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Bankruptcy: Foresight Energy Completes Out-of-Court Restructuring

Foresight Energy on Aug. 30 completed its out-of-court restructuring of more than $1.4 billion in indebtedness, the company announced.

The coal-mining company reached a tentative deal to restructure its debt outside of bankruptcy court in April after it failed to make a $23.6 million coupon payment due Feb. 15. After several extensions, the company launched the restructuring transactions on Aug. 1.

By way of background, the company found itself in a precarious position after the Delaware Chancery Court in December ruled that a revised “partnership” deal implemented by principal equity holder Murray Energy demonstrated a “de facto” change in control, putting Foresight on the hook to repay a $600 million bond issue at 101%.

With long-term debt of $1.5 billion and a cash position of $16.2 million as of March 31, Foresight did not have sufficient liquidity to repay the debt in the event of acceleration.

The company said the restructuring was implemented principally through concurrent exchange and tender offers in which holders of 99.98% of the principal amount of the company’s 7.875% senior notes due 2021 participated. The company purchased roughly $105 million of outstanding notes for cash, and exchanged the remaining notes for about $349 million of new second-lien notes, roughly $299 million of new convertible PIK notes, and warrants to acquire up to 4.5% of the total outstanding units of the company upon the redemption of the convertible PIK notes (see “Foresight Energy launches exchange offer to support restructuring,” LCD News, Aug. 2, 2016, and “Foresight Energy’s facility to be amended after exchange offer,” LCD News, Aug. 2, 2016, for a detailed description of the exchange offer and related transactions).

The company further said the restructuring also provided for, among other things, the amendment and restatement of the company’s senior credit facility and receivables securitization facility, respectively. — Alan Zimmerman

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US High Yield Bond Funds See $889M Cash Inflow

U.S. high-yield funds recorded an inflow of $888.9 million for the week ended Aug. 17, according to the weekly reporters to Lipper only. It’s the second consecutive week of inflows, but down from $1.65 billion last week.

high yield fund flows

ETF influence accounted for just 41% of the total, or $366 million, compared to 76% of last week’s ballooning inflow.

With another inflow, the four-week trailing average narrowed to negative $24 million, from negative $166 million last week.

The year-to-date total inflow is now $9.6 billion, with 32% ETF-related. A year ago at this juncture, the measure was an outflow of $1.45 billion, with 72% ETF-related.

The change due to market conditions this past week was positive $751.5 million, representing 0.4% of total assets. Total assets at the end of the observation period were $200.9 billion. ETFs account for about 21% of the total, at $41.9 billion. — Jon Hemingway

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S&P: High Yield Default Rate to Hit 5.6% by June 2017

high yield default rate

The U.S. speculative-grade default rate is expected to reach 5.6% by next June, from 4.3% in June of this year, according to S&P Global Fixed Income Research.

In a worst-case scenario the default rate could rise to 7.1% by June 2016, S&P said, citing continued concerns regarding the energy/oil & gas segment – a large high yield issuer constituency – including low/volatile prices and more limited debt funding sources.

In an optimistic scenario the speculative grade default rate could rise to 4.3%. – Tim Cross

The full report, which also details the default rate ex energy, high yield issuance (overall and by rating), default rate by time horizon, and default rate vs interest burden, is available to S&P Global Credit Portal subscribers here. It was written by Diane Vazza and Nick Kraemer.

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Fridson: Rise in Credit Quality does not Explain Crude Oil Price/High Yield Spread Decoupling

Synopsis: We disprove the assertion that the crude oil price and the high-yield spread decoupled in July because the credit quality of high-yield energy companies improved. Investors should expect the high-yield spread to blow out again if crude enters a sustained downturn and if greed gives way to fear among investors.

The lead topic of our recent analysis, “Oil and high-yield decouple; month-end recap” (available to LCD News subscribers), has generated a vigorous debate during the last two weeks. As we explained in that piece, there was no particular correlation between crude oil prices and the high-yield option-adjusted spread (OAS) up until mid-2014.

Once crude oil began its sharp descent, however, the BofA Merrill Lynch US High Yield Energy Index started swinging violently in conjunction with oil’s ups and downs. As the largest industry subindex, Energy strongly influenced the overall BofA Merrill Lynch US High Yield Index, which was consequently transformed into a barometer of the crude price.

It was therefore a sharp departure from recent experience when the BAML High Yield Index and, to a lesser extent, the BAML High Yield Energy Index tightened versus Treasuries in July despite a sharp decline in the crude price.

A recent Barron’s article did an excellent job of summarizing the explanations that have been advanced for July’s decoupling. The arguments can be summed up as follows: 

Group A. Improvements in the quality of the high-yield energy universe

  1. The weakest energy credits—a quarter of all the speculative-grade energy names—have already defaulted over the past year. What remains is a less default-prone energy universe.
  2. Further reducing the expected high-yield energy default rate, the rating agencies have downgraded billions of dollars of formerly investment-grade energy debt to the upper end of the speculative-grade category. These issues are less likely to default than the surviving lower-tier names.
  3. The survivors have deleveraged through asset sales or equity offerings. As one sell-side strategist commented, “The energy companies in high-yield today are not the same companies we had two years ago. Those that remain are somewhat stronger.”

Group B. Changes in investor attitudes

  1. Investors do not think the July drop in crude prices will turn into a sustained decline. 
  2. Investors who sold high-yield when oil bottomed, then sat out the rebound, do not want to repeat the experience.

Group A’s explanations for July’s decoupling, if correct, are quite bullish for high-yield bonds. They suggest that even if the attitudinal changes listed in Group B give way to more pessimistic feelings, high-yield can withstand a new downturn in crude prices, thanks to reduced risk that cheaper oil will trigger defaults.

We reject this optimistic interpretation.

It is true that to a not inconsequential extent, fallen angels have displaced original issue high-yield bonds within the high-yield energy universe. Nevertheless, the ratings mix within energy is worse than it was two years ago, implying increased, rather than decreased, default risk.

Moreover, there has been no material improvement in the energy sector’s credit quality since Feb. 11, 2016, when renewed slippage in the crude price drove the OAS on the BAML High Yield index to an astronomical 1,984 bps, up from an interim low of 994 bps on Nov. 4, 2015. 

If the high-yield energy universe’s credit quality did not materially improve after February, then the BAML High Yield Energy Index should have widened dramatically versus Treasuries when the crude price fell in July, unless the spread-widening was in truth explained by the attitudinal factors listed in Group B.

Carrying the logic one step further, if credit quality improvement did not explain the July decoupling, then investors should expect both the energy and the overall high-yield spreads to blow out once again if:

  • crude drops on a sustained basis and
  • investors become less worried about selling at the bottom and more worried about failing to sell before the bottom is reached.

Quantifying the energy sector’s alleged quality improvement
As detailed in the chart below, fallen angels currently represent a larger portion (25.3%) of the BAML High Yield Energy Index’s face value than in mid-2014. At that date, just before the crude price began to plummet, fallen angels accounted for just 5.5% of the face amount. The proportion has even risen significantly since the Feb. 11, 2016, wide point in the high-yield spread, when 14% of the face amount of the high-yield universe consisted of fallen angels.

Fridson pie chart 2016-08-17

The past two years’ ongoing shift toward fallen angels, however, does not correspond directly to the trend in default risk. In the table below, we stratify the BAML High Yield Energy Index by rating, in percentage-of-issuers terms, on the same three dates depicted in the preceding breakdown between fallen angels and original issue high-yield bonds.

Fridson table 2016-08-17

As the bulls maintain, today’s high-yield energy universe is not the universe of two years ago. They are exactly wrong, however, about the direction of the change in credit quality.

Credit quality is lower by this important measure than it was in mid-2014. The CCC-C component, the source of most defaults that occur within one year of the measurement date, is twice as large as it was on Jun. 30, 2014 (40.00% versus 20.00%). Downgrades from BB or B have more than offset any credit quality improvement resulting from addition of comparatively high-quality fallen angels. The BB component has shrunk from 28.82% to 23.87% of energy issuers.

True, the CCC-C component has declined since Feb. 11, 2016, but only from 40.99% to 40.00%. No one, we trust, will seriously argue that the BAML High Yield Energy Index’s OAS tightened (from 831 to 823 bps) in July 2016, instead of widening by almost 1,000 bps, as it did between Nov. 14, 2015, and Feb. 11, 2016, because the CCC-C component declined by not quite one percentage point in the interim.

Another way of expressing the change in riskiness of the speculative-grade energy universe over the past two years is to calculate average expected one-year default rates for each measurement date, based on the ratings mixes shown in the preceding graphs.

To generate these numbers, we use average annual default rates per rating category for the period 1970–2015, as reported by Moody’s. The chart below shows that in an average year, the June 30, 2014 energy universe would have been expected to suffer a 3.09% default rate. That rate jumped to 5.89% on Feb. 11, 2016, a material change to be sure.

Since then, however, the expected one-year default rate has declined only negligibly, to 5.82% (this analysis is less than 100% precise due to data constraints). It beggars belief, however, that the energy sector’s dramatic change in response to declining oil prices between February and July of this year resulted from as minor a reduction in credit risk as that which occurred in the last month.

Fridson bar chart 2016-08-17

Incidentally, let us dispose of the knee-jerk reaction of some high-yield promoters who say that ratings are wrong and irrelevant.

We do not contend that every single rating of S&P Global Ratings, Moody’s, and Fitch Ratings exactly captures its expected default probability, down to the second decimal point. In aggregate, though, the ratings do a pretty good job, as evidenced by Moody’s data for the years 1970–2015 showing that over every interval from 1–20 years, the Caa-C cumulative default rate exceeded the B rate, which in turn exceeded the Ba rate.

Furthermore, the market—which rating agency bashers claim is smarter than the raters—by and large agrees with the ratings. The chart below shows that even at the more granular, alphanumeric level, today’s median option-adjusted spreads within the energy sector increase in a nearly monotonic fashion with each step down the rating scale.

Fridson energy spreads by rating chart 2016-08-17

Bottom line: Improvement in credit quality does not explain why, in a radical departure from its behavior of the preceding two years, the high-yield energy sector tightened in July in the face of a sharp drop in the crude oil price.

A more credible explanation
Judging by the evidence presented above, the conclusion seems inescapable that July’s decoupling reflected attitudinal changes of the kind listed above in Group B. Investors must be aware that reversals in such attitudes are routine occurrences in the securities markets.

Yes, investors do not currently expect oil prices to fall on a sustained basis, but that was undoubtedly true for many market participants when the crude price initially ticked lower in the second half of 2014. Yes, selling out at the bottom in crude prices and missing the rebound is currently a bigger worry for high-yield investors than riding the market to an even lower level, but lurches from greed to fear are proverbial in financial markets. 

In light of these realities, investors should be mindful of the following excerpt from the Barron’s article cited above:

“Still, don’t expect this disconnect between high-yield paper and oil to last if the price of crude keeps falling. ‘Long-term, high-yield has to reflect at least in part the fundamentals, and if fundamentals are that the price of oil is going to be lower for longer, high-yield has to eventually reflect that,’ warns Sean Coleman, chief credit officer at Franklin Square Capital Partners.”

Even one buy-side bull, who puts faith in the high-yield energy credit quality improvement that has resulted from cost-cutting by U.S. oil shale producers, acknowledges the limitations of that cushion. David Riley of BlueBay Asset Management says that persistence of the July decoupling depends on investors continuing to see the recent crude price drop as a mere technical move, rather than a reflection of global oil demand fundamentals. “Investors should carefully watch for any recoupling of oil prices and global financial markets,” he warns, “as the oil price moves below $40 a barrel.”

In a similar vein, sell-sider Brad Rogoff of Barclays Capital cautions that the energy sector “looks a little rich” and that a drop below $40 probably entails “some downside.” We regard those comments as understatements.

Keep in mind that even though the BAML High Yield Energy Index’s OAS contracted in July, the sector lost ground to the Non-Energy component during July. Between June 30 and July 31, Energy tightened by just eight basis points, versus 60 bps for Non-Energy, meaning that Energy widened by 52 bps versus the rest of the high-yield universe.

In short, investors did not truly ignore the crude price’s decline, blithely assuming that all of the weak energy credits had already defaulted. Rather, in their desperate quest for income, investors drove other high-yield bonds up so spectacularly that relative-value considerations prevented energy issues from managing to show an absolute decline.

There is no shortage of evidence or opinion to support our view that a push to an ever more overvalued state for corporate debt, rather than improvement in the energy sector’s credit risk, explains the July decoupling. According to J.P. Morgan Chase & Co., investor demand for bond funds is the highest since at least 2007 relative to demand for stock funds.  Valuation has naturally suffered. “I’d really question if you are being rewarded for the risk you are taking,” comments Duncan Sankey, head of credit research for Cheyne Capital, regarding the corporate market. For further insight into the risk-reward tradeoff, see the following section of this piece, which updates the FridsonVision Fair Value Model.

Another bottom line: The real reason for July’s decoupling between the crude oil price and high-yield spreads is investors’ desperate search for yield. If that pressure abates, there will be no solid basis for arguing that Energy—and by extension the high-yield asset class as a whole—cannot fall in response to a future drop in oil prices.

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Global Market Intelligence. His weekly leveraged finance commentary appears exclusively on LCD, an offering of S&P Global Market Intelligence. Marty can be reached at [email protected].

Research assistance by Michael Li and Yanzhe Yang.

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers 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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Big Tex/ATW Bonds Price to Yield 9.625%

big tex logoBig Tex/American Trailer Works (ATW) today placed its offering of seven-year (non-call three) notes backing the acquisition and merger of the two companies by Bain Capital. The deal was finalized at the low end of talk, sources said. The 144A-for-life notes were issued though issuer entity BDC Acquisition and shopped via Goldman Sachs and Barclays. In addition to financing the M&A transaction, the proceeds will also be used to refinance ATW’s existing debt. Terms:

Issuer BDC Acquisition (American Trailer Works)
  Ratings B/B3
Amount $670 million
Issue senior secured (144A-for-life)
Coupon 9.625%
Price 100
Yield 9.625%
Maturity Sept. 15, 2023
Call non-call three (1st call @ par+50 coupon)
Trade Aug. 17, 2016
Settle Aug. 24, 2016
Joint Bookrunners GS/BARC
Price talk 9.75% area
Notes 1st call @ par+50 coupon

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Sinclair Television Group Prices $400M Bond Offering to Yield 5.125%

sinclair television groupSinclair Television Group late yesterday priced its upsized bond offering in the middle of talk, sources said. Bookrunners include Wells Fargo as lead, along with J.P. Morgan, Deutsche Bank, RBC, SunTrust Robinson Humphrey, Bank of America Merrill Lynch, and MUFG. Sinclair tapped the market to raise funds to repay $350 million of its 6.375% senior unsecured notes due 2021. This is the latest refinancing effort from the broadcasting company. Earlier this year, it issued $250 million of 5.875% senior notes due 2026 to repay drawings under its RCF. The new notes were finalized with a first call premium of par plus 50% coupon, sources said. Terms:

Issuer Sinclair Television
Ratings B+/B1
Amount $400 million
Issue senior (144A)
Coupon 5.125%
Price 100
Yield 5.125%
Maturity Feb. 15, 2027
Call non-call five
Trade Aug. 15, 2016
Settle Aug. 30, 2016 (T+11)
Bookrunners WFS/JPM/DB/RBC/STRH/BAML/MUFG
Co-managers Citizens/Liontree/Moelis
Price talk 5.00-5.25% area
Notes First call at par +50% coupon; upsized from $350 million.

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Investors Pour €319M into European High Yield Funds

J.P. Morgan’s weekly analysis of European high-yield funds shows a €319 million inflow for the week ended Aug. 10. The reading includes a €49 million inflow to ETFs, and an €87 million inflow for short-duration funds. The reading for the week ended Aug. 3 is revised from a €265 million outflow to a €274 million outflow. Note, the net weekly reading also includes flows from long-only managed accounts.

The provisional reading for July is a €221 million outflow. This is the third-consecutive monthly outflow, following a €1.83 million outflow in June. It is also the fifth monthly outflow this year, with January and February seeing outflows of €1.3 billion and €824 million, respectively. None of these readings though surpass the €3.3 billion and €2.1 billion inflows recorded in March and April, respectively.

Fund flows for 2016 now stand at a €788 million inflow, down from a 2016-high of €3.2 billion in April, and well below the €8.8 billion inflow tracked at this stage last year.

U.S. high-yield funds recorded an inflow of $1.65 billion for the week ended Aug. 10, according to the weekly reporters to Lipper only. This follows two straight weeks of outflows that totalled $2.6 billion over that period. ETFs led the way with $1.26 billion of inflows, or roughly 76% of the total. The year-to-date total inflow is now $8.7 billion, with 31% ETF-related. A year ago at this juncture, the measure was an outflow of $1.6 billion, with 83% ETF-related.

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.” — Nina Flitman

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Service King Prices $75M High Yield Bond Offering to Yield 8.029%

service kingService King late Thursday placed a $75 million add-on to its 7.875% notes due 2022, sources said. The deal was finalized at 99.25, plus accrued interest from April 1, via bookrunners J.P. Morgan, Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Macquarie, and Blackstone. The amount outstanding on the notes prior to the recent tack-on was $300 million. The borrower will use the proceeds for general corporate purposes. Terms:

Issuer Service King
Ratings CCC/Caa1
Amount $75 million (add-on)
Issue senior (144A-for-life)
Coupon 7.875%
Price 99.25
Yield 8.029%
Spread T+671
Maturity Oct. 1, 2022
Trade Aug. 11, 2016
Settle Aug. 16, 2016 (T+3)
Bookrunners JPM/BAML/CS/DB/MACQ/BLACKSTONE
Price talk 99 area OID
Notes 40% equity claw at 107.875

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5-Hour Energy Scraps Financing Deal after Sale of company Falls Through

Arrangers for Innovation Ventures, the maker of 5-Hour Energy drinks, pulled the company’s two-pronged financing package this morning after the sale to Renew Group Private fell apart.

5 Hour Energy logoThe financing package included a $525 million senior secured loan and a $400 million senior note issue that had been circulating the market, according to sources. Proceeds would have backed Renew Group’s purchase and refinanced outstanding bonds.

Innovation Ventures is still evaluating plans that would allow it to refinance its debt, the company stated this morning in a press release.

Bank of America Merrill Lynch and KeyBanc Capital Markets were arranging the loan and had set price talk of L+450, with a 1% LIBOR floor and a 99 offer price on a $500 million term loan.

S&P Global Ratings rated the issuer B+ and the first-lien debt BB, with a 1 recovery rating. The proposed bonds drew B–, with a 6 recovery rating.

As reported, Farmington Hills, Mich.–based Innovation Ventures is 80% directly or indirectly owned by CEO Manoj Bhargava, who would have sold a roughly 80% stake through a trust. — Kelsey Butler

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MGM Properties Prices $500M High Yield Bond Offering Backing Refinancing

MGM Growth Properties yesterday completed its offering of 10-year (non-call life) notes after a $100 million upsize, for a total of $500 million, sources said. The deal was finalized lower than talk, and at par, for a yield of 4.5%, sources noted. Bookrunners included Bank of America Merrill Lynch (left), Barclays, J.P. Morgan, Citi, Deutsche Bank, BNP Paribas, Fifth Third, Morgan Stanley, and SMBC. Proceeds will be used to refinance amounts outstanding under the company’s revolver that were drawn in connection with the acquisition of the real property of Borgata Hotel Casino and Spa from MGM Resorts International and for general corporate purposes. Terms:

Issuer MGM Growth Properties
Ratings BB–/B2
Amount $500 million
Issue unsecured notes (144A)
Coupon 4.50%
Price 100%
Yield 4.50%
Spread T+296 bps
Maturity Sept. 1, 2026
Call non-callable for life
Trade Aug. 9, 2016
Settle Aug. 12, 2016
Joint bookrunners BAML/JPM/BARC/C/DB/BNP/FIFTH THIRD/MS/’SMBC
Price talk 4.625% area
Notes first call at par plus 50% coupon

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