At the time, the loan market was enjoying a broad rally that began in late 2008 as high-yield bond and equities markets improved.

Gains in the loan market at that time were also attributable to a reversal of technicals to favor loan investors. A bruising string of BWIC activity had subsided. Moreover, new issues remained scant, resulting in an outsized effect on secondary prices due to year-end amortization payments, including the repayment of Alltel‘s $14 billion institutional term loan.

Despite an end-of-year rally in 2008, loans logged their sixth successive month of red ink in December 2008, with a 2.95% loss, capping off the longest losing streak on record.

All told, the Index was off 29.10% in 2008, a staggering result by any measure. It was the loan market’s first annual loss after 11 straight years of positive returns, dating from the start of the S&P/LSTA Index, in 1997, through 2007.

EFH landed in bankruptcy on April 19, 2014, after two years of publicly discussing Chapter 11 as a viable option. The company began experiencing financial troubles soon after its massive 2007 LBO.

When its debt came to market, the buyout of Dallas-based TXU by Kohlberg Kravis Roberts and Texas Pacific Group was backed by $31.65 billion in financing, making it the largest LBO ever. (The deal for the company also included investments from TPG Capital and Goldman Sachs.)

The transaction was valued at $45 billion, including the assumption of debt. Sponsors contributed $8 billion in equity. Senior leverage was 4.8x, and total leverage was about 6.9x, according to sources. The deal was announced in February 2007, through delays as a result of the credit crisis pushed completion off until October.

The LBO debt included a $20.4 billion, three-part loan, as a $16.45 billion, seven-year B term loan (a $3.45 billion B-1, a $7 billion B-2, and a $6 billion B-3); $2.7 billion, six-year revolving credit, a $1.25 billion deposit LC facility, and a $4.1 billion delayed-draw term loan, of which $2.15 billion already is drawn.

There was also a $2 billion, six-year revolving credit, and a $7.5 billion, three-part bond offering. The financing included an approximate $3.75 billion balance on the $11.25 billion bridge financing.

Industry watchers soon realized the LBO was a bad bet. Following the decline of natural gas prices, the company’s earnings plummeted, and under the weight of its crushing debt it filed for bankruptcy. — Kelsey Butler/Abby Latour

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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US Leveraged Loan, High Yield Bond Issuance – Oct. 7, 2016

US leveraged finance issuance

It was status quo issuance-wise in the U.S. leveraged finance market.

There was a relatively healthy $12.6 billion of leveraged loans issued last week, as borrowers continue to take advantage of an accommodating lending market. Year to date, U.S. loan issuance now totals $366 billion, up slightly from the pace set last year, amid a surging September 2016 market.

U.S. high yield bond issuance was relatively quiet for a second straight week, with $2.9 billion of offerings priced. Year to date, U.S. high yield volume totals $184 billion, down nearly 20% from this point in 2015. – Staff reports

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Leveraged Loan Issuance Keeps On as Investor Demand for Paper Grows

US leveraged finance issuance

Leveraged finance issuance in the U.S. is continuing its post-Labor Day surge with a substantial $28.4 billion in combined loan and high yield bond issuance last week, up from the already healthy $25.6 billion the previous week, according to LCD, an offering of S&P Global Market Intelligence.

Loans once again led the way, with $19.5 billion of new issuance via a whopping 38 deals, as investors remain hungry for paper.

“Arrangers continued to roll out new transactions into a market brimming with a mix of M&A, refinancing, and recap deals,” writes LCD’s Jon Hemingway, who covers the leveraged loan segment. “And the next two weeks should be busy as investors sort through this new business.”

Those M&A deals made some of the biggest splashes in market. Nexstar Broadcasting last week unveiled a $2.85 billion term loan to help finance the company’s $4.6 billion acquisition of Media General. Also, Inventive Health launched to syndication a $1.68 billion institutional loan backing the purchase of an equity stake in the company by PE concern Advent International.

 The sustained investor appetite is clear. U.S. loan funds last week saw another sizable cash inflow, of $306 million. That’s seven straight weeks investors have put money into the asset class, totaling $1.27 billion, according to Lipper.

Issuance in the high yield bond segment of the leveraged finance space totaled $8.9 billion last week, up slightly from the previous week. Many of those deals refinanced debt, though there was M&A as well, including a $500 million issue backing Onex Corp.’s LBO of Thomson Reuters IP&S (Camelot) and a $400 million deal backing PDC Energy’s acquisition of Kimmeridge Energy assets.  As well, Dutch internet concern Ziggo priced $2.65 billion of notes as part of a cross-border offering backing a recapitalization and dividend.

While issuance continued, high yield investors appeared to take a broader step backward last week, withdrawing a hefty $2.45 billion from the asset class, according to Lipper.

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Leveraged Loan Market Off to Shotgun Start after Labor Day Hiatus

US leveraged finance issuance

The U.S. leveraged finance market returned from the Labor Day break ready to do business, with some $25.6 billion in new deals last week, the most since the middle of June, according to LCD, an offering of S&P Global Market Intelligence.

Leading the charge was the leveraged loan segment, which saw a healthy $17.4 billion in issuance via 23 credits. Of note, it’s not just issuers looking to take advantage of the increasingly low rates on offer to opportunistically refinance existing debt.

“Roughly half the deals last week backed LBOs and other M&A transactions,” according to LCD’s Jon Hemingway, in his weekly market analysis.

This will be a welcome development to institutional loan investors, of course, as the riskier M&A/LBO transactions offer higher spreads and fees than do plain-vanilla deals (such as refinancings). As well, they add new money to an asset class that is increasingly hungry for paper.

Indeed, investors last week poured a net $318 million into U.S. loan funds.That’s the largest cash inflow in 17 months.

With the recent activity, 2016 U.S. leveraged loan volume totaled $299 billion as of Sept. 9, down only 4.2% from the same period last year.

The high yield bond segment also returned from a two-week hiatus, pricing $8.2 billion in deals, the most since the week of June 10. Unlike the loan market, high yield issuers seemed focused on lowering borrowing costs.

“Opportunistic refinancing was the major theme this week as the market returned to life following the Labor Day break,” said LCD’s Jakema Lewis, in her weekly market wrap, published Sept. 8. “A significant portion of [offerings] this week has come from issuers looking to take out or repay existing debt.”

As with the loan market, investors returned to high yield funds last week,pumping a net $610 million into the asset class. That’s the fifth week out of the last six that the asset class has seen an inflow.

U.S. high yield issuance through Sept. 9 totaled $158.6 billion, down 26% from the same period a year ago, according to LCD.

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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S&P: European Leveraged Finance Mart Shrugs Off Brexit Vote as Borrowers’ Market Persists

The European leveraged finance markets have held up extremely well since the shock of the U.K. electorate’s vote to leave the EU, according to a report published on Monday by S&P Global Ratings entitled ‘Borrower-Friendly Credit Conditions Endure As The European Leveraged Finance Market Shrugs Off Brexit Uncertainty’.

The high-yield bond market has come back to life after a three-week closure due to the referendum, says S&P. Meanwhile, the result of the Brexit vote barely disrupted the leveraged loan market, and the shortage of new issuance so far in 2016 is even giving some private equity sponsors an opportunity to take dividends, S&P adds.

S&P says much of the resilience in the capital markets can be attributed to stimulus measures such as the European Central Bank’s (ECB) Corporate Sector Purchase Programme (CSPP), and will be aided further by the recently announced corporate bond asset purchase scheme (CBPS) from the Bank of England.

European CLO issuance topped €5 billion in July. That's the most in one month during the '2.0 CLO' era.

European CLO issuance topped €5 billion in July. That’s the most in one month during the ‘2.0 CLO’ era.

Credit conditions for borrowers became much friendlier in the second quarter of 2016, with an uptick in loan repricing transactions, according to S&P, and the agency expects the European leveraged finance loan and bond markets to remain favourable for borrowers since the need for new funding — driven by mergers and acquisitions (M&A) activity — remains lower than investor demand. This is largely the result of trade buyers continuing to dominate the M&A playing field, making it tough for private equity sponsors to compete with them on valuations and thereby reducing the need for new finance, the report adds.

S&P goes on to say that while borrowers have taken this opportunity to refinance expensive subordinated debt with cheaper senior secured issuance, the result has been an increase in the amount of senior leverage in loan-funded transactions. This move is reflected in the reduction S&P has observed in the percentage of deals with ‘6’ recovery ratings and an increase in those with ‘2’, ‘3’, and ‘4’ recovery ratings this year.

Improvements in borrowing conditions could result in a new wave of refinancings, repricings, and maturity extensions, but this could also enable private equity sponsors to achieve less-stringent transaction terms, S&P warns. Companies’ leverage could also increase, S&P says, and although overall debt-to-EBITDA multiples haven’t risen in 2016, senior leverage has continued to climb to its highest level since 2007.

However, rather than the borrower-friendly conditions extending to companies further down the credit scale, S&P predicts investors will remain focused on issuers’ credit quality, and will continue to push back selectively on terms they deem too generous or risky.

The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280, or sending an e-mail to [email protected]. — Luke Millar

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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US Leveraged Finance Issuance: Leveraged Loans vs High Yield Bonds

US leveraged finance issuance

U.S. leveraged finance issuance – leveraged loans and high yield bonds – totaled $21.5 billion last week, the most since the week of June 10.

Loans comprised the bulk of the total, with $14.2 billion in deals launched last week. High yield bond issuance totaled $7.3 billion.

Year to date (through Aug. 5), U.S. leveraged loan issuance totals $272 billion, down some 11% from this point in 2015, according to LCD, an offering of S&P Global Market Intelligence.

U.S. high yield bond issuance through Aug. 5 totals $140 billion, down a hefty 30% from the same period in 2015.  – Tim Cross

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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S&P: 107 Global Corporate Defaults so far in 2016

defaults by region

The global corporate default tally has grown to 107 as of yesterday, compared to 68 at this point in 2015, according to S&P Global Fixed Income Research. The last time the corporate default count was this high? In 2009, when there were a whopping 194.

The bulk of the 2016 defaults – 72 – come from the U.S., according to S&P. – Staff reports

This analysis is part of S&P Global Fixed Income’s weekly default analysis, which also details default by sector, a list/xls of 2016 defaults, and other analysis. It is available to S&P Global Credit Portal subscribers here.

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Despite Healthy Return, US Leveraged Loans Outpace Only Treasuries in July

returns by asset class

Leveraged loans were in the middle of the pack with respect to July returns, outperforming the 10-year Treasury yield but underperforming equities, high-yield bonds, and investment-grade bonds, according to LCD, an offering of S&P Global Market Intelligence.

The loan returns stats are per the S&P/LSTA Index – Staff reports

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Diamond Resorts Rolls out $600M High Yield Bond Offering Backing Apollo LBO

Diamond Resorts is offering $600 million of eight-year (non-call three) unsecured notes, sources say. Bookrunners on the deal are RBC Capital Markets (left), Barclays, and Jefferies.

A roadshow for the offering will run Aug. 1–4, sources noted. The proceeds will be used to back Apollo Management’s $2.2 billion purchase of Diamond Resorts. Apollo in late June agreed to acquire the company for $30.25 per share. At the time the deal was announced, the company said closing was expected over the next few months.

Take note, the issuer is also shopping a $1.2 billion seven-year term loan B and a $100 million revolver to fund the buyout. Price talk for the loan has been set at L+500, with a 1% LIBOR floor and a 99 offer price.

Expected ratings for the notes are CCC+/Caa1. On July 25, S&P Global Ratings lowered its corporate credit rating for Diamond Resorts to B from B+, noting the incremental leverage and the company’s financial sponsor ownership.

Diamond Resorts International operates a network of more than 420 vacation destinations located in 35 countries throughout the continental U.S., Hawaii, Canada, Mexico, the Caribbean, South America, Central America, Europe, Asia, Australasia, and Africa. — Staff reports

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.