Category: Insight

(Bloomberg)  High Yield Market Highlights

• March has priced $19.4b so far, the slowest third month since 2009
• Average March issuance has been $31b in last five years
• This will be the slowest 1Q since 2016, which was hit by WTI dropping to a more than 13-year low
• Inflows slowed a bit this week as markets stalled
• Net inflows total ~$11b YTD vs outflows of ~$18b in the same period last year
• S. high yield returns of 6.99% YTD is best since 2003
• BBs beat single Bs and CCCs with a YTD return of 6.99%
• Single-Bs beat CCCs, with YTD return of 6.949%
• CCCs YTD was 6.76%, the lowest in the high yield space
• CCCs are having best 1Q since 2012
• Leveraged loans, higher in the capital structure, have YTD returns of 3.85%
• S. junk bonds operate against backdrop of strong technicals as reflected in net inflows into retail funds and light supply, low default rate, steady corporate earnings, Fed accommodation
• Markets imply more than a 55% probability of the Fed cutting rates as early as September and 62% in October

(Reuters)  Leverage levels peaking again on US mega buyouts 

• Leverage levels on US private equity buyouts are returning to record levels and private equity firms’ equity checks are shrinking as banks underwrite more aggressive loans, safe in the knowledge that they will not be penalized by regulators.
• Average leverage levels of 6.8 times in 2019 so far are rebounding towards a recent record of 6.97 times in the third quarter of 2018, before year-end volatility cooled the market and the number fell to 6.09 times, according to LPC data.
• As leverage and the amount of debt that sponsors are piling on businesses is rising, the amount of equity they are contributing is falling. Equity checks of 35.7% in the first quarter of 2019 so far are lower than 38.7% in 2018 and 43.3% in 2017, the data shows.
• Huge highly leveraged buyout loans are contributing to the spike, including US$3.2bn of loans for travel commerce platform Travelport and a US$6.4bn dual-currency loan for Power Solutions, which backs the buyout of Johnson Controls’ battery unit.
• Current leverage ratios are the highest debt-to-Ebitda levels seen since the second quarter of 2007, before the financial crisis, when leverage also averaged 6.8 times. This is due to regulators giving more freedom to arranging banks and investors’ hunt for higher yield, market participants said.
• US regulators implemented Leveraged Lending Guidance (LLG) in 2013 to limit systemic risk. This imposed extra scrutiny on loans with leverage greater than 6 times and also required all secured debt or half of total debt to be able to be paid down within five to seven years.
• LLG was relaxed last year when government agencies said that it was guidance and not a rule, which is encouraging banks to arrange more highly leveraged deals without fear of regulatory penalties. It is also producing riskier deals and more aggressive market conditions.

(CNBC)  Bond market says not only is a recession coming, but the Fed will cut interest rates to stop it 

• Fed funds futures were pointing to a quarter point in easing, as traders said scary signals continued to emanate from the bond market
• There was an inversion in the yield curve, meaning very short rates rose above longer 10-year note rates, a fairly reliable recession signal
• Traders say the bond market may be overreacting, while stocks seem to be ignoring the recession warnings and fears the Fed will have to jump in with one or more rate cuts to stop the economy from rolling over
• One strategist commented that he believes some of the moves in the market Monday were more about technical signals and short squeezes than real fear about recession. The Fed changed the tone in markets significantly when it was even more dovish than expected and cut its rate forecast to just one for this year from two.

(Bloomberg)  Here’s Why U.S. Bond Yields Plunged So Much Over the Past Week

• The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move.
• Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of
  traders — those who had bought mortgage bonds and those who had bet markets would remain calm — to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.
• What’s the evidence? While yields on 10-year Treasuries declined to as low as 2.35 percent, the rate on similar maturity swaps dropped to as little as 2.30 percent, according to data compiled by Bloomberg. The 10-year swap spread, as the gap between the two is known, had shown the swap rate at a premium for nearly all of the past year until last week. But that has now flipped to a discount and the gap has gone to a level unseen since 2017, indicating a flurry of activity in the derivatives market.
• The Treasuries rally and resulting volatility surge quickly burned those who had sold options, pressuring them to hedge in the swaps market by receiving fixed rates. That’s tantamount to going long Treasuries and is a profitable trade if yields keep falling. The intensity of that trading — along with the actions of mortgage investors — accelerated the drop in Treasury yields.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.3 billion and year to date flows stand at $12.7 billion.  New issuance for the week was $8.4 billion and year to date HY is at $53.0 billion, which is -0% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bond returns hit 7 percent for the year-to-date as BB yields fell to a 13-month low after the Fed’s mid-week dove surprise.
• S. high-yield funds have seen net inflows in 8 of the last 10 weeks
• Junk bond rally also boosted by S&P 500 at a 5- month high, oil at a 4-month high
• Supply was steady, with another $1.8b pricing led by ADT’s senior secured tranches
• Senior secured notes dominated junk bond supply year-to-date accounting for 30% of the issuance activity, the highest proportion in at least 2 years
• They accounted for 13% of the supply last year and 21% the year before
• ADT cut its bond offering to $1.5b after dropping the $1.25b 8NC3 senior unsecured tranche as there was not enough demand for those notes at an acceptable rate
• Both secured tranches priced at lower end of talk, had orders above $3b for the 2 tranches combined
• With loan supply lagging this year, senior secured notes are being used to repay loans and/or fund acquisitions as in Power Solutions
• High-yield returns YTD surged to 7%, the best in fixed income
• Single-Bs beat CCCs for second time this year, with YTD return of 6.97%
• BBs and CCCs were at 6.93%
• Loans lag high yield, with YTD return of 4.2%

(Business Wire)  B&G Foods Announces that Bill Herbes, EVP of Operations, Plans to Retire

• B&G Foods announced today that William F. Herbes, the Company’s Executive Vice President of Operations, plans to retire at the end of December 2019. Mr. Herbes, age 64, has served as Executive Vice President of Operations since joining the Company in August 2009.
• Commenting on Mr. Herbes’ retirement plans, Kenneth G. Romanzi, who currently serves as Executive Vice President and Chief Operating Officer and, as previously announced, will become B&G Foods’ next President and Chief Executive Officer on April 6, 2019, said, “Bill has been a very important member of our management team since joining B&G Foods almost ten years ago. It has been a privilege to work with Bill and I am delighted that Bill has agreed to remain with B&G Foods through year end and partner with Erich Fritz, our Executive Vice President and Chief Supply Chain Officer, to continue to evolve our operations to become even more efficient and cost effective.”
• Robert C. Cantwell, President and Chief Executive Officer of B&G Foods said, “Bill has been a tremendous contributor to B&G Foods’ growth over the past ten years. Since assuming responsibility for our supply chain and manufacturing operations in 2009, our company’s net sales have more than tripled and our domestic and international sourcing and manufacturing operations and capabilities have greatly expanded. Mr. Herbes has played an integral role in our growth, including through post-M&A integration of numerous manufacturing facilities, distribution centers and co-pack arrangements, including B&G Foods’ two largest manufacturing facilities. Under Bill’s strong leadership, we also successfully established a frozen distribution network following our acquisition of the Green Giantbrand and successfully outsourced our shelf-stable distribution network to a third-party logistics provider. Over the years, Bill has also played a key role in our cost savings initiatives. I am very pleased that Bill will continue with B&G Foods through the remainder of 2019 and wish him the best of luck in his retirement.”

(PR Newswire)  Steel Dynamics Provides First Quarter 2019 Earnings Guidance

• Steel Dynamics provided first quarter 2019 earnings guidance in the range of $0.88 to $0.92 per diluted share.  Comparatively, the company’s sequential fourth quarter 2018 earnings were $1.17 per diluted share and prior year first quarter earnings were $0.96 per diluted share. Fourth quarter 2018 results included additional company-wide performance-based compensation of $0.04 per diluted share and lower earnings of $0.10 per diluted share, associated with planned maintenance outages at the company’s liquid pig iron production facility and its two flat roll steel mills.
• First quarter 2019 earnings from the company’s steel operations is expected to decrease in comparison to sequential fourth quarter results, primarily related to lower earnings from the company’s sheet operations.  However, recent increases in sheet steel prices are having a positive impact, resulting in increased order activity and reconstituted order backlogs.
• Overall steel shipments are expected to increase in the first quarter 2019, compared to fourth quarter 2018 results, and average quarterly steel product pricing is expected to decrease more than the cost of average scrap consumed.  The company believes domestic steel consumption will continue to improve through the year.

(New York Times)  Fed, Dimming Its Economic Outlook, Predicts No Rate Increases This Year

• The Federal Reserve said Wednesday that the United States economy was slowing more than it had previously thought as it left interest rates unchanged and signaled little appetite for raising them again in the near future.
• The Fed now expects 2.1 percent growth this year, down from the 2.3 percent it forecast in December. The outlook for 2020 is even more bleak, with the Fed now projecting growth of just 1.9 percent.
• The downbeat assessment comes as the Fed sees signs of weakness in areas like consumer spending and business investment, which Mr. Powell said “suggest that growth is slowing somewhat more than expected.” Average monthly job growth, while strong, “appears to have stepped down from last year’s strong pace,” he added.
• Powell tried to reassure markets by saying “economical fundamentals are still very strong,” but he acknowledged that recent developments both domestically and abroad were making it harder for the American economy to grow as quickly as it did last year.
• Forecasts released at the end of the two-day meeting show the typical member of the Federal Open Market Committee now expects not to raise rates at all this year. Most officials now expect a single rate increase in 2020 and none in 2021.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.4 billion and year to date flows stand at $11.1 billion.  New issuance for the week was $4.6 billion and year to date HY is at $42.7 billion, which is -12% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds extended this week’s rally, as dedicated funds received fresh cash inflows.
• Yields held firm as oil rallied to close at a 4-month high after rising for 4 straight sessions
• Returns were at new YTD highs across ratings, with high-yield index at 6.52%
• Triple Cs were best performers yesterday, held top rank YTD, with 6.83% gain
• BBs returned 6.35%, single-Bs 6.45%
• Loans lagged high yield bonds, with YTD return of 4.2%
• S. junk operating against backdrop of strong technicals as reflected in slow issuance activity, net inflows into retail funds, low default rate, steady corporate earnings

(Fierce Wireless)  New details cause FCC to pause T-Mobile/Sprint merger for third time

• The FCC has stopped the clock on a proposed merger between wireless carriers Sprint and T-Mobile. The agency said it has received “significant new information” regarding the deal and has opened up a three-week period ending March 28 for public comment. The pause comes on day 122 of the 180-day review period the FCC holds for mergers.
• Opposition to the merger gained momentum when the Wireless Internet Service Providers Association (WISPA) joined a coalition of rural wireless providers that oppose the merger. The 4Competition Coalition is comprised of 25 organizations, including WISPA, Dish, C Spire and the Rural Wireless Association (RWA). The coalition has argued that the merger, which would reduce the number of nationwide wireless carriers to from four to three if successful, would hamper rural consumers’ access to wireless service. “The combined company would have significant new incentive and ability to raise prices and preemptively stamp out competition from newcomers. And the merger would result in the loss of tens of thousands of jobs in the process,” the coalition claims on its website.
• Earlier this week, T-Mobile filed new plans for the combined company to provide residential broadband service. T-Mobile CEO John Legere seemed to respond to the opposition in a blog post this week, which claimed that the combined company will pose a competitive challenge to cable broadband providers.
• “We’ll give millions of Americans—especially those in underserved rural areas—more choices and options for connecting to the internet and participating in the digital economy,” Legere wrote. “With the New T-Mobile and our unique 5G capabilities, we’ll be able to offer a fast and reliable alternative for in-home broadband.”

(Company Filing and CAM)  AMC Entertainment notes downgraded to CCC+ by S&P 

• AMC launched a potential refinancing of their existing credit facilities. They intend to use a portion of the net proceeds of such refinancing to redeem all of the outstanding 5.875% Senior Subordinated Notes due 2022 and 6.00% Senior Secured Notes due 2023 pursuant to the provisions of the indentures pursuant to which such notes were issued. There can be no assurance as to whether and when such refinancing and redemption will occur and on what terms such refinancing will occur, if at all.
• While the refinancing is for the most part leverage neutral, S&P lowered the ratings on the existing senior subordinated notes due to the added secured debt placed above the notes in the capital structure.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at $9.7 billion.  New issuance for the week was $5.0 billion and year to date HY is at $38.0 billion, which is -6% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bond yields jumped the most in four weeks, closing at a two-week high, as returns turned negative across ratings for a third consecutive session, the worst run since January. Triple C bonds suffered the biggest decline since December.
• Yields rose in 5 of the last 9 trading sessions as S&P 500 dropped the most in 4 weeks to close at 3-week low
• Equity fell for 4 straight sessions for first time since December
• VIX rose for 4 straight sessions for the first time since October, closing at a 5-week high
• Nervous junk bond investors withdrew cash from high yield funds, the first negative flow since January
• Resilience of high yield was evident in steady pricing of new issues
• Biggest LBO deal YTD, Power Solutions, had $15b in orders for senior secured and unsecured tranche combined, after just two days of roadshow
• Junk bonds still remain best-performing in fixed income, with YTD return of 6.07%
• CCC bonds fell 0.18% yesterday, have gained 6.38% YTD
• High yield maintained lead over loans, which returned 4.16% YTD
• S. junk bonds operate against the backdrop of strong technicals as reflected in slow issuance, low default rate, steady corporate earnings

(Bloomberg)  CenturyLink Finds ‘Material’ Accounting Issues With Level 3

• CenturyLink Inc. discovered a “material weakness” in accounting involving the value of assets acquired with the 2017 purchase of Level 3 Communications and notified regulators that its 10-K filing will be late.
• CenturyLink said it found problems with “internal controls” in its books involving recording and “measuring fair value of assets and liabilities” it took over with the Level 3
  acquisition, according to a filing Monday. The rural telephone company said it needs to audit the accounting before it can report its year-end numbers, but that the problem won’t cause any material changes to the results it reported Feb. 13.
• Monroe, Louisiana-based CenturyLink bought Level 3 to strengthen its sales to businesses and cope with a long-running decline in landline demand. The company — one of the largest junk-bond issuers in the U.S. — is part of a challenging industry that includes Windstream Holdings Inc., which filed for bankruptcy protection last month.

(Bloomberg)  Digital Colony Is Said to Weigh Bid for Zayo 

• Digital Colony, a communications infrastructure-focused firm formed by Tom Barrack’s Colony Capital Inc. and Digital Bridge Holdings LLC, is part of a potential buyer group weighing a bid for Zayo Group Holdings Inc., according to a person with knowledge of the matter.
• The group, led by Digital Colony and investment firm EQT, has fully committed debt financing, said the person, who asked not to be named because the matter is private. A Digital Colony representative didn’t immediately respond to a request for comment, and an EQT representative declined to comment.
• Zayo is a Boulder, Colorado-based owner of fiber networks across North America and Europe on Wednesday said it’s “evaluating strategic alternatives.”
• Zayo, led by Chief Executive Officer Dan Caruso, postponed its analyst day, and said it will take “a minimum of several weeks to months” to consider its options, though there’s no set timetable nor assurance a strategic alternative will result.

(Bloomberg)  T-Mobile’s Sprint Deal Draws State Concerns Over Consumer Harm

• State antitrust enforcers are expressing deep concerns that T-Mobile US Inc.’s proposed takeover of Sprint Corp. could raise prices for consumers, signaling they might seek to thwart the deal.
• Some state attorneys general who are investigating the $26 billion transaction took the unusual step this week of publicly voicing worries that the combination could harm competition, offering insight for the first time into how they view the tie- up.
• Maryland Attorney General Brian Frosh, a Democrat, said combining T-Mobile and Sprint would further concentrate an already consolidated industry by leaving just three national carriers. “That’s dangerous for competition. That’s dangerous for consumers,” Frosh said in an interview on the sidelines of an annual conference in Washington for state attorneys general.
• The comments come after more than a dozen states joined to investigate the deal in parallel with the Justice Department and the Federal Communications Commission, which are nearing the end of their reviews.
• The tie-up has been widely criticized by consumer groups and Democratic lawmakers who want officials to oppose the deal. The states can sue to block the merger on antitrust grounds even if federal officials approve the takeover.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at $11.0 billion.  New issuance for the week was $2.2 billion and year to date HY is at $31.4 billion, which is -10% over the same period last year.

(Bloomberg)  High Yield Market Highlights 

• U.S. junk bond supply has revved up, with $21 billion priced in February making it the busiest month since March 2018. It was the highest-volume second month in four years.
• 30 deals priced, all oversubscribed multiple times, most priced at lower end of talk
• About 26% of the supply was to fund LBO suggesting strong demand for risk
• About 25% was rated CCC, some funding dividend distributions to equity sponsors
• About 54% of total supply was drive-by offerings
• S. high yield returned most YTD since 2001, up 6.26% after the best January since 2009
• Triple-Cs led the gains in junk bonds with 6.96%, also best since 2001
• CCCs January performance was best in almost 3 years, at 5.28%
• Junk bond yields dropped across ratings closing February near 4-month lows, with the exception of BBs, which closed at a 10-month low of 5%
• CCC yields and spreads dropped most for the month, closing at 10.52% and +780bps, respectively
• CCC spreads fell below +800 for first time since early December
• Low default, better-than-feared corporate earnings, firm oil and above all a dovish Fed boosted risk assets

(Globe Newswire)  Windstream Holdings, Inc. Files for Voluntary Reorganization Under Chapter 11 of the U.S. Bankruptcy Code Following Judge Furman’s Decision

• The Company intends to use the court-supervised process to address debt maturities that have been accelerated as a result of the recent decision by Judge Jesse Furman in the Southern District of New York against Windstream Services, LLC, a subsidiary of the Company.
• “Following a comprehensive review of our options, including an appeal, the Board of Directors and management team determined that filing for voluntary Chapter 11 protection is a necessary step to address the financial impact of Judge Furman’s decision and the impact it would have on consumers and businesses across the states in which we operate,” said Tony Thomas, president and chief executive officer of Windstream. “Taking this proactive step will ensure that Windstream has access to the capital and resources we need to continue building on Windstream’s strong operational momentum while we engage in constructive discussions with our creditors regarding the terms of a consensual plan of reorganization. We acted decisively to secure the long-term financial stability of Windstream, and we are confident that, upon completion of the reorganization process, we will be even better positioned to invest in our business, expand our speed and capabilities for our customers and compete for the long term.
• As previously announced on February 15, 2019, Judge Furman ruled that Windstream Services, LLC’s 2015 spinoff of certain telecommunications network assets into a real estate investment trust (REIT) violated its agreements with bondholders. The decision arose from challenges by Aurelius Capital Management (“Aurelius”) and U.S. Bank National Association that the spinoff was invalid under the terms of those agreements.
• The effect of Judge Furman’s decision was that an event of default under the relevant indenture had occurred that had not been cured or waived. The acceleration of the obligations outstanding under such indenture gave rise to a cross-default under the indentures governing Windstream’s other series of secured and unsecured notes. In addition, the decision gave rise to a cross-default under the credit agreement governing Windstream’s secured term and revolving loan obligations.

(PR Newswire)  S&P Global Ratings Upgrades Equinix to Investment Grade (‘BBB-‘) On Improving Credit Quality

• Equinix, the global interconnection and data center company, announced that S&P Global Ratings (“S&P”) has upgraded all of Equinix’s ratings with S&P by one notch to the investment grade rating of “BBB-“, including its issuer credit rating, its global multi-currency credit facility and term loan ratings, and all of the company’s senior unsecured notes.
• “We are very pleased to have received an investment grade credit rating from S&P, which reflects increased confidence in improving leverage levels and our demonstrated commitment to fund expansion in a disciplined and balanced manner,” said Keith Taylor, Chief Financial Officer, Equinix.

(PR Newswire)  Huntsman Receives Investment Grade Ratings from Moody’s and Fitch

• Huntsman Corporation announced that Moody’s Investors Service, Inc. has upgraded our senior unsecured rating from “Ba1” to “Baa3” with a “stable outlook”.  In addition, Fitch Ratings, Inc. published an initial Long-term Issuer Default Rating for the Company of “BBB-” with a “positive outlook”.
• Peter Huntsman, Chairman, President and CEO commented: “We are pleased to receive today the formal recognition of Investment Grade.  This has been our objective for many years and reflects the significant transformation of our balance sheet and downstream portfolio of businesses. This action will further strengthen our shareholder base, provide greater flexibility with our balance sheet and allow us to continue to expand our downstream businesses.”

CAM High Yield Market Note

2/22/2019

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at $10.7 billion.  New issuance for the week was $2.1 billion and year to date HY is at $29.1 billion, which is -12% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bond spreads and yields were resilient amid wavering stocks as oil prices held steady and funds reported more cash inflows. Spreads continued to tighten after falling below 400 basis points for the first time since mid-November and yields were flat to little changed.
• This was the fourth straight week of inflows and the seventh of the last eight weeks
• Junk bond index rose for eighth straight day to new record high
• Return is 5.7% YTD, making it the best fixed income performer
• CCCs turned negative yesterday, have returned 6.03% YTD
• High yield beats IG, which returned 2.44% YTD, and leveraged loans which are up 3.53%
• Supply continued to trickle in, with a drive by offering from USAC
• Size was increased by $250m after receiving orders of more than $2b for a $500m offering
• Priced at lower end of talk
• Several deals have priced this week, all were drive bys, had orders more than 3x size of offering, suggesting risk appetite is strong
• Supply expected to remain light overall as there has been no big acquisitions or buyouts recently and a good part of refinancing has already been done
• S. junk bonds operate against the backdrop of strong technicals as reflected in slow issuance activity, net cash inflows, low default rate, steady corporate earnings