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Loan bids recoup some losses in week-over-week observation

The average bid of LCD’s flow-name composite advanced 18 bps over the past week, to 98.33% of par, from 98.15 on Aug. 26. (Due to light secondary activity, LCD is reading the flow-name composite once a week, on Wednesdays. We will resume the regular Tuesday/Thursday schedule after Labor Day.)

Among the 15 names in the sample, 10 advanced, one declined, and four were unchanged from the previous reading. Posting the largest moves in either direction were the Charter Communications F term loan due 2021, the PetSmart term loan due 2022, and the Restaurant Brands (Burger King) term loan due 2021, each of which was bid a half-point higher in the previous reading. Note that today’s positive reading snaps a streak of six consecutive declines in the average bid price.

The market has continued to recoup some of the losses posted early last week on concerns about China. Activity has been thin during what is typically a quiet time of the year, but as noted previously, loans have outperformed equities and high-yield last month, and so far in September have been stable despite this week’s swings in stocks.

Looking ahead, players say that although the loan markets and the capital markets overall clawed back lost ground in late August, the watch words for September are “price discovery.” For one thing, all the issues that caused the markets to correct in August – full valuations in the equity markets, China’s currency devaluation and economic slowdown, woes in the emerging markets, tepid economic growth in the U.S., weak oil prices, uncertainty over whether the Fed will begin raising the funds rate – remain in effect. Therefore, arrangers say August’s secondary market decline has left the new-issue market in price discovery mode. Players say it’s tough to gauge where clearing yields will settle once the new-issue market reopens post-Labor Day, which, after all, will be after a new-issue hiatus of several weeks.

With the average loan bid rising 18 bps, the average spread to maturity dropped four bps, to L+427.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.5/L+369 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+367.
  • 96.58/L+529 for the six loans rated B or lower by one of the agencies; STM in this category is L+501.

Loans vs. bonds 
The average bid of LCD’s flow-name high-yield bonds added 82 bps, to 97.60% of par, yielding 7.40%, from 96.78 on Aug 26. The gap between the bond yield and discounted loan yield to maturity stands at 315 bps. – Staff reports

To-date numbers

  • September: The average flow-name loan increased 18 bps from the final August reading of 98.15.
  • Year to date: The average flow-name loan advanced 141 bps from the final 2014 reading of 96.92.

Loan data

  • Bids gain: The average bid of the 15 flow names rose 18 bps, to 98.33% of par.
  • Bid/ask spreads tighten: The average bid/ask spread shrank four basis points, to 34 bps.
  • Spreads drop: The average spread to maturity – based on axe levels and stated amortization schedules – edged down four basis points, to L+427.
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High yield bond market in Aug: slow issuance, wider spreads

High-yield issuance in August was $10.2 billion, barely surpassing the $10 billion of volume in July but outpacing the $3.1 billion priced last August, LCD data shows. Note that issuance concluded on Aug. 19, when KIK Custom Products priced the last deal before the late summer shutdown. August is now the second slowest month of the year, next to July, with June the third slowest month at $21.2 billion. For the year-to-date, volume in 2015 through August is 1.4% behind last year’s pace, at $205.85 billion versus $208.80 billion. That gap has narrowed from the 5% decline at the end of July, but prior to July, volume had been running ahead of the pace for 2014.

Recall July’s slowdown was tied to commodities volatility, China’s stock market plunges, and early in the month, fears of a default in Greece. In August, those issues, apart from Greece, took an even greater toll on the market, and the debate continues over whether the Fed will raise interest rates in September. More participants are taking the view, given the latest disruptions in global markets, that it won’t.

Had the high-yield primary market not already shut down by Aug. 19, the tough conditions late-month would have certainly prevented issuers from tapping the market regardless. Already, several of the 19 deals that priced in August had to come with healthy concessions as investors pushed back amid tough conditions. As seen in June and July, the bulk of issuance came from time-sensitive M&A and LBO issuers, to represent 39% of total volume for the month, although dividend and recapitalization/stock repurchase use of proceeds both grew as compared to previous months.

The yield to worst on the S&P U.S. Issued High-Yield Index finished the month much wider at 7.17%, from 6.59% on July 31. The option-adjusted spread widened to T+573, from T+511 at the end of July. – Joy Ferguson/Matt Fuller

HY market in Aug

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Loan default rates climb in August amid weakness in Energy sector

After a two-month absence, default activity resumed in August, when two energy names – Samson Resources and Alpha Natural Resources – defaulted on $1.6 billion of S&P/LSTA Index loans. As a result, the lagging-12-month default rate climbed to a five-month high of 1.30% by amount, from July’s 33-month low of 1.11%, and to 0.78% by number of issuers, from a 7.5-year low of 0.57%.

Loan index defaults Aug 2015

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U.S. speculative-grade corporate default rate hits two-year high

The U.S. trailing-12-month speculative-grade corporate default rate increased to 2.4% in August, reflecting seven defaults during the month, according to estimates by Standard & Poor’s global fixed income research. The latest reading represents the highest level for the default rate in the past two years.

Alpha Natural Resources Inc., ASG Consolidated LLC, SandRidge Energy Inc., Samson Resources Corp., Wilton Holdings Inc.,SAExploration Holdings Inc., and Halcon Resources Corp. each defaulted in August.

The rating agency expects the U.S. trailing-12-month speculative-grade corporate default rate to rise to 2.9% by June 30, 2016.

At the same time, the Standard & Poor’s U.S. distress ratio rose to 15.5% in August, its highest level in more than four years, as plunging oil prices caused spreads of Oil & Gas issues to widen considerably (see “Oil & Gas issues push S&P U.S. distress ratio to 4-year high,” LCD News, Aug. 27, 2015.)

According to S&P, the U.S. investment-grade spread expanded to 211 bps as of Aug. 31, from 196 bps as of July 31, while the speculative-grade spread widened considerably to 643 bps, from 607 bps. – Rachelle Kakouris

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LCD’s estimate of loan fund flows (8/27): -$111M Lipper/-$156M total

On Thursday, Aug. 27, outflows from loan mutual funds totaled an estimated $111 million based on the Lipper FMI universe of weekly reporters, or $156 million based on the total universe of open-ended funds plus ETFs, versus outflows of $113 million/$143 million on Wednesday, Aug. 26.

For the five business days ended Aug. 27, outflows totaled $933 million (Lipper FMI universe) and $1.21 billion (total universe plus ETFs), versus outflows of $783 million/$979 million during the five business days ended Aug. 20.

Methodology:

LCD compiles these data with the cooperation of a number of mutual-fund complexes. LCD is collecting daily fund-flow data for a representative sample of loan funds. We then take the weighted average AUM change each day from contributors and extrapolate it to:

  • the Lipper FMI AUM universe of $83.9 billion (as of Aug. 26) to provide a “Lipper-style” daily reading of inflows/outflows, and
  • the entire open-ended loan universe of $117 billion to give a fuller view of estimated inflows/outflows.
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Cruel summer: Loan bids end August in red as losses deepen

After drifting lower throughout the month, the average bid of LCD’s flow-name composite took a harsher fall in today’s reading, dropping 51 bps to 98.15% of par, versus the previous reading of 98.66 on Aug. 19.

Today’s drop is the steepest since December 2014, though note it is a week-over-week observation (the flow-names will return to the regular twice-weekly Tuesday/Thursday schedule after Labor Day).

While the flow-name composite had been steadily declining throughout August – there is not one single positive reading this month – declines accelerated in today’s reading. Equities have tumbled in very volatile trading in recent days as concerns about China’s economy have intensified.

Among the 15 names in the sample, 14 declined, and one advanced from the prior reading. Posting by far the steepest loss was the B-/B3 Avaya B-7 term loan due 2020 (L+525, 1% LIBOR floor), which is bid 3.75 points lower, at 84.25. Though there’s no news specific to the credit this week, higher-beta loans and those in out-of-favor sectors have well underperformed the broader market during this recent patch of volatility. By contrast, no other loan moved more than half a point, and excluding Avaya, the average bid would be down 28 bps.

Overall, lower-rated loans under performed: the nine loans in the sample rated B+ or higher, on average, declined 23 bps, to 99.31; the six loans rated B or lower, on average, fell 91 bps, to 96.42.

With a 0.52% drop, loans have held up well as compared with other asset classes in recent sessions. The average bid of the flow-name bond composite fell 94 bps, or 0.96%, over the week, to 96.78% of par, while even with today’s rebound, as of about 2:30 p.m. EDT, the S&P 500 had tumbled nearly 8.6% from the Aug. 19 close of 2,079.61.

Nevertheless, a 51 bps drop is nevertheless a significant move for the typically more stable loan asset class, and pushes the spread to maturity implied by the average bid out to L+430.9, which is 12.6 bps wider than a week ago, 34.7 points wider than the end of July and at its widest level since the end of December. The average bid, meanwhile, is at its lowest level since Jan. 6 (Note there have been some changes to the sample this year, so these are not apples-to-apples comparisons).

Overall, LCD’s flow-name bid declined a total of 1.51 points (1.51%) over the course of the month, down from 99.65 in the final July reading. High-yield and equities suffered a worse drubbing – the average flow-name bond composite slid 2.77 points (2.78%) during the month, while as of just after 2:30 p.m. EDT, the S&P 500 was on track to well underperform both loans and high-yield, off over 9.6% from the July 31 close of 2,103.84.

Given the wild swings in equities in recent days, arrangers and issuers will wait to see what the next 1.5 weeks bring, but the data above indicate that clearing yields are bound to widen when the primary market gets back to business after Labor Day. Market participants are also keeping a close eye on how the recent volatility – and the ensuing expectations that a September rate hike is no longer in the cards – will impact loan funds, which have seen outflows accelerate in recent days. LCD data project, per the Lipper sample of weekly reporters, for the five business days ended Aug. 25, outflows totaled $1.01 billion. As for CLOs, the recent weakness in the secondary creates a buying opportunity for managers, but liabilities could widen as well.

With the average loan bid sinking 51 bps, the average spread to maturity jumped 13 bps, to L+431.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.31/L+375 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+371.
  • 96.42/L+535 for the six loans rated B or lower by one of the agencies; STM in this category is L+506.

Loans vs. bonds
The average bid of LCD’s flow-name high-yield bonds plunged 94 bps, to 96.78% of par, yielding 7.65%, from 97.72 on Aug 19. The gap between the bond yield and discounted loan yield to maturity stands at 339 bps. – Staff reports

To-date numbers

  • August: The average flow-name loan decreased 150 bps from the final July reading of 99.65.
  • Year to date: The average flow-name loan increased 123 bps from the final 2014 reading of 96.92.

Loan data

  • Bids slip: The average bid of the 15 flow names tumbled 51 bps, to 98.15% of par.
  • Bid/ask spread wider: The average bid/ask spread widened one basis point, to 38 bps.
  • Spreads gain: The average spread to maturity – based on axe levels and stated amortization schedules – climbed 13 bps, to L+431.
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High yield bond prices fall to 2015 low; California Resources leads decliners

The average bid of LCD’s flow-name high-yield bonds declined 94 bps in today’s reading, to 96.78% of par, yielding 7.65%, from 97.72% of par, yielding 7.42%, on Aug. 19. There were 10 decliners and just one gainer, with four of the 15 constituents unchanged.

Today’s decline comes after a modest 25 bps advance in last week’s reading, and it is the fourth decline in five readings. Take note that this is a seasonal once-a-week observation, so it’s covering five sessions, rather than three. Next week, the measurement will be also be week-over-week.

Today’s decline was led by a loss of 4.5 points on California Resources 6% notes due 2024. The rest of the decliners were each down two points or less. The negative reading incorporates several heavy sessions since last Wednesday, including Monday’s massive global market sell-off sparked by steep losses in the Shanghai Composite.

Today’s average of 96.78 marks the lowest reading of 2015. The average is down 69 bps from the Aug. 13 reading nearly two weeks ago. Dating back nearly four weeks to the July 30 reading, the average is down 277 bps. However, due to a revision in the sample, the bond bids are still up 109 bps in the year to date.

With today’s decline in the average bid price, the average yield to worst widens 23 bps, to 7.65%, and the average option-adjusted spread to worst climbed 28 bps, to T+617. Both yield and spread are at 2015 wides.

The yield and spread in today’s reading are wider than in the broad index. The S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed yesterday, Aug. 25, with a 7.29% yield-to-worst and an option-adjusted spread to worst of T+587.

For further reference, take note that a June 24, 2014 reading of 106.98 – close to the February 2014 market peak of 107.03 – had the flow-name bond average yield at 5.02%, an all-time low, but spreads weren’t quite there. Indeed, the average yield was 7.63% at the prior-cycle peak in 2007, and the average spread at the time was T+290.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell 51 bps in today’s reading, to 98.15% of par, for a discounted loan yield of 4.26%. The gap between the bond yield and discounted loan yield to maturity is 339 bps. – Staff reports

The data

  • Bids rise: The average bid of the 15 flow names declined 94 bps, to 96.78.
  • Yields fall: The average yield to worst slipped 23 bps, to 7.65%.
  • Spreads tighten: The average spread to U.S. Treasuries widened 28 bps, to T+617.
  • Gainers: The sole gainer was Charter Communications 5.75% notes due 2024, which rose a quarter of a point.
  • Decliners: The 10 decliners were led by California Resources 6% notes due 2024, which slumped 4.5 points, to 69.
  • Unchanged: Four of the constituents were unchanged.
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Loan-fund AUM edges up in July, but outflows heavy so far in August

After declining by $2.8 billion in June, loan mutual funds’ asset under management edged up $343 million in July, to $136 billion, according to Lipper FMI and fund filings, as concerns over the potential Grexit faded after Greece agreed to a bailout package from the European Union. July’s small increase left loan fund AUM down $5.3 billion over the first seven months of 2015, from 2014’s final reading of $141.3 billion (though outflows resumed and intensified in early August amid choppy conditions across the capital markets, as we discuss below).

Loan fund AUG in July

 

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Oil & Gas companies account for more than a quarter of 2015 defaults

The global corporate default tally climbed to 70 issuers after two U.S.-based exploration-and-productions companies triggered a default in the past week. Oil & Gas companies now account for more than a quarter of defaults so far this year, according to a report published by Standard & Poor’s on Friday.

SandRidge Energy entered into an agreement to repurchase a portion of its senior unsecured notes at a significant discount to par, prompting S&P to lower its corporate credit rating on Aug. 14 to D, from CCC+, on what the agency considers to be a distressed transaction and “tantamount to a default”.

Samson Resources failed to make the interest payments due on its $2.25 billion of 9.75% unsecured 2020 notes due Aug. 15. Standard & Poor’s subsequently lowered Samson’s corporate credit rating to D, from CCC-.

Of the 70 defaulting entities, 40 are based in the U.S., 14 in emerging markets, 12 in Europe, and 4 in the other developed nations. By default type, 22 defaulted due to missed interest or principal payments, 19 because of distressed exchanges, 14 reflected bankruptcy filings, seven were due to regulatory intervention, six were confidential defaults, one resulted from a judicial reorganization, and one came after the completion of a de facto debt-for-equity swap.

Standard & Poor’s Global Fixed Income Research estimates that the U.S. corporate trailing-12-month speculative-grade default rate will rise to 2.8% by March 2016, from 1.8% in March 2015 and 1.6% in March 2014. – Staff reports