High yield bond market gains, including new issues, ETFs

The secondary high-yield market opened on stronger footing to start the week today, with gains noted across the board, including benchmarks, new issues, ETFs, and indexes. The healthy start was complimented by some offer-wanted lists making the rounds, flagging buying interest, in contrast to the bevy of bid-wanted lists circulating throughout the marketplace last week, according to sources.

As for widely held issues, the Sprint 7.875% notes due 2023 advanced two full points, to 83, while MGM Resorts International 6% notes due 2023 rose one point, to 95/96, according to sources and trade reporting. Valeant Pharmaceuticals International 6.125% notes due 2025 edged up a quarter of a point, to 97/98, for a net three-point decline following news of a government probe into drug price hikes last week.

On the new issue front, the Altice/Cablevision/Neptune 6.625% guaranteed notes due 2025 were pegged 102.5/103, versus trades at 101.5 on Friday, while the non-guaranteed 10.875% notes due 2025 were wrapped around 104, a fresh high, from 103 Friday and par issuance two weeks ago, according to sources. Likewise, the 10% notes due 2025 from chemicals credit Olin edged up a quarter of a point, to bracket 104, sources added.

Most energy credits bounced strongly from last week’s slump. The EP Energy 9.375% notes due 2020, for example, traded at 79.5 this morning, versus 76 going out last week, and Denbury Resources 5.5% notes due 2022 pushed higher by two points, for a 58.25/59.25 market quote, according to sources. California Resources 6% notes due 2024, meanwhile, traded at 60.25 this morning, versus 59 on Friday and record low quotes of 58/59 last week.

High-yield ETFs were almost all trading higher to start the week, with leaders HYG and JNK up 0.9% and 0.7%, respectively. Higher-quality fund QLTB lagged, with intraday trades just barely in the red this morning, while the actively managed HYLD outperformed, with roughly a 1.4% gain today, data show.

The HY CDX 25 index pushed up five eighths of a point this morning, at 100.75/101, according to Markit. That’s up roughly 1% week over week and higher by just a hair more, at approximately 1.3%, against the series roll at 99.625 one week ago. Recall that prior to the roll, 103.5 was a series low at close on Friday, Sept. 25, and now 100.875 mid-market is a nascent series high. – Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


Hewlett-Packard sells record bond as credit market conditions improve

Amid relatively firm market conditions – at least by recent white-knuckle standards – the high-grade market addressed the eleventh largest deal on the historical list for investment-grade bond deals, and the sixth largest so far for this particularly blockbuster-heavy year, LCD data show. The offering is also the thirteenth so far this year amounting to $10 billion or more – all of which backed either M&A, spin-off financing, or share buybacks – after just three deals meeting that threshold were inked last year.

Hewlett-Packard Enterprise Co. (HPE) yesterday launched a $14.6 billion, curve-spanning deal across nine tranches, according to sources. The deal backs the company’s imminent spin-off from current parent Hewlett-Packard Co., which will separate the enterprise business from the legacy printers and PC hardware business.

The issuer intends to use proceeds from yesterday’s offering to pay a distribution to the parent, Hewlett-Packard (HPQ), prior to its spin-off, which is expected by Nov. 1, according to S&P Capital IQ. HPQ will in turn use the proceeds to repurchase and redeem certain of its outstanding senior notes and other debt, reportedly targeting $8.85 billion of borrowings. HPE will also use proceeds from yesterday’s offering to guarantee the full and prompt repayment of the $300 million of 7.45% notes due Oct. 15, 2029 issued by HP Enterprise Services (EDS) in October 1999.

“HPE will maintain a very strong liquidity profile, exiting the spin transaction with approximately $10 billion of cash and equivalents,” Moody’s said yesterday. “The majority of cash balances and free cash flow will be offshore, but the company will have good access to this cash with only modest tax implications should the company bring cash back to the U.S. HPE will have additional liquidity in the form of a $4 billion, five-year revolving credit facility (RC) with same day availability and ample room under financial covenants, that would be used as a backstop to a comparably sized commercial paper program. The RC will become effective upon the separation of HPE from Hewlett-Packard Company.”

S&P last week termed HPE’s pro forma liquidity profile as “exceptional” and financial-risk profile as “minimal,” under assumptions for adjusted leverage of roughly 0.4x upon separation and leverage holding below 1.5x in 2015 and 2016. HP’s board has authorized a $7.5 billion commercial paper program at HPE, with expected usage of up to $4 billion. HPE projects $16 billion of outstanding debt as of the distribution date.

“Share repurchases should amount to about $800 million and dividends about $400 million in fiscal 2016, in line with the company’s guidance. We expect HPE will administer growth initiatives and shareholder returns in moderation,” S&P stated on Sept. 23.

Coincidentally, pharmaceutical company AbbVie – which produced two of the 10 biggest high-grade deals on record, including a $16.7 billion deal in early May this year – has disclosed that it has obtained a $2 billion, three-year A term loan and a $2 billion, 364-day A term loan from a group of 10 banks to address upcoming maturities, including the 1.2% notes and L+76 FRNs due Nov. 6 dating to a 2012 offering backing the company’s spin-off from Abbott Laboratories. – Staff reports



Fridson: Found! The turning point for HY overweighting

Synopsis: A simple rule derived from the definition of distressed debt has consistently generated alpha for tactical asset allocators in past high-yield recoveries from market lows.

The challenge: When to pull the trigger?
The large variance in short-run returns among asset classes during major market turns produces huge payoffs for successful tactical asset allocation. Consider, for example, what a fixed-income manager could have achieved following the 2001 recession by astutely varying the relative weights of investment-grade and high-yield corporates. In the second quarter of 2002, the investment grade BofA Merrill Lynch US Corporate Index trounced the BofA Merrill Lynch US High Yield Index, 4.37% to -6.98%. One year later, the tables turned, with the HY index crushing the IG index, 10.02% to 2.47%, in the second quarter of 2003.

Given these rewards, why doesn’t every money manager grab oodles of alpha by reallocating during major market turns? The problem is that it requires calling the turn. Classically, the relatively undervalued asset may get more undervalued before the market comes to its senses. Jumping in too early can be disastrous for managers who do not have the luxury of being evaluated only on a multiyear basis. For those trying to put up good quarterly numbers, it is not good enough to say, “I am confident that in the fullness of time the market will recognize the wisdom of my positioning, even if I suffer a year or two of underperformance in the interim.”

Here is the good news: A startlingly simple timing signal has consistently paid off over a three-month horizon in recoveries from high-yield cyclical bottoms. Recognize upfront that the methodology does not guarantee capturing the cyclical rebound’s highest three-month return and the historical sample size is small. With those caveats, the trading strategy is a bona fide no-brainer and has reliably generated very substantial alpha.

Breaking through 1,000
The easy-to-remember rule for deciding when to step up high-yield exposure is to pull the trigger the day after the option-adjusted spread (OAS) on the BofAML High Yield Index falls below 1,000 bps.

High-yield cognoscenti will recognize the 1,000 bps level as the threshold for defining distressed bonds, a standard I introduced some 25 years ago. At an OAS of 1,000 bps, the market is essentially saying that the high-yield asset class as a whole is distressed. When the spread moves out of that territory, the market is signaling that financial distress is receding.

To test this trading rule, I measured three-month returns on the BofAML High Yield Index, the BofA Merrill Lynch US Non-Distressed High Yield Index, the BofA Merrill Lynch US Distressed High Yield Index, the BofA Merrill Lynch US Treasury & Agency Index, and the investment-grade BofAML Corporate Index. I started each trial on the first trading day after the spread first fell below 1,000 bps. Future users of this strategy do not have to predict anything or exercise any judgment, but can instead wait to act until the decisive piece of information has arrived.

For the period preceding OAS availability on the BofAML High Yield Index, that is, prior to Dec. 31, 1996, I used the yield-to-maturity (YTM) difference between the BofAML High Yield Index and the BofA Treasury & Agency Index. (Yield-to-worst figures are also unavailable prior to Dec. 31, 1996.) This substitution is justified by a comparison of the YTM spread and OAS during the period in which both are available. From Dec. 31, 1996 to Dec. 31, 2014, the median monthly difference between the two versions of the spread, when OAS was in a range of 900-1,000 bps, was – remarkably enough – one basis point. (The YTM version was higher by that amount.) As a point of interest, the gap increased as OAS declined.

Note, in addition, that the inception date of the BofAML Non-Distressed High Yield Index and the BofAML Distressed High Yield Index is, you guessed it, Dec. 31, 1996, so returns are not available on those indexes for the first two trials depicted in the table. Finally, the high-yield market had just one cyclical low in the early 1990s, but the high-yield spread exited the distressed zone twice. After falling below 1,000 bps on Dec. 24, 1990, the spread later rose above that threshold before definitively dropping below it on Feb. 12, 1991. (The first trial in the table commences after the market’s closure for Christmas on Dec. 25, 1990.)

First table Fridson Sept 2015

In all five trials high-yield outperformed governments by at least 5.10 percentage points and in the most extreme case, by 13.28 percentage points. Note that these are non-annualized, three-month returns. On an annualized basis, the high-yield returns during the five episodes documented here ranged from 30.32-78.99%. High-yield similarly outperformed IG corporates every single time, by margins ranging from 2.75-12.13 percentage points.

In the three trials in which returns are broken out by distressed and non-distressed, dynamic asset allocators following the 1,000 bps rule and achieving average results would have beaten governments by 2.51 to 4.90 percentage points without needing to own a single distressed issue. The non-distressed high-yield performance edge over IG corporates was likewise substantial in both 2001 and 2009. Naturally, coming off the bottom, the distressed component of the high-yield market turned in exceptionally high returns, ranging from 63.29-174.40% in annualized terms.

Not engineered to catch the absolute bottom
Based on an admittedly limited historical record, the simple 1,000 bps rule generates a substantial three-month performance bonus for tactical asset allocators. Adopters of the trading rule should be forewarned, however, that I have not solved the problem of precisely calling the bottom. Indeed, the high-yield OAS may narrow by hundreds of basis points, producing sizzling high-yield returns, before it finally cracks the 1,000 bps barrier.

The table below compares the high-yield returns captured by the 1,000 bps rule during the high-yield market’s four cyclical recoveries with the peak quarterly returns observed in those cycles. In 2001 the 1,000 bps rule actually produced a return slightly higher than that of the best quarter of the cyclical rebound. In the others, an asset allocator astute enough to have entered at the start of the peak quarter did materially better than followers of the 1,000 bps rule. For mere mortals, however, adding hundreds of basis points over comparable-period returns on high-quality bonds is an outstanding achievement.

Second table Fridson Sept 2015

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Capital IQ. His weekly leveraged finance commentary appears exclusively on S&P Capital IQ LCD. Marty can be reached at

Research assistance by Yueying Tang and Zizhen Wang.


LCD Daily High Yield Bond Index Report: Data for September 28, 2015

The S&P U.S. Issued High Yield Corporate Bond Index tracks U.S.-dollar-denominated high-yield bonds issued by U.S.-domiciled companies and includes ratings-based sub-indices. Observations below are as of the most recent close, the prior close, a week ago, and a year ago. The data is courtesy of S&P Dow Jones Indices. Further details can be found online at

HY Corporate Bond Index Sept 28 2015


Unisys withdraws $350M high yield bond offering, citing unattractive market

Unisys on Friday withdrew its $350 million offering of five-year (non-call two) secured notes via joint bookrunners Wells Fargo and Bank of America. Unisys said in a statement that the “current terms and conditions available in the market were not attractive for the company to move forward.”

This is the 15th deal withdrawn from the market in 2015, although two of those – Fortescue Metals and Presidio – returned. In all, $3.93 billion in issuance has been withdrawn this year.

Proceeds had been targeting general corporate purposes, including funding cost-reduction and savings initiatives, obligations under defined benefit plans, and investments in next-generation services and technologies, filings showed.

The notes had been rated BB/Ba2 and guided at 8% area.

Blue Bell, Pa.-based Unisys is an information-technology company that provides IT services, software, and technology solutions worldwide. The company trades publicly on the NYSE under the symbol UIS, with a market capitalization of roughly $650 million. – Staff reports


Glencore bonds plunge as company scrambles for liquidity

Bonds backing Swiss metals-and-mining concern Glencore plunged in price today after reports late last week that the company was seeking to sell a minority stake in its agricultural business, following other recent bids to shore up its credit standing amid weak commodity-price trends.

The 2.875% bonds due Apr. 16, 2020, which were placed in April by Glencore funding vehicle Glencore Funding at T+155, traded today at a dollar price of 81, or down more than seven points on the day to change hands at T+647, or 380 bps wider week to week, trade data show. The issuer’s 4% notes due April 2025, which were placed in the same April offering at T+220, traded today at dollar prices south of 70, or roughly eight points lower on the day for spreads of roughly T+664, from T+350 a week ago.

News surfaced Friday that Glencore had hired Citigroup and Credit Suisse Group to sell a minority stake in its agricultural business to a group of sovereign wealth funds and Asian trading houses, according to S&P Capital IQ. The whole division could be valued at roughly $12 billion.

The news came hard on the heels of Glencore’s Sept. 7 announcement of plans to raise roughly $2.5 billion of equity capital as part of a broader plan to preserve capital and reduce debt valued at more than $10 billion, in the face of what the company characterized as a “weak commodity price environment.” That plan included the suspension of roughly $2.4 billion of scheduled dividends, $1.5 billion of further cuts to working capital, $2 billion of other asset sales, and cuts to loans and advances and capital spending.

“Notwithstanding our strong liquidity, positive operational free cashflow generation, lack of debt covenants, modest near-term maturities and the recent affirmation of our credit ratings, recent stakeholder engagement in response to market speculation around the sustainability of our leverage, highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty,” said CEO Ivan Glasenberg and CFO Steven Kalmin in a joint statement.

S&P and Moody’s earlier this month affirmed respective BBB/Baa2 ratings after the announcement of the equity-raising plan, but both noted negative outlooks on the ratings profile.

Moody’s shift to negative reflected “the scope for a prolonged difficult market that may cause a slower recovery in Glencore’s financial profile, particularly if copper prices were to decline to below $2.2/lb on a prolonged basis from Moody’s current copper price assumption of $ 2.35/lb for 2016.”

“Given Glencore’s financial leverage, changes in EBITDA and operating cash flow have a proportionately greater impact on our debt coverage measures than changes in debt,” S&P analysts argued. – John Atkins


S&P U.S. distress ratio approaches four-year high

The S&P U.S. distress ratio climbed to 15.7% in September, its highest level since December 2011, according to a report by S&P Global Fixed Income Research (S&P GFIR).

The Metals, Mining, and Steel sector had the largest increase in the proportion of distressed issues, according to the report, gaining about 1.2% to a distress ratio at 53.4%. This also represents the highest sector distress ratio and the second-most issues at 47.

The Oil and Gas sector accounted for 95 of the 270 issues in the distress ratio. The sector had 40% of total distressed debt, and the second-highest sector distress ratio, at 41.9%.

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

A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe and sustained market disruption. The default rate – a lagging indicator of distress – increased to 2.21% as of July 31, 2015, from 2.01% on June 30.

Today’s report, titled “Distressed Debt Monitor–Distress Ratio Nears A Four-Year High,” is available to subscribers of premium S&P GFIR content at the S&P Global Credit Portal.

For more information or data inquiries, please call S&P Client Services at (877) 772-5436. – Staff reports


Loan bids post second-consecutive drop as high yield bonds, equities slide

Amid slightly softer market conditions, the average bid of LCD’s flow-name composite dipped 17 bps over the past two trading sessions, to 98.22% of par, from 98.39 on Sept. 22.

The composite was biased toward the downside, with decliners outnumbering advancers 12 to one; two loans were unchanged from the previous reading. The Neiman Marcus term loan due 2020 (L+325, 1% LIBOR floor) and theIntelsat term loan due 2019 (L+275, 1% LIBOR floor) posted the steepest losses at a half-point each, both dropping to a 98.25 bid.

The average bid is down 26 bps on the week, though remains seven basis points above its recent low of 98.15 on Aug. 26.

With high-yield and equities under pressure, the loan market has eased a bit after pushing higher earlier in the month, though the losses have been most heavily skewed toward certain high-beta names or those with headline risk, underscoring today’s heavily bifurcated market conditions.

While the weakness in high-yield and equities helped put a damper on sentiment in the loan market, it’s also worth noting that CLO issuance has slowed appreciably this month while outflows from loan mutual funds persist. So far in September, a mere $2.76 billion of deals have priced. Meanwhile, for the five business days ended Sept. 23, LCD data project a $419 million net outflow per the Lipper sample of weekly reporters.

The loan market overall, however, has well outperformed high-yield: the average bid of LCD’s flow-name bond composite tumbled 186 bps in today’s reading, to a fresh 2015 low of 94.44%.

With the average loan bid decreasing 17 bps, the average spread to maturity advanced five basis points, to L+432.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.65/L+365 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+363.
  • 96.06/L+552 for the six loans rated B or lower by one of the agencies; STM in this category is L+520.

Loans vs. bonds 
The average bid of LCD’s flow-name high-yield bonds dove 186 bps, to 94.44% of par, yielding 8.53%, from 96.30 on Sept. 22. The gap between the bond yield and discounted loan yield to maturity stands at 426bps. – Staff reports

To-date numbers

  • September: The average flow-name loan lifted seven basis points from the final August reading of 98.15.
  • Year to date: The average flow-name loan increased 130 bps from the final 2014 reading of 96.92.

Loan data

  • Bids lower: The average bid of the 15 flow names fell 17 bps, to 98.22% of par.
  • Bid/ask spreads wider: The average bid/ask spread widened one basis point, to 35 bps.
  • Spreads rise: The average spread to maturity – based on axe levels and stated amortization schedules – gained five basis points, to L+432.

High yield bond prices tumble to 2015 low as market eyes Fed, commodities

The average bid of LCD’s flow-name high-yield bonds fell 186 bps in today’s reading, to 94.44% of par, yielding 8.53%, from 96.30% of par, yielding 7.76%, on Sept. 22. Performance within the sample was deeply negative, with all 15 constituents in the red and 10 by greater than a full point.

Today’s drop is the largest single decline for the year to date, and it puts the average at a fresh 2015 low, surpassing the prior trough of 96.78 in late August. Moreover, it’s the largest single negative observation since the plunge of 241 bps to the 2014 low of 93.33 on Dec. 16. In turn, the average is hovering just 111 bps above that low, which itself was the lowest since a measurement of 93.11 on Nov. 29, 2011.

This latest decrease in average bid price builds on a 58 bps decrease in Tuesday’s observation, for a net decline of 244 bps in the past week. Dating back two weeks, the average is down squarely 400 bps, but it’s lower by just 328 bps in a trailing-four-week measurement, as that captures some of the early September rebound from August lows.

The secondary high-yield market has been under pressure all week amid signs of ongoing retail cash outflow from the asset class and alongside a broader markets sell-off on slumping commodity prices and global growth concerns following the Fed’s decision to leave rates unchanged last week. Energy credits, in particular, met significant selling pressure, but widely held issues declined and indexes fell into the red for the year to date.

The S&P U.S. Issued High-Yield Corporate Bond Index, for one, moved to negative 0.30% at market close on Sept. 23, from positive 0.27% two days earlier and positive 0.72% one week ago. And one year ago at this point, the index was putting for a 4.43% year-to-date return. – Staff reports


Intelsat bonds advance on asset-sale reports

Intelsat bonds are higher this morning on news reports that the company is exploring a sale of some of its assets in an effort to pay off its more than $14 billion of debt. The company’s 7.75% notes due 2021 gained 1.25 points this morning to trade at 70.75, trade data show, while the company’s share price fell nearly 4% to $7.61.

As reported by the Financial Times, Intelsat is said to have hired Goldman Sachs to find potential buyers, and French operator Eutelsat and Liberty Media have been approached. Intelsat declined to comment.

BC Partners and Silver Lake acquired Intelsat in 2008 for $16.6 billion. The satellite operator reported net debt of $14.85 billion at the end of its 2015 second quarter, against quarterly revenues of $598.11 million. Revenue for 2014 was $2.47 billion.

At the low 70s level, the 7.75% notes are still down roughly 20 points from six months ago, trade data show. – Joy Ferguson