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Junk-Debt Market’s Flight to Quality Is About to Heat Up Again

Kelsey Butler
Junk-Debt Market’s Flight to Quality Is About to Heat Up Again

(Bloomberg) -- Companies selling debt in the U.S. leveraged loan and junk bond markets after Labor Day may find investors have a stronger appetite for quality than risk.

The deal pipeline for both types of debt indicates higher rated, well-known companies plan to seek financing in the coming months. They are likely to be well-received by investors worried about a recession yet still looking for yield.

“Investors are likely to remain highly selective but will be buyers in size for the structures that compare favorably to paper available in the secondary market,” said Jeff Cohen, Credit Suisse’s global head of leveraged finance capital markets. Portfolio managers may also have cash leftover after receiving a recent influx of loan repayments, he said.

Amid negative sentiment due to the trade war and a possible global recession, riskier loan sales have struggled in the $1.2 trillion market. The loan market has seen five borrowings scrapped in recent weeks: Vewd Software USA LLC, Golden Hippo, Glass Mountain Pipeline Holdings LLC, Life Time Inc. and Chief Power Finance LLC.

Quality Prevails

Yet, at the same time, higher-rated companies including some software and consumer products names saw materially oversubscribed order books, and attractive pricing.

US Foods Inc. tightened pricing on a $1.5 billion first-lien term loan earlier this month. US Ecology Inc. lowered borrowing costs on its $450 million term-loan refinancing. Both deals were oversubscribed, according to people familiar with the matter who declined to be identified.

The divergent outcomes seen of late means upcoming transactions in cyclical industries, or in lower ratings buckets, may struggle to get done, according to market participants.

Issuance Slows

Yet there isn’t an overwhelming amount of supply in the pipeline.

“We’ll see issuance continue to come, but clearly we’re not going to come anywhere near the volumes from last year,” said George Goudelias, senior portfolio manager at Seix Investment Advisors LLC.

Loan volume mandated but yet to launch is at $25.9 billion as of August 21, up from about $23.5 billion at the start of the month, according to data compiled by Bloomberg.

High-yield bore the brunt of this month’s sell-off, but has since clawed back some of those losses.

The high-yield market hasn’t seen a deal price since Aug. 12, yet about $20 billion of issuance may come in September, Bank of America Corp.’s Oleg Melentyev said. That compares to $23 billion in September 2018, and $40 billion in both 2016 and 2017. The market is about $1.24 trillion in size.

On Tap

Debt sales for Frontier Communications Corp., Inmarsat, UGI Energy Services LLC and Merlin Entertainment may come this fall. Larger deals, including Eldorado Resorts Inc.’s buy of Caesars Entertainment Corp. and Zayo Group Holdings’ take private may be shopped late in the fourth quarter or early 2020.

Timing on T-Mobile US Inc.’s $7 billion in term loans to help finance its acquisition of Sprint Corp. and other jumbo deals are still in flux.

Bigger picture, slowing global growth will be a concern for market participants and pricing may be driven by economic data.

“Growth, around 2.3% is not fantastic, it’s not compelling,” Goudelias said. “But it’s efficient for companies to grow, which is ultimately what you want as a leveraged finance investor.”

--With assistance from Jeannine Amodeo, Gowri Gurumurthy and Davide Scigliuzzo.

To contact the reporter on this story: Kelsey Butler in New York at kbutler55@bloomberg.net

To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Kelsey Butler, Adam Cataldo

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