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Community Health High Yield, Leveraged Loan Debt Swoons as Earnings Underwhelm

Community Health bonds fell sharply in late afternoon trading Wednesday after the hospital operator rolled out preliminary second-quarter earnings that underwhelmed analyst expectations.

Community Health 6.875% notes due 2022 were the most actively traded, falling 3.5 points, to 86.5, according to MarketAxess. Over in loans, the issuer’s term loan H dipped about three quarters of a point on the day, to 99.75/100, sources said.

Adjusted EBITDA for the quarter is expected to clock in at roughly $435 million, according to a company release, or nearly 15% shy of analyst expectations of $510 million, based on consensus data provided by S&P Global Market Intelligence.

“The lower than anticipated results were primarily caused by lower than expected volume and the resulting lower net operating revenues,” the company noted in the release. “The results were also impacted by increases in medical specialist fees, purchased services and information systems expense.”

Community Health expects to book net operating revenue for the quarter of about $4.14 billion, compared with $4.59 billion in 2Q16.

Net cash provided by operating activities is expected to be about $261 million, and roughly $503 million for the first half of the year. This compares with $338 million and $632 million for 2Q16 and 1H16, respectively.

Community Health bonds had climbed sharply over the past few weeks as repeal efforts encountered enough resistance from GOP senators to potentially dispel the damaging potential impact on rural facility operators.

But the bonds shed gains this week as Senate Republicans moved to open a debate on at least a scaled-down version of repeal-and-replace legislation for the extant Affordable Care Act.

Franklin, Tenn.–based Community Health (NYSE: CYH) is an operator of general acute-care hospitals and outpatient facilities in communities across the U.S. — James Passeri

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US High Yield Funds See $2.2B Investor Cash Inflow

U.S. high-yield funds recorded an inflow of $2.2 billion for the week ended July 19, the largest such inflow since the week ended April 5, when the total was $2.4 billion, according to weekly reporters to Lipper only.

US high yield fund flows

This inflow snaps four straight weeks of outflows from the asset class for a total outflow of $4.2 billion over that period.

ETFs made up the bulk of the inflow this week, at $2 billion. The $200 million inflow to mutual funds follows last week’s exit of $1.4 billion.

The four-week trailing average remains in negative territory for the fourth consecutive week, rising to negative $453 million, from negative $1 billion last week.

The year-to-date total outflow is $6.6 billion, with a $8.3 million outflow from mutual funds outweighing a $1.7 billion inflow to ETFs.

The change due to market conditions this past week was an increase of $1.3 billion. Total assets were $210 billion at the end of the observation period. ETFs represent about 24% of the total, at $49.7 billion. — James Passeri

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S&P: As Risk, Defaults Rise in Retail, Expect Recoveries to Lag other Sectors

Amid sector challenges and rising defaults, default-related losses are likely to be higher in retail than in other sectors, especially for creditors that are either unsecured or have junior-lien positions, according to a new report published by S&P Global Ratings on Thursday.

Furthermore, with retailers historically showing a higher tendency to liquidate rather than reorganize after default, a separate report also finds that recovery prospects in a liquidation scenario are often dramatically lower than when a company continues to operate. This is because most retailers are asset light, meaning most creditors are highly dependent on profitability and cash flow as a source of repayment.

retail recoveryThe overall credit environment is generally improving amid mostly favorable economic conditions, including modest but steady GDP growth, low unemployment, tame inflation, and healthier household balance sheets. This environment—and more stable oil and gas prices—has contributed to a sharp decline in the speculative-grade default rate, which has dropped from 5.1% at the end of 2016 to 3.8% at the end of June, and now stands below the historical long-term average of 4.3%.

In contrast, distress and default levels are rising in the retail sector, with factors such as adapting to online retailing, rising competition, and shifting consumer tastes and spending habits contributing to the struggles.

In terms of trouble ahead, 18% of U.S. retail ratings are in the CCC category or lower, about double the level at the beginning of the year.

Meanwhile, the market is also signaling concern with the distress ratio —the share of speculative grade issues with option-adjusted spreads more than 1,000 bps above Treasuries—rising to 21% for the retail sector, well above that of the oil and gas sector, which has the next-highest distress ratio for a non-financial sector at 14%.

In the post-default scenario, overall recovery prospects for creditors to U.S. retailers are much lower than those for the greater domestic corporate universe, especially for creditors that are either unsecured or have junior-lien positions.

In the event of liquidation, estimated recoveries in the retail sector would be about 50% lower than going-concern recoveries on average. The full reports entitled “U.S. Retail Debt Recoveries Likely To Be Below Average Amid Sector Challenges And Rising Defaults“, and “U.S. Retail Recovery Prospects: Liquidation Could Lead To Worse Recovery Outcomes,” are available at www.globalcreditportal.com and at www.spcapitaliq.com. — Staff reports

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High Yield Bond Trading Prices Post Biggest Gains in 2 Months

The average bid of LCD’s flow-name high-yield bonds climbed 73 bps in today’s reading, to 102.45% of par, yielding 6.05%, from 101.72, yielding 6.28%, on July 13. Within the 15-bond sample, there were 13 gainers, one decliner, and one issue was unchanged.

The average bid is now 65 bps higher over the last two weeks and 47 bps higher over the last four weeks. Today’s result shows the largest gain since the May 23 reading, when the average bid was 101.55, representing an increase of 82 bps.

The largest gainer was Frontier Communications 11% notes due 2025, which increased 1.5 points, to 89.5. Gains of 1.25 points were recorded for Community Health 6.875% notes due 2022, at 90.25; Valeant Pharmaceuticals 5.875% notes due 2023, at 87.25; Post Holdings 5% notes due 2026, at 101; and Sprint 7.875% notes due 2023, at 114.75.

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US High Yield Funds See Yet Another $1B-plus Investor Withdrawal


US high yield fund flows

U.S. high-yield funds recorded an outflow of $1.1 billion for the week ended July 12, according to weekly reporters to Lipper only. This is the fourth straight week of outflows from the asset class for a total of $4.2 billion over that period.

Mutual funds led the exit this week, with outflows of $1.4 billion outweighing inflows into ETFs of $276 million, following last week’s exit of $184 million from ETFs.

The four-week trailing average remains in negative territory for the third consecutive week, dipping to $1 billion, from $705 million last week.

The year-to-date total outflow is $8.9 billion, with an $8.5 billion outflow from mutual funds and a $319 million exit from ETFs.

The change due to market conditions this past week was an decrease of $33.9 million. Total assets at the end of the observation period were $206.3 billion. ETFs account for about 23% of the total, at $47.3 billion. — James Passeri

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Private Equity Companies Gamble on Oil and Gas Defaulters—S&P Global

Given the apparent bottoming out of the decline in oil prices, improving credit conditions in the oil and gas sector, and the favorable financing conditions across markets currently, many distressed oil and gas companies appear to be a high-return bet.

However, risks do exist, and adding more debt to these firms’ existing loads may prove costly if interest rates rise, if the larger U.S. or European economy dips into recession, or if oil prices once again decline, S&P Global Fixed Income Research warned in a report this week.

The drop in oil prices that began in the second half of 2014 was particularly hard felt among U.S.-based shale oil producers, as this relatively expensive extraction method proved unsustainable amid an approximate 80% drop in oil prices.

“The speculative-grade default rate has risen in recent years primarily due to disproportionate stress in the energy and natural resources sector, where oil and gas companies have been struggling with falling revenue due to lower oil prices,” said Diane Vazza, head of S&P Global Fixed Income Research.

Private equity defaulters story table 2 2017-07-11(1)Moreover, many recent defaulters in the oil and gas sector have gained extra funding sources via private equity companies taking out ownership.

Recovery prospects
In terms of recovery prospects, bond prices for defaulting U.S.-based firms with private equity ownership do show some interesting distinctions among sectors. In the energy and natural resources sector, the average bond prices leading up to default were generally lower than those in other industries. But these same firms’ average bond prices were generally higher a month after default.

Generally, favorable recent bond prices for the oil and gas segment are in line with or slightly better than historical recovery rates.

The full report can be found here ($). — Rachelle Kakouris

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Investors Withdraw $1.1B from US High Yield Funds

US high yield fund flows

U.S. high-yield funds recorded an outflow of $1.2 billion for the week ended July 5, according to weekly reporters to Lipper only. This is the third straight week of outflows from the asset class for a total of $3 billion over that period.

Mutual funds made up the bulk of the outflow this week, at $972 million, following last week’s exit of $1.2 billion. The $184 million outflow from ETFs follows an outflow of $536 million last week.

The trailing four-week average remains in negative territory for the second consecutive week, deepening to negative $705 million from negative $270 million last week.

The year-to-date total outflow is now $7.7 billion, split between outflows of $7.1 billion from mutual funds and $595 million from ETFs.

The change due to market conditions this past week was an increase of $521.5 million. Total assets at the end of the observation period were $207.8 billion. ETFs account for about 22.6% of the total, at $47.1 billion. — James Passeri

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This story is taken from analysis which 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.