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US High Yield Funds See Cash Inflow Courtesy Big ETF Gain

high yield fund flows

U.S. high-yield funds recorded an inflow of $122 million for the week ended Oct. 25, according to weekly reporters to Lipper only. This comes on the heels of last week’s outflow of $450 million.

ETFs drove the action this week with an inflow of $530 million, while $407 million exited mutual funds.

The four-week trailing average fell to positive $321 million from positive $399 million last week, and has now remained in the black for six consecutive weeks.

The year-to-date total outflow is now $6.7 billion, with an $11.6 billion outflow from mutual funds outweighing a $4.9 billion inflow to ETFs.

The change due to market conditions this past week was a decrease of $216 million, snapping a streak of eight consecutive weeks of increases. Total assets at the end of the observation period were $215 billion. ETFs account for about 25% of the total, at $53.8 billion. — James Passeri

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Fridson: High Yield Bond Covenant Quality Hits All-Time Low

The covenant quality of high-yield new issues reached an all-time low in the third quarter, as measured by the FridsonVision series. Moody’s series, of which ours is a refinement, bottomed out in the second quarter. For reasons detailed below, the two series diverged in September, with FridsonVision’s showing minor improvement versus August’s reading, while the Moody’s series deteriorated slightly, month over month.

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To provide background, “Covenant quality decline reexamined” ($) describes how we modify the Moody’s CQ Index to remove noise arising from month-to-month changes in the calendar’s ratings mix. On average, covenants are stronger on triple-Cs than on single-Bs, and stronger on single-Bs than on double-Bs. Therefore, for example, if issuance shifts downward in ratings mix in a given month, without covenant quality changing within any of the rating categories, the Moody’s CQ Index will show a spurious improvement. We eliminate such false signals by holding the ratings mix constant at an average calculated over a historical observation period.

cov quality

The opposite of the effect described just above occurred in September (see chart below). As the double-B component expanded from 24.0% of all issues in August, to 38.2% in September, Moody’s series worsened from 4.54, to 4.59 (1 = Strongest, 5 = Weakest). Filtering out the impact of monthly variations in ratings mix, the FridsonVision series showed a similarly sized improvement from 4.59, to 4.55.

On a quarterly basis, though, the pattern was reversed. The FridsonVision series deteriorated from 4.37 in August to an all-time low of 4.44 in 3Q17. This series’ previous worst score was 4.38 in 1Q15. Meanwhile, the Moody’s series improved slightly from its all-time quarterly worst 4.49 in 2Q17 to 4.47 in 3Q17 (see chart below). That seeming improvement in covenant quality reflected an unusually heavy concentration of issuance in the double-B category in 2Q17 and a return to about an average concentration in 3Q17. – Martin Fridson

This analysis was excerpted from Marty’s regular weekly column, available to LCD News subscribers. 

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This story was excerpted from a full analysis 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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US High Yield Bond Funds See $450M Investor Cash Withdrawal

Investors withdrew $450 million from U.S. high-yield funds this week, ending a four-week run of inflows totaling nearly $3 billion, according to Lipper. With the recent activity, the four-week average dips to a $399 million inflow, down from $728 million a week ago.

high yield fund flowsHigh-yield funds proper took most of the hit during the week, with a $281 million outflow, while ETFs saw a $169 million withdrawal.

Year-to-date, U.S. high-yield funds and ETFs have seen $6.8 billion of outflows, thanks to the funds, which have been hit with $11.2 billion of withdrawals so far in 2017. High-yield ETFs have seen $4.3 billion of inflows.

The change due to market conditions during the week was positive $169 million, marking the eighth straight advance. Total assets at the end of the observation period are $212.2 billion, with ETFs accounting for $53.3 billion of that. — Staff reports

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Nathan’s Famous Wraps $150M High Yield Bond to Slash Borrowing Costs

nathans logoNathan’s Famous (Nasdaq: NATH) today placed $150 million of eight-year secured notes at the tight end of talk, sources said. Jefferies was sole bookrunner for the offering. Proceeds will be used to refinance the company’s 10% secured notes due 2020, to partially fund a dividend to shareholders, and for general corporate purposes, which may include working capital. The borrower in its February 2015 market debut placed $135 million of the 2020 notes, also to back a dividend. These bonds will become callable at 105 on Nov. 15, 2017. Jericho, N.Y.–based Nathan’s Famous owns and franchises restaurants under the Nathan’s Famous brand name, and sells products bearing the Nathan’s Famous trademarks through various channels of distribution. Terms:

Issuer Nathan’s Famous
Ratings B–/B3
Amount $150 million
Issue Secured (144A/Reg S for life)
Coupon 6.625%
Price 100
Yield 6.625%
Maturity Nov. 1, 2025
Call non-call three (first call @ par+50% coupon)
Trade Oct. 18, 2017
Settle Nov. 1, 2017 (T+10)
Sole bookrunner JEFF
Price talk 6.75% area
Notes Up to 35% equity claw @ 106.625 until Nov. 1, 2020; change of control put @ 101; make-whole @ T+50

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Default Protection Costs on Nordstrom Debt Tumble After Co. Shelves Take-Private

Credit spreads referencing department store operator Nordstrom (NYSE: JWN) firmed after the company today confirmed recent speculation that the Nordstrom family had suspended its going-private bid for the balance of the year.

Five-year protection costs on Nordstrom debt tumbled by 40 bps to indications of 246 bps, marking a 14% decline. Readings had hovered near 350 bps last month before press reports surfaced that private-equity interest was wavering as financing conditions grow more onerous for brick-and-mortar retailers, particularly following the unnervingly rapid unraveling of Toys R Us.

However, CDS was substantially lower on June 7, at 170 bps, just before the company announced its ambitions to take the storied retailer private. Readings were at 110 bps in early December 2016 before rounds of sector-rattling reports regarding weak holiday shopping results.

Nordstrom 4% notes due March 15, 2027 changed hands this morning at T+175, after trading as wide as T+200 one month ago, trade data show. The 4% 2027 issue dates to pricing on March 6 this year at a tighter T+155 level.

Nordstrom said it would take up its efforts to take the company private “after the conclusion of the holiday season.” Company co-Presidents Blake W. Nordstrom, Peter E. Nordstrom, and Erik B. Nordstrom, President of Stores James F. Nordstrom, Chairman Emeritus Bruce A. Nordstrom, and Anne E. Gittinger made the notification to the Special Committee of the Board of Directors of Nordstrom.

The present BBB+/Baa1/BBB+ ratings on Nordstrom reflect stable outlooks at Moody’s and Fitch, but a negative outlook at S&P Global Ratings since August 2016 due to ongoing sale-store declines across the department-store sector.

S&P Global Ratings in June said the going-private proposition had no immediate effect on ratings, though it assumed any sale would represent a leveraged transaction (in the context of  adjusted debt-to-EBITDA of roughly 2x as of April), and said it would likely place the ratings on CreditWatch with negative implications on the announcement of a specific transaction.

Nordstrom is at present rated higher than its more down-market peers Macy’s (BBB–/Baa3/BBB) and Kohl’s (BBB–/Baa2/BBB), both of which are fallen-angel candidates with negative outlooks on the cusp-level grades at S&P Global Ratings.

Prior to the recent declines, Nordstrom’s go-private strategy had vaulted its debt-protection costs north of the current five-year readings for Macy’s (roughly 300 bps), which reflect both brutal operating progressions and a simmering perception of potential LBO risk. Nordstrom’s CDS also remains more expensive that the 200 bps currently bandied for protection on the debt of Kohl’s, according to Markit. — John Atkins

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Investors Pour $967M into US High Yield Funds

US high yield fund flows

U.S. high-yield funds recorded an inflow of $966.8 million for the week ended Oct. 11, according to weekly reporters to Lipper only. This week’s result is the largest of the current four-week inflow streak and brings the total over that span to $2.9 billion.

ETFs led the way with $847 million, accounting for 88% of the total, while mutual funds recorded their largest inflow in five weeks, at $119.7 million.

With this result, the four-week trailing average rises to $727.7 million, the highest level since the first week of the year, from $462 million last week.

The year-to-date total outflow is $6.37 billion. A $4.52 billion year-to-date inflow for ETFs is far outweighed by $10.9 billion leaving mutual funds so far in 2017.

The change due to market conditions last week was positive $135.3 million, marking the seventh straight increase, the longest run since February. Total assets at the end of the observation period were $215.4 billion. ETFs account for about 25% of the total, at $53.4 billion. — Jon Hemingway

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