Category: Insight

 Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$2.9 billion and year to date flows stand at $2.8 billion.  New issuance for the week was $8.1 billion and year to date issuance is at $113.8 billion.

(Bloomberg)  High Yield Market Highlights

• Barclays credit strategists led by Brad Rogoff have increased their forecast for full-year supply to $290b to $310b, driven by an increase in refinancings and general corporate purpose funding. The previous estimate was $240b to $260b
• “The midpoint of this estimate would represent the largest supply year since 2014. Several tailwinds should result in additional supply, including the need to fund negative free cash flow, as well as loan issuers’ turning to the bond market given a more supportive demand technical,” they wrote in a note Friday
• Investors continue to pour cash into the asset class with an inflow of $2.9b into U.S. high yield funds for the week
• This is the sixth straight week of inflows
• Junk bonds returned 0.22% yesterday, the third straight session of gains
• Heavy issuance hasn’t weighed on spreads which edged tighter again to +735bps, and are 10bp lower since last Friday. Yields fell 6bps to 7.93%

(Bloomberg)  New York Fed Says It Will Begin Buying ETFs in ‘Early May’

• The Federal Reserve is close to starting up two corporate lending programs that could buy up to $750 billion in debt and exchange-traded funds under its emergency coronavirus actions.
• The New York Fed announced on its website Monday that it expects to begin purchasing shares of eligible ETFs in early May through its Secondary Market Corporate Credit Facility. Lending through the Fed’s Primary- and secondary-market corporate credit facilities via purchases of corporate bonds will begin soon thereafter, it said. ETFs are included in the secondary facility and the program’s announcement in March had a major impact on that market.
• “Additional details on timing will be made available as those dates approach,” the New York Fed said.
• The corporate facilities are among nine emergency lending programs announced by the Fed to help shelter the U.S. economy from the pandemic and keep credit flowing. The move was a dramatic escalation of the central bank’s intervention, stepping into the corporate debt markets for the first time since the 1950s and including some sub-investment grade debt in the ETF purchases.
• The corporate programs are backed by the more than $2 trillion economic relief package passed by Congress. Businesses across the nation have shuttered to limit contagion and more than 30 million people have claimed unemployment benefits in the last six weeks. So far, only four programs are up and running.
• “Many companies that would’ve had to come to the Fed have now been able to finance themselves privately since we announced the initial term sheet on these facilities,” Fed Chair Jerome Powell said during an April 29 press conference. “The ultimate demand for the facilities is quite difficult to predict because there is this ‘announcement effect’ that really gets the market functioning again. Of course, we have to follow through, though. And we will follow through to validate that announcement effect.”

(Reuters) U.S. airlines burn through $10 billion a month as traffic plummets

• S. airlines are collectively burning more than $10 billion in cash a month and averaging fewer than two dozen passengers per domestic flight because of the coronavirus pandemic, industry trade group Airlines for America said in prepared testimony seen by Reuters ahead of a U.S. Senate hearing on Wednesday.
• Even after grounding more than 3,000 aircraft, or nearly 50% of the active U.S. fleet, the group said its member carriers, which include the four largest U.S. airlines, were averaging just 17 passengers per domestic flight and 29 passengers per international flight.
• “The U.S. airline industry will emerge from this crisis a mere shadow of what it was just three short months ago,” the group’s chief executive, Nicholas Calio, will say, according to his prepared testimony.
• Net booked passengers have fallen by nearly 100% year-on-year, according to the testimony before the Senate Commerce Committee. The group warned that if air carriers were to refund all tickets, including those purchased as nonrefundable or those canceled by a passenger instead of the carrier, “this will result in negative cash balances that will lead to bankruptcy.”

(Bloomberg)  Junkiest Junk Decays in Basement of Credit Rally 

• Investment-grade credit has recouped March losses and junk bonds are halfway back despite foul fundamentals and a deluge of new issuance. CCC debt didn’t rise with the tide and looks set to plumb new depths as the distressed cycle grips.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$1.6 billion and year to date flows stand at -$0.1 billion.  New issuance for the week was $7.0 billion and year to date issuance is at $105.6 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds are poised to start weaker after coming off the best month for returns since January 2019 with gains of 4.5%. Stock futures are lower on concern of lasting pain from the pandemic after weak corporate earnings and economic data.
• Del Monte Foods is expected to kick off issuance in May. It’s mulling an increase in the size of its five-year offering to $700m from $500m after investors piled orders into the deal
• Other potential issuers could stay on the sidelines if the market tone stays weak.
• Issuance in April topped $37.3b to make it the busiest month of the year, according to data compiled by Bloomberg.
• Junk bond investors poured more cash into the asset class for the week. This was the fifth straight week of inflows, with confidence buoyed by a pledge by the Federal Reserve to buy some speculative-grade debt
• Junk bond spreads declined 14bps to +744bps, while yields dropped 13bps to 8.05% on Thursday even as the S&P 500 fell
• High yield gained for the third consecutive session with returns of 0.39% and 4.5% for the month
• Single-B spreads and yields fell 11bps to +748bps and 8.09%, respectively, and posted gains of 0.4%. Single-Bs were the best performing across junk rating tiers Thursday
• CAA yields fell 9bps to 14.84% and spreads were down 15bps to +1,437bps. The index ended an eight-day losing streak to post a gain of 0.36%

(Wall Street Journal)  U.S. Car Makers Pencil In May 18 As Manufacturing Restart Date 

• Detroit’s car companies are targeting May 18 to resume some production at their U.S. factories after the companies shut down their plants in March amid the spread of the coronavirus, according to people familiar with the plans.
• Executives from General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV in recent days tentatively settled on the timeline after talks with United Auto Workers leaders and Michigan Gov. Gretchen Whitmer’s office, the people said.
• The UAW last week expressed concern that reopening factories early next month — as earlier target dates had called for — wouldn’t provide enough time to develop safety protocols to protect workers from the risk of infection.
• The companies continue to work with the union on drawing up safety protocols for reducing exposure risk for workers and have made progress in recent days, although they haven’t completed those terms, the people said. A UAW spokesman declined to comment.
• A Ford spokeswoman said the company hasn’t decided when it will restart North American factories. “We are continuing to assess public health conditions, government guidelines and supplier readiness to determine when the time is right to resume production,” she said.
• Last week, Ms. Whitmer extended an executive order closing the state’s nonessential businesses through May 15 to combat the state’s outbreak.
• The May 18 start date would apply to all of the Detroit companies’ U.S. factories, even in states where stay-at-home orders are lifting sooner, the people familiar with the discussions said.
• The timing would allow the auto makers to complete safety protocols with the UAW and give parts suppliers more time to prepare shipments, the people said.

(Bloomberg)  Powell Says More Action Needed to Shield U.S. Economy From Virus

• Federal Reserve Chairman Jerome Powell urged lawmakers to deliver more fiscal stimulus to shield the U.S. economy from the coronavirus as he warned of a weak recovery even once the pandemic passes.
• “Economic activity will likely drop at an unprecedented rate in the second quarter,” Powell told a video press conference Wednesday. “It may well be the case that the economy will need more support from all of us, if the recovery is to be a robust one.”
• The Federal Open Market Committee held interest rates near zero and said in a unanimous statement that it “will use its tools and act as appropriate to support the economy.” Officials also cautioned the pandemic would weigh on the economy over the medium term. Data earlier on Wednesday showed the economy had already shrunk in the first quarter at the fastest pace since 2008.
• “Both the depth and length of the economic downturn are extraordinarily uncertain and will depend in large part on how quickly the virus is brought under control,” Powell told reporters, playing down the prospects for a quick, v-shaped recovery and noting the severe effects of the lock-down that has brought the economy to an “abrupt halt.”
• The central bank’s Board of Governors has also announced nine lending programs, pledging to make funds available to banks, companies and municipalities in an unprecedented use of the Fed’s emergency powers. Only four of the facilities are up and running with no set time frame yet for those remaining to become operational — including those aimed at Main Street.

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.”