Oct 5 (IFR) - Issuers continued to get away with aggressively priced and structured deals in the US high-yield market this week, despite recent widening from September’s record low yields. The average yield-to-worst on the Barclays US high-yield corporate index has widened to 6.42% from its alltime low of 6.15% in mid-September.
In all, US$9.266bn in US dollar volume priced from 18 issuers, with another roughly US$1bn in volume anticipated for Friday.
Record tight yields, dividend deals and share buyback leveraging events were all included in this week’s issuance, although there remains some restraint on certain names; and despite the aggressive push by issuers, investors point out that it has become very hard to find any value in the primary market.
“There is no value in any of these deals,” said one investor. “That’s how we get to the end of the new issue cycle. Now these deals are done for the benefit of the issuing company rather than the investor, and the near alltime record low yields aren’t helping.”
This week, Tenet Healthcare was able to achieve a record low yield - 6.75% - in seven-year maturities for its Triple C rated tranche, part of a US$800m two-part offering, while Petco popped in on Thursday with a PIK toggle dividend offering.
Petco Holdings, the holding company for the pet products retailer Petco Animal Supplies, sold US$550m in five-year non-call one Caa1/CCC+ rated senior PIK toggle notes at 8.50% at a slight discount of 99.50, to yield 8.625%. This was tighter than initial price talk of 8.75%-9% with a discount price of 98-99.
It was the second PIK toggle deal to tap the market in as many weeks. CDRT, the indirect parent of Emergency Medical Services, priced a US$450m five-year non-call one senior PIK toggle note offering priced at 9.25% at a discount of 97 to yield 10.028%, which was about 12.5bp-25bp wide of talk.
While that deal was heard to have struggled to get done, Petco’s offering illustrated a warming to PIK toggle dividend offerings. The deal was heard to have garnered more than US$2.5bn in orders from over 100 accounts.
Quebecor Media, the Canadian media conglomerate, increased leverage by almost one turn with its bond offering priced this week.
The company tapped the markets with an upsized US$1.35bn US and Canadian dollar two-part offering to fund the purchase of a portion of the minority equity interest of Quebecor held by Caisse de depot et placement du Quebec, a Canadian pension fund.
Elsewhere in the market, a host of companies, including Swift Energy, Alta Mesa and Vanguard Natural Resources, dropped with small add-on deals to take advantage of the favorable rates.
“There’s so many of these tack-on deals,” said the investor. “Issuers are just so opportunistic. They don’t need the money, but the market is so hot that who is going to turn down these deals at these levels?”
S&P’s Diane Vazza, head of global fixed income research, wrote in a report this week: “Despite lingering, and perhaps even escalating, global risks, investors continued to flock to the credit markets in search for better yields in September.”
Moody’s has found that covenant quality has declined as issuance has surged.
The agency said September was the second worst month in 2012 for covenant quality after January. The average covenant quality score for September issuance is the fourth weakest since January 2011, when Moody’s started tracking the data.
The average Covenant Quality score issued in September was 3.88 on the Moody’s scale, where 1 is strong and 5 is weakest (with good, moderate and weak in between).
In another sign of weak covenant quality, secured bonds made up only 11.8% of total issuance, well below the historical average of 21.6%.
Moody’s also found that in the Single B portion of the high-yield market, 28.6% of bonds ranked in the agency’s weakest category of covenant quality, compared with the historical average of 9.4%. This included deals from Tesoro Logistics, Cablevision Systems and Nielsen Finance.
September’s bonds show weaker covenant quality in all high-yield rating categories, including Triple C names. The only exception is secured bonds, which as a group provided higher protection than the historical average, Moody’s said.
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