CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.8 billion and year to date flows stand at $8.2 billion.  New issuance for the week was $3.2 billion and year to date HY is at $106.7 billion, which is +16% over the same period last year.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds have positive momentum after three straight days of gains despite the biggest fund outflows since December. Rising oil and equity markets are supportive and all eyes are on this morning’s U.S. employment report for clues on the strength of the economy.
• The primary looks to be wide open after a number of borrowers, including first-time issuer GrubHub, increased the size of offerings this week
• Five of the seven deals priced this week were drive-by deals, signaling that junk investors were scrambling for supply
• Risk assets got a boost yesterday from reports that U.S.- Mexico talks were progressing towards a deal
• This followed Chair Powell reiterating earlier this week that the central bank is standing by to act if the trade war causes disruption
• Junk bond YTD returns are 8.117%, the best asset in fixed income
• BBs were at 8.344%
• Single-B stood at 8.19%
• CCCs were still the worst performers at 6.767% YTD
• Loans were at 5.578%
• Investment grade bonds were at 7.376%

(CAM Note)  Moody’s Downgraded the Debt of Tenneco by One Notch

• The senior unsecured debt is now rated B3.
• Moody’s cited an expected slower pace of deleveraging, weaker financial performance, and a soft auto production environment.

(Business Wire)  The GEO Group Negotiating with State of Victoria to Increase Capacity at the Ravenhall Correctional Centre by 300 Beds

• The GEO Group, Inc. announced that its subsidiary, The GEO Group Australia Pty Ltd (“GEO Australia”) is currently in negotiation discussions with the State of Victoria to increase the capacity at the Ravenhall Correctional Centre by an additional 300 beds increasing the Centre’s capacity to 1,600 beds. The 300-bed capacity increase is expected to generate incremental annualized revenues of $19 million.
• The Ravenhall Correctional Centre was developed by a GEO led consortium. The $700 million project was financed under a Public-Private Partnership structure, which included a capital investment from GEO of approximately $90 million with returns on investment consistent with GEO’s company-owned facilities. GEO Australia operates the Centre, which opened in late 2017, under a 25-year contract with the State of Victoria.
• George C. Zoley, Chairman of the Board and Chief Executive Officer of GEO, said: “We appreciate the trust placed in our company by the State of Victoria, which is a reflection of our partnership with the State since 1999 with the opening of the Fulham Correctional Centre. We are looking forward to working with the Department of Justice and Community Safety to further strengthen our longstanding partnership.”

(Market Watch)  Junk bond canary soothes fears around yield curve recession signal

• The muted selloff in the market for high-yield corporate debt brings some calm to investors rattled by the Treasury market’s potential signal of a recession.
• Analysts skeptical of calls for a trade-induced economic downturn say the resilience of so-called junk bonds shows the U.S. expansion has room to run, and that the growth worries emanating from an inversion of the Treasury yield have gone too far.
• In recent weeks, the Trump administration’s stridency in pursuing more protectionist trade policies, imposing tariffs on China and threatening to slap levies on Mexico, have cast a shadow over the U.S. economy, on course for its longest period of sustained growth in post-World War II history.
• “So far, credit spreads have remained well behaved, which also suggests to us that the probability of an imminent slowdown is not high,” said Sean Darby, chief equity strategist for Jefferies.
• One reason why some market watchers are dismissing the yield curve’s recession warning is because its predictive powers come from its ability to detect when businesses struggle to find credit. But debt-bloated firms have continued to issue bonds this year, suggesting financial conditions still remain supportive of growth.