CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$15.9 billion. New issuance for the week was $6.3 billion and year to date HY is at $255 billion, which is up 22% over the same period last year.

(Bloomberg) Junk Investors Welcomed Debut Offerings as Yields Held Steady

• Junk bond issuers kicked off the week on a busy note, adding $2.5b to the pipeline; Starwood Property drove by and priced $500m at the tight end of talk.
• Two of the four issuers, MATW and MPVDCN, were tapping the debt markets for the first time, suggesting investors were willing to consider unknown credits
• Junk yields were steady as oil prices held firm and were off a tad from the 29-mo. high on Friday; stocks were near new highs
• GNC Holdings dropped its $500m 5NC3 notes offering and boosted its loan as bond investors strongly resisted adding on a retail name to their portfolios indicating investors were cautious in assessing risk
• The supportive environment for high yield continued amid steady stocks, strong oil and light supply
• Other factors that backed high yield remained strong: the Moody’s Liquidity Stress Indicator was at a new record low of 2.6% as of mid-November, suggesting strong corporate liquidity and issuers having ready access to capital markets
• Corporate default rates declined and the covenant stress index slipped to 2.3% in Oct., suggesting low risk of issuers violating financial maintenance covenants
• Steady economy, declining default rates, low volatility, rising oil prices and steady stocks augur well for high yield  

(Bloomberg) Rare Expansion for Corporate Junk on Busy Issuance, Downgrade

• The U.S. corporate high yield market has expanded in November, only the fourth monthly size gain in the past year as gauged by the Bloomberg Barclays U.S. Corporate High Yield Bond Index. Active primary, as well as a number of downgrades, will increase the net roster along with the index capitalization in the Dec. 1 rebalancing.
• Membership in the Bloomberg Barclays U.S. Corporate High Yield Bond Index is due to expand by a net 14 securities in the Dec. 1 rebalancing, only the fourth instance of roster growth in the past 12 rebalancing cycles. The primary market heated up in November on rising oil prices and credit spreads near the tightest levels in three years. The median net membership change over the past 12 rebalancings remains at negative 11 bonds.
• The Bloomberg Barclays U.S. Corporate High Yield Bond Index capitalization will add an estimated $4 billion in the Dec. 1 rebalancing, with $24 billion in bonds joining vs. $20 billion exiting. New issues account for $19 billion, with energy companies particularly active in the primary market as crude oil rose above $55 a barrel. 

(Deal Reporter) Regal, Cineworld Said to Reach Agreement on $23/Share

• Cineworld and Regal reached an agreement in principle on RGC takeout price of $23/share
• Talks are still ongoing and not the final agreement yet, though deal expected in next few days
• Offer price not likely to be further improved, seen as firm
• Funding for Cineworld’s bid for Regal Entertainment looks “stretched,” citing a top Cineworld holder, who said there’s a question of how much leverage the combined company can handle.
• RGC/Cineworld implied post-deal net debt to Ebitda, prior to any equity raise, likely >7x vs AMC’s 5.6x
• Cineworld in process of meeting with large holders this week, holders that will have input on the company’s likely equity offering  

(Modern Healthcare) Healthcare industry braces for multiple hits from Senate tax bill

• The sprawling tax cut legislation speeding through Congress is likely to result in major changes in healthcare, including significant insurance coverage losses, higher premiums, tighter access to capital, and greater margin pressure.
• Experts caution that the legislation will have big downstream effects on funding for Medicare, Medicaid, Affordable Care Act subsidies and other federal and state healthcare programs. That’s because the projected $1.5 trillion increase in the federal budget deficit resulting from the tax cuts would put pressure on Congress to slash healthcare spending.
• Indeed, Sen. Marco Rubio (R-Fla.) said Wednesday that cutting taxes must be followed by restructuring and shrinking spending on entitlement programs, including reducing benefits and raising the eligibility age for Medicare and Social Security.
• Insurers and providers strongly oppose the Senate tax bill’s provision, likely to be adopted by the House, that would immediately repeal the Affordable Care Act’s tax penalty on people who don’t obtain health insurance. They warn that would hurt market stability by leading healthier people to drop coverage, thus driving up premiums and pushing insurers to exit the exchange market. 
• Healthcare industry analysts also are worried about the Senate bill’s repeal of the federal deduction for state and local taxes paid by individuals. That likely would create pressure in states with relatively high state and local taxes, like California and New York, to reduce taxes, leading to less revenue for funding Medicaid and other healthcare programs.
• And that could hurt providers and insurers. “We already are in a world where operating margins are being pressured and are generally declining,” said Martin Arrick, managing director of S&P Global Ratings’ not-for-profit group. “This will be one more event that puts additional pressure on provider margins.”