NEW YORK, Aug 8 (IFR) - The US high-yield market may have
suffered its biggest outflows on record over the past week, but
strategists, bankers and investors say the move is overdone and
completely out of line with what is occurring in other fixed
The outflows, which reached US$7.1bn last week and
US$12.604bn over the past month, according to Lipper data, have
had a brutal impact on the market.
Banks have pulled deals for the first time in months, while
those that have priced bonds have paid double-digit coupons.
Spreads, meanwhile, have widened by 90bp, with the
yield-to-worst on the Barclays high-yield index now at 5.73%.
Market players are now trying to figure out if there is
worse to come or if more stable conditions will return.
Dislocation in the credit market - with relative calm in the
investment-grade sector, and even European subordinated
financial paper by comparison, despite the bailout of Portuguese
bank BES - does not make sense, some say, if the culprits for
the high-yield sell-off are geopolitical or rate rise fears.
"The high yield market experienced nothing more than a
short-term correction and some profit-taking, and we wouldn't be
surprised to see a fairly quick rebound," said Dan Doyle, a
high-yield portfolio manager at Neuberger Berman.
"Why? Generally speaking, high yield performance is driven
by defaults and economic growth. We're hard pressed to see a
scenario where defaults significantly increase over the next
Moody's expects defaults to remain in the 2% to 2.5% range
over the next year.
RUN BY ETFS
Most reason that high-yield has been hit so hard because of
the concentration of short-term high-yield paper held by
exchange traded funds and mutual funds. The run on the market by
retail investors follows gains of 5.7% in the six months to end
of June, according to Bank of America Merrill Lynch data.
"There's a rotation trade going on," said one senior
leveraged finance banker. "People have been in high-yield for
three to four years and done pretty well out of it so they are
taking some chips off the table, but I don't know where they are
putting that cash - it's certainly not into equities."
Deutsche Bank strategists Oleg Melentyev and Daniel Sorid
said the outflows also have to be put in perspective with the
huge growth in the high-yield market. They point to eight
previous episodes of outflows since 2009 which have lasted 21
days on average, citing EPFR data.
Aug 4 marked the 20th consecutive trading session of
negative outflows in global high-yield funds, they said.
An outflow of US$3.7bn on August 1 was lower than a 1.1%
withdrawal on August 9 2011 following the downgrade of US
sovereign debt during the debt ceiling debacle, or 1.14% on May
10 2010 - the start of a three-year long European sovereign
crisis, the Deutsche Bank strategists said.
Others point to far frothier conditions in previous cycles -
and said calm will be restored.
"Spreads have spent over 13 years of their history at levels
tighter than we are now," said Phil Milburn, co-manager of the
Kames high-yield bond fund.
He called talk of a bubble in high-yield "absolute
"Provided default rates do not meaningfully increase, and
one's time frame is long enough to look through a few months of
mark-to-market volatility, investors should still earn
mid-single digit returns from high yield," Milburn said.
Even so, the adjustment has been painful, and the primary
market now looks set to grind to a halt until after Labor Day.
The sell-side is nervous, as they have underwritten large
M&A transactions on terms that could result in them losing money
if conditions deteriorate a lot more.
For now, they are sticking to the mantra that investors
still have plenty of cash and that there is no forced selling.
Income from coupons alone comes to about US$7bn a month,
taking into account the roughly US$1.2trn size of the US
high-yield market and average high-yield coupon of 7.03%,
according to the Barclays index.
Thin liquidity in secondary, made worse by low bank
inventories, has made it tough for investors to buy bargains.
Billion-plus bond deals pushed back this week for the buyout
of Safeway and Jupiter Resources by Cerberus and Apollo
respectively will no doubt pay the price for the volatility when
their deals are launched in September.
But overall, the M&A acquisition pipeline is fairly
manageable after a robust year for high-yield volumes that have
reached US$201bn so far this year, according to IFR data.
There's roughly US$30bn of M&A bond supply earmarked from
now until the rest of the year. Around US$12bn of that is for
Valeant's planned takeover for Allergan - a deal that is still
far from certain.
Other big deals M&A deals pegged for later this year include
Zebra Technologies, Dollar Tree and Scientific Games -
high-quality credits, most likely to be rated Double B, bankers
And though flex and cap rate terms may change to reflect the
market's setback, appetite to commit new financing hasn't waned.
"This is a good time to be underwriting deals as long as you
believe that outflows will slow, that there is nothing
fundamentally wrong with credit, and that rates will rise
gradually," said another senior leveraged finance banker.
"I'd rather be underwriting deals at 7.5% than 6.5%."
(Reporting by Natalie Harrison; Additional reporting by IFR's
Mariana Santibanez and Robert Smith and TRLPC's Michelle Sierra;
Editing by Shankar Ramakrishnan)