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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.

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US High Yield Bond Funds See $128M Cash Withdrawal

U.S. high yield funds saw a net $128 million withdrawal the week ended June 21, ending three weeks of inflows into the asset class totaling $1.3 billion, according to Lipper weekly reporters.

US high yield fund flows

ETFs accounted for $82 million of this week’s withdrawal while high yield funds lost $46 million. Despite the dip, the four-week average rises to a $294 million net inflow, as a $567 million withdrawal the week ended May 24 rolls off this metric.

Year to date, U.S high-yield funds have seen a net $4.8 billion withdrawal, with ETFs seeing a small, $124 million net gain.

The change due to market conditions was a hefty $1.3 billion decline this week. Total assets at the end of the observation period were $207.9 billion, $46.7 billion via ETFs. — Staff reports

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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.

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S&P: US Distress Ratio Sinks to 6.8%, a 32-Month Low

The U.S. distress ratio has continued its downward trend and now stands at 6.8% as of May 15, 2017, from 7% as of April 17.

US distress ratio

This is its lowest level since September 2014 when the ratio stood at 5%, and marks a steady decline from its February 2016 peak when it reached 34%, according to S&P Global Ratings Fixed Income Research.

This decline reflects somewhat stabilized commodity pricing pressure but belies an increase in the distress ratio of the retail and restaurants sector, which now has a commanding lead of 20.6% with 21 distressed issues.

The ratio measures speculative-grade issues with option-adjusted composite spreads of more than 1,000 basis points relative to U.S. Treasuries, and indicates the level of risk the market has priced into its bonds.

By sector, retail and restaurants is followed by the oil-and-gas sector, which had the second-highest ratio at 10.6%. — Rachelle Kakouris

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Europe: Amid Investor Appetite, Bond Issuance – and Yield – Evaporates

Europe high yield bond issuance

May proved to be a disappointing month for high yield bond issuance in Europe, but this was not a reflection of how strong conditions were for those that made it to market.

Those issuers that did price flew through syndication, achieving tight yields, often after multiple revisions to guidance. From the buyside’s perspective, investors simply keep buying deals despite record-low yields. But with inflows returning and secondary prices near record highs, they have little choice.

Speaking of yields: Did we mention they’re low?

Europe bond yields

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Investors Pour $521M into US High Yield Bond Funds

US high yield fund flows

U.S. high-yield funds recorded an inflow of $521 million for the week ended May 31, according to weekly reporters to Lipper only.

A $1.1 billion inflow into ETFs outweighed a $617 million exit from mutual funds. It was the third straight week of outflows for mutual funds.

The four-week trailing average remains in negative territory, narrowing to negative $280 million from negative $507 million last week.

The year-to-date total outflow is now $5.5 billion, reflecting outflows of $5.2 billion from mutual funds and $316 million from mutual funds.

The change due to market conditions this past week was a increase of $623 million. Total assets at the end of the observation period were $206.2 billion. ETFs account for about 23% of the total, at $47.3 billion. — James Passeri

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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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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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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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This story 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.