Category: High Yield Weekly

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$2.2 billion and year to date flows stand at -$1.7 billion.  New issuance for the week was $17.3 billion and year to date issuance is at $98.6 billion.

(Bloomberg)  High Yield Market Highlights 

• The junk bond market is likely to see more supply with stock futures rising and oil steadying. Titanium dioxide producer Tronox is set to price a $400 million deal Friday, while Delta Air Lines is seeking to raise about $3 billion from loans and bonds that may price early next week.
• Issuers have been racing to the market, mostly to shore up liquidity. Over $17b of volume has priced this week and the month’s tally is now over $33 billion.
• New issues have been well received
• Streaming giant Netflix pulled in more than $5b of orders on its $500m offering and priced it at a yield of 3.625%, among the lowest ever seen in the U.S. high-yield bond market and in line with prices typically offered on investment-grade bonds.
• Gap drew more than $8b of demand for a $2.25b deal that was increased from $2b. Demand was skewed to the five-and seven year tranches, according to people familiar with the matter
• XPO Logistics increased the size of its offering by $100m to $850m and priced it at the lower end of talk. Orders had reached more than $4b by early afternoon
• US Foods’ $1b deal was upsized from $800m as orders topped $3.2b
• Investors poured more cash into junk bonds with retail funds reporting an inflow of $2.2b for week, after seeing a record weekly inflow last week. This was the fourth straight week of inflows.
• Junk bond yields and spreads were a touch weaker Thursday. Spreads have widened 42bps since Monday to 762bps over Treasuries
• Index returns have been negative in three of the last four sessions

(Bloomberg)  Oil Plunges Below Zero for First Time in Unprecedented Wipeout

• Of all the wild, unprecedented swings in financial markets since the coronavirus pandemic broke out, none has been more jaw-dropping than Monday’s collapse in a key segment of U.S. oil trading.
• The price on the futures contract for West Texas crude that was due to expire Tuesday fell into negative territory — minus $40.32 a barrel at the low. That’s right, sellers were actually paying buyers to take the stuff off their hands. The reason: with the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies have run out of room to store it. And if there’s no place to put the oil, no one wants a crude contract that is about to come due.
• Underscoring just how acute the concern is over the lack of immediate storage space, the price on the futures contract due a month later settled at $20.43 per barrel. That gap between the two contracts is by far the biggest ever.
• “The May crude oil contract is going out not with a whimper, but a primal scream,” said Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd.
• “There is little to prevent the physical market from the further acute downside path over the near term,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “Refiners are rejecting barrels at a historic pace and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former.”

(Bloomberg)  Distressed Energy Debt Jumped by $11 Billion Amid Oil Collapse

• Distressed debt in the U.S. energy sector has jumped to $190 billion, up more than $11 billion in less than a week, as oil prices tumbled below zero.
• The collapse of oil makes investors nervous about whether energy companies will be able to repay their debt. Energy sector distressed debt — bonds that yield at least 10 percentage points over Treasuries and loans that trade for less than 80 cents on the dollar — totaled $190 billion on Tuesday, according to data compiled by Bloomberg. That’s up from $179 billion on April 15.
• Distressed debt surged to the highest since 2008 last month as markets sold off on coronavirus fears and the oil price halved. The amount outstanding fell by nearly 50% after the Federal Reserve announced plans to buy investment grade and some high-yield debt, boosting credit markets. But after oil fell below zero, distressed debt in the energy sector could retest recent highs.
• Oil giant Occidental Petroleum Corp. has more distressed debt than any other U.S. company, with its $21 billion tally nearly double that of the next highest on the list. Oil companies made up five of the top 10 issuers with the most distressed debt as of Tuesday.

(Bloomberg)  Fed to Buy Junk Bonds Among Other Support

• The Fed said it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.
• The money comes on top of the massive stimulus that the Fed had already announced and it thrusts the institution into the sort of speculative lending activities it had shunned in the past — underscoring the risks that Chairman Jerome Powell is willing to take to shore up the economy.
• “We will continue to use these powers forcefully, pro-actively, and aggressively until we are confident that we are solidly on the road to recovery,’ he said in a speech 90 minutes after the details of the measures were announced.
• “Our country’s highest priority must be to address this public health crisis,” Powell said in a statement accompanying details of the new actions. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”
• Investors quickly bid up prices on corporate bonds and stocks after the announcement. High-yield debt was among the biggest gainers, with some of the largest ETFs tracking those bonds surging the most in a decade.
• But the nature of the Fed’s actions pass the traditional boundaries of the central bank to purchase lower-rated debt and the credit of municipalities, raising questions about its future role.
• “Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers that are available only in very unusual circumstances,” he said in his speech. “I would stress that these are lending powers, not spending powers.”
• The Fed has deployed nearly every tool in its toolbox since March to try and help keep lending flowing in the economy — as businesses shuttered to stem the spread of the virus. It’s unleashed programs used in the 2008-2009 financial crisis to improve liquidity in the Treasury and credit markets, and reached into unchartered territory to support American businesses, states and local governments.
• In a move that surprised some investors, the central bank will also expand its bond-buying program to include debt that was investment-grade rated as of March 22 but was later downgraded to no lower than BB-, or three levels into high yield. It’ll also buy exchange-traded funds, the preponderance of which will track investment-grade debt along with some that track speculative-grade debt. Together, the programs will support as much as $850 billion in credit.
• “The reason the Fed had to expand the pool of credit that they are willing to buy is that so many borrowers are slipping into these lower-rated categories,” said Mark Vitner, senior economist at Wells Fargo Securities. “This is aimed more at fallen angels rather that dastardly devils.”
• The Fed also said it will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

(Federal Reserve)  Secondary Market Corporate Credit Facility

• Eligible ETFs: The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
• Eligible Individual Corporate Bonds will have a remaining maturity of 5 years or less. The issuer must have been rated at least BBB-/Baa3 as of March 22, 2020, by two or more major nationally recognized statistical rating organization (“NRSRO”).
• Additionally, an issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the Facility makes a purchase.
• The Facility will cease purchasing eligible corporate bonds and eligible ETFs no later than September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System and the Treasury Department. The Reserve Bank will continue to fund the Facility after such date until the Facility’s holdings either mature or are sold.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$2.9 billion and year to date flows stand at -$16.0 billion.  New issuance for the week was $4.3 billion and year to date issuance is at $76.5 billion.

(Bloomberg)  High Yield Market Highlights

• The robust demand for new issuance, coupled with continued fund inflows, has pushed junk bond spreads to a three-week low.
• Junk bonds have posted gains in seven of the last 10 sessions.
• Investors have been pouring cash into high-yield retail funds for the last three weeks
• Nordstrom increased the size of its debt offering by $100m to $600m after getting orders of more than $4b as junk investors sought higher- quality debt
• Nordstrom priced at par to yield 8.75% after talk tightened from 10% area to 9%-9.25%
• The retailer is still high grade, but fallen angels are expected to outperform high yield, according to Ashish Shah of Goldman Sachs Asset Management said
• This was the second investment-grade borrower to tap high-yield investors to increase liquidity by offering attractive coupon, following Carnival
• Elsewhere in primary, propane distributor Ferrellgas sold $575m 1st lien senior secured notes, rated B3/CAA, at par to yield 10%
• Tightened talk from 10.5%-11%
• Earlier in the week, Wynn raised $600m, up from $350m initially, through the sale of five-year notes and cut the coupon to 7.75% from around 8.5%
• Junk bond yields dropped to a three-week low of 8.48% while spreads tightened to +785, also a three-week low
• BA spreads narrowed to 535bps while yields dropped to 6.04%
• Single B yields fell to 8.42% and spreads fell to 779 bps
• CAA yields dropped to 16.82% and spreads tightened to 1,641bps

(Bloomberg)  Fertitta’s Record Rate Stokes Surge in Demand for Leveraged Loan

• A record high interest rate on Tilman Fertitta’s loan sale seems to be doing to trick. Order books for the $250 million deal are at least double that just a day after it was launched, according to people familiar with the matter.
• The loan, which matures in October 2023, is being arranged by Jefferies Financial Group Inc. Based on initial discussions with investors, it’s being offered at a spread of 14 percentage points over the benchmark London interbank offered rate with a floor of 1% and at a discount of about 96 cents on the dollar.
• That makes the all-in yield at least 16%, according to calculations by Bloomberg. The spread is the highest ever seen in the U.S. leveraged loan market excluding companies in bankruptcy, according to data compiled by Bloomberg. That all-in yield may fall due to strong demand for the debt, the people said.
• The Texas billionaire is looking to raise the loan to keep his casino and restaurant empire afloat through year-end if the Covid-19 virus shutdown persists. The offering is ending a near one-month drought in the market for risky corporate loans, but the company will be saddled with excruciatingly high borrowing costs.
• To put those costs into more perspective, Fertitta’s Golden Nugget sold a $200 million loan in January that financed a dividend at just 2.5 percentage points over Libor. That loan, which also matures in 2023, has since dropped and is trading at about 75.5 cents on the dollar, according to data compiled by Bloomberg. That equates to a yield of almost 12%, and a premium of at least four percentage points for the new loan.

Update:

• Texas billionaire Tilman Fertitta has cut the interest rate on a $250 million leveraged loan sale to keep his restaurant and casino empire afloat and is considering boosting the size of the deal after being inundated with demand from investors.
• Potential lenders have submitted about $1.4 billion of orders for the debt, which pays an all-in yield of at least 14%, according to a person with knowledge of the matter. Fertitta is considering increasing the size of the loan to $300 million and will still contribute $50 million of his own cash into the company, the person said, asking not to be identified because the discussions are private.
• The loan is now being offered at a spread of 12 percentage points over the benchmark London interbank offered rate with a floor of 1% and at a discount of about 96 cents on the dollar, according to separate people familiar with the matter.

(Reuters)  Global oil output cuts held hostage to standoff

• Oil producers in the OPEC+ group, led by Saudi Arabia and Russia, were expected to pressure Mexico on Friday to seal an accord for a collective cut in output of 10 million barrels per day, before asking other nations for a further 5 million bpd of cuts.
• The United States has encouraged global cooperation to bolster an oil market that collapsed as the coronavirus pandemic accelerated in March and producers resorted to a price war after failing to agree on how to prop up prices.
• Oil prices tumbled on Thursday despite OPEC+ nearing agreement as the lockdowns ordered across the world sucked life out of the global economy, and traders reckoned that even a combined reduction of 15 million bpd would be too little to stabilize the market.

(Bloomberg)  Fed to Buy Junk Bonds, CLOs and Lend to States in New Stimulus

• The Federal Reserve on Thursday announced another series of sweeping steps to provide as much as $2.3 trillion in additional aid during the coronavirus pandemic, including starting programs to aid small and mid-sized businesses as well as state and local governments.
• In an unprecedented move, the Fed also said Thursday it would move to shore up some of the hardest-hit parts of financial markets, pledging to start buying some debt recently downgraded to below investment grade as well as certain collateralized loan obligations and commercial mortgage-backed securities.
• “Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” Fed Chair Jerome Powell said in a statement. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”
• A Municipal Liquidity Facility will offer as much as $500 billion in lending to states and municipalities, by directly purchasing that amount of short-term notes from states as well as large counties and cities.
• The Main Street Lending Program will “ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans.”
• Expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities and the Term Asset-Backed Securities Loan Facility to support as much as $850 billion in credit.
• Its Secondary Market facility may purchase U.S.-listed ETFs. While the preponderance of those holdings will be those primarily focused on U.S. investment-grade corporate bonds, the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
• Starting the Paycheck Protection Program Liquidity Facility, “supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$5.9 billion and year to date flows stand at -$18.9 billion.  New issuance for the week was $0.6 billion and year to date issuance is at $72.1 billion.

(Bloomberg)  High Yield Market Highlights

• The U.S. junk bond market is springing back into action with more companies looking to issue debt. Investors poured cash into U.S. high-yield funds with an influx of $5.9 billion.
• Borrowers have started testing risk appetite again with sales of senior secured bonds as the leveraged loan market remains on ice, according to one high-yield syndicate banker
• Junk bonds may slip Friday as stock futures fall following disappointing economic data from Europe and ahead of March payrolls that are expected to decline for the first time since 2010
• A jump in oil prices may lend some support with the OPEC+ coalition pushing for other major oil producers to join it in a deep reduction of global crude output
• Junk-bond yields rose 4bps to 9.77% but have dropped by more than 190bps from 11.69% on March 23. Spreads widened 10bp to +919bps
• Junk-bond returns were negative for the second day, with 0.37%
• CAA yields fell 9bps to 18.04% and spreads tightened to +1,772. Posted losses of 0.6%

(Bloomberg)  Investors Clamor for Credit With New Deal Demand Off the Charts 

• Investors are meeting a flood of corporate debt issuance with even greater demand, a strong sign for risk appetite as issuers continue to bring new deals.
• YUM! Brands Inc., bringing the first U.S. high-yield offering in nearly a month, already boosted the size of its deal to $600 million from $500 million amid $3 billion of orders. Oracle Corp., which was downgraded by two credit raters after announcing a deal Monday, has amassed more than $50 billion in orders for what could now be at least a $15 billion offering, according to people with knowledge of the matter.
• Credit markets are showing signs of thawing, as strong reception of record investment-grade issuance has trickled into the high-yield market. While market access was initially limited to only top-notch firms like Exxon Mobil Corp. and PepsiCo Inc. just two weeks ago, investors have since gotten more comfortable with riskier names, and massive demand has cut down borrowing costs.
• Last week, U.S. companies borrowed a record $109 billion, met with $550 billion of demand, in what one dealer called a “food fight” for new bonds. It was a similar story in Europe, where investors placed more than 310 billion euros ($340 billion) of orders for about 75 billion euros of bonds.
• “As corporates should remain keen on retaining liquidity to weather the growing pain of lockdowns, we expect issuance windows to continue to attract issuers,” Commerzbank strategists said in a note to clients this morning.
• YUM! Brands is bringing the first junk bond sale since March 4, one of the most positive signs of the recovery in credit to date. The investment-grade market continues to be active, with 12 deals in the market as of 12:49 p.m. in New York on Monday.
• Airlines worldwide raised more than $17 billion in bank loans in March to shore up finances as the coronavirus grounds flights, with U.S. carriers like Delta the most active.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.0 billion and year to date flows stand at -$24.9 billion.  New issuance for the week was zero and year to date issuance is at $71.5 billion.

 (Bloomberg)  High Yield Market Highlights 

• U.S. junk bonds are off the lows after this week’s strong gains but may struggle as equity markets falter. Spreads have backed off from the 1,000 bps distressed level where they started the week, and robust ETF inflows help boost sentiment.
• Investors pulled $2b from retail funds in the week. This was the sixth straight week of outflows from U.S. high-yield funds
• Junk yields dropped below 11% to close at 10.33%, down 67bps, the biggest decline in percentage terms since June 2000
• Spreads closed at 959bps after the biggest drop in nine months
• Returns were up for three consecutive sessions
• BB yields fell 44bps to close at 8.31% and spreads tightened 45bps at +746
• Single-B yields fell 84bps to 10.01%, the biggest drop since 2008, and spreads tightened the most in nine months, to 937bps
• Energy sector yields dropped 63bps to 22.38%, the third day of decline and the longest declining streak in 10 weeks
• Spreads tightened for a foruth straight session closing at +2,161, down 54bps, the longest declining streak in 11 weeks

(Bloomberg)  What’s in Congress’s $2 Trillion Coronavirus Stimulus Package

• The bill provides direct help to citizens, businesses, hospitals and state and local governments.
• Big Businesses: About $500 billion can be used to back loans and assistance to companies, including $50 billion for loans to U.S. airlines, as well as state and local governments.
• Small Businesses: More than $350 billion to aid small businesses.
• Hospitals: A $150 billion boost for hospitals and other health-care providers for equipment and supplies.
• Individuals: Direct payments to lower- and middle-income Americans of $1,200 for each adult, as well as $500 for each child. Senate Minority Leader Chuck Schumer said checks would be cut April 6.
• Unemployed: Unemployment insurance extension to four months, bolstered by $600 weekly. Eligibility would be expanded to cover more workers.
• Restrictions on Business Aid: Any company receiving a government loan would be subject to a ban on stock buybacks through the term of the loan plus one additional year. They also would have to limit executive bonuses and take steps to protect workers.
• Transparency: The Treasury Department would have to disclose the terms of loans or other aid to companies, and a new Treasury inspector general would oversee the lending program.

(Bloomberg)   Distressed Debt Balloons to Almost $1 Trillion, Nears 2008 Peak

• The amount of distressed debt in the U.S. has quadrupled in less than a week to nearly $1 trillion, reaching levels not seen since 2008 as the collapse of oil prices and fallout from the coronavirus shutters entire industries across the globe.
• In total, the tally has ballooned to $934 billion of U.S. corporate bonds that yield at least 10 percentage points above Treasuries and loans that trade for less than 80 cents on the dollar, according to data compiled by Bloomberg.
• The coronavirus pandemic has caused the worst sell-off since the global financial crisis and deepened stress in credit markets. Driven by some of the lowest oil prices since the early 2000s, the amount of distressed bonds has surged to the highest level since April 2009.
• Most of the distressed debt outstanding stems from U.S. energy companies battered by less travel demand and an all-out price war between Saudi Arabia and Russia. The capital-intensive industry, which financed its shale production largely through debt, suddenly faces the prospect of deeper losses after oil plunged below $20 a barrel. Last month, it traded above $50.
• The amount of distressed debt tied to the oil and gas sector stands at over $161 billion, up from $128 billion a week ago. One of the biggest casualties has been Occidental Petroleum Corp., which has seen its funding costs skyrocket and its credit rating cut to make it the biggest fallen angel in the current downgrade cycle. Oxy’s bonds led the list of high-yield losers on Wednesday, with four of its issues among the top 10 decliners.
• Energy isn’t alone. Every sector except utilities is under stress, with distressed ratios growing by double or triple digits. Telecommunications, retail, entertainment and healthcare industries make up the bulk of distressed debt. Retailers such as Neiman Marcus Group Inc. and theater chains such as AMC Entertainment Holdings Inc. have been hit hard as companies are forced to close and customers are told to stay home.
• S. junk bonds entered distressed territory for the first time since the global financial crisis after spreads on the securities topped 1,000 basis points at the end of last week. The index move marks a period of turmoil in the credit markets as investors flee funds that buy all types of corporate debt.

(Bloomberg)  Ford Becomes Largest Fallen Angel After S&P Downgrade to Junk

• Ford Motor Co. was cut to junk by S&P Global Ratings as the coronavirus pandemic delivers a shock to the global auto industry and renders the carmaker the largest fallen angel to date.
• S&P downgraded Ford’s credit rating one notch to BB+ and may cut it further, according to a statement. The move follows Moody’s Investors Service, which dropped its rating Ford for the second time in sixth months earlier Wednesday. Its two high-yield ratings will remove its $35.8 billion of debt from the Bloomberg Barclays investment-grade index at the end of the month.
• Ford is one of many auto companies facing what Moody’s calls an unprecedented “credit shock,” with the coronavirus outbreak also posing a major threat to peers including General Motors Co. and Volkswagen AG. But Ford is particularly at risk because of the problems it’s been having with executing an $11billion restructuring that’s yet to improve performance.
• “Ford is managing through the coronavirus crisis in a way that safeguards our business, our workforce, our customers and our dealers,” the company said in an emailed statement. “We plan to emerge from this crisis as a stronger company.”

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$5.3 billion and year to date flows stand at -$22.9 billion.  New issuance for the week was zero and year to date issuance is at $71.5 billion.

 (Bloomberg)  High Yield Market Highlights 

• U.S. junk bonds may pare losses Friday with stock futures higher and oil extending a recovery. But the asset class has lost the most in any month so far since 2008, and investors pulled billions of dollars of cash from funds.
• Yet the junk-bond index has posted losses for 11 straight sessions, with 2.63% on Thursday alone. The asset class has lost 17.6% year-to-date and 16.46% in March, the biggest monthly loss since 2008
• High-yield spreads widened 72bps Thursday to 976bps. Single-B spreads widened 78bps to 990bps. That’s very close to the 1,000bps that’s typically considered distressed
• In less than two weeks, the amount of distressed debt in the U.S. has doubled to a half-trillion dollars as the collapse of oil prices and the fallout from the coronavirus shutters entire industries.
• Junk-bond yields jumped 63bps to close at 10.75%, the highest since September 2009
• Energy-bond yields surged to a new 20-year high of 23.69%, with the index losing more than 37% this month
• High-yield bonds with more than $1.37b outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months. But that’s down 70% from the prior week, and the primary market hasn’t seen a deal price since March 4

(Bloomberg)  Junk Debt Market Freeze Risks $35 Billion Banker Headache

• Banks that agreed to help private equity firms and highly leveraged companies fund recent acquisitions may have to come up with billions of dollars of their own cash
  to finance the deals if the market for risky debt remains shut.
• Underwriters across Wall Street have committed to providing more than $30 billion to junk-rated companies by mid-year, according to data compiled by Bloomberg and people with knowledge of the matter who asked not to be identified because not authorized to speak publicly.
• But with the markets for leveraged loans and high-yield bonds virtually shut since the Covid-19 pandemic triggered fears of a global recession, the banks now face the prospect that they might not be able to offload the risk before the takeovers are scheduled to close.
• The exposure is a small fraction of the commitments they held heading into the 2008 financial crisis. Still, it could force banks to take losses or tie up capital for months just as
  dozens of companies are drawing credit lines or seeking fresh financing to cope with the coronavirus fallout.
• The deals run the gamut of sectors and geographies, ranging from an $11 billion financing for the leveraged buyout of ThyssenKrupp’s elevator unit in Europe to a $500 million debt deal for Culligan’s acquisition of water-filtration company AquaVenture.
• Representatives for lead arrangers including Morgan Stanley, JPMorgan Chase & Co., Deutsche Bank AG, Bank of America Corp., Citigroup Inc. and Barclays Plc declined to comment.
• For the vast majority of deals, the acquisitions themselves are not in doubt. If the banks are unable to syndicate the loans to institutional investors before closing, they are typically required to come up with the cash, and may try to offload the debt at a later date.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $2.0 billion.  New issuance for the week was $3.1 billion and year to date issuance is at $63.7 billion.

(Bloomberg)  High Yield Market Highlights

• It’s looking like a risk-off day in the junk-bond market as stock futures fall amid renewed concerns about the spread of the coronavirus outside China.
• CAA yields, meanwhile, have crossed the 10% mark for the first time in three weeks.
• Issuers are likely to remain on the sidelines Friday and the calendar is light, though Bausch Health is expected to emerge with a $3.25b junk-bond that’s part of a broader $8b refinancing
• Yields rose 4bps to 5.13%, the biggest jump in three weeks though the index posted a modest gain of 0.018%
• BA yields rose 4ps to 3.64%, single-B yields rose to 5%

(Bloomberg)  Macy’s, Renault Add to Fallen Angel Fear With Downgrades to Junk

• The credit-rating downgrades of Macy’s Inc. and Renault SA to junk status are rekindling fears among investors of a potential uptick in so-called fallen angels after a run of relative tranquility in the U.S. corporate bond market.
• The American retailer and French carmaker each lost an investment-grade rating Tuesday, affecting billions of dollars of debt. They follow Kraft Heinz Co., the iconic U.S. packaged-food company, which was downgraded to junk by two credit raters last Friday as its turnaround shows little signs of progress.
• Even though Macy’s and Renault were downgraded for idiosyncratic reasons and will still trade in investment-grade indexes unless another credit-rating company follows suit, their cuts bring back to the fore what had been a central concern among investors less than two years ago: That a slowing global economy could hamper companies’ ability to service their obligations, especially those that had taken on significant debt loads to finance deals.
• While many firms took actions to reduce debt levels in 2019, several are still proving to be susceptible to ratings risk. Kraft Heinz alone, with around $21 billion of debt leaving the Bloomberg Barclays investment-grade index at the end of this month, nearly eclipses last year’s fallen angel volume of just under $22 billion, according to Bank of America Corp. strategists. Macy’s has about $8 billion of total debt, while Renault’s roughly $66 billion is predominantly denominated in euros and yen, according to data compiled by Bloomberg.
• By year-end, the volume of fallen angels is likely to dwarf that of 2019, according UBS Group AG strategists led by Matthew Mish. They predict there could be as much as $90 billion of investment-grade debt downgraded to high yield this year. Guggenheim Partners has said as much as 20% of BBBs in the U.S., or $660 billion, will get cut to junk in the next downgrade wave.

(Reuters)  U.S. labor market remains strong; manufacturing likely stabilizing

• The number of Americans filing for unemployment benefits rose modestly last week, suggesting sustained labor market strength that could help to support the economy amid risks from the coronavirus and weak business investment.
• There was encouraging news on the struggling manufacturing sector, with other data on Thursday showing factory activity in the mid-Atlantic region accelerated to a three-year high in February, likely as tensions in the 19-month trade war between the United States and China diminished.
• But the coronavirus, which has killed more than 2,000 people, mostly in China, and Boeing’s suspension last month of the production of its troubled 737 MAX jetliner, grounded in March 2019 after two fatal crashes, continue to loom over the manufacturing sector.
• Minutes of the Federal Reserve’s Jan. 28-29 meeting published on Wednesday showed policymakers “expected economic growth to continue at a moderate pace,” but expressed concern about possible economic risks from the coronavirus, which has also infected thousands globally.
• “Manufacturing growth may be past its trough,” said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “However, looking ahead we continue to believe that activity will advance at a lackluster pace as global growth and trade policy headwinds are unlikely to significantly relent and the negative impact of the coronavirus will be felt via global supply chains interlinkages.”

(Bloomberg)  Aecom Conference Cancellation May Increase Deal Rumblings

• Reports on Aecom not attending two industrial conferences this week are being “seen as a positive indication that the company might be in later-stage negotiations for a deal,” Baird analyst Andrew Wittmann wrote in a note.
• Baird confirmed that Aecom canceled from a Citi conference, and is not in attendance at a Barclays conference
• Wittmann noted previous reports that Aecom had been approached by WSP Global regarding a deal

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $2.4 billion and year to date flows stand at $3.7 billion. New issuance for the week was $12.4 billion and year to date issuance is at $60.6 billion.

(Bloomberg) High Yield Market Highlights

• Zayo Group Holdings Inc. is readying more than $3 billion of junk bonds, one of the biggest buyout financings since 2018 that may test investor appetite for riskier debt in the CAA tier.
• The new notes, along with a leveraged loan package totaling more than $5b, will finance Zayo’s buyout by private equity firms Digital Colony Partners and EQT Partners
• The bond portion of the offering may include $1b of seven-year secured notes and $2.1b of unsecured eight-year bonds, and marketing begins next Tuesday
• It’s hitting the market after two straight weeks of gains for junk- bonds, which looks set to continue on Friday as stock futures edge higher and oil climbs
• Triple C rated bonds have lagged the broader high-yield market so far this year, returning 0.942% through Thursday while the larger junk universe rose 1.11%
• Yet CAA index yields have still fallen to a nine-month low of 9.71% and posted positive returns for three consecutive sessions this week. Other issuers, including Hecla Mining, have also priced debt in this rating range
• Investors have plenty of cash to put to work too after corporate high-yield funds reported inflows
• BA and single-B yields have fallen to a three- week low of 3.59% and 5%, respectively
• BAs have gained for ten straight sessions, taking year-to-date returns to 1.175%  

• (Bloomberg) Natural Gas Tumbles to 4-Year Low on ‘Epic’ U.S. Demand Loss

• Natural gas futures sank to a four-year low as the latest U.S. forecasts all but eliminated bulls’ hopes for a late-winter cold push.
• Frigid weather in parts of the Midwest and West this week won’t stick around for long, according to Commodity Weather Group LLC. Mild temperatures are poised to blanket the eastern half of the country in late February, a shift from previous outlooks that showed a lingering chill.
• Unusually warm winter weather has wreaked havoc on gas demand, allowing an onslaught of supply from shale basins to overwhelm the market. American liquefied natural gas cargoes, a key outlet for production, are at risk of being curtailed as the coronavirus outbreak in China curbs consumption in the world’s second-largest economy. The resulting collapse in global gas prices is squeezing profits for U.S. exporters.
• “The lack of heating demand is epic. It’s a worst-case scenario,” John Kilduff, founding partner at hedge fund Again Capital LLC in New York, said by phone. “We continue to have a very weak demand environment that’s persisted all winter.”
• The gas glut has been especially severe in the Permian Basin, where local prices for March delivery have dropped below zero. Output from the West Texas and New Mexico shale play, where gas is extracted as a byproduct of oil drilling, is increasing so fast there isn’t enough space on pipelines to take it away.  

(Reuters) T-Mobile-Sprint merger wins approval from U.S. judge

• T-Mobile edged closer to a takeover of Sprint Corp after a federal judge on Tuesday approved the deal, rejecting a claim by a group of states that said the proposed transaction would violate antitrust laws and raise prices.
• During a two-week trial in December, T-Mobile and Sprint argued the merger will better equip the new company to compete with top players Verizon Communications Inc and AT&T Inc as the third-largest U.S. wireless carrier, creating a more efficient company with low prices and faster internet speeds.
• Finalizing a deal will be a boon to Japan’s Softbank Group Corp, Sprint’s controlling shareholder, as the conglomerate offloads a troubled asset that has lost subscribers at a faster rate and as it seeks to secure funding for a second Vision Fund.
• Sprint and T-Mobile said in a statement that they would move to finalize the merger, which is still subject to closing conditions and possible additional court proceedings.
• A spokesman for the California Public Utilities Commission, the last regulatory body to decide on the merger, said its review of the deal is expected to conclude in July.

(Wall Street Journal) MGM Resorts Chief Set To Step Down

• MGM Resorts International Chief Executive Jim Murren will leave the global casino operator after its board picks his successor, the company said.
• Mr. Murren, who is also stepping down as chairman, has led the company since 2008. He is leaving before his contract expires at the end of 2021.
• “When I thought through how I could best serve MGM going forward, I thought it was pretty clear that a leader should help lead a company into the next decade or two,” Mr. Murren said on a conference call with Wall Street analysts on Wednesday. “I wanted to make sure the board had the time, which it will use promptly, to do a robust search and find my successor.”
• MGM Resorts, which has a market value of $17 billion, didn’t give a firm date for Mr. Murren’s departure. The board has formed a search committee to find a new CEO, the company said. Mr. Murren said he anticipates being on MGM Resorts’ next quarterly earnings call, in about three months.
• The company has sold off much of its real estate, including deals with MGM Growth Properties, a real-estate investment trust MGM Resorts spun off in 2016, and other property deals. The company’s “asset-light” strategy is intended to pull cash out of the company’s valuable real estate, including prime locations on the Las Vegas Strip.
• MGM Resorts’ remaining company-owned real estate includes MGM Springfield in Massachusetts, a 50% stake in CityCenter in Las Vegas and more than half of MGM Growth Properties.  

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at $1.2 billion.  New issuance for the week was $12.5 billion and year to date issuance is at $48.2 billion.

(Bloomberg)  High Yield Market Highlights 

• New issues have been well-received
• Yet it’s looking like a risk-off day as stock futures slide on renewed fears of the spread of the coronavirus
• Junk- bond yields have fallen 24bps in the past week. At 5.28%, they’re just 30bps off the 5.5-year low hit on Jan. 21
• Spreads have tightened 34bps over the same period to 356bps over Treasuries
• Even riskier debt has rallied with yields on CAAs falling below 10% for the first time in two weeks to 9.95%
• Junk- bond investors are pouring money back into exchange-traded funds again
• HYG and JNK, the two biggest high-yield ETFs, reported a combined inflow of $325m yesterday after $630m the previous day

(New York Times)  Some Takeaways From Trump’s State of the Union Address

• President Trump framed his third year in office as an unmistakable success and his fourth as more of the same.
• A partisan atmosphere loomed over the House floor from the very start of Mr. Trump’s speech, when Republican lawmakers chanted “four more years” after the president stepped up to the rostrum. The hostility carried through to the end, when House Speaker Nancy Pelosi ripped up a copy of the address after he finished delivering it.
• He proclaimed that the economy was setting records, that American enemies were on the defense, and that the American spirit had been renewed.
• “In just three short years, we have shattered the mentality of American decline and we have rejected the downsizing of America’s destiny,” he said. “We are moving forward at a pace that was unimaginable just a short time ago and we are never going back.”
• Trump dived into the state of the economy at the top of the speech, making broad declarations about tax cuts, deregulation and the renegotiation of the North American Free Trade Agreement, the new version of which he signed into law last week.
• Trump addressed two pieces of potential health care legislation that remain a top priority for both parties in the coming months: surprise billing and prescription drugs.
• After signing an initial trade deal with China last month, Mr. Trump pointed on Tuesday to the tariffs he has imposed on the country in order to take on its “massive theft of America’s jobs.” He said that “our strategy has worked.”
• Trump’s attention on foreign policy later swung to the Middle East, when he highlighted two people his administration killed in recent months: Abu Bakr al-Baghdadi, the leader of the Islamic State, and Maj. Gen. Qassim Suleimani, the powerful Iranian commander.

(Wall Street Journal)  Ford’s Operating Income Plunges

• Ford Motor Co. said fourth-quarter operating income sank by two-thirds, and it issued a lower-than-expected profit outlook for 2020, the latest signs of trouble for Chief Executive Jim Hackett’s turnaround plan.
• Ford said operating income for the October-to-December period was $485 million, down from $1.5 billion a year earlier. Earnings per share adjusted for one-time items were 12 cents, well short of analysts’ estimate of 17 cents.
• The company’s financial standing has continued to weaken under Mr. Hackett, who was brought in nearly three years ago to revive the auto maker’s profit growth and give it a stronger vision for the future.
• Revenue for the full year dropped 3% to $155.9 billion.
• “Financially, it wasn’t OK,” finance chief Tim Stone said of the 2019 results during a discussion with reporters at Ford’s headquarters. “Strategically. . .I think we made strong progress.”
• Ford pinned the shortfall in part on lower production volumes in North America stemming from problems with launches of key models, including the redesigned Explorer and Escape sport-utility vehicles and its Super Duty pickup truck. It also cited higher warranty costs and a bonus payout to United Auto Workers that totaled about $600 million.
• The auto maker forecast operating profit this year of $5.6 billion to $6.6 billion, compared with $6.38 billion last year. That equals an earnings-per-share range of 94 cents to $1.20, which is lower than the average analysts’ estimate of $1.30, according to S&P Global Market Intelligence.
• Hackett’s strategy to revitalize Ford — which includes a multiyear, multibillion-dollar restructuring — hasn’t returned the company to earnings growth or restored profitability overseas, where Ford is closing plants and shedding thousands of workers to cut costs.
• “Financially, the company’s 2019 performance was short of our original expectations, mostly because our operational execution — which we usually do very well — wasn’t nearly good enough,” Mr. Hackett said. “We recognize, take accountability for and have made changes because of this.”
• In a bright spot for the year, Ford trimmed its losses in overseas markets. It halved its China loss, to $771 million from $1.55 billion, which it attributed to cost cutting. In Europe, the company had a $47 million loss for the year, down from a $398 million loss a year earlier.