By Caleb Frazier and Joy Ferguson
NEW YORK, May 25 (IFR) – Macroeconomic concerns are weighing
on lending and investment in riskier asset classes, causing more
than $2.6 billion of high-yield bonds and leveraged loans to be
cancelled or postponed this week.
Many of the deals that were pulled were dividend
transactions or lower-quality high-yield transactions, said one
leveraged credit portfolio manager.
“These were deals that were ‘sold’ to the company when the
markets were feeling better and they missed the train as the
markets have faltered for these more aggressive transactions,”
said the manager.
One of the biggest casualties of the changed market tone was
chemical distributor Univar UNIV.UL, which pulled its proposed
$750 million dividend recapitalisation loan and delayed its $750
million seven-year non-call three senior unsecured notes issue.
Proceeds were to be used to redeem the existing senior
subordinated notes and pay a cash dividend to shareholders.
QR Energy, a master limited partnership (MLP) that
acquires, owns and exploits oil and natural gas properties,
postponed its $300 million eight-year non-call four senior
notes.
The company was looking to use proceeds to repay outstanding
debt under the revolver, but clearing rates proved too high in
the current market.
Generac Power GNRPS.UL, a producer of power generators,
dropped its lower rated (Caa1/B-) $425 million eight-year
non-call three senior notes offering.
Hudbay Minerals, meanwhile, decided to postpone its
B3/B $400 million eight-year non-call four senior notes offering
as market conditions proved particularly unfriendly to the
mining sector, which has already been under pressure amidst a
commodities sell off.
The postponements come at a time when global market
volatility is forcing lenders to demand more bang for their
buck. while spread widening is making the bond markets expensive
for issuers.
“Given the weakness in the market and the turn in flows, it
has become a buyer’s market,” said Gershon Distenfeld, head of
US high yield for AllianceBernstein.
“Companies that don’t have to issue now will likely stay on
the sidelines for the time being, looking for a more
opportunistic time to issue. Those companies that have to issue
debt in the near-term will be forced to pay quite a bit more
than they would have several weeks ago.”
LOANS VS HIGH YIELD
The loan markets may still have a slight edge over the
high-yield bond markets in this distressed climate.
“Clearly loans are hanging in there quite well, relatively
speaking, due to the demand for spread product with no duration.
So you will see swings, but not as bad as the past ones,” said
one portfolio manager.
The Barclays US high-yield corporate index has been widening
consistently since the beginning of May. The average yield to
worst has moved out to 7.84% as of Thursday from a recent low of
6.96% on May 3.
The average option adjusted spread widened to 656bp from
572bp for the same period.
Average loan spreads have also moved against a number of
borrowers in the loan markets. Aluminum product manufacturer
Constellium, for example, was forced to downsize its dividend
recapitalization loan by $150 million and increase pricing twice
to get the loan over the finish line.
In the end, the issuer came away with a $200 million term
loan at a yield of more than 10%, up from the 8.5% it was
originally seeking.
Misys, AlixPartners, Generac, Roofing Supply and Hearthside
all followed suit in lifting pricing on their loans last week to
get their deals done.
The result has been a general rise in average yields for US
term loans. Sitting at 6.13% at the end of April, the average
yield to a three-year takeout stood at 6.64% last week.
In the secondary loan markets, average prices are beginning
to weaken. May 17 saw a handful of high beta names decline 1-2
points amid increased volume and, though the market righted
itself the following day, average bids saw a decline of about
50bp that week.
Still, the decline in loans has been somewhat muted when
compared to junk bonds. Prices in the Merrill Lynch High Yield
Master II Index declined about 2.25 points in the last two
weeks.
And it has been the high-yield bond component that has
proved to be the real sticking point in some recent financing
packages in which both bonds and loans were being sold.
As the market turned and, despite pulling its bond sale,
Generac still managed to upsize its term loan B by $100 million
to $900 million – albeit at a price. Originally, part of a $1.2
billion dividend recapitalization, the issuer reduced the
proposed dividend payment to $6 per share from $10 per share as
the bond market proved to be tough.
At the same time, Generac bumped up pricing on the upsized
term loan B to 500bp over Libor from Libor plus 450bp and
widened the original issue discount to 98 from 98.5, taking the
yield from around 6.3% to 7%.
The price bump seemed to do the trick as the loan performed
well when it hit the secondary market, trading up to around
99.25 on the break for a yield of a little more than 6.4%.
FUND FLOWS
Funds are already seeing the sentiment play out. High-yield
bond funds saw $2.46 billion flow out of the asset class for the
week ending May 23, according to Lipper. That came after a heavy
outflow the previous week, a stark turnaround from the roughly
$3.225 billion that had flowed into the asset class in the four
weeks before that.
But inflows into bank loan mutual funds have bucked the
trend, chalking up their twelfth straight inflow. This week,
bank loan mutual funds saw $63.7 million in inflows, following
the almost $300 million inflow the week before.
These inflows come on top of the roughly $2.3 billion in
collateralised loan obligations that have been issued over the
last two weeks, further helping to offset some of the pain that
other, riskier asset classes are facing in today’s risk-off
environment.
Still, high-yield market participants are expecting a
rebound.
“High-yield offers a lot of value,” said AllianceBernstein’s
Distenfeld. “Fundamentals of most companies are in really good
shape. Most companies have not only been paying down debt, they
also have ample liquidity to get them through periods of
economic weakness.”
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