High-yield bond issuance came to life last month as the secondary market rallied from the 2016 double-bottom low amid a rebound in oil and iron ore pricing, and a return of retail cash inflows to the asset class.
The $9.36 billion of output in the month was not historically large—average monthly volume over the past year was $21.8 billion—but it expanded upon $5.94 billion in January and $3.83 billion in December, which represented the lowest monthly volumes since early 2009 amid the credit crisis. In contrast to January, which saw 88% of its issuance come from the shadow calendar backlog of M&A deals, a mild reopening of the market brought forth opportunistic issuers alongside M&A deals in February for roughly half-and-half supply, at 46% and 54%, respectively.
Indeed, there were several drive-by bond-refinancing efforts, most notably $1.7 billion from benchmark issuer Charter Communications, as well as loan-refinancing deals, such as Realogy Group with $250 million and $400 million from woundcare-products maker Acelity/Kinetic Concepts.
The expanding issuance, especially with regard to quickly arranged opportunists, came on the back of the market rebound. The S&P U.S. Issued High Yield Corporate Bond Index (ticker: SPUSCHY) turned out just a 0.5% return for the month, but that’s after bottoming out at mid-month before rallying 3.70% in the final two weeks. The yield to worst on the index fell to 8.67%, after peaking at 9.62% mid-month and closing January at 8.85%.
Indeed, it was an enduring two-week rebound from the February trough that strategists called the second half of a double bottom after the January swoon. To this end, the SPUSCHY index bottomed out with a negative 3.9% year-to-date return on Jan. 20 after the New Year sell-off, rallied back to just negative 1.56% on Jan. 29, turned down to negative 4.84% on Feb. 11, and then recovered to negative 1.03% by the close of the month.
But not all investors are convinced.
“The markets have been a little more receptive to the risk environment recently, but I’m not sure we are out of the woods yet,” outlined Clayton Albright III, Head of Investment Strategy at Wilmington Trust.
Away from the oil market issues, Albright flags the broader markets. “The big question that we have is whether the U.S. economy is on a path to recession. We are keeping a strong eye on that.”
The LCD flow-name bond sample followed a similar track. The average bid price edged up 22 bps in the final February observation, to 91.64% of par, offering an average yield to worst of 8.79%, from a 2016 low of 87.63 on Feb. 11, yielding 9.75%. That was deeper than the Jan. 21 prior low of 88.77, yielding 9.45%.
With such limited supply, typical monthly observations on sector issuance and use of proceeds will not be explored. More notable in the month is the year’s first postponed deal, the €1.55B cross-border LeasePlan buyout financing, as well as the year’s first bond-to-loan funding shift, a $300 million swing in the Solera/Audatax buyout financing.
Last year, there were 11 such shifts, with $875 million moving that way, according to LCD. Looking ahead, the challenging market conditions of late have slowed the M&A machine and, thus, expansion of the shadow calendar. Nonetheless, ON Semiconductor last month was added to the list, with a $400 million offering of senior notes to support the loan financing of the company's acquisition of rival Fairchild Semiconductor.
The U.S. trailing 12-month speculative-grade corporate default rate is estimated to have increased to 3.3% in February, from 2.82% in January, according to S&P Global Fixed Income Research (S&P GFIR). The current observation estimate represents the highest level in just over six years, or since the rate was at 3.43% in December 2010.
There were 11 corporate defaults during the month. Specialty metals company A.M. Castle and industrial manufacturer Constellation Enterprises extended maturities on secured notes; Sheridan Investment Partners paid down two loan facilities below par; Comstock Resources completed a bond-for-equity exchange; PetroQuest Energy completed a bond-uptier exchange; Noranda Aluminum, SFX Entertainment, and Paragon Offshore each filed for bankruptcy; and Energy XXI and Venoco via issuer entity Denver Parent skipped interest payments.
The U.S. corporate bond distress ratio stood at 33.9% in February, a level last surpassed in July 2009 during the recession, when the ratio fluctuated from 14.6% to a staggering 70%, according to S&P GFIR. The latest observation is up from 24.5% at the end of 2015, and is more than double the 13.2% reading in July 2015. Looking ahead, the S&P GFIR forecast for the U.S. speculative-grade default rate is for an increase to 3.9% by the end of 2016. — Matt Fuller
This story first appeared on www.lcdcomps.com, LCD's subscription site offering complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.