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Outflows Signal High Yield Credit Concerns Remain; Deals Pulled, Potential Downgrades Surge
The high-yield credit market remains stressed. An active week ended poorly as a heavy pipeline saw Vistaprint pull its deal citing "market conditions" as perhaps both a re-awakening of liquidity fears (Fed hawkishness concerns), price/spread moves, potential downgrades soar, and outflows signal the flashing red light that HY markets are shining is as red as ever. With buybacks having dwindled already - removing a significant leg from the equity rally - it seems CFOs are realizing that maybe they should have used some of that easy money to build as opposed to buy as they face weak growth, a lack of liquidity, and a wall of maturing debt in the next few years that will have to be refinanced at higher yields and spreads.
More outflows again this week... (despite the noise from talking-heads that professionals were buying as retail sold)
U.S. high yield bond funds posted outflows of $765.8m for the week ended Sept. 10 vs $198.1m the previous week, the second consecutive week of outflows, according to Lipper data.
- Loans posted outflows of $342m vs $435m the previous week, the ninth consecutive week of outflows
- Loans have posted outflows in 20 of previous 23 weeks
- HY ETFs posted outflows of $447m after outflows of $74m last week
- Largest week of outflows in HY ETFs since week ended Aug. 6
- Loan ETFs posted outflows of $39.3m, according to Bloomberg data
And potential downgrades rise to the highest level year-to-date...
Potential issuer downgrades increased to 532 as of Aug. 29 vs 506 as of July 31, highest since Dec. 2013, S&P’s Global Fixed Income Research head Diane Vazza writes in client note.
- Financial institutions (26.3%) had the greatest number of potential downgrades, followed by consumer products (7.7%), oil and gas (7.7)
- Financial institutions, sovereigns, oil and gas, and metals and mining risk of downgrade potential exceeds historical avg
- Total number of entities with negative outlooks rose to 469 as of Aug. 29 vs 445 as of July 31; entities with ratings on CreditWatch with negative implications rose to 63 vs 61
- Entities poised for upgrades dropped to 303 as of Aug. 29 vs 320 a month earlier
- 32 issuers were removed from the list of potential upgrades while 15 were added
- Greatest concentration of issuers removed from last month’s report came from the media and entertainment sector
- Largest number of issuers added to the report came the oil and gas and utilities sector
As HY spreads continue to flash red!!
Forcing at least one name to pull a deal this week
Vistaprint Postpones its $250m 7NC3 Inaugural Bond Offering
Postpones sr notes offering due to current market conditions. “We will potentially revisit in the future if market conditions become more favorable,” CFO Ernst Teunissen said in the statement.
Perhaps it is time to worry about this...
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You were warned:
High-Yield Bonds "Extremely Overvalued" For Longest Period Ever
High Yield Credit Market Flashing Red As Outflows Surge
Is This The Chart That Has High-Yield Investors Running For The Hills?
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Remember all that bullshit about pristine corporate balance sheets and cash on the sidelines... well as a gentle reminder we only warned that it was a mirage twenty times as firms added debt while they could... instead of cleaning up, they levered up... debt was not delevered, it was rolled and raised...
Mark Spitznagel's words are clear - scale the cash on the balance sheet against debt and we are as bad as we were in 2008.
The fallacy of cash piles on the balance sheet meaning strong balance sheets...
US companies are carrying far more net debt than in 2007
Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.
In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.
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As we noted previously, this is why 'equity' investors should care
The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering - for even the worst of the worst credit - has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.
Simply put - equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... but it only ends with equity and credit weakening together. That is the credit cycle... it cycles.
Charts: BofA, DB, Bloomberg
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3:30 ramp today. Just getting underway. Up to VWAP...
....I'm First post....Please up arrow so I can set the record on this site for up arrows...tia
sarc off
a little Friday fun as we all know Obama/Kerry are leading the planet to its destruction.
This is the new bubble on top of the other echo bubbles (tech, housing, ignorance and etc.). When the bond bubble crashes, all of these crappy companies will implode when the money evaporates.
Gets a little tiring, doesn't it? I remember the olden days, when markets used to reflect the health or illness of the underlying economy, instead of the VIX futures, the dollar/yen cross, or the games being played by the algo-bots. Call me old fashioned, but I still think truth will have the last word---someday.
I'm stubborn as those garbage bags
That time will not decay.
I'm junk, but I'm still holding up
This little wild bouquet.
Democracy is coming to the USA. L. Cohen
These are still the lowest rates in US history...with HUGE carry as well.
We have the biggest energy boom in world history going on inside the USA...and now even the lowly dollar is now busting another huge move higher.
Commodity prices including gold and silver are tanking again. Chicago needs 100 billion to start work on a Midwestern subway system? I don't see the problem and...fer sure I can't see a single Bank in the USA if not the world falling over itself to finance something like that.
Can't speak to high yield because "it's high yield for a reason." Better to be in equities with a management team that respects it's dividend...unlike say...General Electric.
Apple alone is at 700 billion in market cap!
Solar stocks are having a huge day today...
So how much does it cost to get 1 barrel of shale oil out of the ground ?
Deja vu - a la 2008.
Equity traders have unfortunately taken over credit analyses and markets in search for carry. There is no wisdome anymore in Credit. Bill Gross knows that and liquidity will dry up as these markets are stop gap so recommends to buy. If you are the market like Bill you can only sell to a manipulated market.
Tyler we need one of your handy-dandy swirl charts right about now... Oh ya, also the chart that shows where we are, on the "idiot scale", of this economic cycle.
Credit is virtual; non existent, just rollovers into eternity. Why bother about the yield when the sum vaporizes over time?
Ignore that spread between HY and Spider.
This 1929ish Tweet just in from Liesman:
"The spread between equities and HY has established a permanent gap that will never again be closed."
It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward. When this happens we are at the end game.
At some point the return on loaning money is simply not worth the risk! Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.
The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.
http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit...