Category: Insight

(Bloomberg)  Massive Package of Virus Relief, Federal Funding Passes Congress 

• Congress passed the second-biggest economic rescue package in U.S. history as part of a massive year-end spending bill, concluding months of discord between Democrats and Republicans over how to address the pandemic that continues to surge across the country.
• In addition to funding government operations for the rest of the fiscal year, the legislation will provide aid for small businesses, supplemental unemployment benefits and $600 stimulus payments to most Americans and their children starting as soon as next week. It also includes money for schools, airlines and for distribution of vaccines.
• The Senate followed the House late Monday in passing by overwhelming margins the $2.3 trillion bill, just hours after lawmakers got their first look at the 5,593 pages of text. The White House has said President Donald Trump will sign it.
• Economists say the aid should be enough to avert a double-dip recession next year, though risks remain and both parties expect to be wrangling over addition relief measures after President-elect Joe Biden takes office on Jan. 20. Many of the aid provisions, such as the extended jobless benefits, will expire in the first quarter of next year.
• While the bill is smaller than many economists had anticipated months ago, it could be enough to ward off another contraction in gross domestic product.
• “This latest fiscal rescue package will add approximately 1.5 percentage points to annualized real GDP growth in the first quarter of 2021 and close to 2.5 percentage points to calendar-year 2021 growth,” said Mark Zandi, of Moody’s Analytics. “If lawmakers had not come through, the economy probably would have suffered a double-dip recession in early 2021.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at $48.7 billion.  New issuance for the week was $12.8 billion and year to date issuance is at $425.8 billion. 

(Bloomberg)  High Yield Market Highlights 

• The U.S. junk bond rally is set to extend the CCC-tier’s reign as the best-performing high-yield debt to seven consecutive weeks, with the index poised to end the week with gains of 0.5%. That beats higher-quality BBs and single-Bs.
• The CCC index has rallied for 24 straight sessions and posted gains of 0.2% on Thursday, the longest winning streak since 2011
• The high-yield primary has cleared its calendar ahead of the holidays, pricing $2.5b yesterday to take the month’s volume to almost $30b, the busiest December since at least 2006
• While the primary takes a break, one of the market’s top-five dealers expects more borrowers to return in the new year as the “extremely attractive” conditions should continue at least into the first quarter
• Average January issuance over the last six years has been in the range of $20b, according to data compiled by Bloomberg
• CCCs have accounted for 20% of the overall issuance volume this week
• Energy dominated the primary this week, accounting for almost one-third of the supply
• Junk bond yields rose 1bp to close at 4.41%, just 7bps off the all-time low of 4.34%. Spreads closed at +378bps, down from +379
• The index gained for the fourth straight session, with returns of 0.09%
• CCC yields closed at a new 6Y low of 7.37%, down 5bps, while spreads closed at fresh 2Y low of +677bpsm also down 5bps
• The high yield market may pause as the week winds down and stock futures move sideways while oil gains to a new 10-month high

(Wall Street Journal)  Energy Agency Cuts Global Oil-Demand Forecast 

• It will be several months before coronavirus vaccinations start to boost global oil demand, with the recovery in some of the world’s wealthy countries “going backwards” this quarter, the International Energy Agency said Tuesday.
• In its monthly oil-market report, the IEA cut its forecast recovery in demand for 2021 by 170,000 barrels a day to 5.7 million barrels a day.
• That included a reduction of 400,000 barrels a day to its forecast demand for the second quarter when analysts had expected the expansion of vaccination programs around the world to begin lifting economic activity.
• The agency also lowered its demand forecast for the final quarter of 2020.
• Demand has somewhat recovered in the second half from its 16% drop in the second quarter, but that resurgence “is almost entirely due to China’s fast rebound from lockdown,” the IEA said. But the demand outlook in the wealthy countries that make up the Organization for Economic Cooperation and Development is bleak, according to the IEA.
• With another wave of infections prompting a return to lockdown measures in Europe, demand there in the final three months of the year is expected to be even weaker than it was in the third quarter, the agency said.
• Expected pressure on the airline industry in 2021 was a major driver behind the IEA’s downgrades.
• Weaker demand for jet fuel and kerosene is projected to next year account for 80% of the shortfall of 3.1 million barrels a day in overall demand compared with 2019, meaning the world in 2021 would recover only two-thirds of the demand lost this year.

(Bloomberg)  Fed to Maintain Bond Buys Until ‘Substantial’ Economy Gains Seen

• The Federal Reserve strengthened its commitment to support the U.S. economy, promising to maintain its massive asset purchase program until it sees “substantial further progress” in employment and inflation.
• At their final meeting of a tumultuous year, policy makers led by Chair Jerome Powell on Wednesday voted to maintain monthly bond purchases of at least $120 billion and scrapped their previous pledge to keep buying “over coming months.”
• The Fed meeting came as lawmakers on Capitol Hill tried to wrap up an agreement on new stimulus after months of deadlock, with both fiscal and monetary policy poised to help continue cushioning an increasingly shaky economy during the wait for widespread vaccine distribution.
• The Federal Open Market Committee said “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.” Its quarterly projections for the economy showed some improvement compared with September.
• The committee unanimously kept the federal funds target rate in a range of zero to 0.25%, where it’s been since March, and a majority of Fed officials continued to forecast that their benchmark lending rate would be held near zero at least through 2023.
• The FOMC “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” policy makers said, repeating language from their November statement.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at $48.7 billion.  New issuance for the week was $4.5 billion and year to date issuance is at $402.0 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bond yields breached record lows for the second time this year Thursday and could go even lower with credit risk falling, and stock futures and oil prices rising.
• The average yield for the Bloomberg Barclays U.S. corporate high yield index plummeted to 4.45%, sinking below the previous record of 4.56% set on Nov. 9. That had pierced a low not seen since June 2014
• High-yield funds reported a small outflow for the week, reversing the prior week’s inflow
• Three borrowers priced four tranches for $1.7b on Thursday. That included a deal from AssuredPartners with ratings in the CCC tier that offered one of the lowest yields on record, according to data compiled by Bloomberg
• The insurance broker priced $550m of 8NC3 notes at 5.625%, the lower end of talk. LifePoint Health Inc. sold $500m notes in the CCC tier at 5.375% earlier this week
• IPL Plastics, owned by Madison Dearborn Partners, priced a $125m PIK toggle with a 9% cash coupon at 99 cents on the dollar, in line with talk. That also had CCC band ratings
• Seagate Technology, which is rated Ba1/BB+, priced $500m 8.6NC3 notes at 3.125% and $500m 10.6NC5 at 3.375%. Both tranches priced at the tight end of talk, and proceeds will buy back stock
• CCCs are set to outperform BBs and single Bs for the fifth consecutive week with gains of 0.99% so far, the data show
• CCC yields fell to 7.61% Thursday, and are about 200bps lower over the month

(Bloomberg)  Biden Fills Yellen-Led Economy Team

• President-elect Joe Biden rolled out the first set of nominations for his economic team on Monday, formally announcing his selection of Janet Yellen to be Treasury secretary, Neera Tanden to lead the Office of Management and Budget and Cecilia Rouse to head the Council of Economic Advisers.
• Biden also announced his intent to nominate Adewale Adeyemo, a former senior adviser at BlackRock Inc., to be deputy Treasury secretary. Adeyemo is a Nigerian-born attorney and president of the Obama Foundation.
• “As we get to work to control the virus, this is the team that will deliver immediate economic relief for the American people during this economic crisis and help us build our economy back better than ever,” Biden said in a statement.
• If confirmed, the nominations of Yellen, Tanden and Rouse would be the first time the top three Senate-confirmed economic positions went to women. Tanden’s nomination already appeared to be in trouble with Senate Republican aides expressing opposition on Sunday even before it was formally announced.
• Biden has also tapped two economic advisers from his presidential campaign, Jared Bernstein and Heather Boushey, to be members of the CEA.
• Biden did not announce his pick for a key White House economic post, director of the National Economic Council. But Brian Deese, another BlackRock executive who served in the Obama administration, is likely to be offered the job, people familiar with the matter said.
• The choices show Biden turning to experienced Washington hands as he begins building his economic team, with an eye toward racial and gender diversity.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.3 billion and year to date flows stand at $45.0 billion.  New issuance for the week was $11.0 billion and year to date issuance is at $387.7 billion. 

(Bloomberg)  High Yield Market Highlights 

• The junk-bond market is having its busiest week in about two months as borrowers look to lock in low rates before the Thanksgiving holiday. Credit risk is higher Friday amid the prospect of an end to Federal Reserve backstops.
• U.S. Treasury Secretary Steven Mnuchin requested that emergency liquidity including primary and secondary market corporate credit facilities introduced earlier in the year expire as scheduled on Dec. 31.
• “This was unexpected by investors and will likely lead to near-term underperformance, especially in short- dated credit, where valuations were too tight to begin with,” Barclays Plc credit strategists Brad Rogoff and Shobhit Gupta wrote in a note.
• It’s probably not negative for the long term though since the Fed has been willing to backstop credit valuations, they said. A new Treasury secretary under the new administration in January could also re-establish these facilities.
• Issuance volume for the week was quite strong. The volume was the most since mid-September, according to data compiled by Bloomberg.
• Average yields rose 6bps to close at 4.86% Thursday. Spreads widened 5bps to 422bps more than Treasuries.
• The broader index posted a small loss of 0.01%, the first after four sessions of gains. The index is set to end the week with modest gains of 0.6%.
• CCCs bucked the trend on Thursday, posting gains of 0.05% and are poised the end the week with returns of 0.86%, the best in the high-yield market.

(Reuters)  Oil up on hopes for delay to OPEC+ supply increase, vaccine 

• Oil prices firmed on Wednesday on hopes OPEC and its allies will delay a planned increase in oil output and after Pfizer said its COVID-19 vaccine was more effective than previously reported.
• Crude oil futures contracts jumped by about $1 after Pfizer Inc said on Wednesday final results from the late-stage trial of its vaccine showed it was 95% effective. Last week, it had put the efficacy at more than 90%.
• Moderna Inc said on Monday that preliminary data for its vaccine also showed it was almost 95% effective.
• “Oil prices today are modestly rising on hopes that OPEC+ will decide to postpone its planned production increase in January and on the latest vaccine euphoria,” said Rystad Energy’s head of oil markets, Bjornar Tonhaugen.
• To tackle weaker energy demand amid a second wave of the pandemic, Saudi Arabia called on fellow members of the OPEC+ group to be flexible to meet market needs and to be ready to adjust their agreement on output cuts.
• OPEC+, comprising the Organization of the Petroleum Exporting Countries (OPEC), Russia and other producers, met on Tuesday but made no formal recommendation before the group’s full ministerial meeting on Nov. 30-Dec. 1 to discuss policy.
• Members of OPEC+ are leaning towards delaying the current plan to boost output in January by 2 million barrels per day (bpd), sources have said. They are considering a possible delay of three or six months.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.2 billion and year to date flows stand at $49.0 billion.  New issuance for the week was $7.7 billion and year to date issuance is at $376.7 billion. 

(Bloomberg)  High Yield Market Highlights

• Tervita Corp., a Canadian waste management company focused on oilfield services, may price a junk bond Friday after it hiked pricing discussions. The riskiest debt in the CCC tier, meanwhile, is outperforming with gains of 1.44% this week.
• Tervita is offering a five-year bond at a yield of 11% area with an OID of two points, and lengthened the call period to three years from two. Early pricing discussions were for a coupon of 10% plus a two point discount
• CreditSights analysts said Tenneco’s new $500m 8NC3 issue that’s due to price today demands a premium given uncertainty around the credit with respect to asset sales
• Borrowers are hitting the market to take advantage of fund inflows, and a rally in the risky debt that looks set to extend with credit risk falling, and stock futures rising
• Junk-bond investors poured over $3 billion into retail funds during the week.
• Sizzling Platter LLC, which owns and operates franchise restaurants such as Little Caesars, revived a junk-bond sale after shelving borrowing plans last month
• It raised $350m from a five-year note offering, higher than the $325m it was looking to sell before. Borrowing costs of 8.5% were also more than it initially sought first time around
• Orders reached about $550m by mid-afternoon, according to people familiar with the matter
• Barclays Plc strategists led by Brad Rogoff expect high-yield supply to exceed $300b in 2021. Though a normalization from this year’s pace, “it is above all years from 2014-2019,” Rogoff wrote in note
• Junk-bond yields have retreated from an all-time low of 4.56% reached earlier this week amid hopes of a coronavirus vaccine that fueled a rally already underway on a Joe Biden election victory
• Yields rose to 4.99% on Thursday, up 26bps, the biggest jump in five months
• Spreads closed at 435bps more than Treasuries, up 23bps, and the most widening in seven weeks
• CCC yields also jumped the most in five months to close at 8.33%, up 40bps. Spreads closed at +764bps, widening 18bps
• CCCs are slated to gain at least 1.44%, outperfoming BBs and Bs

(Bloomberg)  Stockpiling Cash Ahead of a Covid Winter 

• One after another, some of the most embattled names in corporate Americaare racing to raise easy money while they can.
• In the junk bond market, corporations are hurrying to lock in today’s ultra-low interest rates.
• The rush underscores the angst gripping many companies even as global investors drive financial markets to giddy heights. With reduced odds for a large stimulus package, companies looking for money to tide them through the crisis are riding an election rally and progress toward a vaccine that could end the pandemic. But it could be a short reprieve, with President-elect Joe Biden warning a “dark winter” lies ahead as the virus roars back, signaling some hard months before a vaccine is available.
• “Companies are currently focused on strengthening their balance sheets and boosting cash liquidity,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. “The window is open, so take advantage of it — before a Covid Winter.”
• There will likely be more companies tapping credit markets amid record low borrowing costs, to either shore up cash, or to curb the cost of their existing loans or bonds with new and cheaper debt.
• And at these rates, other companies will follow suit, either opportunistically or to help weather the impact of Covid-19, according to Jerry Cudzil, head of U.S. credit trading at TCW Group.
• “All-in yields are almost too enticing for companies to ignore,” he said. “Given the recent rally, many companies can access the capital markets at levels not seen since pre-Covid.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.3 billion and year to date flows stand at $45.8 billion.  New issuance for the week was $3.6 billion and year to date issuance is at $368.9 billion. 

(Bloomberg)  High Yield Market Highlights 

• A rally in U.S. junk bonds pushed yields near a record low as investors sought riskier assets on bets the Federal Reserve will continue to support the economy with low rates as the prospect of a divided U.S. government looms.
• Yields on the debt were just 10bps off a record low of 4.83% set in June 2014, and closed at about a 6-year low on Thursday
• The index is heading for its biggest weekly gains in five months, with spreads closing at an eight-month low of +436bps
• The rally was across ratings: single B yields were just 14bps off a six- year low of 4.99% and closed at an eight-month low of 5.13%. Spreads closed at +453bps, also an eight-month low
• The CCC index is set to outperform BBs and single Bs this week, with expected gains of 2.23%. Yields are at a new two-year low of 8.95% and spreads are at an eight-month low of +831bps
• Returns across ratings are poised to be the biggest since June
• The broader junk bond index posted gains of 0.6% on Thursday after gaining for four straight sessions. It is set to report returns of 2.13% for the week, the biggest since June 5
• Single B returns were 0.6% on Thursday and are poised for gains of 1.93% for the week. BB returns for the week could be 2.21%
• The junk bond rally may take a pause as stock futures stalled on Friday, unwinding some of the week’s surge as the election count continued 

(Bloomberg)  Junk Bonds Outperform Stocks in Busiest October Since 2012 

• Junk-rated issuers sold more than $34 billion of bonds last month, making it the busiest October since 2012 despite market turmoil from falling stocks and oil.
• While market volatility did pressure junk bonds and resulted in more than $4 billion of outflows in the last two weeks of October, new issues largely drew orders multiple times the deal size and most priced at the tight end of talk
• Outflows from retail funds coupled with tumbling stocks amid fears that the renewed spread of the virus could derail fragile economic growth, forced five borrowers to withdraw their debt offerings.
• The broader junk bond index posted a modest gain of 0.5% in October. CCCs, the riskiest of junk bonds, also reported a small gain of 0.22%
• Equities posted a loss of 2.66%, while the price of WTI crude dropped 11% in the month
• Junk bonds shrugged off equity volatility with yields little changed closing October at 5.78% vs 5.77% in September
• CCC yields actually dropped 5bps to close the month at 10.05% and have been falling for seven consecutive months, the longest declining streak since October 2009
  

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.0 billion and year to date flows stand at $45.4 billion.  New issuance for the week was $7.9 billion and year to date issuance is at $365.3 billion. 

(Bloomberg)  High Yield Market Highlights 

• PetSmart Inc. and Aston Martin are due to wrap up junk-bond sales Friday in what may be another volatile session amid rising coronavirus cases and fresh concerns about the outlook for technology giants.
• BC Partners sweetened terms on its PetSmart Inc. debt sale to split the company from Chewy Inc. by increasing the size of the bond portion, shifting funding from a concurrent loan offering, and raising pricing
• Books on the bond are due to close at 10:30 a.m. in New York. Commitments on the loan were extended to the same time
• Smyrna Ready Mix scrapped plans for a $315m loan sale and upsized its high-yield bond offering by the same amount to $830m
• The 8NC3 notes are expected to price in the range of 5.75%-6% after talk was widened from early discussions of 5%
• It’s the second loan to be pulled from syndication in lieu of bonds this week following MultiPlan on Oct. 27
• Aston Martin may also sell bonds, rated in the CCC tier, in euros and dollars
• Retail investors are fleeing the asset class, pulling $3 billion from high-yield during the week, the first cash exit since September
• HYG, one of the largest exchange-traded funds in the sector, posted outflows in the latest session, the fourth straight day of withdrawals
• Junk bonds have come under pressure with yields jumping 44bps week-to-date to 5.77%, the highest since Sept. 30. Credit risk is higher Friday, while stock futures are lower
• The broader index posted losses of 0.039% on Thursday, the fourth straight day of negative returns, putting the market on track for the biggest weekly loss since September
• While some borrowers have had to sweeten deals to attract buyers, new issues have seen robust demand in several cases

(Bloomberg)  JPMorgan Sees Junk-Bond, Leveraged Loan Issuance Falling in 2021

• High-yield bond gross issuance will total $375b next year, down 15% from the record of ~$425b expected in 2020, according to a report from analysts at JPMorgan.
• If that prediction holds, it would put 2021 among the biggest years for gross volume since 2012-2014, which averaged $374b
• Outlook assumes another year of “heavy refinancing activity,” JPMorgan analysts led by Peter Acciavatti said in the report
• Forecast sees issuance at $125b net of refinancing, a decline of 10%-15% from the ~$150b for this year
• Sees 30% fall in gross loan net volume to $275b from ~$400b this year, “amid little-to-no repricing activity”
• Sees net volume down 10% to $150b from ~$165b
• Historically low interest rates coupled with a baseline forecast for a continued recovery in the U.S. economy should lead to “somewhat more of the same” for capital markets in 2021, the analysts said
• Spread of the virus and release of a vaccine will continue to be elements of uncertainty as the unpredictability surrounding the election will lift
• “These conditions should produce only a modest increase in the M&A pipeline, whereas 2Q’s surge of general corporate purpose deals will not repeat itself,” according to the report
• Due to the “low state of yields” record refinancing wave will continue
• “That said January and February’s wave of loan re-pricings will also not repeat itself with an average dollar price $3 below where it stood in February,” the analysts said