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Investors Withdraw $568M from US High Yield Bond Funds

U.S. high-yield funds recorded an outflow of $568 million for the week ended May 24, according to weekly reporters to Lipper only. This week’s exit from the asset class follows last week’s inflow of $649.5 million.

US high yield fund flows

ETFs made up the bulk of the outflow this week at $347 million, while $221 million was pulled out of mutual funds.

The year-to-date total outflow is now just over $6 billion, with a $4.6 billion outflow from mutual funds pairing with a $1.45 billion exit from ETFs.

The four-week trailing average remains in negative territory for the fourth straight week, widening to negative $507 million from negative $292 million last week.

The change due to market conditions this past week was an increase of $597 million. Total assets at the end of the observation period were $205 billion. ETFs account for about 22% of the total, at $46.1 billion. — James Passeri

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Dynegy Notes Rise as PJM Capacity Auction Rattles Power Names

The long-awaited results of PJM Interconnection’s forward-capacity auction—the nation’s largest and a key benchmark in establishing the long-term rates among U.S. merchant power suppliers—were unveiled late Tuesday, sparking a sharp climb across a range of Dynegy’s unsecured bonds and rattling a slew of names in the sector.

Dynegy 8% notes due 2025 were among the most active in Wednesday trading, rising 2.5 points, to 96.25, according to MarketAxess, while the Houston-based generator’s 7.625% notes due 2024 and 7.375% notes due 2022 climbed 2.75 points and two points, respectively, to 96.25 and 98.

PJM Interconnection, the Valley Forge, Pa.–headquartered regional transmission organization (RTO), accounted for more than half of Dynegy’s roughly $1.25 billion in first-quarter sales, and made up 52% of the issuer’s 2016 wholesale power generation, according to a February filing with the Securities and Exchange Commission.

Although PJM’s banner numbers broadly missed analyst forecasts—primarily in the setting of a 2010–2011 payout rate to merchant suppliers of $76.5 rate per megawatt-day, down sharply from the roughly $100 rate for the previous period and a consensus range of forecasts of about $90–120—Dynegy was poised to gain in light of its unique position in regional markets, according to a Morgan Stanley report out Wednesday.

One zone in particular was the so-called DEOK zone, of which Dynegy is a majority owner, and which broke out for a positive performance for its first time, Morgan Stanley analysts added, underscoring their selection of Dynegy and NRG Energy as “top picks in merchant power.”

“Expectations were pretty low,” Cowen analyst Amer Tiwana noted of the PJM results in a Wednesday phone interview, noting that many merchant suppliers were benefited merely from the number of forecasters bracing for the worst, especially as the U.S. merchant power industry has been long pressured by an environment of low gas prices and a slate of new projects waiting to come on line.

Dynegy bonds have most recently been in the spotlight amid reports that Vistra Energy could be in the hunt with a takeover offer, with bonds climbing on the heels of a Wall Street Journal report last week that the two issuers have entered into preliminary discussions over a potential tie-up that would create one of the country’s biggest independent power generators.

Morgan Stanley noted in a separate Wednesday report that such a tie-up supports its Overweight thesis for Dynegy, especially in light of the benefits of regional diversity and the likelihood of cash flows significantly improving through expected annual cost savings of about $250–300 million.

“We see the strategic rationale for both companies of such a deal, and if a transaction was announced, we would expect it to be structured as a stock-for-stock basis due to change of control considerations on Dynegy’s debt,” the analysts noted.

Houston-based Dynegy’s corporate and bond ratings are B+/B2 and B+/B3, respectively, with a 3 recovery rating on the unsecured notes by S&P Global Ratings. — James Passeri

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High Yield Bond Bids Surge Anew, Hit 10-Week Peak

The average bid of LCD’s U.S. flow-name high-yield bond sample surged 82 bps in today’s reading, to 101.55% of par, yielding 6.26%, from 100.73, yielding 6.27%, on May 18. Within the 15-bond sample, there were 11 gainers, two decliners, and two unchanged issues.

us high yield bond bids

The average bid is now up 66 bps over the last two weeks and 130 bps over the last four weeks. Today’s results show the highest average bid price for the sample since March 2, when the average bid price was 102.10.

While the majority of the constituents were in the black in today’s assessment, there were a few standouts. Community Health 6.875% notes due 2022 increased three points, to 89.25. Also, PetSmart 7.125% notes due  2023 were two points higher, at 94.5. The retailer’s sole existing bond issue has been active in the secondary market following the launch of a $2 billion, two-part offering to back the purchase of Chewy.com.

Meantime, the decliners in today’s reading were Altice 7.75% notes due 2022 at 106, and Dollar Tree 5.75% notes due 2023 at 106.25, both a quarter of a point lower.

MGM Resorts 6% notes due 2023, and Post Holdings 5% notes due 2026 were both unchanged.

The average yield to worst was one basis point lower, at 6.26%, and the average option-adjusted spread tightened nine basis points, to T+436. However, both the average yield and average spread remain wider in comparison to broad high-yield market indices. For example, the S&P Dow Jones U.S. Issued High Yield Corporate Bond Index II closed on May 22 with a yield to worst of 5.38% and an average option-adjusted spread to worst of T+417.

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Chesapeake Energy Eyes High Yield Bond Market for $750M Offering

Chesapeake Energy’s proposed $750 million offering of 10-year (non-call five) senior notes is talked at 8–8.25%, according to sources. Books are expected to close at 3 p.m. EDT with pricing to follow via joint bookrunners Citi, Credit Agricole, and J.P. Morgan.

Proceeds will be used to finance a concurrent tender offer for up to $750 million of Chesapeake’s outstanding debt, and for general corporate purposes. The issuer is looking to tender for its 8% senior second-lien notes due 2022, 6.625% senior notes due 2020, 6.875% senior notes due 2020, 6.125% senior notes due 2021, and 5.375% senior notes due 2021.

Chesapeake was last in the market in December when it placed $1 billion of 8% notes due January 2025, also to refinance existing notes. Those notes traded up to 102.25 this morning, yielding around 7.5%, from 99.75 Friday afternoon, trade data shows.

Existing issue ratings are CCC/Caa3. Corporate ratings are B–/Caa1, with positive outlooks on both sides.

Chesapeake Energy (NYSE: CHK) engages in the acquisition, exploration, and development of properties for the production of oil, natural gas, and natural-gas liquids (NGL) from underground reservoirs in the U.S. — Jon Hemingway/Nina Flitman

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After Big Retreat, Investors Pour $650M into US High Yield Funds

U.S. high-yield funds recorded an inflow of $649.5 million for the week ended May 17, according to weekly reporters to Lipper only. The gain snaps two consecutive weeks of outflows, which totaled $2.1 billion over the period.

US high yield fund flows

ETFs drove the inflows this week, pulling in $687.5 million, while mutual funds reported an outflow of $38 million. This marks a reversal from last week’s $1.7 billion outflow from ETFs and an $18 million inflow into mutual funds.

The four-week trailing average remains in negative territory, rising to negative $292 million, from negative $545 million last week.

The year-to-date total outflows from high-yield funds is now $5.4 billion, with a $4.3 billion exit from mutual funds and a $1.1 billion outflow from ETFs over the period.

The change due to market conditions this past week was an increase of $286 million. Total assets at the end of the observation period were $206.6 billion. ETFs account for about 22% of the total, at $46.3 billion. — James Passeri

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Fridson: High Yield Bonds Might Soon Be Attractive, vs Leveraged Loans

High-yield bonds may soon be fairly valued, or even attractive, relative to leveraged loans.

How do we arrive at such a conclusion? In brief, we adjust for differences in the ratings mix between the two asset classes and compare the three-year discounted spread on the S&P/LSTA Leveraged Loan Index and the option-adjusted spread (OAS) on the BofA Merrill Lynch US High Yield Index.

We convert the difference in these spreads into an index geared to one standard deviation from the mean in either direction. A reading of +1.0 indicates that bonds are extremely rich versus loans and a reading of -1.0 indicates that loans are extremely rich versus bonds.

loan-bond relative value

As the chart illustrates, in February, high-yield bonds were extremely rich versus loans. They ceased to be in March, as the reading dropped from 1.1 to 0.6. That trend continued in April, with loans experiencing more spread-tightening than bonds. At month-end the reading stood at 0.25. If the trend continues at its pace of the past two months, high-yield will reach fair value versus loans this month and even become slightly cheap in relative terms. – Martin Fridson

This analysis is part of Marty’s latest weekly commentary, available to LCD News subscribers on www.lcdcomps.com. As well as his weekly write-up, Marty pens a monthly analytical feature on the high-yield bond world for LCD News.

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High Yield Bond ETFs See $1.7B Investor Cash Withdrawal

U.S. high-yield funds recorded an outflow of $1.7 billion for the week ended May 10, according to weekly reporters to Lipper only, marking the largest outflow since the week ended March 15, when the outflow from the asset class totaled $5.7 billion.

high yield fund flowsThis week’s result was entirely driven by a $1.7 billion outflow from ETFs, while mutual funds recorded a small inflow of $18 million.

The year-to-date total outflow is now $6.1 billion, reflecting a $4.3 billion outflow from mutual funds added to a $1.8 billion exit from ETFs.

The four-week trailing average dropped to negative $545 million from negative $201 million last week.

The change due to market conditions this past week was a decline of $111 million. Total assets at the end of the observation period were $204 billion. ETFs account for about 22% of the total, at $45.5 billion. — James Passeri

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S&P: YTD Global Corporate Defaults Total 39, with 2 Consumer Prodcuct Cos. this Week

U.S. clothing concern Rue21 and Croatia-based retailer Agrokor missed interest payments this week, bringing the global corporate default tally so far in 2017 to 39, according to S&P Global Fixed Income Research. That’s down from 62 defaults at this point in 2016.

 

corporate high yield defaults

Despite the two retail defaults, the global speculative default rate dipped for the third straight month, to 3.7% as of March 31, from 3.9% the previous month. The rate remains elevated compared to a year ago, when it was 3.1%, according to S&P.

This analysis was written by S&P’s Dian Vazza, Sudeep Kesh, and Nicole Serino. The full analysis is available via S&P Global Fixed Income Research.

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LCD is 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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Community Health add-on notes price at 101.75 to yield 5.83%; terms

Community Health Systems has wrapped a $900 million tack-on to its 6.25% senior secured notes due 2023, following a $200 million increase, sources said. Credit Suisse was left lead on the transaction, which cleared at the middle of talk. The deal was launched for funds to refinance the company’s existing term loan A due 2019. The borrower will use the additional proceeds for general corporate purposes, which may include the repayment of debt, sources said. In March, the company first issued $2.2 billion of the notes. Franklin, Tenn.–based Community Health (NYSE: CYH) owns, leases, and operates general acute care hospitals in the U.S. Terms:

Issuer Community Health Systems
Ratings BB-/Ba3
Amount $900 million (add-on)
Issue senior secured notes (SEC-registered)
Coupon 6.25%
Price 101.75
Yield 5.83% (YTW)
Spread T+389
Maturity March 31, 2023
Call callable on March 31, 2020 @ 103.125
Trade May 9, 2017
Settle May 12, 2017 (T+3)
Bookrunners CS/BAML/C/CACIB/DB/GS/JPM/RBC/STRH/WFS
Price talk 101.5-102
Notes Upsized by $200 million; add-on brings full amount issued to $3.1 billion; change of control put @ 101; up to 40% equity claw until March 31, 2020 at 106.25%; make-whole @ T+50

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Valeant debt gets boost from guidance hike, drive to delever

Valeant Pharmaceuticals’ broad stack of unsecured debt was among the most active in high-yield trading Tuesday, climbing alongside the company’s term loans after the debt-laden drug maker raised its 2017 EBITDA guidance on its quarterly earnings rollout, which underscored plans to meaningfully reduce its debt load.

Valeant saw its largest gains on the shorter-end of its cap structure, with its 6.375% notes due 2020 jumping two points, to 91.625, and among the most active in early trading, according to MarketAxess. The issuer’s 5.875% notes due 2023 ticked up three-quarters of a point, to 78.75, while the 6.125% notes due 2025 rose 0.875 points, to 76.875, with both changing hands at a steady clip.

Valeant was also the best European performer today, with its 4.5% notes due 2023 up 2.5 points, at 74, versus lows of 69.25 in mid-April.

On the loan front, Valeant’s F-3 tranche B term loan due April 2022 was quoted at 101.375/101.625 today, up about three-eighths of a point from the last session, sources said.

The moves follow Tuesday’s announcement that Valeant is hiking its 2017 adjusted EBITDA guidance by roughly $50 million, to $3.6–3.75 billion, from a previous guidance of $3.55–3.7 billion.

Creditors could also take relief in a stronger liquidity profile, with Valeant unveiling balance-sheet cash of $1.21 billion as of March 31, versus $542 million year over year.

Meanwhile sales and adjusted EBITDA for the first quarter of were $2.1 billion and $861 million, respectively, both falling shy of analyst forecasts by about 3%, according to consensus data provided by S&P Global Intelligence.

The B/B3 issuer pared its substantial debt load by $1.3 billion in the first quarter, with $28.54 billion outstanding as of March 31, or down about 5.5% year over year.

Most recently, Valeant announced last week it has managed to pay down its term loan debt by roughly $220 million following the earlier-than-expected close of the sale of three skincare brands to L’Oreal as well as its divestiture of a manufacturing facility in Brazil.

“We believe strongly that we have clear pathways to get our capital structure in order by one, reducing our leverage throughout the sales; two, through cash generation; and three, the best way, through growth our operating earnings,” Valeant CEO Paul Herendeen said on a Tuesday earnings call with analysts.

Valeant Pharmaceuticals (NYSE: VRX) is a Laval, Quebec–based specialty pharmaceutical company. — James Passeri/Kelsey Butler