A Return to Safety. Friday’s bond markets bring new leveraged-buyout paper, a mea culpa, and issuance forecasts. Treasuries rallied as the stock market fell, with yields on the benchmark 10-year note down five basis points to 3.19%. (A basis point is 1/100th of a percentage point.) Among major currencies, the South African rand was down 1.1% against the dollar, seemingly a casualty of the risk-off trade in markets. The yen and the Swiss franc, both haven currencies, were up 0.4% and 0.1%, respectively, against the dollar. Here’s what else is happening in bond and FX markets:
is buying health-care company RegionalCare—soon to be renamed LifePoint Health—and financing the purchase with $1.6 billion of high-yield notes and a $3.4 billion term loan. Initial price talk on the notes is 9% to 9.25%. While the deal won’t leave the company with too much leverage, CreditSights warns that the notes’ covenants “continue the trend of Apollo testing the market’s willingness to swallow increasingly sponsor-friendly arrangements.” The high-yield notes are unsecured, and some provisions in the bond contract allow the company to issue debt that has priority over the $1.6 billion of high-yield notes if the company defaults, among other issues. CreditSights writes that Apollo could be planning to make more debt-financed acquisitions with LifePoint. Given all of that, “we would pass on the new senior notes” as long as yields are below 10%.
•Mea culpa (kinda). OK, so we were wrong when we predicted that things could get worse for corporate bond funds before they get better. Last week, things mostly got better. Taxable bond funds (both mutual funds and exchange-traded funds) brought in $4.1 billion in the week ended Nov. 7, according to Lipper data. But the flows weren’t evenly distributed. Taxable bond ETFs, which are used by both individuals and institutions, were responsible for all of that inflow, bringing in $6.6 billion of cash. Taxable bond mutual funds, the best read of retail investor demand, lost a net $2.5 billion. And investment-grade mutual funds lost $323 million of investor cash. High-yield bond funds were slightly more popular, with ETFs attracting $631 million of cash and mutual funds bringing in $409 million.
•Leveraged-loan boom. When it comes to issuance trends, Barclays strategists Brad Rogoff and Shobhit Gupta forecast that 2019 will bring more of the same. They predict that nonfinancial investment-grade companies will issue $410 billion of debt next year, which would be a 5% decline from this year’s expected total. Of that, the sharpest increase could come from the basic-materials sector, they write. The strategists expect high-yield bond issuance to decline by roughly 5% as well. By contrast, the supply of new debt in the red-hot leveraged-loan market could match or exceed this year’s total, which is on pace to hit a record $400 billion. And it could be the busiest year in the asset-backed security market since the financial crisis. At these prices, it sure seems a better time to be an underwriter than an investor.
Write to Alexandra Scaggs at firstname.lastname@example.org