High-yield issuance was $35.5 billion in May, surpassing initial estimates of $25-30 billion, but representing a small $1.8 billion decline month-over-month and falling short of the $37 billion total from May 2014 and $43.5 billion total from May 2013, LCD data shows.
The high-yield market was generally rangebound in May, despite volatility in stocks and Treasuries mid-month and a net retail cash outflow of $2 billion from the asset class for the month, according to Lipper, with one week of inflows flanked by three weeks of outflows.
After spiking to 2.28% mid-month, the 10-year Treasury yield fell back to 2.12% at the end of the month, although yields have been rising in early June. By comparison, the yield-to-worst on the S&P U.S. Issued High-Yield Index generally held in a tight range at 5.90-5.99%, only spiking to 6.02% in mid-May and ending the month lower at 5.87%. The option adjusted spread was similarly stable, ending the month at T+463, from T+461 at the start of May. Bankers said investors were constructive on the new-issue market despite the peripheral volatility, with plenty of cash stockpiled in preparation for the busy month.
Large deals anchoring May volume included a $2.1 billion M&A transaction from The Chemours Company, a $2 billion, two-part M&A deal for CommScope, Altice/Suddenlink’s $1.72 billion three-part issue, and Spectrum Brands’ $1 billion issue. Billion-dollar-plus refinancing deals were placed by Burger King, HCA, Ally Financial, Energy Transfer Equity, MarkWest Energy, and SandRidge Energy.
Energy issuers came out of the woodwork to post 25% of total issuance, with companies bringing both short-dated secured offerings and longer-dated senior notes, and demand was strong. To be sure, market participants are diving back into the sector as it outperforms the broad index, marking a turnaround from the end of last year. According to S&P, the energy sector has returned 6.23% in 2015 through the end of May, versus 4.08% for the U.S. issued high-yield index.
A few of the energy deals in May were short-dated secured issues targeting the repayment of RC debt. Participants say these transactions are viewed as transitional debt instruments as energy companies seek to shore up balance sheets until industry conditions turn more positive. Indeed, bankers say to expect more first- and second-lien secured energy offerings targeting the reduction of revolver debt as companies face extra liquidity pressure amid the current re-determination period.
The average bid of LCD’s flow-name sample was up modestly on the month, gaining 11 bps to 101.96% of par on May 28, from 101.85% of par on April 30. The reading of 101.96 on May 28 set the average option-adjusted yield to worst at 6.21% and spread to worst at T+469, down from 6.23% and T+474 at the end of April.
The S&P U.S. Issued High Yield Corporate Bond Index closed on May 30 at a weighted-average price of 100.58, offering a yield-to-worst of 5.87%, or T+463. By comparison, the price was 100.85 at the end of April, offering a yield to worst of 5.90%, or T+470. Year-to-date returns on the index advanced to 4.08%, versus 3.75% at the end of April. The month-over-month return was 0.32%, a drop from 1.13% in April, but outperforming March’s negative 0.47%.
Just one deal was scrapped during the month. World Acceptance Corp. postponed its $250 million offering of senior notes mid-month, according to a company press release. Talk on the offering of five-year senior notes was set at 9% area after the call period was lengthened by a year, to non-call three, but the company pulled the issue, saying the deal was opportunistic and that it could return when terms are more favorable in the future. Interestingly, the company’s CEO A. Alexander McLean is stepping down this week.
Refinancing activity shot up in May, to 62% of total use of proceeds, from 54% in both April and March. M&A also advanced month-over-month, representing 29% of issuance, up from 26% in April but below March’s 32%. May’s M&A results include 21% from acquisitions and 7.6% from spin-offs. LBO issuance ended the month at just over 3%, up from 1.6% in April. While M&A and refinancings took larger slices of the pie, corporate purposes accounted for just 1% of total use of proceeds, down from 16% in April and 6% in March. Combined recapitalizations, which includes general recapitalizations, dividends, and stock repurchases, made up roughly 5%, a 3% uptick from April but down from 8% in March.
In terms of sector, Oil & Gas led by a huge margin with 25% of total issuance for the month. This was followed by Services & Leasing, at 13%, and Chemicals, at 9%. Healthcare, which led in April, at 17.5%, represented just under 7% of total issuance.
Indeed, sixteen Oil & Gas issuers priced deals in May for a combined $9 billion, the largest of which were MarkWest Energy, SandRidge Energy, and Energy Transfer Equity. By comparison, seven Oil & Gas deals were priced in April, for a combined $3 billion, LCD data shows.
Within the credit spectrum, BB issuance knocked single-B issuance out of the lead spot, which it had held for five months. BB paper amounted to 37% of supply, up 10% month-over-month, followed by single-B issuance, at 32%, up 2% from April. Split-rated BB/B volume represented 14% of issuance, down from 23% in April. CCC and B/CCC issuance was basically unchanged from April, at 6.5% and just over 7% of total issuance, respectively.
Looking ahead, the shadow calendar holds about $30 billion of volume, with Charter Communications adding an anticipated $13.8 billion of secured and senior debt after the company announced its $56 billion acquisition of Time Warner Cable, although it is expected that the $6 billion of secured debt will be assigned investment-grade ratings. Frontier Communications is also on the shadow calendar with roughly $11.6 billion as part of its acquisition of some of Verizon Communications’ wireline operations. Timing is undetermined.
For June, bankers estimate $35-40 billion of issuance, with this week’s calendar already at $8.4 billion from 14 issuers, including LBO supply from Life Time Fitness and Informatica, along with M&A offerings from Tenet Healthcare and NXP B.V. Bankers expect M&A supply to continue to grow, although LBO volume is not expected to pick up meaningfully.
The U.S. trailing-12-month speculative-grade corporate default rate is estimated to have increased to 2.0% in May, from 1.8% in April, according to S&P Global Fixed Income Research (S&P GFIR). The current observation represents the highest level in 17 months, or since the rate was at 2.2% in December 2013.
There were eight corporate defaults in May, and all were public. Magnetation and Patriot Coal filed for bankruptcy; Colt Defense and Tunica-Biloxi Gaming Authority/Paragon Casino skipped bond coupons; Warren Resources and Midstates Petroleum inked sub-par bond exchanges; and SandRidge Energy and Halcon Resources completed bond-for-equity exchanges, also below par.
The S&P GFIR forecast for the U.S. speculative-grade default rate is for a modest increase, to 2.5% by December 2015 and 2.8% by March 2016.
Looking ahead, the market awaits word of any development out of American Eagle Energy, which skipped its first coupon ever on March 1, meaning the 30-day grace has long since passed. KKR-controlled Samson Resources has warned that a Chapter 11 reorganization could be “expeditious,” while Colt Defense has netted funding for a prepackaged bankruptcy just as it extended for a fourth time a deeply distressed exchange offer on its $250 million issue of 8.75% unsecured notes. Meanwhile, rare-earth-minerals company Molycorp skipped its June 1 coupon amid restructuring talks reportedly with a bondholder group led by JHL Capital Group. – Joy Ferguson/Matt Fuller