January 17, 2013 / 6:16 PM / 5 years ago

TEXT - Fitch says looming debt ceiling can't keep high-yield markets down

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(The following statement was released by the rating agency)
    Jan 17 - Primary issuance in the leveraged finance markets remains strong
despite uncertainty around U.S. debt ceiling negotiations, 
according to Fitch Ratings.

The high yield bond market is off to a record start this year, coming on the 
heels of a record-setting 2012 during which over $315 billion of high yield 
bonds were priced. As of Jan. 15, a total of 19 high yield bonds totaling $9.3 
billion have been sold. This represents a 12% increase over the same time period
last year. Over 75% of the issuance to date has been used to refinance existing 
debt, a trend generally seen throughout 2012.

Issuers continue to take advantage of historically low spreads in an effort to 
reduce overall interest expense and push out their debt maturity profile. We 
expect this trend to continue as long, as borrowing rates remain favorable. High
yield spreads have dropped 35 basis points thus far in 2013. Based on Fitch's 
most recent "U.S. Leveraged Finance Stats Quarterly" report, interest coverage 
for the speculative grade category has improved from 2.9x in 2010 to 3.5x at the
end of the third quarter 2012. Speculative grade coverage statistics could 
continue to strengthen, as they are just now beginning to realize a full 12 
months of savings from lower cost debt issued over the past 12 to 18 months, 
offset by higher debt levels among companies at the higher end of the credit 
spectrum.

High yield investors have seemingly become comfortable once again with risk, 
underscored by easy access for issuers. Investor confidence has been supported 
by decent economic and earnings reports, stronger credit profiles and a benign 
bond default at remain around 2% (we project the U.S. high yield default rate to
be around 2% in 2013). High yield investors poured in $1.1 billion into high 
yield retail funds the week of Jan. 9, 2013, reversing a four week trend of 
outflows and further evidence of a risk on investor environment.

The leveraged loan market has also had a solid start. After a somewhat slow 
first week, the leveraged loan market saw a pick-up in primary activity. Loan 
demand continues to be high as investors look to hedge against higher future 
inflation. Leveraged loan retail funds have seen two weeks of inflows in 2013, 
totaling nearly $1 billion. This marks the 30th consecutive week of positive 
flows into the asset class, dating back to 2012. 

Loan demand from collateral loan obligations (CLOs) has continued as the primary
CLO market has quickly picked up steam in 2013. As many as 13 deals are being 
marketed and, so far this week, three deals were priced totaling approximately 
$1.8 billion. Based on the pipeline of CLO deals to date, over 35 deals could 
price between January and February and most consensus estimates put full year 
2013 issuance between $70 billion and $80 billion.

Through the first two weeks, a total of 14 deals have been launched, totaling 
$15 billion of new loan issuance. In addition, Fitch's forward calendar has 
doubled from $16 billion at the end of December to $35 billion as of Jan. 15, 
2013. As loan spreads continue to grind lower, we expect borrowers will take 
advantage of the favorable tone, which could translate into a new wave of 
repricings, similar to what was seen in the first four months of last year.

We believe one trend likely to continue into 2013 is the resurgence of the 
second-lien loan market. Second-lien issuance hit an annual post-crisis high of 
$18 billion in 2012, with nearly 40% of this total coming in the last quarter of
the year. Thus far in January, Ameriforge Group, NEP Broadcasting, NFR Energy, 
LLC, and TNS Inc. have combined added $1 billion of second-lien loans to the 
forward calendar. 

Recent surges in second-lien issuance have been observed during periods of 
strong demand, as investors are willing to accept poorer security packages in 
exchange for higher pricing. We note that the recovery rates on second-liens 
loans over the past several years have decreased significantly and also exhibit 
a wider range of values than first lien recoveries. On average, second-lien 
recoveries are more similar of those observed on unsecured bonds.  

Limited supply in the primary market has forced investors to turn to the 
secondary market for assets, which has pushed secondary bids higher. After 
hitting a 2012 high of 97.94 on Dec. 24, 2012, the overall market bid continues 
to trend higher in 2013. Today, approximately 80% of all loans in the secondary 
loan market are priced at 98.0 or higher.

 (Caryn Trokie, New York Ratings Unit)

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