Junk Bond Issuers Get in Now, While the Going's Still Good
(Bloomberg) -- Junk bond issuers sprang to life this week, getting better terms from investors in the biggest spree since August. The sales bump is welcome relief to cash-rich, yield-hungry credit investors who’ve had nothing to buy since November -- but few expect it to last.
After being whipsawed by heightened volatility in the fourth quarter -- which completely froze out junk bond issuers last month -- market participants predict that sales will come in spurts for the rest of 2019. There’s little visible M&A or refinancing opportunity to drive volume, and even though credit markets have erased December losses, there’s little confidence that the bullish tone will last.
“The market is open, but I wouldn’t say there’s a rush to the party at this point," said John McClain, portfolio manager at Diamond Hill Capital, whose firm manages about $1 billion in high-yield assets. He drew parallels with 2018, when January strength was followed by February market weakness, and predicted greater volatility ahead.
This week was the busiest since August for the junk bond market, which has absorbed 15 deals worth a total of $11.7 billion so far this month. Underscoring the strength of demand, most were upsized, priced at the tight end of guidance, and traded up in the secondary market.
The sudden glut coincided with a mild downturn in the high-yield secondary market, which is on pace for its best start to a year since 2009. The speed and extent of this year’s rebound made strategists quickly question the sustainability of the rally.
“You’re going to have these bouts of credit spreads tightening followed by credit spreads widening," said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott.
Even if high-yield issuance increases, it probably won’t be to levels of a few years ago, owing to macro headwinds, said Lurie. And while sell-side strategists raised forecasts for 2019 returns, a lot of investors are still nursing wounds from last year, she said.
“It’s going to be more sporadic issuance this year because of the general nature of volatility," said Lurie.
Junkiest Junk Test
The big test for high yield is whether there’s the same level of investor enthusiasm for large LBO financing and deals rated CCC.
“It remains to be seen when and whether the market will warm up to deals closer to the cusp of either acceptable credit quality or earnings volatility," said Bank of America credit strategist Oleg Melentyev in a Friday note.
Dun & Bradstreet plans to raise $1.35 billion in junk bonds next week, including an $850 million issue that is expected to be rated CCC.
“It’s bullish for high yield if this clears and books are meaningfully oversubscribed with issuance inside of initial price talk," said McClain.
He added that bond issuers generally will be more tactical, given that borrowing costs are higher than last year and there is more uncertainty. He expects a year-on-year increase in high-yield sales -- from the nine-year low struck in 2018 -- to be offset by a decline in bank loan issuance.
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