IFR International - 28.07.2018

HIGH-YIELD

UNITED STATES

JUNK BOND PICKERS AWAIT FALLEN
ANGEL BOON

(IGH
YIELDûBONDûINVESTORS ûWHOûHAVEûBEENû
STARVEDûFORûNEWûISSUESûTHISûYEAR ûCOULDûBEûSETû
for a treat if a large swathe of Triple B
CREDITSûAREûDOWNGRADEDûTOûJUNK ûACCORDINGû
TOû-ICHAELû4EMPLE ûDIRECTORûOFûCREDITû
RESEARCHûATû!MUNDIû0IONEER
High-yield issuance is running some
US$34.6bn below last year’s tally due to a
DECLINEûINûRElNANCINGûACTIVITYûANDûASû
COMPANIESûRELYûMOREûHEAVILYûONûCASHûANDû
THEIRûOWNûSTOCKûTOûlNANCEû-!
)NûADDITION ûMANYûJUNK
RATEDûCOMPANIESû
WITHûFUNDINGûNEEDSûHAVEûFOUNDûMOREû
ATTRACTIVEûOPPORTUNITIESûINûTHEûLOANûMARKETû
WHEREûTHEûDEMANDûFORûmOATING
RATEûLOANû
products remains robust.
"UTûINVESTMENTûOPPORTUNITIESûINûHIGH
yield could get a boost if a deterioration in
balance sheet among the companies sitting
ONûTHEûCUSPûOFûJUNKûLEADSûTOûAûSWATHEûOFû
downgrades.
Estimates on the amount of Triple B
ISSUANCEûTHATûCOULDûBEûDOWNGRADEDûOVERûTHEû
NEXTûSEVERALûYEARSûRANGEûBETWEENû53BNû
ANDû53BN ûACCORDINGûTOû4EMPLE
“This deluge spells opportunity for
INVESTORS vûHEûWROTEûINûAûNOTEûISSUEDû4HURSDAYû
morning. “One might categorise the current
high-yield market as desert dry - which a
DELUGEûOFûFALLENûANGELSûCOULDûREHYDRATEv
4HEûARGUMENTûINûFAVOURûOFûPOTENTIALû
FALLENûANGELSûISûTHISûONCEûAûCOMPANYûHASû
BEENûDOWNGRADEDûTOûJUNK ûITSûCOSTûOFûCAPITALû
GOESûUP ûSOûMANAGEMENTûSTARTSûTOûFOCUSûONû
debt reduction by selling assets and
DIRECTINGûFREEûCASHmOWûTOûREDUCINGûDEBT
h)TSûONEûOFûTHEûBESTûTIMESûTOûINVESTûINû
THESEûSECTORS vû4EMPLEûSAID
h7EREûVERYûEXCITEDûBYûDOWNGRADESûOFû
COMPANIESûWITHûVERYûATTRACTIVEûBUSINESSû
MODEL ûBECAUSEûTHEûCOMPANIESûINTERESTSû
become aligned with debtholders’. It ends
UPûBEINGûAûVERYûEXCITINGûTIMEûTOûINVESTûINû
CROSSOVERûFALLENûANGELS vûHEûSAID
!ûLOTûOFûHAIRûHASûBEENûPULLEDûOUTûOVERûTHEûSIZEû
OFûTHEû4RIPLEû"ûMARKETûINûRECENTûMONTHSû!Tû
53TRN ûTHEû4RIPLEû"ûRATINGSûBRACKET ûWHICHû
SITSûJUSTûABOVEûJUNK ûISûLARGERûTHANûITûHASûEVERû
BEENû)TûISûANûUNPRECEDENTEDûSITUATION ûANDûTHEû
POTENTIALûRAMIlCATIONSûHAVEûSPLITûOPINION
“The size of that thing that is sitting on
TOPûOFûYOUû
ûITSûNEVERûBEENûBIGGERûINûTHEû
WHOLEûHISTORYûOFûTHEûMARKET vû/LEGû
-ELENTYEV ûHEADûOFûHIGH
YIELDûCREDITûSTRATEGYû
ATû"ANKûOFû!MERICAû-ERRILLû,YNCH ûSAID

!Tû53TRNûTHEû4RIPLEû"ûBRACKETûCONSTITUTESû

ûOFûTHEûENTIREû)'ûCORPORATEûBONDûMARKETû)Tû

is also larger than both the high-yield and

LEVERAGEDûLOANûMARKETSûCOMBINED

4HEûCONCERNûISûTHATûIFûAûSIZEABLEû

proportion of Triple B debt is downgraded to

JUNKûITûCOULDûCAUSEûBORROWINGûCOSTSûTOûRISEûIFû

INVESTORSûAREûUNABLEûTOûABSORBûTHEûADDITIONALû

SUPPLYû

ûANDûEVENûLEAVEûSOMEûSMALLERûJUNKû

companies without access to capital.

ON THE OTHER HAND

But others beg to differ.

!Nû!RMAGEDDONûSCENARIOûSEEMSûUNLIKELYû

INûTHEûNEARûTERMûACCORDINGûTOûANALYSTSûFROMû

RATINGSûAGENCYû30û'LOBAL

4HEYûBELIEVEûTHATûWHILEûTHEûCURRENTû

POPULATIONûOFû4RIPLEû"ûlRMSûINûTHEû53ûISûLARGEûITû

SHOULDûREMAINûSTABLEûFROMûAûCREDITûPERSPECTIVEû

in the near to medium-term horizon.

)NûADDITIONûTHEREûAREûAROUNDûûCOMPANIESû

in the US that are considered to be potential

FALLENûANGELSûATûTHISûTIMEû4HOSEûISSUERSûHAVEû

LESSûTHANû53BNûINûDEBTû30ûSAID

Other analysts agree.

)NûAûREPORTûRELEASEDûONû*ULYûû"!-,û

analysts said that the demotion of a string of

"""

ûCORPORATEûNAMESûTOûJUNKûTERRITORYûISû

LIKELYûTOûHAPPENûOVERûAûPERIODûOFû

ûYEARSû

RATHERûTHANûINûAûGIANTûhmUSHv

“That leaking nature of fallen angel risk -

ASûOPPOSEDûTOûAûBIGû@mUSHû

ûMAKESûITûMUCHû

MOREûMANAGEABLEvûANALYSTSûWROTE

!ûMOREûMANAGEABLEûSWATHEûOFûDOWNGRADESû

ISûGOODûNEWSûFORûMANAGERSûSUCHûASû4EMPLEû

who hope to make hay of such opportunities.

h!SûLONGûASûEXISTINGûOWNERSûOFûTHATûDEBTû

ARENTûFORCEDûTOûSELLûTHEIRûEXPOSURESûTHEû

DAMAGEûISûSOMEWHATûLIMITEDvûHEûTOLDû)&2

BRUIN, COMSTOCK FACE PUSH-BACK

4WOûENERGYûNAMESûBRUIN E&P PARTNERS and

COMSTOCK RESOURCESûHAVEûFALLENûVICTIMûTOû

CHANGINGûSENTIMENTûINûTHEûJUNKûBONDû

market after being forced to back up on

pricing on recent deals.

7ITHûTHEûPACEûOFûINmOWSûINTOûHIGH

YIELDû

JUNKûFUNDSûSLOWINGûINVESTORSûAREûBECOMINGû

INCREASINGLYûSELECTIVEûABOUTûTHEûPRICEûTHEYû

are willing to pay for certain credits.

“Until we see cash coming back into the

ASSETûCLASSûTHEûBUYSIDEûISûGOINGûTOûBEûMUCHû

more diligent on who they are allocating

CAPITALûTOvûONEûINVESTORûSAID

(IGH

YIELDûFUNDSûSAWûJUSTû53Mû

enter the asset class for the week ending

*ULYûûDOWNûFROMûTHEû53BNûTHEû

WEEKûBEFOREûACCORDINGûTOû,IPPERûDATA

Independent oil and gas company

#OMSTOCKûENDEDûUPûPRICINGûITSû53Mû

EIGHT

YEARûNON

CALLûTHREE

YEARûBONDûATûû

on July 20.

4HEû4EXAS

BASEDûCOMPANYûRATEDû#AA""û

ALSOûUPPEDûITSûYIELDûTOûûFROMûINITIALû

PRICEûTALKûOFûûAREA

-EANWHILEû%0ûCOMPANYû"RUINû"" û

FACEDûSIMILARûPUSH

BACKûFROMûINVESTORSûWHOû

disliked the fact that US$200m of the

US$600m bond was being used to fund a

special equity contribution.

The energy company had been looking to

price an eight-year non-call three structure

AFTERûSOUNDINGûOUTûINVESTORSûWITHûAûYIELDûOFû





But market push-back left Bruin delaying

the deal by a day and shortening the tenor to

AûlVE

YEARûNON

CALLûTWOûTHATûWASûTALKEDûATû



ûANDûPRICEDûTOûYIELDûAûHIGHERû



“It’s not necessarily Comstock or Bruin-

SPECIlCûBUTûTHEûMARKETûISûBEINGûAûLITTLEûMOREû

DISCERNINGûBETWEENûCREDITSvûAûSECONDû

INVESTORûSAID

“There isn’t a lot of money coming into

THEûASSETûCLASSûANDûINVESTORSûHAVEûTHEûNEXTû

RECESSIONûATûTHEûBACKûOFûTHEIRûMINDSvûHEû

said.

LIFEPOINT BONDS JUMP AFTER APOLLO

ACQUISITION

LIFEPOINT HEALTH bonds were up sharply on

-ONDAYûFOLLOWINGûNEWSûTHATûPRIVATEûEQUITYû

ALL US$ DENOMINATED HIGH-YIELD BONDS

BOOKRUNNERS – 1/1/2018 TO DATE

Managing No of Total Share

bank or group issues US$(m) (%)

1 JP Morgan 100 14,778.63 11.0

2 Goldman Sachs 79 9,611.47 7.1

3 BAML 87 8,756.61 6.5

4 Barclays 67 8,637.80 6.4

5 Deutsche Bank 75 8,563.03 6.4

6 Wells Fargo 65 8,527.32 6.3

7 Credit Suisse 69 8,095.76 6.0

8 Citigroup 71 7,965.62 5.9

9 Morgan Stanley 64 7,725.45 5.7

10 RBC 44 5,112.15 3.8

Total 262 134,505.34

Including US domestics, Euro, foreign, globals. Excluding equity-related debt.

Source: Thomson Reuters SDC code: B5

ALL NON-DOLLAR DENOMINATED HIGH-YIELD BONDS

1/1/2018 TO DATE

Managing No of Total Share

bank or group issues €(m) (%)

1 JP Morgan 35 3,408.38 8.2

2 Deutsche Bank 31 3,391.14 8.1

3 BNP Paribas 35 2,763.02 6.6

4 Credit Suisse 26 2,262.39 5.4

5 HSBC 27 2,215.39 5.3

6 Citigroup 20 2,159.23 5.2

7 BAML 19 2,155.06 5.2

8 Goldman Sachs 23 2,080.24 5.0

9 Barclays 19 1,835.18 4.4

10 Morgan Stanley 12 1,463.43 3.5

Total 95 41,798.30

Excluding equity-related debt.

Source: Thomson Reuters SDC code: B6