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:
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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.
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