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S&P: ECB Stimulus to Boost European High Yield Bond Issuance in 2016

The European Central Bank’s March announcement of a new Corporate Securities Purchase Programme (CSPP) — expected to take effect in June — will be a game changer for corporate bond market issuance in Europe over the next few months, including for private equity-owned firms and leveraged corporates, according to S&P.

european leveraged finance volume

In its quarterly leveraged finance report, titled The ECB’s Corporate Buying Program Will Boost European High Yield Bond Issuance In First-Half 2016, S&P says that before the announcement, debt capital markets activity in Europe had been moribund in 2016, and had completely dried up for speculative-grade borrowers.

Inflows into high-yield funds had already begun to improve in early March, and secondary pricing fell to a point where investors started to step back in. These factors helped some well-known and highly rated names to start wading back into primary high-yield, but the ECB’s actions are likely to give the market a real boost, adds the agency.

S&P expects the anticipation of the ECB’s program launch in June will have a beneficial impact on new bond issuance, as spreads will tighten across the credit curve. This will likely lead to an increase in refinancing and recapitalization activity, as well as greater debt-funded merger and acquisition financing for corporates and private equity, it adds.

The risk from a credit perspective is that this scenario could lead to more shareholder-friendly activities — something that S&P says it will continue to monitor closely and flag to the market.

The report, which was published today on RatingsDirect, also discusses how the leveraged loan market stayed open throughout the months that were difficult for public bond issuance. Most of the deal flow came from LBOs and particularly smaller transactions, according to S&P. The rating agency also notes that borrowers active in the market used deal structures that show a reversion to the typical pre-crisis structure for leveraged buyouts, of senior secured loan lending with an accompanying revolving credit facility.

S&P anticipates that the current public debt market conditions will remain volatile throughout the year, leading to stops and starts in deal flow volume as borrowers take advantage of windows of opportunity to issue. Markets will remain vulnerable to disruption from overall volatility, including from idiosyncratic political risk, such as the U.K. referendum on whether to leave the EU, and the U.S. elections, the agency adds. — Staff reports

The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to [email protected].

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Western Digital places $5.3B bond offering backing SanDisk buy

Western Digital yesterday completed its long-awaited, two-part bond deal in support of an acquisition of rival electronic-storage-solutions concern SanDisk, via an eight-strong bookrunner team led by Bank of America. Terms were finalized at the tight end of talk on the secured notes, and the middle of guidance for the unsecured series, after rejiggered tranching that produced $375 million more secured notes and $750 million less unsecured notes, with the $375 million difference moved to the euro-denominated institutional loan and U.S. dollar-denominated pro rata loan financing. Terms on both are wider than early market whispers amid the heavy market conditions over the past week, the sheer size of the effort (it’s the largest single non-investment-grade syndication effort since early September), and some investor skepticism over business fundamentals and industry competition, sources said. However, with the changes the paper was in demand, and an early read from the gray market points to roughly one-point gains on the break, sources added. Terms:

Issuer Western Digital
Ratings BBB–/Ba1/BBB–
Amount $1.875 billion
Issue Secured notes (144A-life)
Coupon 7.375%
Price 100
Yield 7.375%
Spread T+577
Maturity April 1, 2023
Call NC3
Trade March 30, 2016
Settle April 13, 2016 (T+10)
Bookrunners BAML/JPM/CS/RBC/MIZ/MUFG/HSBC/SMBC
Co-managers Scotia/BNPP/TD/US Bancorp/BBVA/STRH/Fifth Third/StanChart
Price talk 7.5% area
Notes Net deal downsized by $375 million in favor of more loan financing; tranche upsized by $375 million.

Issuer Western Digital
Ratings BB+/Ba2/BB+
Amount $3.35 billion
Issue Senior notes (144A-life)
Coupon 10.5%
Price 100
Yield 10.5%
Spread T+882
Maturity April 1, 2024
Call NC3
Trade March 30, 2016
Settle April 13, 2016 (T+10)
Bookrunners BAML/JPM/CS/RBC/MIZ/MUFG/HSBC/SMBC
Co-managers Scotia/BNPP/TD/US Bancorp/BBVA/STRH/Fifth Third/StanChart
Price talk 10.5% area
Notes Tranche downsized from original $4.1 billion.

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.
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After Brutal Start, 1Q European High Yield Bond Issuance Gets Lift via ECB Stimulus

european high yield bond issuance

It was a tough first quarter for the European high yield bond market. Primary issuance collapsed, deals were postponed, secondary prices fell, liquidity dried up, and outflows dominated.

That all changed in mid-March, however, when the European Central Bank announced fresh stimulus measures. Suddenly, it felt as if the market was on its feet for the first time in 2016.

Starting with the bad news: 2016 is the worst opening quarter for European high yield issuance since 2009, with just €7.1 billion of supply printed (only €540 million priced in the very dark days of 2009’s first quarter). This contrasts starkly with the record first-quarter volume of €27.1 billion issued last year, while the average 1Q volume from 2010 through 2015 was €17.7 billion.

The market turned in mid-March, however, after the European Central Bank announced a 20% increase in its monthly bond purchase programme, which will now include investment-grade corporate bonds.

Following that event conditions in high yield vastly improved — the Crossover tightened more than 100 bps, and by March 24 LCD’s bond flow composite was 324 bps higher than the last reading in February, while issuance picked up as money poured into accounts.

The week after the ECB announcement, European high-yield funds saw the third-largest weekly inflow on record, at €1.11 billion. Moreover, the new-issue yield for double-B rated bonds tightened by 93 bps, to 3.84% (through the end of March), the tightest it has been since May 2015.

Looking ahead, high-yield players are hoping that the ECB effect will be similar to what happened during the first quarter of last year, in that accounts will be awash with cash, and more issuers will look to come to market. The early signs are that this is, indeed, happening. — Staff reports

This story – along with numerous other charts detailing 1Q European high yield bond activity – first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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European High Yield Bond Funds See Another Hefty Cash Infow – €747M

J.P. Morgan’s weekly analysis of European high-yield funds shows a €747 million inflow for the week ended March 23. The reading includes a €254 million inflow for ETFs, and a €27 million outflow for short duration funds. The reading for the week ended March 16 is revised from a €1.089 billion inflow to a €1.11 billion inflow. Note, the net weekly reading also includes flows for managed accounts.

The provisional reading for February is an €824 million outflow. A €1.31 billion outflow was tracked in January, which is the second-largest monthly outflow number recorded (the largest being a €2.2 billion outflow in June 2013). February’s reading also marks the third consecutive monthly outflow, which is the longest losing run since LCD began looking at J.P. Morgan’s records in 2011. Outflows for 2016 are €2.2 billion, while this time last year there had been just over €4 billion of inflows.

The latest reading is the fifth consecutive weekly inflow, and follows the third-largest weekly inflow on record last week. By the weekly reporters, March has seen roughly €2.7 billion of inflows, which will tip the 2016 number back into positive territory. This influx of cash though is not being met by a wall of decent-yielding primary supply. Rather, the last fortnight has seen accounts served a diet of largely sub-4% deals. It is also hard for managers to source paper in size in secondary, meaning this new cash is struggling to find a decent home. Interestingly short-duration paper saw an outflow during the last week, indicating money is perhaps moving away from the more defensive strategy and into longer-dated supply.

Meanwhile, U.S. high-yield funds recorded an inflow of $2.2 billion in the week ended March 23, according to Lipper. This is the sixth consecutive infusion of fresh retail cash, for a net inflow of $13.4 billion over that span, which includes the record $5 billion that was ploughed into the asset class three weeks ago. The influence of ETFs was impressive this past week, at 72% of the total or roughly $1.5 billion, up from 38% in the prior week.

J.P. Morgan only calculates flows for funds that publish daily or weekly updates of their net asset value and total fund assets. As a result, its weekly analysis looks at around 60 funds, with total assets under management of €50 billion. Its monthly analysis takes in a larger universe of 90 funds, with €70 billion of assets under management. For a full analysis, please see “Europe receives HY fund flow calculation.”$ — Luke Millar

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here

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S&P: Global Corporate Default Tally Highest Since 2009

global corporate defaults

With five more defaults last week, the global default tally for 2016 now totals 31 issuers, compared to 25 at this point last year, according to S&P. As is clear in the chart, 2016 has the most YTD defaults since 2009, at the height of the post-Lehman financial convulsions.

Not surprising, oil & gas companies lead the pack re defaults, with 10, according to S&P.

Four of the five defaulting last week were U.S. entities: Peabody EnergyUCI Holdings. American Media, Templar Energy – Tim Cross

 

The full analysis is available to S&P Global Credit Portal subscribers here. It includes downloadable xls files detailing the Global Corporate Default Summary, a full list of global corporate defaults year-to-date, as well as data points backing up the above chart.

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Bond prices recoil from 2016 peak with broad-based decline

The average bid of LCD’s flow-name high-yield bonds dropped 126 bps in today’s observation, to 93.82% of par, yielding 8.24%, from 95.08 on Tuesday, yielding 7.95%. Performance within the sample was broadly in the red, with 14 decliners, one gainer, and thus none unchanged.

The decline is the largest downsize move in the twice-weekly observation in eight weeks, and it knocks the average bid price off the 2016 peak. Moreover, it puts trailing metrics in the red for the first time in over a month, at negative 73 bps week over week and negative 76 bps reaching back two weeks. Still, the late February and early March rebound rally looms large, with the average still up a solid 218 bps dating back four weeks.

Moreover, the average is still up a whopping 619 bps from the 2016 low of 87.63 recorded on Feb. 11. Downdrafts this past week were linked to some high-yield ETF redemptions, as evidenced by bid-wanted lists making the rounds day to day, and longer-term investors freeing up some cash to address the new-issue calendar. Recall that the eight deals placed this week totaling $5.8 billion represent the highest one-week output in 18 weeks.

Within the sample, 14 constituents were lower, with Valeant Pharmaceuticals International 5.875% notes the sole gainer, higher by 1.5 points, at 77.5. This week’s news for the volatile credit was that William Ackman of Pershing Square Capital Management has joined the board and Valeant’s embattled CEO is being shown the door. Recall that the 5.875% notes—which at $3.25 billion share the podium as one of the seventh-largest single high-yield issues ever sold—were in a 103 context last fall prior to drug-pricing subpoenas, questions over accounting arrangements with subsidiaries, and, most recently, the shake-up in management.

With today’s move lower in the average bid price, the average yield to worst spiked 29 bps higher, at 8.24%, and the average option-adjusted spread to worst widened by the same measure, to T+664. Take note that the average yield to worst of 7.95% on Tuesday matched the level of three weeks ago. Those two readings were the first sub-8% readings in four months, or since Nov. 5, at 7.84%.

Given a smaller sample of high-beta credits, the LCD flow names have moved a bit wider than the broader market averages. For example, the S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed Wednesday, March 23, with a 7.84% yield to worst, and an option-adjusted spread to worst of T+678.

Bonds vs. loan
The average bid of LCD’s flow-name loans rose five basis points in today’s reading, to 98.48% of par, for a discounted loan yield of 4.25%. The gap between the bond yield and the discounted loan yield to maturity stands at 399 bps. — Staff reports

The data:

  • Bids decrease: The average bid of the 15 flow names fell 126 bps, to 93.82.
  • Yields increase: The average yield to worst surged 29 bps, to 8.24%.
  • Spreads increase: The average spread to U.S. Treasuries pushed outward by 29 bps, to T+664.
  • Gainers: The lone gainer was Valeant 5.875% notes due 2023, which jumped 1.5 points, to 77.5.
  • Decliners: The largest of the 14 decliners was Dish Network 5.875% notes due 2022, which fell four points, to 94.
  • Unchanged: None.
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S&P: US Distress Ratio Dips for First Time Since May 2015

distress ratio

The U.S. Distress Ratio slipped to 24.8% in March from 33.9% in February, the first time this measure of market duress has decreased in almost a year, according to S&P Global Market Intelligence.

One notable change from last month: The oil and gas sector accounted for 128 of the 438 issues in the Distress Ratio, compared to 172 in February. Still, O&G has the highest sector distress level, at 63.1%, followed by metals/mining.

The full Distressed Debt Monitor report is available via S&P’s Global Credit Portal (subscriber site). This analysis also includes the U.S. Default Surveillance Tool Kit, high-yield issuance by quarter, distressed activity by dollar amount, as well as Distress Ratio by Industry. – Staff reports

Check out LCD News, LCD’s subscription service, for full leveraged loan/high yield bond coverage. 

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Bond prices advance to fresh 2016 peak despite mixed reading

The average bid of LCD’s flow-name high-yield bonds advanced 53 bps in today’s observation, to 95.08% of par, yielding 7.95%, from 94.55 on Thursday, yielding 8.10%. Performance within the sample was mixed, with eight gainers, three decliners, and four issues unchanged.

The modest gain wipes out the decline of 12 bps in Thursday’s reading, for a 41 bps move higher week over week. Although there were two observations in the red over the past 11 weeks, they didn’t weigh much influence, and the trend is clearly for positive momentum. The average bid price is now up 66 bps dating back two weeks and higher by 366 bps reaching back four weeks.

Moreover, the average is now up 745 bps from a 2016 low of 87.63 on Feb. 11, and it’s at a new 2016 high, surpassing by a hair the prior peak of 95.05 recorded on March 3. As for the year-to-date reading, the average is up 279 bps, following declines of 1,050 bps in 2014 and 536 bps in 2013.

Gains would certainly be greater if not for the ongoing, now-six-month saga in Valeant Pharmaceuticals International. The embattled company’s 5.875% notes are the biggest loser today, down 1.75 points, to 76, for a 4.5-point loss for the week and 10-point decline month over month. Recall that the Valeant 5.875% notes—which at $3.25 billion share the podium as one of the seventh-largest single high-yield issues ever sold—were in a 103 context last fall prior to drug-pricing subpoenas, questions over accounting arrangements with subsidiaries, and, most recently, a shake-up in management.

With today’s modest gain in the average bid price, the average yield to worst was 15 bps lower, at 7.95%, but the average option-adjusted spread to worst actually widened by five basis points, to T+635. The anomalous move can be linked to U.S. Treasury market strength of late, as falling yields encourage spread expansion. Further to the yield metrics, take note that 7.95% matches the level of three weeks ago and marks the first sub-8% readings in four months, or since Nov. 5, at 7.84%.

Given a smaller sample of high-beta credits, the LCD flow names have moved a bit closer to broader market averages. For example, the S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed Monday, March 21, with a 7.73% yield to worst, but an option-adjusted spread to worst of T+665.

Bonds vs. loans
The average bid of LCD’s flow-name loans ticked 16 bps higher in today’s reading, to 98.43% of par, for a discounted loan yield of 4.25%. The gap between the bond yield and the discounted loan yield to maturity stands at 370 bps. — Staff reports

The data:

  • Bids increase: The average bid of the 15 flow names rose 53 bps, to 95.08.
  • Yields decrease: The average yield to worst fell 15 bps, to 7.95%.
  • Spreads increase: The average spread to U.S. Treasuries inched outward by five basis points, to T+635.
  • Gainers: The largest of the eight gainers was the Hexion 6.625% notes due 2020, which surged 4.5 points, to 83.5.
  • Decliners: The largest of the three constituents in the red was again the Valeant 5.875% notes due 2023, which shed another 1.75 points, to 76, for a net 10-point drop this past month.
  • Unchanged: Four of the 15 constituents were unchanged in today’s reading.
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S&P: Oil & Gas Cos. Lead the Way in Potential U.S. Credit Downgrades

upgrades downgrades bias

The outlook for the energy sector continues grim.

Of the 318 U.S. entities that S&P deems ‘poised for downgrade,’ oil and gas concerns comprise the most of any industry, at 45. What’s more, nearly half of the 157 O&G issuers rated by S&P for this analysis have a Negative Bias, also the most of any industry.

S&P tracks possible upgrades/downgrades as an indicator of economic/market stress. As of Feb. 29, the gap between potential downgrades and upgrades (187) increased significantly from the number a year ago (129). These numbers include speculative grade and investment grade entities. – Tim Cross

The full analysis is available to S&P Global Credit Portal subscribers here. It includes charts detailing upgrade/downgrade bias distribution by rating, high yield vs. investment grade, sector specifics, and a full list of issuers on CreditWatch. 

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Western Digital Readies $5.6B Bond Offering Backing SanDisk Buy

Western Digital this morning launched off the shadow calendar its SanDisk acquisition bond financing, comprising $1.5 billion of seven-year (non-call three) secured notes and $4.1 billion of eight-year (non-call three) senior notes, according to sources. Roadshows are scheduled to run Monday, March 21 through Monday, March 28, with pricing to follow via a Bank of America–led bookrunner team, the sources added.

While first call premiums have not been outlined for the two series, take note that while par plus 75% coupon to balance the short schedule is most typical, an issuer-friendly arrangement at par plus 50% coupon has become more acceptable over the past year. Beyond that, market sources relay that the equity-clawback feature on both tranches is most typical, as three-year for up to 35% of the issue, at par plus coupon, and the change-of-control call provisions are also regular-way, at 101% of par.

Additional bookrunners on the long-awaited effort are J.P. Morgan, Credit Suisse, RBC, and HSBC. Proceeds, along with those from a TLA, TLB, and an RC draw, will be used to back the $19 billion acquisition of the rival storage-technology company, and issuance is under Rule 144A for life.

As reported, the company has guided the $4.2 billion U.S. dollar TLB, and $550 million-equivalent, euro-denominated TLB at L/E+450–475, with a 0.75% floor and OID of 98.5. The seven-year, covenant-lite term debt will include 12 months of 101 soft call protection, and at current guidance the term loan would yield roughly 5.64–5.9% to maturity.

Take note that the same bank line up is arranging the loans but J.P. Morgan is the left lead. A planned $3 billion, five-year A term loan has been increased to $3.75 billion, with pricing set at L+200. Western Digital also plans to draw down a portion of its $1 billion, five-year revolver at closing.

Issuer ratings have firmed at BB+/Ba1/BB+. The secured debt is rated BBB–/Ba1/BBB–, with a 2L (lower end of substantial, 80–90%) recovery rating from S&P’s. The unsecured debt is rated BB+/Ba2/BB+, with a 4L (lower end of average 40–50%) recovery rating.

Irvine, Calif.–based Western Digital makes hard disk drives, solid state drives, and cloud-network storage solutions, with a client focus on set-top boxes, printers, in-car navigation devices, and other general consumer electronics. Milpitas, Calif.-based SanDisk makes solid-state drives and other storage solutions with a client focus on computers, tablets, phones, and wearables. — Matt Fuller/Luke Millar

This story first appeared on www.lcdcomps.com, LCD’s subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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