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Setback: Why did high yield bond fund flows decline last week?

Chanderlekha Nayar

Must know: The weekly high yield bonds and leveraged loans update (Part 3 of 8)

(Continued from Part 2)

While most of issuers were busy wrapping up the month, few late comers gazed at the high yield bond market to seize the lower interest rate opportunity. Of the four deals last week, three were for refinancing purposes and one to shore up the general corporate dealings. Average ticket size of the deals was up by 9% to $470 million from $430 million the previous week. The number of deals year-to-date were 71, 34 deals lower than the 105 deals over the same period in 2013. All the refinancing deals last week were rated B or B-, except D.R. Horton, Inc. (DHI), the largest residential house builder in the U.S., which was rated BB. The company placed an upsized $500 million offering of five-year senior bullet notes at the tight end price talk for general corporate purpose.

Refinancing deals were mostly in the $350 million to $500 million range, with the highest deal from Advanced Micro Devices, Inc. (AMD), a semiconductor company with manufacturing, research and development, and sales and administrative facilities throughout the world. The company issued non-callable for life five-year senior notes to raise $500 million for refinancing their existing debt. Covanta Holdings Corporation (CVA) and Modular Space also placed $400 million offering of ten-year (non-call five) unsecured notes and $365 million of five-year (non-call two) second-lien notes at the tight end of price talk, respectively, to refinance the company’s existing debt. When deals are priced within tight end of price talk, it generally indicates that deals were priced cheaply, benefiting the issuers. The flip side is when deals are in the wide range of price talk, which means investors may push back on deal terms and seek higher yields.

Last week clearly indicated a bearish sentiment in the high yield bond market. Issuers were mostly silent and investors remained concerned about persistent heavy weather obscured by the poor economic data.

Pipeline ahead indicates higher M&A

Last week was quite dead from M&A perspective however, the forward looking calendar shows some optimism. Of the 14 high yield bond (JNK) deals announced for next week, only one deal was in the refinancing space while the remaining 13 deals were for M&A and LBOs (leveraged buyouts). Investors can set a watch guard on AerCap Holdings N.V. (AER) and Crown Castle International (CCI) deals which are expected to transact $2.7 billion and $3.4 billion M&A deals, respectively.

Continue to Part 4

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