$1 Billion In High Yield Outflows Leads To "Market Top" Speculation In Junk Bond Land, Pulled Deals
Even as AMG data was strangely missing late last night according to Prospect News' High Yield Daily, EPFR Global of Cambridge, Massachusetts, which uses a different methodology from AMG (i.e. a working one), indicated a major $1 billion outflow in high yield bond funds. This follows a $335 million inflow and a $137 million outflow in the past two weeks. Subsequently, Dow Jones confirmed the EPFR data, indicating that Lipper FMI recorded $984 million of outflows for the week ending Wednesday. As HY fund flow data is critical when pitching refi deals to junk companies, this key inflection point will likely stall not only the HY new issuance market, but will lead to substantial drops in secondary market prices for junk bonds.
Further DJ disclosure indicates that indeed the state of the junk bond market is becoming very precarious:
At a time when credit markets have also watched nervously as Greece struggles with its debt burden, market participants say that mutual fund investors have cashed out, locking in gains on some lower-rated notes in particular and putting pressure on the broader market.
"The market timers all came in this week and bailed on the mutual funds," said Andrew Feltus, portfolio manager at the Pioneer Global High Yield Fund.
The weakness has also hampered the new-issue market, after the week started with a large block of new issuance, including a $2 billion note sale from GMAC Inc.
But after a $750 million bond sale from Freescale Semiconductor met with a tepid response and traded below issue price in the secondary market, issuers grew cautious. ITC DeltaCom Inc. (ITCD) said on Wednesday that it had withdrawn a $325 million note offering due to market conditions, and Kemet Corp. (KEME) on Thursday said it had pulled a scheduled $275 million high-yield bond offering, also citing market conditions.
Other issues remain on the docket, including a $1 billion sale by Bombardier Inc. (BDRBF, BBD.A.T) slated for Friday. Some market participants said Bombardier is a comparatively strong company that appears to be a good candidate to get a deal done despite this week's weakness.
Another bond that marked the top of the most recent credit bubble iteration has got to be the McClatchy 11.5% 1st Lien (yes, first lien... at 11.5%) Notes. This is a company that a year ago everyone had written off for at least an 11 if not a 7. The Notes came to market at 98.824 and are already down 3 points. As the business model is on par with Movie Gallery's melting icecube (which last week crashed and burned for a second bankruptcy in as many years) and the proceeds were used merely to delay the inevitable, i.e., extend maturities, the accounts who believe the glass is half full instead of half empty are about to get taken out to the woodshed.
As the equity market, which for the past year has been purely beta driven, has been closely correlating with the HY market (and all other asset classes), any concerted and persistent selling in HY land will surely translate to greater equity selling pressure, which will in turn intensify the dumping of HY bonds, and so forth. Gotta love the excess leverage which Prime Brokers have been handing out with such reckless abandon over the past 6 months.