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Energy Transfer Equity places tack-on high yield bonds to yield 5.602%

Energy Transfer Equity this afternoon completed an upsized tack-on to its 5.875% senior notes due 2024 via Credit Suisse, Deutsche Bank, Morgan Stanley, and RBC. Terms were finalized at the midpoint of talk, along with a $200 million upsize. Proceeds will be used to refinance bank debt. Terms:

Issuer Energy Transfer Equity
Ratings BB/Ba2
Amount $700 million
Issue senior add-on (144A)
Coupon 5.875%
Price 102
Yield 5.602%
Spread T+311
Maturity Jan. 15, 2024
Call nc-life
Trade May 22, 2014
Settle May 28, 2014 (T+3)
Lead Books CS/MS/DB/RBC
Px talk 102
Notes Upsized by $200 million
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Fridson: High-yield bonds go from way overvalued to way, way overvalued

Extreme overvaluation of the U.S. high-yield market has given way to very extreme overvaluation. Our updated fair-value estimate of the option-adjusted spread (OAS) of the BofA Merrill Lynch US High Yield Index (formerly known as the High Yield Master II) is 570 bps. The actual spread on April 30, 2014 was 371 bps, for a difference of -199 bps, or -1.53 standard deviations. We define a disparity of one standard deviation (130 bps) in either direction as an extreme. One month earlier, the fair-value estimate was 514 bps, and the actual spread was 377 bps, resulting in an extreme overvaluation of “only” 1.06 standard deviations.

High-yield has now been extremely overvalued for seven consecutive months, the longest streak in history. (Option-adjusted spreads are available from Dec. 31, 1996 onward.) Moreover, the actual spread has been less than fair value (although not always at an extreme) for 23 consecutive months (see the chart below). That is not a record, but it is ominous that the longest such streak on record, 27 months, came to an end in September 2008, the month in which Lehman Brothers collapsed, plunging global financial markets into chaos.

As in the 27-month streak, monetary policy is the key to the present, extended period of overvaluation. The Fed’s explicit objective is to push investors into risky assets by artificially depressing interest rates. In response, investors are accepting excessively small compensation for credit risk, so desperate are they to boost their yields. High-yield portfolio managers are not unaware of the inadequacy of spreads, but are willing to skate on thin ice on the assumption that the Fed is committed to rescuing them if anything goes wrong.

Why did high-yield get a lot richer during April, even though the index’s OAS contracted by a mere four basis points? As detailed in “Determining fair value for the high-yield market” (Nov. 13, 2012), five independent variables explain 82% of the historical variance in the option-adjusted spread of the BofA Merrill Lynch US High Yield Index. Comparing the updated numbers with month-earlier figures, we find that Industrial Production dipped from 0.7% to 0.6% and Capacity Utilization receded from 79.2% to 78.6%, with both changes pointing to a wider fair-value spread. Also calling for an increase in OAS was the latest (April) quarterly credit-availability number, derived from the Federal Reserve’s survey of senior loan officers. The percentage of banks tightening credit for large and medium-size companies minus the percentage easing worsened slightly, from -13.7% to -11.1% In addition, the yield on the BofA Merrill Lynch Current 5-Year US Treasury Index, which is inversely correlated with the high-yield spread, declined from 1.73% to 1.68%. The speculative-grade default rate, a backward-looking number that has little impact on fair value, rose from 1.5% to 1.7%, as reported by Standard & Poor’s.

In summary, the actual spread was little changed, but overall risk increased substantially. The determinants of fair value (other than the credit-availability measure, which is reported only once a quarter) may improve in May. In that case, the spread could once again finish the month close to where it began, but this time the divergence from fair value would shrink rather than expand. Absent an offsetting trend in underlying Treasury rates, high-yield could then post a strong one-month total return. For value-oriented investors with a somewhat longer horizon, however, the present, very extreme overvaluation calls for underweighting high-yield until the market begins to provide better compensation for the full risk of owning the asset class.

Single-Bs lead the league in overvaluation
Applying our fair-value methodology to the BAML High Yield Index’s rating subdivisions, as shown in the following table, we find that the single-B segment is the most overvalued. At -240 bps, its gap is -1.87 standard deviations tight to fair value. The lowest-rated bonds are the least overpriced, whether measured by the BofA Merrill Lynch CCC & Lower US High Yield Index, at -0.80 standard deviations, or the pure CCC subindex that we generate from the BAML data, at -1.21 standard deviations.

Covenant quality dips in April
Covenant quality of new high-yield issues declined in April, as illustrated in the chart below. On its scale of 1 (strongest) to 5 (weakest), Moody’s reported a mild drop from 4.13 to 4.19. We find a bigger decline, from 4.04 to 4.32. This is somewhat out of character, as our series tends to be less volatile than that of Moody’s. That aberration can be written off to statistical noise.

As described in “Covenant quality decline reexamined” (Oct. 1, 2013), our methodology filters out the impact of month-to-month changes in ratings mix of new issues. Those changes contaminate the analysis, because higher-rated speculative-grade issues tend to have weaker covenants than lower-rated ones. (Indeed, Ba issues had an average score of 5.00 – generally indicating covenant-lite status – in April.)

 

To put this all in perspective, we do not advise portfolio managers to base major investment decisions on monthly covenant-quality data. The quarterly series shown below removes additional statistical noise. Our version of this series presents a smoother (and we believe, truer) trend than that of Moody’s, but both show little change since the third quarter of 2013. In absolute terms, the latest quarter’s numbers show no meaningful difference between our series (4.07) and that of Moody’s (4.10).

 

Martin Fridson, CFA
Chief Investment Officer
Lehmann, Livian, Fridson LLC

Research assistance by Kai Chen

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Cablevision high yield bonds (BB/Ba2) price to yield 5.25%

Cablevision, via issuer entity CSC Holdings, this afternoon completed its offering of senior notes via Citi, Bank of America, Barclays, BNP, Credit Agricole, Credit Suisse, Deutsche Bank, J.P. Morgan, Natixis, RBC, RBS, Scotiabank, SunTrust, U.S. Bancorp, Goldman Sachs, Guggenheim, and ING. Terms were finalized at the tight end of talk, along with a $250 million upsize, according to sources. Proceeds will be used to repay a portion of the borrower’s 2020 TLB. Terms:

Issuer CSC Holdings
Ratings BB/Ba2
Amount $750 million
Issue senior (144A)
Coupon 5.25%
Price 100
Yield 5.25%
Spread T+274
Maturity June 1, 2024
Call nc-life
Trade May 20, 2014
Settle May 23, 2014 (T+3)
Lead books Citi/BAML/Barc/BNP/CA/CS/DB/JPM/Nat/RBC/RBS/Scotia/STRH/USB/GS/Gugg/ING
Px talk 5.375% area
Notes Upsized by $250 million
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Momentive creditor panel ‘reluctantly’ objects to DIP

The unsecured creditors’ committee in the Chapter 11 proceedings of Momentive Performance Materials has objected to final approval of the company’s DIP, saying the facility unfairly benefits Apollo and the company’s other second-lien note holders and unfairly limits the committee’s ability to investigate the validity of liens and prepetition transactions.

 

The committee said it filed the objection “reluctantly,” and only after more than two weeks of negotiations with the company, the DIP agents, and “certain” pre-petition secured parties, failed to resolve the committee’s concerns. The committee said it intends to continue negotiations, and could yet withdraw its objection “to the extent that the committee is able to narrow the disputes by reaching agreement on at least certain issues.”

 

The committee’s reluctance notwithstanding, the objection is, to say the least, unusual, given that unsecured creditors are unimpaired under the company’s proposed reorganization plan, slated to see their claims reinstated or paid in full, in cash.

 

According to the panel, however, the reorganization plan “may turn out to be unconfirmable,” and the objection is aimed at positioning the panel and unsecured creditors in case that scenario comes to pass.

 

Specifically, the panel expressed concern about whether the company’s plan, which the committee characterized as a “new value” plan in that it cancels existing equity and distributes new equity via both a direct distribution and a rights offering, could be confirmed “without a market test.” The panel said it also had concerns about “whether there is improper disparate treatment of uncertain unsecured creditors, and about the conduct of the debtors in binding themselves to pursue such a plan.”

 

“To be clear,” the panel said, “the committee is evaluating both the RSA and recently-filed plan of reorganization and needs to conduct its due diligence regarding that and other things.”

 

What remains unclear, of course, is why a creditors’ committee would try to derail a reorganization plan that leaves its constituents unimpaired.

 

Leaving aside the low probabilities that, first, the committee even mounts a challenge to the proposed reorganization plan and second, that as a result the reorganization plan is not confirmed, the committee said it was nonetheless concerned with the timing of the case. The hearing on final DIP approval is set for May 23, several weeks ahead of the hearing on approval of the company’s restructuring support agreement, which is set for June 19. The RSA hearing, presumably, would be the bankruptcy court’s first opportunity to evaluate and potentially rule on the non-confirmability of the company’s proposed reorganization plan.

 

The committee is further concerned that a DIP order entered next week could potentially lock in certain benefits for Apollo and the company’s second-lien noteholders that could, if a new plan is required to be developed, come at the expense of unsecured creditors.

 

The committee’s objections appear to have two targets. First, the committee wants to prevent the company from paying legal fees for Apollo and other second-lien noteholders as a form of adequate protection, which the committee argues is not justified. Second, the committee objects to limitations the DIP places on the time and resources made available for the committee to investigate the validity of senior lenders’ liens and other pre-petition transactions.

 

The committee wants at least 150 days to conduct any investigations, and the amount of the carveout for expenses to be doubled, to $500,000.

 

Again, the committee concedes that if the company’s plan is confirmed, “litigation over the scope of liens would be irrelevant and be superseded by the plan releases.” But the panel further states, “If, however, that plan is not confirmable, the debtors will need to start from scratch and propose a new plan of reorganization, and there will be time in that scenario to sort out actual disputes over such matters as perfection, scope of collateral, and prepetition transfers, before litigation is commenced. – Alan Zimmerman

 

 

 

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Actively managed ETF HYLD tops milestone $1B in assets

Peritus Asset Management’s speculative-grade corporate exchange-traded fund HYLD this week crossed a milestone of $1 billion in assets under management, according to a corporate release. The fund is the sole actively managed ETF in the marketplace since debuting in December 2010 with $5 million under management.

HYLD managers pick holdings based on value and income stream, and with a view that deals are either performing or not, rather than tiering based on various ratings. This gives managers the ability to avoid certain LBO credits, PIK-toggle debt, and other precipice bonds. Additionally, the managers may from time to time hedge with U.S. Treasuries to capture a “flight to quality” trade if there is a market disruption, according to the firm.

Since the focus is largely on seasoned credits, with the ability to include floating-rate loans and high-yield equities, the fund’s stated duration and maturity tends to be shorter than that of the market indexes, according to the firm.

HYLD is managed by Tim Gramatovich, chief investment officer, and Ron Heller, chief executive officer and senior portfolio manager, according to the firm. The sponsor is AdvisorShares, and NYSE Arca is the exchange.

The fund is still the only actively managed high-yield ETF. The slew of others in market are all designed to track indexes, including plain-vanilla, broad-indexed (HYG, JNK, and PHB), short-tenor indexed (SJNK, HYS, and SHYG), international indexed (IHYG, GHYG, EMHY, and IJNK), non-U.S. high-yield (HYXU), interest-rate-hedged indexed (HYHG), and ProShares’ ultra, 2x indexed (UJB).

There’s also a contrarian, short-seller fund (appropriately, SJB, suggestive of a mandate to “short junk bonds”), and a ladder of Guggenheim’s target-maturity, bullet shares ranging 2014-2020 at present (BSJE-BSJK). – Matt Fuller

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

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AES Corp. upsized $775M of five-year high yield bonds price at 99.75 OID

AES Corp. this afternoon completed its upsized $775 million offering of senior floating-rate notes via Citigroup, Barclays, Bank of America Merrill Lynch, and Credit Suisse. Terms on the SEC-registered deal were finalized at L+300, with an OID of 99.75, the tight end of talk. Ahead of pricing, the deal was increased to $775 million from $500 million. Proceeds will be used to repay amounts under the borrower’s TLB. Terms:

Issuer AES Corp
Ratings BB-/Ba3
Amount $775 million
Issue senior FRNs (SEC Reg.)
Coupon L+300
Price 99.75
Yield N/A
Spread N/A
Maturity June 1, 2019
Call nc1
Trade May 15, 2014
Settle May 20, 2014 (T+3)
Lead books Citi/Barc/BAML/CS
Co’s. BNPP/CA/HSBC/MUFJ/RBS/SG
Px talk L+300, offered at 99.5-99.75
Notes Upsized by $275 million ahead of pricing.
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Bankruptcy: Momentive files reorg plan; disclosure-statement hearing set for June 19

Momentive Performance Materials filed its proposed reorganization plan and disclosure statement yesterday with the bankruptcy court in White Plains, N.Y.

The bankruptcy court scheduled a hearing on the adequacy of the disclosure statement for June 19, according to an entry on the court docket.

Under the plan, the company will repay both its first-lien notes ($1.1 billion of 8.875% first-priority senior secured notes due 2020) and its 1.5-lien notes ($250 million of 10% senior secured notes due 2020) in full, in cash, including accrued and unpaid interest, but excluding any make-whole amounts.

Second-lien lenders ($1.161 billion of 9% second-priority springing lien notes due 2021 and €133 million 9.5% second-priority springing lien notes due 2021), are to receive the equity in the reorganized company, along with participation rights in a $600 million rights offering at a price per share determined by using the pro forma capital structure and an enterprise value of $2.2 billion, applying a 15% discount to the equity value.

The disclosure statement did not provide a valuation for the company or, as a result, a recovery value for the second-lien claims.

Holders of the company’s holding company PIK notes will receive remaining cash at the holding company, after payment of administrative expenses, but again, the disclosure statement does not provide a value for this recovery. The company’s senior subordinated creditors, meanwhile, will not see any recovery, and existing equity, needless to say, is to be cancelled.

The plan contemplates up to $1.27 billion in exit financing, comprised of a $270 million ABL and up to $1 billion in a new exit term loan, to be used to repay outstanding amounts under the company’s DIP and to fund distributions under the plan. – Alan Zimmerman


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Sabine Pass upsized $2B 10-year high yield bonds (B+/Ba3) price at 5.75% yield

Sabine Pass Liquefaction this afternoon completed its $2 billion offering of ten-year secured notes via a large bookrunner group including RBC, Mizuho, Societe Generale, Morgan Stanley, HSBC, Scotia, Credit Suisse, Lloyds, Mitsubishi UFJ, Credit Agricole, ING, Banca IMI, Standard Chartered, J.P. Morgan, and SMBC, according to sources. Terms were finalized at the midpoint of talk, along with a $500 million upsize. Sabine Pass plans to use the proceeds to pay capital costs in connection with the construction of trains at its facility in Cameron Parish, La. and to repay bank debt. Terms:

Issuer Sabine Pass Liquefaction
Ratings BB+/Ba3
Amount $2 billion
Issue secured notes (144A)
Coupon 5.75%
Price 100
Yield 5.75%
Spread T+314
Maturity May 15, 2024
Call nc-life
Trade May 13, 2014
Settle May 20, 2014 (T+5)
Lead books RBC/Mizuho/SG/MS/HSBC/Scotia/CS/Lloyds/MUFJ/CA/ING/BancaIMI/SC/JPM/SMBC
Jt. Lead Co’s BAML/Santander/CIBC/GS
Co’s. DB
Px talk 5.75% area
Notes Upsized by $500 million
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Bankruptcy: Momentive seeks court approval of RSA, backstop agreement

Momentive Performance Materials asked U.S. Bankruptcy Judge Robert Drain to set a June 19 hearing on the company’s restructuring support agreement and a backstop commitment which, together, “provide a blueprint for how the debtors will navigate through the reorganization process,” court filings show.

Momentive filed for Chapter 11 protection in White Plains, N.Y., on April 13, with an RSA in hand supported by holders of about 85% of the company’s second-lien notes. The RSA sets a series of milestones that envision a quick trip through bankruptcy for the company, including approval of the RSA within 67 days of filing – or June 19 – and confirmation of the company’s reorganization plan within 120 days, or Aug. 11.

The proposed RSA would eliminate more than $3 billion of debt and leave the reorganized company with more than $300 million in liquidity, and net debt of about $1.2 billion, Momentive has said. The plan includes a $600 million rights offering and commitments for up to $1.3 billion in exit financing. On Friday, Momentive filed its motion seeking court approval of the RSA and a backstop commitment for the rights offering.

Under the rights offering, $600 million in new common stock will be issued at a price per share based on a $2.2 billion enterprise value with an applied 15% discount to the equity value, court documents show. The RSA contemplates holders of Momentive second-lien claims will receive their pro rata share of 100% of the company’s new common stock, subject to dilution by the rights offering and a management incentive plan representing up to 7.5% of new common stock. Second-lien noteholders will also be allowed to participate in the rights offering.

Under the backstop agreement, the so-called “commitment parties” will receive a backstop premium equal to 5% of the rights offering amount, or $30 million, payable in new common stock. – John Bringardner

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Kratos Defense high yield bonds (B/B3) price at 98.97 to yield 7.25%

Kratos Defense & Security Solutions this afternoon completed its first-lien senior notes offering via SunTrust Robinson Humphrey, according to sources. Terms were finalized at the midpoint of talk. Note, the first call is at par plus 75% of the coupon. The deal also includes a 10% call provision at 103 through the non-call period, although this was revised to just one time during the non-call period (from two times). The offering is a first-lien version of the postponed deal from November. Proceeds for the new offering, as with the original attempt, are being used to redeem the borrower’s $625 million issue of 10% secured notes due 2017. Terms:

Issuer Kratos Defense & Security Solutions
Ratings B/B3
Amount $625 million
Issue 1st-lien secured (144A-life)
Coupon 7%
Price 98.966
Yield 7.25%
Spread T+563
Maturity May 15, 2019
Call nc2 @par+75% coupon
Trade May 9, 2014
Settle May 14, 2013 (T+3)
Lead Books STRH
Px talk 7.25% area
Notes First call at par+75% coupon. 10% call provision at 103 revised to just one time allowed during call period.