Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.2 billion and year to date flows stand at $49.0 billion.  New issuance for the week was $7.7 billion and year to date issuance is at $376.7 billion. 

(Bloomberg)  High Yield Market Highlights

• Tervita Corp., a Canadian waste management company focused on oilfield services, may price a junk bond Friday after it hiked pricing discussions. The riskiest debt in the CCC tier, meanwhile, is outperforming with gains of 1.44% this week.
• Tervita is offering a five-year bond at a yield of 11% area with an OID of two points, and lengthened the call period to three years from two. Early pricing discussions were for a coupon of 10% plus a two point discount
• CreditSights analysts said Tenneco’s new $500m 8NC3 issue that’s due to price today demands a premium given uncertainty around the credit with respect to asset sales
• Borrowers are hitting the market to take advantage of fund inflows, and a rally in the risky debt that looks set to extend with credit risk falling, and stock futures rising
• Junk-bond investors poured over $3 billion into retail funds during the week.
• Sizzling Platter LLC, which owns and operates franchise restaurants such as Little Caesars, revived a junk-bond sale after shelving borrowing plans last month
• It raised $350m from a five-year note offering, higher than the $325m it was looking to sell before. Borrowing costs of 8.5% were also more than it initially sought first time around
• Orders reached about $550m by mid-afternoon, according to people familiar with the matter
• Barclays Plc strategists led by Brad Rogoff expect high-yield supply to exceed $300b in 2021. Though a normalization from this year’s pace, “it is above all years from 2014-2019,” Rogoff wrote in note
• Junk-bond yields have retreated from an all-time low of 4.56% reached earlier this week amid hopes of a coronavirus vaccine that fueled a rally already underway on a Joe Biden election victory
• Yields rose to 4.99% on Thursday, up 26bps, the biggest jump in five months
• Spreads closed at 435bps more than Treasuries, up 23bps, and the most widening in seven weeks
• CCC yields also jumped the most in five months to close at 8.33%, up 40bps. Spreads closed at +764bps, widening 18bps
• CCCs are slated to gain at least 1.44%, outperfoming BBs and Bs

(Bloomberg)  Stockpiling Cash Ahead of a Covid Winter 

• One after another, some of the most embattled names in corporate Americaare racing to raise easy money while they can.
• In the junk bond market, corporations are hurrying to lock in today’s ultra-low interest rates.
• The rush underscores the angst gripping many companies even as global investors drive financial markets to giddy heights. With reduced odds for a large stimulus package, companies looking for money to tide them through the crisis are riding an election rally and progress toward a vaccine that could end the pandemic. But it could be a short reprieve, with President-elect Joe Biden warning a “dark winter” lies ahead as the virus roars back, signaling some hard months before a vaccine is available.
• “Companies are currently focused on strengthening their balance sheets and boosting cash liquidity,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. “The window is open, so take advantage of it — before a Covid Winter.”
• There will likely be more companies tapping credit markets amid record low borrowing costs, to either shore up cash, or to curb the cost of their existing loans or bonds with new and cheaper debt.
• And at these rates, other companies will follow suit, either opportunistically or to help weather the impact of Covid-19, according to Jerry Cudzil, head of U.S. credit trading at TCW Group.
• “All-in yields are almost too enticing for companies to ignore,” he said. “Given the recent rally, many companies can access the capital markets at levels not seen since pre-Covid.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at $45.8 billion.  New issuance for the week was $3.6 billion and year to date issuance is at $368.9 billion. 

(Bloomberg)  High Yield Market Highlights 

• A rally in U.S. junk bonds pushed yields near a record low as investors sought riskier assets on bets the Federal Reserve will continue to support the economy with low rates as the prospect of a divided U.S. government looms.
• Yields on the debt were just 10bps off a record low of 4.83% set in June 2014, and closed at about a 6-year low on Thursday
• The index is heading for its biggest weekly gains in five months, with spreads closing at an eight-month low of +436bps
• The rally was across ratings: single B yields were just 14bps off a six- year low of 4.99% and closed at an eight-month low of 5.13%. Spreads closed at +453bps, also an eight-month low
• The CCC index is set to outperform BBs and single Bs this week, with expected gains of 2.23%. Yields are at a new two-year low of 8.95% and spreads are at an eight-month low of +831bps
• Returns across ratings are poised to be the biggest since June
• The broader junk bond index posted gains of 0.6% on Thursday after gaining for four straight sessions. It is set to report returns of 2.13% for the week, the biggest since June 5
• Single B returns were 0.6% on Thursday and are poised for gains of 1.93% for the week. BB returns for the week could be 2.21%
• The junk bond rally may take a pause as stock futures stalled on Friday, unwinding some of the week’s surge as the election count continued 

(Bloomberg)  Junk Bonds Outperform Stocks in Busiest October Since 2012 

• Junk-rated issuers sold more than $34 billion of bonds last month, making it the busiest October since 2012 despite market turmoil from falling stocks and oil.
• While market volatility did pressure junk bonds and resulted in more than $4 billion of outflows in the last two weeks of October, new issues largely drew orders multiple times the deal size and most priced at the tight end of talk
• Outflows from retail funds coupled with tumbling stocks amid fears that the renewed spread of the virus could derail fragile economic growth, forced five borrowers to withdraw their debt offerings.
• The broader junk bond index posted a modest gain of 0.5% in October. CCCs, the riskiest of junk bonds, also reported a small gain of 0.22%
• Equities posted a loss of 2.66%, while the price of WTI crude dropped 11% in the month
• Junk bonds shrugged off equity volatility with yields little changed closing October at 5.78% vs 5.77% in September
• CCC yields actually dropped 5bps to close the month at 10.05% and have been falling for seven consecutive months, the longest declining streak since October 2009
  

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.0 billion and year to date flows stand at $45.4 billion.  New issuance for the week was $7.9 billion and year to date issuance is at $365.3 billion. 

(Bloomberg)  High Yield Market Highlights 

• PetSmart Inc. and Aston Martin are due to wrap up junk-bond sales Friday in what may be another volatile session amid rising coronavirus cases and fresh concerns about the outlook for technology giants.
• BC Partners sweetened terms on its PetSmart Inc. debt sale to split the company from Chewy Inc. by increasing the size of the bond portion, shifting funding from a concurrent loan offering, and raising pricing
• Books on the bond are due to close at 10:30 a.m. in New York. Commitments on the loan were extended to the same time
• Smyrna Ready Mix scrapped plans for a $315m loan sale and upsized its high-yield bond offering by the same amount to $830m
• The 8NC3 notes are expected to price in the range of 5.75%-6% after talk was widened from early discussions of 5%
• It’s the second loan to be pulled from syndication in lieu of bonds this week following MultiPlan on Oct. 27
• Aston Martin may also sell bonds, rated in the CCC tier, in euros and dollars
• Retail investors are fleeing the asset class, pulling $3 billion from high-yield during the week, the first cash exit since September
• HYG, one of the largest exchange-traded funds in the sector, posted outflows in the latest session, the fourth straight day of withdrawals
• Junk bonds have come under pressure with yields jumping 44bps week-to-date to 5.77%, the highest since Sept. 30. Credit risk is higher Friday, while stock futures are lower
• The broader index posted losses of 0.039% on Thursday, the fourth straight day of negative returns, putting the market on track for the biggest weekly loss since September
• While some borrowers have had to sweeten deals to attract buyers, new issues have seen robust demand in several cases

(Bloomberg)  JPMorgan Sees Junk-Bond, Leveraged Loan Issuance Falling in 2021

• High-yield bond gross issuance will total $375b next year, down 15% from the record of ~$425b expected in 2020, according to a report from analysts at JPMorgan.
• If that prediction holds, it would put 2021 among the biggest years for gross volume since 2012-2014, which averaged $374b
• Outlook assumes another year of “heavy refinancing activity,” JPMorgan analysts led by Peter Acciavatti said in the report
• Forecast sees issuance at $125b net of refinancing, a decline of 10%-15% from the ~$150b for this year
• Sees 30% fall in gross loan net volume to $275b from ~$400b this year, “amid little-to-no repricing activity”
• Sees net volume down 10% to $150b from ~$165b
• Historically low interest rates coupled with a baseline forecast for a continued recovery in the U.S. economy should lead to “somewhat more of the same” for capital markets in 2021, the analysts said
• Spread of the virus and release of a vaccine will continue to be elements of uncertainty as the unpredictability surrounding the election will lift
• “These conditions should produce only a modest increase in the M&A pipeline, whereas 2Q’s surge of general corporate purpose deals will not repeat itself,” according to the report
• Due to the “low state of yields” record refinancing wave will continue
• “That said January and February’s wave of loan re-pricings will also not repeat itself with an average dollar price $3 below where it stood in February,” the analysts said

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at $48.4 billion.  New issuance for the week was $8.7 billion and year to date issuance is at $357.4 billion. 

(Bloomberg)  High Yield Market Highlights 

• Apollo Global Management Inc. and Platinum Equity may sell risky PIK toggle notes Friday to fund dividends to the private equity firms. Fund inflows may have tapered off, but U.S. junk bonds are set to post gains for the fourth straight week, led by the riskiest CCC tier.
• Investors are said to be pushing for changes on a $500m junk bond sale for Platinum Equity’sMulti-Color Corp.
• Lenders are resisting the deal’s call structure, which currently allows the label-maker to buy back the five-year bonds just one year after being sold
• Early pricing discussions for the five-year offering are 12% if interest is paid in cash, and an additional 0.75 percentage point if paid with more debt
• Apollo’s Aspen Insurance Holdings Ltd. is selling $500m of PIK toggle notes. Early pricing discussions for the five-year issue are in the high-7% range
• U.S. corporate high-yield funds saw incoming cash of about $100 million for the week
• Yields rose 3bps to 5.34%, and may retreat again with credit risk falling and equity futures rising this morning
• The index posted a modest loss of 0.005% on Thursday
• CCCs bucked the trend, posting gains of 0.02%, and are on track to be best performing asset class for the week with 0.15% returns
• Three years after saddling PetSmart Inc. with debt to acquire online rival Chewy Inc., a group led by private equity firm BC Partners is splitting them in two
• The group plans to recapitalize PetSmart with $1.3b of equity and $4.65b of debt raised from institutional money managers
• Business development companies are tweaking their credit agreements to allow their borrowers to defer interest payments
• Known as turning the loans into PIK obligations, the change can help borrowers conserve cash in the near term, but boost their debt loads in the process

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.8 billion and year to date flows stand at $48.2 billion.  New issuance for the week was $8.0 billion and year to date issuance is at $348.7 billion. 

(Bloomberg)  High Yield Market Highlights 

• Ligado Networks is slated to price its $3.85b junk bond sale today, dangling a record 17.5% coupon to lure investors as its seeks to refinance debt and avoid bankruptcy.
• The hiked interest rate is the biggest offered on a high-yield deal since at least 2002, according to data compiled by Bloomberg, and comes amid other sweetened terms
• U.S. junk bonds showed resilience amid falling equities Thursday
• Apollo Global Management Inc.’s Jim Zelter says there will be a new spike in defaults next year as some companies struggle to service the extra debt they took on during the pandemic
• Investor confidence in junk bonds was evident via the cash allocation to the asset class. High-yield retail funds reported an inflow of almost $2 billion for the week
• Risk assets have remained buoyant despite a lack of progress on stimulus and disappointing macro data, Barclays strategist Brad Rogoff wrote on Friday
• The junk bond index came under slight pressure, posting a loss of 0.26% and is headed for a modest weekly loss of 0.06%
• Yields jumped 13bps to close at 5.37%, the biggest increase in three weeks
• Spreads widened 10bps to close at +475bps, also the most widening in three weeks

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.9 billion and year to date flows stand at $46.4 billion.  New issuance for the week was $6.6 billion and year to date issuance is at $340.6 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed for the biggest weekly gains in more than two months with yields just 53bps off June 2014’s record low of 4.83% as CCCs and even lower rated pay-in-kind bonds find eager buyers.
• The rally may extend as global equities, also on track to post their best weekly gains since July, and U.S. stock futures climb on renewed hopes of fresh stimulus
• Investors returned to the asset class with gusto, pouring cash into retail funds after recent exits amid market volatility. U.S. high yield funds reported an inflow of $4.01b for the week ended Oct. 7, the 11th biggest on record, after pulling cash the previous two weeks
• Issuance continued unabated this week with almost $7 billion in debt pricing
• In keeping with the recent trend and an overall risk-on tone, demand for new issues was at least about 3x offering sizes, and even CCCs saw robust demand
• The high-yield index posted gains of 0.2% on Thursday and is on track to see the biggest weekly gains since July. The index has seen gains for four straight sessions
• Yields closed at 5.36%, a five-week low, and is just 53bps off the record low of 4.83%
• Spreads closed at +474, down 5bps and also a five-week low

(CNBC)  Trump reverses course on coronavirus relief talks 

• President Donald Trump reversed course Tuesday night and urged Congress to approve a series of coronavirus relief measures that he would sign, including a new round of $1,200 stimulus checks for Americans.
• Earlier in the day, he had halted talks between top Democrats and Republicans until after the election, which appeared to have killed the chances of a new package.
• “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?” Trump tweeted Tuesday night.
• He said in another tweet that he would approve funding for specific struggling industries, such as airlines and small businesses, which is short of what House Democrats proposed.
• “The House & Senate should IMMEDIATELY Approve 25 Billion Dollars for Airline Payroll Support, & 135 Billion Dollars for Paycheck Protection Program for Small Business. Both of these will be fully paid for with unused funds from the Cares Act. Have this money. I will sign now!” Trump said.
• A senior administration official familiar with the president’s thinking said Tuesday that a “large-scale stimulus package is on the sidelines,” as Trump made clear earlier, saying the president felt it best not to string people along. But the White House appears to be planning to push a series of smaller, individual packages on mutually agreed-upon items.
• Initial coronavirus aid expired at the end of July. Current negotiations had centered on a package that would have provided another round of direct payments to Americans, enhanced unemployment benefits and money for schools, testing, small businesses and the airline industry, which has begun substantial layoffs.
• Trump had slammed the door on a pre-election deal hours after Federal Reserve Chairman Jerome Powell said more stimulus to the economy is necessary, saying the recovery has “a long way to go.”
• Pointing to promising recent economic developments, Powell said easing up on added relief could “lead to a weak recovery, creating unnecessary hardship for households and businesses.”
• “By contrast, the risks of overdoing it seem, for now, to be smaller,” Powell told the National Association for Business Economics. “Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”
• Congressional negotiators have been deadlocked for months over a new stimulus package after having passed initial relief earlier in the year. Pelosi and Treasury Secretary Steven Mnuchin had recently resumed talks, but progress had been stalled.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.2 billion and year to date flows stand at $41.5 billion.  New issuance for the week was $3.8 billion and year to date issuance is at $334.0 billion.

 (Bloomberg)  High Yield Market Highlights

• U.S. junk bonds may be hit by market volatility after President Donald Trump and First Lady Melania Trump tested positive for the coronavirus. Meanwhile at least two deals are slated to be sold on Friday
• A key gauge of credit risk is lower, while stock futures tumbled as uncertainty mounted around the U.S. presidential elections
• Investors are already jittery, pulling over $2 billion from high-yield funds this week. This was the second straight week of withdrawals
• Demand for new issues is showing no signs of waning with investor orders as much as three to four times the amount of debt available
• Spreads tightened 7bps to close at an almost two-week low of 510bps more than Treasuries. Yields dropped 8bps to 5.69%
• The index posted gains of 0.17% on Thursday, the fourth straight session of positive returns
• CCCs have gained 1.05%, beating BBs and single Bs at 0.83% and 0.9% respectively

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$4.8 billion and year to date flows stand at $43.7 billion.  New issuance for the week was $11.2 billion and year to date issuance is at $330.1 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed for the biggest weekly loss since April amid fund outflows, equity volatility and concerns about the economic outlook. Most new issues have been well received by investors, but borrowers may take a step back until more stability returns.
• Investors pulled over $4 billion from junk-bond funds during the week, the 10th biggest withdrawal on record
• Spreads widened another 14bps Thursday. They’ve jumped 43bps since last Friday to 533bps more than Treasuries, the highest level since July 17, according to the data
• Yields have risen 15bps to a 10-week high of 5.98%. They’ve been under pressure for six straight days, the longest losing streak since March
• The index has lost 1.45% this week, the worst since April. Energy has lost 2.93%, the most since March
• The primary market has still managed to absorb more than $11 billion of new issue supply this week,
• The number of bonds trading above call prices has fallen to $37.3b outstanding from $56.8b the previous week, which could have a knock-on effect on potential refinancings
• September volume has reached more than $44 billion to make it the fourth busiest month on record, the data show

(Bloomberg)  U.S. Junk Bonds Set Sales Record Amid Yield Hunt

• U.S. high-yield bond sales reached an annual record of $329.8 billion Wednesday as companies reap the benefits of the Federal Reserve’s liquidity-boosting policies and investors grasp for yield.
• The crush of debt offerings accelerated in April after the U.S. central bank began purchasing some high-yield bonds as part of its efforts to support the corporate credit markets.
• Since then, issuance has eclipsed the prior annual sales record of $329.6 billion set in 2012, according to data compiled by Bloomberg.
• Companies staring at sharp, pandemic-induced revenue declines were emboldened to borrow billions of dollars to help ride out the pandemic. Some of the most virus-battered borrowers, including airlines, hotels and even cruise operators, were able to tap investors for financing, sometimes paying double-digit coupons.
• Now, junk-rated issuers have tilted away from securing lifelines and are instead looking to lock in lower interest rates and push out maturities on existing debt loads. The shift, coupled with support from the Fed, has forced investors to accept diminishing yields.
• The junk market’s record year follows the U.S. investment grade bond market, which reached a new annual issuance high in mid-August. Europe’s high-yield bond sales surged in July, the busiest for that month since 2009.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at $48.6 billion.  New issuance for the week was $21.3 billion and year to date issuance is at $318.9 billion.

(Bloomberg)  High Yield Market Highlights 

• S. junk bonds are holding up well amid heavy supply. They’re set to post gains after two weeks of losses, and the riskiest debt in the CCC tier is leading the way.
• CCCs have returned 0.85% so far this week, the fourth week of gains. The broader index has gained 0.15%
• Spreads have also been resilient, tightening 8bps to 488bps more than Treasuries since Friday even after the third busiest week on record for supply, according to Bloomberg
• “Despite the lack of good news, spreads were little changed on the week and volatility remains light compared with equities,” Barclays Plc strategists led by Brad Rogoff wrote in note on Friday. This means that the market is “in a range”, he added
• The annual supply record is in sight with just a bit more needed to topple the previous high of $329.6b set in 2012
• New issues are drawing investor demand of more than three times the size of debt offered in many cases
• Junk bond spreads and yields closed at +488bps and 5.48%, respectively
• CCC spreads bucked the trend, tightening 7bps to +919bps, the lowest level since Feb. 26

(Barron’s)  The Federal Reserve Is Buying Fewer Junk Bonds. That Should Be Good News 

• The Federal Reserve has taken a step back from the high-yield bond market. That isn’t necessarily bad news, Citigroup says.
• It bought high-yield debt at a pace of $550,000 a day in August, according to Citi’s analysis of the Fed’s latest report. That is significantly slower than its peak pace of $55 million a day in mid-May.
• The composition of the Fed’s purchases has changed in a couple of ways as well.
• First, the central bank bought bonds directly, instead of buying exchange-traded funds that own bonds. While ETFs were the quickest way for the central bank to provide broad support to the corporate debt market, they are only a fraction of the market’s total size. So it shouldn’t be surprising that the Fed has focused its efforts on direct bond purchases instead.
• More important, junk-rated bonds made up a smaller share of the Fed’s purchases. They made up just 1.1% of the bonds purchased during the month ended Aug. 28, down from a 2.5% share in July, Citi found.
• “Critically, the updated report indicates the Fed has significantly reduced both the scale and scope of support for high yield,” the bank’s strategists wrote in a note.
• “The improvements in market structure and economic performance indicate less need for continued broad-based support,” the bank’s strategists wrote. “Should conditions deteriorate over the medium term, the Fed would likely ramp purchases again.”

(Wall Street Journal)  Central bank signals rates near zero at least through 2023

• The Federal Reserve pledged to support the economic recovery by setting a higher bar to raise interest rates and by signaling it expected to hold rates near zero for at least three more years.
• In new projections released Wednesday after a two-day policy meeting, all 17 officials who participated said they expect to keep rates near zero at least through next year, and 13 projected rates would stay there through 2023.
• The Fed’s rate-setting committee also released new guidance specifying it would maintain rates near zero until it sees evidence of a tight labor market and inflation reaches 2% “and is on track to moderately exceed 2% for some time.”
• “They set an enormously high bar to raise rates here. That’s the bottom line,” said Roberto Perli, a former Fed economist who is now at research firm Cornerstone Macro.
• The Fed’s meeting was its first since officials made public last month a new policy framework that abandoned officials’ longtime strategy of pre-emptively lifting interest rates to head off higher inflation rates.
• The latest materials from the Fed revealed just how much the central bank expects to change the way it will react to improvements in the economy.
• New economic projections, for example, showed most officials expected interest rates to stay near zero over the next three years, even if inflation reaches 2% and the unemployment falls to around 4%.
• “These changes clarify our strong commitment over a longer time horizon,” said Fed Chairman Jerome Powell at a news conference. “I’m not looking for a big reaction right now. But I think over time, guidance that we expect to retain the current stance until the economy has moved very far toward our goals is a strong and powerful thing.”