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imageNEW YORK: A dramatic tightening in US high-yield bond spreads opened the primary for a few well-known issuers this week - but market players are not expecting the issuance floodgates to open, at least in the near term.

Supply is due to come in at around a decent US$4bn this week - the second straight week of big inflows into the asset class.

Lipper reported US$1.796bn of cash pouring into high-yield funds for the week ended March 10 following almost US$5bn the week before - the biggest weekly inflow on record.

Deals were well received, providing a much needed boost to a market whacked by volatility over the last few months.

A couple of the trades were upsized, including First Data's US$900m add-on and Level 3's US$775m 10-year unsecured issue - and traded well in secondary, pleasing investors.

By Friday morning, Sinclair Broadcast's US$350m 10-year was trading 2.25 points above its launch price at 102.25.

First Data's was about 1.5 points higher at 100.875 and Level 3, which dipped below reoffer initially as markets temporarily softened, was back above par at 100.875.

Another big confidence booster was the sale of a previously postponed leveraged buyout financing for Dutch vehicle-leasing company LeasePlan.

The majority of it was done in the European high-yield market, but it also got a US$400m tranche sold at a yield of 7.375pc - tighter than the 8.25pc area talk a month ago before the deal was shelved.

That comes soon after underwriters sold US$1.73bn of Triple C bonds backing the buyout of software company Solera, albeit at an 11.47pc yield.

That deal was a big positive for the market, as is its multi-point rally since then in secondary.

"The market has definitely turned," said Jeff Galloway, a portfolio manager at Amundi Smith Breeden. "We've had around 14 up days, equities are off their lows, and there have been inflows into high-yield. That has really created a much better environment for high-yield and the primary market is heating back up again."


Yet some bankers readying deals say the new issue market is still not completely healed and that only the more well-established, high-quality borrowers will have access in the near term as the buyside builds back its confidence in the asset class.

"People are still cautious given how far and fast the rally has been," said one high-yield syndicate banker.

Indeed, the tightening of spreads recently has been staggering and primarily driven by the recovery in oil prices and fading US recession worries.

On Friday, the CDX HY 25 index was almost a point higher at 102.375bp and is now six points above lows of 96.4 touched a month ago, according to Tradeweb. Over the same period, average high-yield bond spreads have tightened 183bp to T+704bp to yield 8.6pc, while the moves have been even more pronounced in the energy sector where spreads have come in 609bp to T+1380bp to yield 15.34pc.

That equates to returns of 6pc and 16.9pc over the past month respectively, according to Bank of America Merrill Lynch data. Some, however, are worried that broader market volatility could come back - preventing them from going completely risk-on.

"There is incredible demand for high quality issuance with a 5pc type trading level, but demand for the riskier part of high-yield is still very anemic," said another banker.

While the rally in high-yield has been impressive, the riskier part of the market - that rated Triple C and under - has lagged, tightening by 236bp to T+1830bp over the past month and still yielding close to 20pc.


A best-efforts trade for logistics equipment leasing company TRAC Intermodal, a US$485m second-lien dividend recapitalisation bond rated Caa1/B-, will shed more light on investor risk appetite.

Private equity group Fortress Investment Group plans to pay itself a dividend from the bond sale - a more aggressive use of proceeds more akin to bull markets.

Whispers are in the region of 10pc, and while pricing was first earmarked for this week, it may fall back to next. "It's not everyone's cup of tea," said one banker with knowledge of the trade.

"We've mostly seen high-quality Single B or Double B issuance coming in the 5pc-6pc kind of area.

This (TRAC) is definitely not in that category."

Then there is the multi-billion financing for the Veritas LBO - spectacularly pulled last year and still on banks' books. "We're a way off launching that," said the second banker.

"The leveraged loan probably could clear but at a price lower than bookrunners would want. The bonds are harder - it's a more junior part of the capital structure."

Copyright Reuters, 2016


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