Why issuance fell alongside erosion in long-term Treasury yields

Market Realist

Why high yield bond issuance reveals a horizontal market (Part 3 of 4)

(Continued from Part 2)

Reserve trends

Unlike last week’s movements—where we saw the leveraged loan (BKLN) market react positively to declining U.S. ten-year Treasury yields—this week showed less energy in the market. Issuance declined to $14 billion—$4.4 billion lower than the previous week’s issuance of $19 billion. The year-to-date issuance was $128 million, 22% lower than the $164 million we saw over the same period in 2013.

The decline in last week’s activity was mainly due to two reasons. One reason, which is quite obvious in the leveraged loan space, is the erosion of U.S. ten-year Treasury yields, which declined 8 basis points. The second reason is that investors were quite vigilant and selective on the deal terms last week. Leveraged loans pay a quarterly floating rate quoted as a spread to a benchmark (like LIBOR+125bps). LIBOR is a reference rate that moves with overall interest rates. Increases in interest rates compress credit spreads as investors demand safer bonds. Similarly, when interest rates decline, demand falls, which widens the credit spread.

A recent LBO deal

Nine West Holdings’ LBO financing deal gained a lot of investor attention last week. Sycamore Partners LLC, a private equity firm, is buying Nine West Holdings Inc., which will include Nine West Co. and Jeanswear Co. The company tapped the market for a $250 million 5.5-year covenant-lite secured-term loan. The price on the loan was in the wide end of the talks, at L+350-375, with a 1% LIBOR floor and a discount of 99, yielding 4.69% to 4.95% if held until maturity. On completion of the deal, Nine West Holdings Inc. is expected to remain the surviving entity, while some divisions of the Jones Group, Inc. (JNY)—previously acquired by Sycamore Partners LLC—will be carved out. Jones Group, Inc. (JNY) is an American designer, marketer, and wholesaler of branded clothing, shoes, and accessories.

When deals are in the wide end of the talk, they imply that investors are pushing for better pricing. This isn’t good for issuers, as they have to increase yields to create demand. But when deals are in the tight end of talks, they mean solid demand for issuance, which allows issuers and investors to negotiate reasonable pricing terms.

On the M&A and LBO fronts, the leveraged loan market remained modest, with four deals. Most of the refinancing and dividend recapitalization deals clicked very well in the market. Prices remained higher on new issues last week, with the average yield-to-maturity on new BB loans up 3.55% from 3.45% the previous week. The average yield on new single-B deals increased to 4.98% from 4.91% the previous week.

Some of the M&A and LBO deals that tapped the market last week include IMG Worldwide—which came to market to raise a $1.9 billion loan. IMG Worldwide is expected to be acquired by William Morris Endeavor Entertainment (WME) and Silver Lake.

Alliance Laundry acquired Primus Laundry Equipment Group, raising $230 million. National Vision, Inc. an independent optical retailer, issued a $475 million loan on the announcement of its being acquired by KKR & Co. L.P. (KKR) from Berkshire Partners, a Boston-based investment firm. Kohlberg Kravis Roberts & Co. (KKR) is a private equity investment firm specialized in acquisitions, leveraged buyouts, management buyouts, special situations, growth equity, and mature and middle-market investments.

Continue to Part 4

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