- New-issue bonds, loans are pricing higher
- Argentine default, Russia sanctions sting
- Some deals may wait till after Labor Day
The HY 22 index was down almost half a point on Aug. 1 at 106.245, while cash bonds continued to come under pressure, according to sister magazine International Financing Review. “The cash market is down at least another half a point today and feeling heavy,” one trader said. He said bonds in exchange-traded funds had borne the brunt of the sell-off.
Level 3’s $1 billion deal was the standout underperformer in the week’s $5.703 billion in new supply. The trade, one of the most aggressively priced of the week, was bid at 97 on Aug. 1 after pricing at par.
Others that offered more in the way of concession, including Mallinckrodt International’s $900 million acquisition financing, were hovering around reoffer. One market source said Mallinckrodt paid around 75 basis points more than it would have done three weeks ago before the latest bout of volatility, which was initially sparked by outflows.
More than $5.5 billion of cash has been pulled out of high-yield funds in the last three weeks alone, according to Lipper data, although the pace of redemptions has slowed. High-yield issuers looking to price before the late August summer slowdown are expected to pay at least 100bp more than they would have at the start of the month, mirroring moves in the cash market.
The Barclays yield-to-worst index is now at 5.7 percent from 4.83 percent on June 20.
And execution has become tougher. Three deals expected to price in early August for Jupiter Resources, NCSG Crane & Heavy Haul Corp and Warren Resources were delayed until the following week. Jupiter Resources is Apollo Global Management’s $1.125 billion deal to pay for its acquisition of Bighorn gas assets in Alberta from Encana, Canada’s biggest natural gas producer.
Left-lead Credit Suisse began marketing the deal when whispers were heard in the mid-7 percent area. Price talk was now expected the following week, with the deal now guided around 8.5 percent, one investor said. Whispers on NCSG Crane’s $310 million deal are now heard at 9 percent from 7.5 percent to 8 percent earlier in the week.
Price talk on the Warren Resources $300 million issue were announced at 8.25 percent area with books due to close on Aug. 4. That has been delayed in hopes the markets would stabilize. The markets were choppier for most of July. Most of the most recent week’s deals came at the wide end of, or wider than, price talk. But several were upsized and initially performed well on the break.
On the back of that, bankers had predicted some $15 billion of supply over the first half of August. But those estimates were scaled back after a particularly volatile day, due to rate rise fears, Argentina’s default, Russia’s sanctions and Portuguese banking woes, which all combined to rock both the equity and credit markets.
“It’s very likely now that some of those issuers that had been planning on coming to market will now wait until after Labor Day,” one syndicate banker said. “It usually takes issuers a while to adjust to new pricing levels.”
Companies looking to refinance will have more flexibility over timing, but acquisition financings will be harder to put off. One issuer probably unable to do so is Safeway, which agreed in March to be taken private by buyout shop Cerberus Capital Management. The bank meeting for the $4.5 billion loan portion of the deal took place as scheduled, and the $1.625 billion bond was expected to follow suit. “The bank meeting gets everything rolling. I would expect the bond will come next week,” said the banker.
The market is meanwhile likely to remain sensitive to indications of potential interest-rate moves. Five-year Treasury yields rallied 10bp to 1.66 percent on Aug. 1, while 10-year yields rallied 6.5bp to 2.49 percent after weaker-than-expected payrolls data countered strong growth numbers earlier in the week that had fueled expectations of a near-term rate rise.
Non-farm payrolls increased 209,000 last month after surging by 298,000 in June, the Labor Department said on Aug. 1. Economists had expected a 233,000 job gain. “There’s a view out there that when yields get to 5.75 percent to 6 percent and 10-year Treasuries stay around 2.5 percent, buyers will jump in as the asset class will look pretty cheap against everything else,” the banker said.
Natalie Harrison is deputy editor of U.S. credit for IFR.