CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$24.4 billion.  New issuance for the week was $3.2 billion and year to date HY is at $78.5 billion, which is -21% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bond issuance and inflows have resumed, with CCC-rated LBO supply highlighting the strength of risk appetite. Lipper reported an inflow for week ended May 2 after an outflow the prior week.
• Four deals for $1.34b priced yesterday, two of them CCC credits
• GFL Environmental, rated CCC, did a drive-by to fund an LBO by an investor consortium led by BC Partners
• Strong fundamentals and steady growth are boosting junk bonds
• Oil is hovering near a 3 year high amid reports that OPEC was likely to extend production cuts into 2019
• Consensus at Milken Institute conference this week was that the credit markets would have a few more years of a smooth run as global growth was steady and fundamentals were sound
• Credit cycle will extend, and there’s no fear of imminent recession
• CCCs continued to top BBs, B, stocks and IG, with YTD positive returns of 1.25%
• Stocks report negative returns YTD 1.06% and IG negative 3.38%
• Moody’s notes that the number of companies rated B3 or lower declined and was down 22% from a year ago and 35% from its peak in 2016
• “Decreasing number of lower-rated corporate issuers is a sign of declining or low default rate risk in the year ahead,” Moody’s analyst Julia Churson wrote
• Moody’s forecasts default rate to decline to 1.7% by March 2019, helped by rising corporate earnings, abetted by fiscal stimulus

(Wall Street Journal)  Watch Out: Junk Bonds Getting Junkier

• One thing owners of junk bonds are usually sure of is that when the borrower defaults, they will get a veto on cash going to shareholders, to junior debtors or into new deals.
• Not any more. Junk bonds financing private-equity firm KKR & Co.’s latest buyout subvert the usual order by allowing such payments to go ahead even after a formal default.
• The $1.4 billion of bonds, to repay temporary borrowing for the buyout of Unilever PLC’s margarine business, mark a new low in the quality of covenants protecting lenders and are yet another sign of the wall of money chasing the higher yield on offer from junk bonds.
• Several recent bonds have allowed what are known as restricted payments even when a company is in technical default — so that, for example, a planned takeover or joint venture wouldn’t be derailed.
• Flora Food Group, Unilever’s business, appears to be the first explicitly to allow them after a formal “event of default,” which should put creditors at the front of the line.
• This matters when it comes to assessing the risk of the market as a whole. Junk-bond enthusiasts tend to highlight the yield spread over Treasurys, which in the U.S. is much higher now than it was at the end of the last bull market in 2007 and about where it stood in 2014.
• But the weakening of covenants means that losses are likely to be bigger if there is another wave of defaults, which ought to justify lower prices, and so higher spreads over Treasurys.

(New York Times)  Sprint and T-Mobile C.E.O.s Are in Washington to Sell Their Merger

• From the moment T-Mobile and Sprint announced their $26.5 billion merger on Sunday, the wireless carriers have positioned their proposed deal with an eye toward Washington. After all, regulators in the Obama administration blocked one of their previous efforts to combine.
• This time around, the chief executives of the companies emphasized that merging would help them to:
• Build a next-generation wireless network, one robust enough to keep up with China in a growing technological arms race; Create thousands of jobs, especially in rural areas; Keep prices low for consumers, especially as cable companies like Comcast try to enter the market.
• The heads of both companies began a charm offensive in Washington on Tuesday

(Knowledge@Wharton)  T-Mobile and Sprint: Will the Deal Go Through?

• T-Mobile and Sprint, the nation’s third and fourth largest wireless telecom companies, have been trying to tie the knot for years. But concerns that regulators won’t approve a merger because it would reduce competition have kept them apart. Their antitrust concerns are not unfounded: In 2011, the U.S. Justice Department torpedoed AT&T’s planned $39 billion acquisition of T-Mobile. Three years later, Obama’s FCC chairman, Tom Wheeler, bluntly told Sprint he was skeptical such a deal would be approved.
• That was then, this is now. Today’s FCC is more business friendly, chaired by Republican Ajit Pai and with a GOP majority among its commissioners.
• But has the environment changed sufficiently that T-Mobile’s acquisition of Sprint will not be dead on arrival in Washington? “I’d be very surprised if Ajit went along with this,” said Gerald Faulhaber, Wharton professor emeritus of business economics and public policy and former FCC chief economist.
• This is the third time that T-Mobile and Sprint reportedly talked about merging — and the same challenges remain. “I’d be surprised if the third time is a charm. Market shares are pretty high. Post-merger, you’d have three firms with more than 30% of the market each. Under the orthodox approach that the merger guidelines take, that would be a clearly challengeable merger,” said Herbert Hovenkamp, a Penn Integrates Knowledge professor at the University of Pennsylvania, with dual appointments at Wharton and Penn Law
• Hovenkamp pointed to another hurdle: Unlike other wireless telecom mergers that need approval by both the FCC and Justice Department, this one also needs to be greenlit by The Committee on Foreign Investment in the United States (CFIUS). That’s because T-Mobile is owned by Germany’s Deutsche Telekom and Sprint is majority owned by SoftBank of Japan. “We’ve got three agencies this time that need to approve this merger,” he said.
• Moreover, the committee, which falls under the U.S. Treasury, is subject to the presidential executive order, Hovenkamp said. In March, the Trump administration sank the acquisition of U.S. chipmaker Qualcomm by Broadcom, a U.S. chipmaker acquired by a Singaporean company that is now relocating back to America. Trump “could probably do that this time again,” he said. “There’s a whole lot of uncertainty facing this merger.”