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US High Yield Bond Funds See $450M Investor Cash Withdrawal

Investors withdrew $450 million from U.S. high-yield funds this week, ending a four-week run of inflows totaling nearly $3 billion, according to Lipper. With the recent activity, the four-week average dips to a $399 million inflow, down from $728 million a week ago.

high yield fund flowsHigh-yield funds proper took most of the hit during the week, with a $281 million outflow, while ETFs saw a $169 million withdrawal.

Year-to-date, U.S. high-yield funds and ETFs have seen $6.8 billion of outflows, thanks to the funds, which have been hit with $11.2 billion of withdrawals so far in 2017. High-yield ETFs have seen $4.3 billion of inflows.

The change due to market conditions during the week was positive $169 million, marking the eighth straight advance. Total assets at the end of the observation period are $212.2 billion, with ETFs accounting for $53.3 billion of that. — Staff reports

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Nathan’s Famous Wraps $150M High Yield Bond to Slash Borrowing Costs

nathans logoNathan’s Famous (Nasdaq: NATH) today placed $150 million of eight-year secured notes at the tight end of talk, sources said. Jefferies was sole bookrunner for the offering. Proceeds will be used to refinance the company’s 10% secured notes due 2020, to partially fund a dividend to shareholders, and for general corporate purposes, which may include working capital. The borrower in its February 2015 market debut placed $135 million of the 2020 notes, also to back a dividend. These bonds will become callable at 105 on Nov. 15, 2017. Jericho, N.Y.–based Nathan’s Famous owns and franchises restaurants under the Nathan’s Famous brand name, and sells products bearing the Nathan’s Famous trademarks through various channels of distribution. Terms:

Issuer Nathan’s Famous
Ratings B–/B3
Amount $150 million
Issue Secured (144A/Reg S for life)
Coupon 6.625%
Price 100
Yield 6.625%
Maturity Nov. 1, 2025
Call non-call three (first call @ par+50% coupon)
Trade Oct. 18, 2017
Settle Nov. 1, 2017 (T+10)
Sole bookrunner JEFF
Price talk 6.75% area
Notes Up to 35% equity claw @ 106.625 until Nov. 1, 2020; change of control put @ 101; make-whole @ T+50

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Default Protection Costs on Nordstrom Debt Tumble After Co. Shelves Take-Private

Credit spreads referencing department store operator Nordstrom (NYSE: JWN) firmed after the company today confirmed recent speculation that the Nordstrom family had suspended its going-private bid for the balance of the year.

Five-year protection costs on Nordstrom debt tumbled by 40 bps to indications of 246 bps, marking a 14% decline. Readings had hovered near 350 bps last month before press reports surfaced that private-equity interest was wavering as financing conditions grow more onerous for brick-and-mortar retailers, particularly following the unnervingly rapid unraveling of Toys R Us.

However, CDS was substantially lower on June 7, at 170 bps, just before the company announced its ambitions to take the storied retailer private. Readings were at 110 bps in early December 2016 before rounds of sector-rattling reports regarding weak holiday shopping results.

Nordstrom 4% notes due March 15, 2027 changed hands this morning at T+175, after trading as wide as T+200 one month ago, trade data show. The 4% 2027 issue dates to pricing on March 6 this year at a tighter T+155 level.

Nordstrom said it would take up its efforts to take the company private “after the conclusion of the holiday season.” Company co-Presidents Blake W. Nordstrom, Peter E. Nordstrom, and Erik B. Nordstrom, President of Stores James F. Nordstrom, Chairman Emeritus Bruce A. Nordstrom, and Anne E. Gittinger made the notification to the Special Committee of the Board of Directors of Nordstrom.

The present BBB+/Baa1/BBB+ ratings on Nordstrom reflect stable outlooks at Moody’s and Fitch, but a negative outlook at S&P Global Ratings since August 2016 due to ongoing sale-store declines across the department-store sector.

S&P Global Ratings in June said the going-private proposition had no immediate effect on ratings, though it assumed any sale would represent a leveraged transaction (in the context of  adjusted debt-to-EBITDA of roughly 2x as of April), and said it would likely place the ratings on CreditWatch with negative implications on the announcement of a specific transaction.

Nordstrom is at present rated higher than its more down-market peers Macy’s (BBB–/Baa3/BBB) and Kohl’s (BBB–/Baa2/BBB), both of which are fallen-angel candidates with negative outlooks on the cusp-level grades at S&P Global Ratings.

Prior to the recent declines, Nordstrom’s go-private strategy had vaulted its debt-protection costs north of the current five-year readings for Macy’s (roughly 300 bps), which reflect both brutal operating progressions and a simmering perception of potential LBO risk. Nordstrom’s CDS also remains more expensive that the 200 bps currently bandied for protection on the debt of Kohl’s, according to Markit. — John Atkins

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Investors Pour $967M into US High Yield Funds

US high yield fund flows

U.S. high-yield funds recorded an inflow of $966.8 million for the week ended Oct. 11, according to weekly reporters to Lipper only. This week’s result is the largest of the current four-week inflow streak and brings the total over that span to $2.9 billion.

ETFs led the way with $847 million, accounting for 88% of the total, while mutual funds recorded their largest inflow in five weeks, at $119.7 million.

With this result, the four-week trailing average rises to $727.7 million, the highest level since the first week of the year, from $462 million last week.

The year-to-date total outflow is $6.37 billion. A $4.52 billion year-to-date inflow for ETFs is far outweighed by $10.9 billion leaving mutual funds so far in 2017.

The change due to market conditions last week was positive $135.3 million, marking the seventh straight increase, the longest run since February. Total assets at the end of the observation period were $215.4 billion. ETFs account for about 25% of the total, at $53.4 billion. — Jon Hemingway

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US High Yield Bond Funds See $433M Investor Cash Inflow

high yield fund flows

U.S. high-yield funds this week saw a $433 million cash inflow from retail investors, following up on an $866 million inflow last week, according to Lipper.

This week’s gain puts the four-week moving average at $461 million, up from $284 million a week ago. ETFs are entirely responsible for the inflow, as investors poured $590 million into those entities this week, while withdrawing $157 million from high-yield funds proper.

The change due to market conditions was $137 million to the upside (a 0.7% increase); it is the fifth-straight gain from market conditions, totaling $2.2 billion over that span.

High-yield fund assets now total $213 billion, with $51.7 billion via ETFs, or 24% of the total. — Staff reports

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Fridson: High Yield Bond Covenant Quality See Record Plunge in August

The covenant quality of high-yield new issues suffered its biggest month-over-month decline ever in August. That plunge brought quality almost to the weakest covenant quality score on record. On a scale of 1 (strongest) to 5 (weakest), the FridsonVision version deteriorated by 0.73 points, to 4.59, from July’s 3.86 (see chart below). The worst score ever recorded was just a hairsbreadth worse, at 4.61 (June 2015).

hy cov quality

To provide background, “Covenant quality decline reexamined” (LCD News, Oct. 1, 2013) describes how we modify the Moody’s CQ Index to remove noise arising from month-to-month changes in the calendar’s ratings mix. On average, covenants are stronger on triple-Cs than on single-Bs, and stronger on single-Bs than on double-Bs. Therefore, for example, if issuance shifts downward in ratings mix in a given month, without covenant quality changing within any of the rating categories, the Moody’s CQ Index will show a spurious improvement. We eliminate such false signals by holding the ratings mix constant at an average calculated over a historical observation period.

In August, Moody’s version of the index worsened by 0.49 points, to 4.54, from July’s 4.05. The rating agency’s slightly more upbeat score (4.54 versus FridsonVision’s 4.59) reflected the distorting impact of a below-average concentration of issuance in the Ba category in August (24.0% versus historical mean of 32.4%). That effect was partially offset by a below-average concentration in Caa issues (20.0% versus a historical mean of 18.6%).

August’s precipitous month-over-month drop in covenant quality resulted from an across-the-board worsening in each rating category. By rating, the July and August average scores were as follows:

In short, issuers took full advantage of the shift in market conditions in their favor, as evidenced by a pickup in primary activity, from just 13 issues in July to 25 in August.

An across-the-board deterioration similar to last month’s contributed to the all-time record one-month plunge in the Moody’s version of the covenant quality index—0.76 percentage points in May 2016. That number was exaggerated by a large month-over-month increase in Ba concentration. Filtering out that effect, the FridsonVision series showed a deterioration of 0.68 points in May 2016, somewhat short of the record of 0.73 points posted in August 2017.

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