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High-yield bond market kicks into overdrive, though investors demand concessions

Fed rally & default fears bring bifurcation back to leveraged loans

High-yield bond market kicks into overdrive, though investors demand concessions

The resurgent U.S. high-yield bond market printed $11.5 billion of new issues last week, propelling volume in that segment to more than $21 billion over the first half of May, according to LCD.

Following a wan $4.2 billion total in March, as coronavirus-related lockdown dynamics smothered the marketplace, issuance by these riskier, sub-investment grade corporates has been in full swing, with a notable acceleration of pace after the Fed on April 9 expanded its corporate safety net to catch coronavirus-era fallen angels.

Volume since that Fed announcement has totaled more than $53 billion through Friday, May 15. That total marks the highest five-week cumulative sum since the period through Oct. 16, 2012, according to LCD.

While the asset class is definitively open, many speculative-grade bond issuers are finding conditions far from a seller's marketplace. The broad distribution of pricing outcomes since the early-March seizure of the new-issue market indicates that companies are tailoring deal concessions in an effort to court wary investors.

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Indeed, the average high-yield bond coupon since March 1 has risen to a lofty 7.10%, from 5.76% during the first two months this year. Those average rates range above median coupons of 6.75% since March 1, and 5% in January and February.

That expansion occurred despite issuers leaning heavily on their asset bases to lock in liquidity. The $25.3 billion of secured debt in the high yield new-issue market in the second quarter, through last week, already is more than all full-quarter totals since 2016's second quarter. The secured debt accounts for 43.4% of all issuance through May 15 in the second quarter, which is roughly in line with the record share for any full quarter — 42.9% — established during the Great Recession, in 2009's second quarter. Overall secured volume in that quarter totaled $23.6 billion.

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Turning to specific issuers, Viking River Cruises Inc. paid the highest premium thus far in the coronavirus era. It printed a 13% coupon for its five-year (non-call two) secured offering last week, offering the B–/B1 deal at a discount, to yield 13.851%, or T+1,351. It was the highest discounted level for a non-pay-in-kind issue since Buena Vista Gaming Authority, in March 2018, placed 13% secured notes at 14.425%.

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That lofty yield helped facilitate a $75 million upsizing in the amount, as Viking offered up a raft of collateral, across a first-priority lien on 20 river vessels, and all material intellectual property, including trademarks and the passenger database.

High-yield investors are also drilling down well past an issue's ratings level for risk/reward assessments. Sector peer Norwegian Cruise Line Holdings Ltd. a week earlier placed the same amount of BB/Ba2 12.25% secured notes at a 12.575% discounted pricing level, also reflecting a $75 million upsize. (Fallen angel Royal Caribbean Cruises Ltd. last week placed $3.32 billion of secured bonds at 11.673%/12.314% discounted levels, but this debt does not count toward high-yield totals due to the company's BBB–/Baa3 secured ratings. The cruise line operator also folded ships, IP and customer data into its collateral pledge.)

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Other issuers paying double-digits for secured funds in recent weeks include Avis Budget Car Rental LLC ($500 million of BB–/Ba2 10.5% notes, yielding 11.297%), Del Monte Foods Inc. ($500 million of CCC+/Caa2 11.875% notes, yielding 12.704%), AMC Entertainment Holdings Inc. ($500 million of CCC+/B3 10.5% notes, yielding 11.031%), and Cleveland-Cliffs Inc. ($400 million of B+/Ba3 9.875% notes, yielding 11.243%).

Taking into account the original-issue discount pricing for many issues, the average yield at pricing for deals completed since March 1 has expanded to 7.30%, from 5.73% over the January/February period. That 157 basis points differential is above the 134 bps expansion for the coupon rate for those time frames, referenced above.

At the other end of the spectrum, issuers garnering OID pricing more than two percentage points below that 7.30% average OID since March 1 include May-priced senior unsecured placements from double-B names Encompass Health Corp., Match Group Inc., Lamar Media Corp., Valvoline US LLC, Lamb Weston Holdings Inc. and split-rated fallen angel Kraft Heinz Foods Co.

While options differ on whether the Fed's liquidity-support expansion last month carries more explicit or implicit weight for market dynamics, the sentiment shift through that action was palpable. Ferrellgas Inc. on April 8 printed $575 million of 10% secured notes due 2025 at par. The Fed then rolled out its inclusion for recent fallen angels on April 9, and Ferrellgas returned to the market one day later, amid a broad-based rally, to tap the 10% issue for an additional $125 million, at a substantially lower, 9.088% rate. The notes, reopened at 103, traded on May 18 at 106, or 8.17%.

This article was written by John Atkins, who oversees bond coverage for LCD.

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