CDS: Default Protection Costs Ease as High Yield Sentiment Improves

One sign that sentiment in the beleaguered high yield bond market is improving: The cost of credit default protection has dropped across the board over the past week. (The one exception: Valeant Pharmaceuticals, which faces a host of unique issues.)

Other signs of late signaling a less-bearish market: Prices on U.S. high yield issues in the secondary this week saw their biggest gain since December 2014, and investors last week poured a whopping $2.7 billion into U.S. high yield funds, a marked turnaround from sizable outflows – and occasional tepid inflows – over the past few months.
CDS change

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JC Penney Debt Gains, Default Protection Cost Plunges After Strong Year-End Report

J.C. Penney bonds and loans were higher this morning after the company released better-than-expected quarterly results and improved guidance for the year ahead. Credit protection costs were essentially halved, and shares gained, with JCP trading up roughly 14% on the NYSE, at $9.50 per share.

The 5.65% notes due 2020 surged six points, to 91/92, according to sources, while the 8.125% notes due 2019 added roughly four points, with trades reported at 101 and 101.5. Long-tenor 6.375% bonds due 2036, meanwhile, jumped 10 points, to 73/74, the sources added.

Over in the loan market, J.C. Penney covenant-lite term debt due 2018 (L+500, 1% floor) is also firmer following the results, rising about a point to bracket 99, according to sources.

In the CDS marketplace, five-year protection costs were chopped down approximately 47%, to 4.8/6.6 points upfront, according to Markit. That’s essentially $500,000 cheaper, at $570,000 for an upfront payment, in addition to the $500,000 annual payment, to protect $10 million of the issuer’s bonds.

Comparable store sales grew 4.1% for the fourth quarter and 4.5% for the full year, according to the company statement. Full-year adjusted EBITDA surged $435 million year over year, to $715 million, besting both the company guidance for $645 million and the S&P Global Market Intelligence consensus mean estimate for $648 million.

Management cited a renewed focus on private brands and omnichannel sales, as well as effective inventory management. Looking ahead, the company put forth guidance for 2016 EBITDA to be $1 billion, the filing showed.

The Plano, Texas–based company is rated CCC+/Caa2. S&P today placed the ratings on CreditWatch with positive implications due to the improved fourth-quarter results and 2016 guidance, which includes a same-store sales increase of 3–4% with further margin improvements. — Matt Fuller/Kerry Kantin

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Avon Products Bonds Soar in Secondary, CDS Costs Plummet on Word of Cerberus Investments

Bonds backing Avon Products soared and credit protection referencing the company collapsed on news that Cerberus Capital Management is making a $605 million equity investment in the cosmetics giant and that it would suspend its common-share dividend. The 6.75% notes due 2023 traded up 10 points, although only in small lots, at 73.25, and the 4.60% notes due 2020 also printed in odd lots, at 84, versus 73, trade data show.

Five-year CDS in the name imploded, tightening 41%, to 8.8/10.8 points upfront, according to Markit. That’s essentially $700,000 cheaper, at a $980,000 upfront payment, in addition to the $500,000 annual payment, to protect $10 million of Avon corporate bonds.

Under terms of the deal, Cerberus will make a $435 million investment in Avon Products in the form of convertible perpetual preferred stock with a conversion price of $5 per share and a dividend that accrues, or is payable in common shares or cash, at a rate of 5% per annum, according to a company statement. This equates to an ownership interest of approximately 16.6% as of Dec. 16, the filing showed.

Avon North America will be separated from Avon Products into a privately held company majority-owned and managed by Cerberus. Cerberus will purchase an 80.1% interest in Avon North America in exchange for a $170 million equity investment, and Avon North America will also assume approximately $230 million of long-term liabilities from Avon Products, according to the company.

As part the strategy, Avon additionally today announced plans to suspend its common-share dividend, effective in the first quarter next year. Proceeds from the Cerberus investment and savings from the canceled dividend will be used to partially offset the transferred liabilities, opportunistically reduce debt, and fund restructuring and reinvestment in the business, according to the company.

Avon shares traded up 16% out of the gate this morning on the news, but soon settled with roughly a 3% gain, to $4.20 per.

Today’s news closes the loop on press reports earlier this fall that Avon was negotiating to sell a stake with a number of private equity firms. According to the report by the Wall Street Journal, which cites unnamed sources, Avon was talking with Cerberus and Platinum Equity.

As reported, Avon Products recently amended its revolving credit facility to $400 million from $1 billion, and extended the maturity to 2020 from 2017, according to S&P, and secured greater flexibility under its financial covenants, which include maximum leverage and minimum interest coverage ratios, to provide more headroom. — Matthew Fuller

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Neiman Marcus Credit Protection Cost Widens After 1Q Sales Drop

Amid heavy market conditions, debt backing Neiman Marcus is weaker today after the high-end retailer late this morning released fiscal first-quarter results showing a 5.6% drop in same-store sales.

The company’s nearly $2.9 billion covenant-lite term loan due 2020 (L+325, 1% LIBOR floor) slid to an 87.5/88.5 market, from levels bracketing 91 ahead of the results this morning, according to sources.

Over in the crushed bond market, it was worse. The Neiman 8% cash-pay notes due 2021 fell to a 72/74 market in the Street, from trades at 80.5 on Friday, and the 8.75% PIK toggle notes due 2021 fell to 70/72, versus 78/79 on Friday and trades at 80 on Thursday, according to sources and trade data. Recall that both CCC+/Caa2 series were just above par roughly a month ago prior to the market inflection and the weight of disappointments in the retail space, especially Macy’s.

Five-year credit protection gapped out 20% this morning, to 290/320 bps, according to Markit. That’s a record wide for the derivative security, which was in a 175 bps context a month ago, also prior to Macy’s disappointing results.

The company¸ which is controlled by Ares Management and Canada Pension Plan Investment Board, reported adjusted EBITDA of $164.3 million, down about 15% from $194.3 million in the year-ago quarter, which sources characterized as below expectations.

Revenue declined to about $1.16 billion, from $1.19 billion.  The company reported a net loss of $10.5 million compared to net earnings of $0.2 million for the first quarter of fiscal 2015.

A conference call to discuss the results is scheduled for 2:30 p.m. EST today.

Today’s drop adds to recent losses in the loans and bonds, which have been under pressure in recent weeks amid a negative bias towards the sector. This is the first time the TLB—which dates to the 2013 LBO, but was repriced early last year—has fallen into the 80s, according to Markit. There was about $2.89 billion outstanding as of Oct. 31. Credit Suisse is administrative agent.

Neiman Marcus is rated B/B3. The term loan is rated B/B2, with a 3L recovery rating from S&P. — Kerry Kantin/Matt Fuller

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