Must-know: Who were the key issuers of high-yield debt last week?
High-yield primary market issuance for the week ending June 6
The week ending June 6, saw a spike in the number of high-yield (HYG) bond transactions in the U.S. primary market, compared to the previous week. A total of 13 new high-yield (JNK) debt issues found their way into the primary market, totaling $5.4 billion. This was more than double the number of issues in the previous week, which saw six new issues totaling $1.9 billion. Last week’s transactions bring the total issuance in 2014 to $158 billion, down slightly from the comparative period in 2013, which amounted to $164 billion. (source: S&P Capital IQ/LCD)
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Prominent high-yield issuers last week included Outerwall (OUTR). OUTR, whose businesses include ~43,700 Redbox movie and video game dispensing kiosks, sold $300 million in senior unsecured notes last week. The notes were sold at a coupon of 5.875% p.a. via private placement. The Ba3 and BB-rated notes are due in 2021. The company plans to use the proceeds to repay its existing debt obligations. It may also use the funds for general corporate purposes.
Other notable issues last week, were privately-held company Ardagh Packaging’s $1.05 billion debt issue, which was dual-currency denominated. In one of the biggest Payment-In-Kind (or PIK) issues since the recession, the company issued $710 million to yield 8.875%, and Euro 250 million to yield 8.375%. PIK issues don’t pay a cash coupon, compensating investors by issuing them additional securities instead. Both currency tranches were priced competitively. The company plans to use the proceeds to retire part of existing costlier debt as well as to fund Euro 73 million return of capital to shareholders.
Secondary market activity
Net flows into high-yield mutual funds were positive for the fifth consecutive week, totaling $302 million for the week ending June 6 (source: Lipper). However, the inflows were almost half the previous week’s levels, which were recorded at $600 million. Net flows into high-yield mutual funds are up by $5.8 billion so far in 2014.
The high yield debt market often moves in tandem with equity markets like the S&P 500 Index (IVV). This is because in times of economic expansion, stock prices tend to increase. Buoyed by the general mood of optimism in financial markets and the better demand environment, yields spreads between below investment grade debt and investment-grade debt (LQD) tend to fall. This is because high-yield borrowers are perceived to have higher ability to service their debt obligations, and lower default risk, when the economy is on an uptick.
This year, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has returned 4.31% YTD through June 10. This is comparative to returns on the S&P 500 Index (IVV), which has touched record highs this year. The iShares Core S&P 500 ETF (IVV) which tracks the S&P 500 Index, has returned 4.89% in 2014 year-to-date.
In the next section, we’ll analyze the issuance of another form of below-investment grade debt, leveraged loans.