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Level 3 Inks Amendment to not Trigger Change-of-Control Provision

Level 3 Communications disclosed that it has entered into an amendment to provide that CenturyLink’s proposed acquisition of the company would not constitute a change of control under its credit agreement and senior notes.

In connection with the amendment, Level 3 agreed to refresh the 101 soft call premium for six months.

Bank of America Merrill Lynch is administrative agent.

As reported, Bank of America and Morgan Stanley committed to provide debt financing to support CenturyLink’s proposed acquisition of Level 3 in a cash-and-stock deal valued at $34 billion.

The financing commitment is for approximately $10.2 billion of secured debt comprising a new $2 billion revolver, which will be undrawn at close, and approximately $8.2 billion of funded secured debt. CenturyLink expects to use $7 billion of the funded debt to finance the cash portion of the deal, and the balance is earmarked to refinance debt expected to mature prior to closing.

Level 3 has about $4.6 billion of term debt outstanding, including its B-3 term loan due August 2019 (L+300, 1% LIBOR floor), a B-2 term loan due May 2022 (L+275, 0.75% floor), and around $5.9 billion of bonds, including the company’s 5.625% notes due 2023 and 5.25% notes due 2026.

Under the terms of the deal, Level 3 shareholders would receive $66.50 per share, 60% in stock and 40% in cash. The deal is expected to be completed by the end of the third quarter 2017, subject to regulatory approvals and other closing conditions.

The combined company would generate around $11 billion of adjusted annual EBITDA on revenue of $26 billion, including synergies. Pro forma net leverage will be less than 3.7x at close, with a long-term target of about 3x, according to the company.

Current corporate ratings of CenturyLink are BB/Ba2. Level 3 is rated BB/Ba3. — Staff reports

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High Yield Bond Fund Inflows Rebound After Brutal 3-Week Stretch

U.S. high-yield funds recorded an inflow of $597.5 million for the week ended Nov. 23, according to weekly reporters to Lipper only. This is the first inflow since Oct. 5 and snaps a skid that saw $7.35 billion exit the asset class in just six weeks.

high yield fund flows

Outflows from mutual funds were mild at $122.6 million while ETFs recorded a $720 million inflow after seeing roughly $1 billion drained in the prior week.

With this result, the four-week trailing average narrows to negative $1.62 billion, from negative $1.78 billion previously.

The year-to-date total inflow is now $4.42 billion, with 46% ETF-related. A year ago at this juncture, the measure was an inflow of $984 million, reflecting $1.33 billion of mutual fund outflows and ETF inflows of $2.31 billion.

The change due to market conditions last week was a $922 million increase. Total assets at the end of the observation period were $198.1 billion. ETFs account for about 21% of the total, at $40.7 billion. — Jon Hemingway

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Another Huge Cash Withdrawal Hits US High Yield Bond Funds

high yield fund flows

U.S. high-yield funds recorded an outflow of $2.283 billion for the week ended Nov. 16, according to weekly reporters to Lipper only. This is the sixth consecutive week of outflows from the asset class totaling $7.35 billion over that period.

With this result, the four-week trailing average drops to negative $1.78 billion, from negative $1.25 billion last week.

Outflows were fairly balanced between ETFs and mutual funds. A $1 billion outflow from ETFs trailed the $1.28 billion that left mutual funds over the past week.

The year-to-date total inflow is now $3.83 billion, with 34% ETF-related. A year ago at this juncture, the measure was an inflow of $1.49 billion, reflecting $823.8 million of mutual fund outflows and ETF inflows of $2.3 billion.

The change due to market conditions this past week was a $1.36 billion decrease. Total assets at the end of the observation period were $196.5 billion. ETFs account for about 20% of the total, at $39.8 billion. — Jon Hemingway

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High Yield Funds Extend Losing Streak, Though Outflows Diminish

U.S. high-yield funds recorded an outflow of $668.6 million for the week ended Nov. 9, according to weekly reporters to Lipper only. While negative, this is much less severe than last week’s $4.12 billion outflow, the largest for the asset class since a record $7.1 billion exodus in August 2014.

US high yield bond flows

Still, it extends the current outflow streak to five weeks, the longest such run since December 2014. The total outflow over that span is $5.1 billion.

With this result, the four-week trailing average drops to negative $1.25 billion, from negative $1.1 billion last week and positive $48.3 million in the week prior.

Over the past week a $1.08 billion inflow to ETFs was outpaced by $1.75 billion that was pulled from mutual funds, the third straight week of outflows. ETF flows swung sharply positive after a massive $3.45 billion outpouring last week.

The year-to-date total inflow is now $6.11 billion, with 38% ETF-related. A year ago at this juncture, the measure was an inflow of $2.84 billion, reflecting $179.8 million of mutual fund inflows and ETF inflows of $2.66 billion.

The change due to market conditions this past week was a $253 million increase. Total assets at the end of the observation period were $200.2 billion. ETFs account for about 21% of the total, at $41.1 billion. — Jon Hemingway

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Fridson on High Yield: What if the Election Ends with no Winner?

How bad was the high-yield market’s pre-election sell-off?

From Oct. 25 from Nov. 4 the option-adjusted spread (OAS) on the BofA Merrill Lynch US High Yield Index widened by 60 bps, from 460 to 520. That ranks just within the first decile of eight-day widenings since the inception of OAS on Dec. 31, 2016. The 60 bps swing also ranks within the top 10% of all moves, wider or narrower.

Note, however, many eight-day widenings during the Global Financial Crisis were far bigger. In all, there were 22 eight-day widenings of 200 bps or more during 2008’s chaos, topped by a move of 438 bps. The biggest eight-day tightening was negative 336 bps, which occurred in the eight-day span ending Jan. 7, 2009.

By labeling the recent move the “pre-election” sell-off we imply—intentionally so—that the tightening presidential race produced a risk-off response. The most widespread interpretation is that Hillary Clinton, who until recently held a commanding lead in the polls, is considered the more predictable of the two main candidates. The nature of a Donald Trump administration is thought to be more uncertain.

Certainly, one could dispute that explanation. As always, other events occurred that could have been responsible for the high-yield downturn. Most prominently, crude oil prices fell by 12% between Oct. 25 and Nov. 4, as measured by the Generic 1st Crude Oil, West Texas Intermediate contract. Over the past two years, to be sure, major swings in energy prices have triggered outsized moves in the high-yield market’s Energy component.

Those industry-specific jumps have resulted in substantial moves in the high-yield index as a whole. From Oct. 25 to Nov. 4, however, the BofA Merrill Lynch US High Yield Energy Index widened almost exactly in line with the BAML High Yield Index as a whole (62 bps and 60 bps, respectively). Based on the fact that Energy essentially performed no worse than the rest of the high-yield universe, we reject the hypothesis that falling crude prices precipitated the sell-off in the last few days before the election.

There may be more to the story, though, than apprehensiveness over a Trump administration. Another possibility is that the market is attributing some probability to a hung election. In the near term, that outcome would present major uncertainty in its own right.

What if the election ends with no winner?
Prior to early November, as far as I have been able to establish, there was little or no discussion of the possibility of the winner of the presidential election remaining unresolved beyond early tomorrow morning. On Nov. 6, though, Fox News discussed the mathematically possible—if statistically improbable—outcome of an exact tie in the Electoral College, at 269–269.

Barring the deadlock being broken by a faithless elector, the decision would then be thrown to the House of Representatives. Perhaps a more easily imaginable scenario is a replay of the 2000 election, when disputed ballots in one state kept determination of the winner on hold for over a month.

Between Election Day, Nov. 7, 2000 and Dec. 12, 2000, when the Supreme Court voted 5-4 to leave intact a Florida vote count that narrowly awarded the state, and consequently the election, to George W. Bush, the BAML High Yield Index’s OAS widened by 119 bps, from 775 to 894. In-between, the spread reached a maximum of 913 bps on Dec. 7.

Was the Nov. 7–Dec. 12 widening, which corresponded to a –2.26% (–21.23% annualized) total return, a hung-election phenomenon that could serve as a guide of what to expect if today’s vote proves inconclusive for the time being? To be sure, the high-yield spread was already on the rise in November 2000. It had ended 1999 at 476 bps, meaning it was up by 299 bps in the year to date on Election Day.

The day before Election Day Bloomberg BusinessWeek reported that the default rate stood at 3.83%, up from 1% in 1997. November 2000 was also noteworthy for precipitous drops in Technology and Telecom equities, with some stocks losing about half their value.

The chart below shows, however, that November’s spread-widening represented a spike, a conspicuous discontinuity in the steady rise in the spread that reached its apogee in late 2002. In November 2000 the BAML index suffered its worst return (–3.84%) since August 1998’s –5.05%, which was a response to Russia’s sovereign default. The November 2000 sell-off was seen as excessive relative to the fundamentals, as evidenced by December reports that Warren Buffett and other value investors were snapping up depressed high-yield bonds.

high yield OAS

To summarize, no two market circumstances are exactly identical. Measuring the impact of an event such as a hung election is inevitably complicated by other, concurrent events. Without downplaying these limitations, we submit that the high-yield widening of 119 bps in the period of uncertainty that followed the Nov. 7, 2000 presidential vote represents the best available estimate of the likely impact of a replay this year.

Investors should keep in mind, though, that the Oct. 25–Nov. 4 widening of 60 bps may indicate that the market has discounted half of the impact in advance. (By contrast, the market was probably caught off-guard by 2000’s unusual turn of events, implying that previous spread-widening was strictly a function of high-yield fundamentals.) – Martin Fridson

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Research assistance by Yanzhe Yang and Jiajun Wang.

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]

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High Yield Bond Prices Sink in Trading to Lowest Point Since July

The average bid of LCD’s flow-name high-yield bonds fell 27 bps in today’s reading, to 98.06% of par, yielding 7.15%, from 98.33, also yielding 7.15%, on Nov. 1. Within the 15-bond sample, there were 10 decliners, three gainers, and two unchanged constituents.

This is the fourth consecutive drop for the average bid, which is read twice each week, and it follows Tuesday’s dramatic plunge of 204 bps, which put the sample below par for the first time since Sept. 27. The current reading is the sample’s lowest level since 97.10 on July 7.

The biggest decliner was NRG Energy 6.625% notes due 2027, which fell three points, to 91.25. Frontier Communications, MGM Resorts, Sprint Corp., Dish Network, and Charter Communications were all down a point or more since Tuesday.

The Valeant Pharmaceuticals International 5.875% notes due 2023 jumped 3.75 points, to 81, in today’s reading, topping the short list of gainers, as investors were pacified by the company’s plans to sell its stomach-drug business for a hefty $10 billion. In Tuesday’s reading, the notes were the largest decliner following reports that its ex-CFO and ex-CEO are the focus of a criminal probe. The Community Health Systems 6.875% notes due 2022 also posted a hefty gain of 2.25 points, to 75.75.

Today’s result puts the average down 349 bps from two weeks ago and 319 bps from four weeks ago.

The average yield to worst was unchanged at 7.15% in today’s reading. The average option-adjusted spread to worst rose 11 bps, to T+564. The average yield and spread remain wider when compared to high-yield’s broader market averages. The S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed on Wednesday, Nov. 2 with a yield to worst of 6.21% and an option-adjusted spread to worst of T+504.

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Investors Yank $4.1B from US High Yield Bond Funds

US high yield bond flows

U.S. high-yield funds recorded an outflow of $4.12 billion for the week ended Nov. 2, according to weekly reporters to Lipper only. This is the largest outflow for the asset class since a record $7.1 billion exodus in August 2014.

This is the fourth consecutive negative reading, but as the previous readings were mild, the total outflow over that span is just $4.4 billion. The four-week trailing average drops to negative $1.1 billion, from positive $407 million last week.

ETFs led the way with a $3.45 billion outflow compared to a $665 million exodus from mutual funds.

The year-to-date total inflow is now $6.78 billion, with 18% ETF-related. A year ago at this juncture, the measure was an inflow of $4.64 billion, reflecting $722.9 million of mutual fund inflows and ETF inflows of $3.92 billion.

The change due to market conditions this past week was a $2.5 billion decrease, the largest since the week ended Feb. 10. Total assets at the end of the observation period were $200.9 billion. ETFs account for about 20% of the total, at $39.9 billion. — Jon Hemingway

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Tutor Perini Scraps $500M High Yield Bond Offering

Tutor Perini has postponed its planned $500 million bond sale due to “adverse market conditions,” according to a company statement.

Earlier this week, the construction company set price talk for the eight-year (non-call three) paper at 7–7.25%. Proceeds from the Goldman Sachs–led deal were to be combined with drawings from a new revolving credit facility to redeem Tutor Perini’s 7.625% notes due 2018, and repay an existing revolver and term loan debt.

“The company will evaluate the timing for the proposed offering as market conditions develop, and at this time does not intend to redeem its outstanding 7.625% senior notes due 2018 or enter into a new credit facility,” Tutor Perini said Nov. 2.

The company issued $300 million of the 7.625% notes in an October 2014 debut offering. As of Sept. 30, the company’s long-term debt also included a $160.5 million revolver, and an $80 million term loan, according to an SEC filing.

Tutor Perini is the latest would-be high-yield bond issuer. Last month, homebuilder UCP canceled a proposed offering for $200 million of notes due 2021 “in light of challenged market conditions.” Whispers for the deal were at 8.25–8.50%. — Jakema Lewis

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Sell-off: High Yield Bond Secondary Prices Tumble Below Par

The average bid of LCD’s flow-name high-yield bonds nosedived 204 bps in today’s reading, to 98.33% of par, yielding 7.15%, from 100.37, yielding 6.64%, on Oct. 27. All 15 constituents in the sample were in the red.

This is the first below-par reading for the average bid price since Sept. 27. It is also the lowest reading since Sept. 15, when the average bid was recorded at 98.85 ahead of the September meeting of the Federal Open Market Committee. Similarly, today’s drop comes with the FOMC’s November session currently underway, as well as one week ahead of the U.S. presidential election.

Additionally, headlines affecting Community Health Systems and Valeant Pharmaceuticals International also weighed on the sample. Valeant 5.875% notes due 2023 shed five points, to 77.25, as news reports surfaced that U.S. prosecutors are examining the actions of former top executives for possible accounting fraud related to the online pharmacy Philidor Rx Services, which Valeant secretly controlled.

Also, Community Health 6.875% notes due 2022 were 6.25 points lower in today’s reading as the market continues to brace for the company’s quarterly report. The hospital operator said last week it expects a 10% drop in revenue for the three months ended Sept. 30, 2016.

The average bid is now down 286 bps over the past week, 270 bps from two weeks ago, and 283 bps from four weeks ago.

The average yield to worst gained 51 bps, to 7.15% in today’s reading, and the average option-adjusted spread to worst rose 48 bps, at T+553. Both the average yield and spread remain wider when compared to high-yield’s broader market averages. The S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed on Monday, Oct. 31 with a yield to worst of 6.04% and an option-adjusted spread to worst of T+483. – Staff Reports

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