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Strong Demand in Resurgent US High Yield

23 January 2019 by Pierre Beniguel

After a long weekend, US investors came back to a busy primary market. Despite the weaker tone, investment banks announced a handful of new deals, all of which were heavily oversubscribed and from a healthy variety of issuers.

We saw a Ba3 rated $750m senior secured second lien bond from Tenet Healthcare, a $500m unsecured bond from BB- rated MGM Growth Properties, a B+ rated $500m unsecured note from grocery chain operator Albertsons, and a BB rated $700m deal from Texas-based energy company Vistra. All deals were upsized and all came inside the initial price talk. Tenet’s deal size was doubled to $1.5bn, while MGM Growth Properties increased by $250m, Albertsons by $100m and Vistra by $600m to $1.3bn.

The health of the primary market is a good indicator for investor appetite, despite secondary volumes being lower than expected for this time of the year, and the performance of the US high yield market has been particularly strong so far this year. According to the Bloomberg Barclays indices, total return year-to-date is 3.8%. The asset class has now recovered about 80% of its losses from the early October peak. In an environment where markets remain nervous, an 80% recovery in losses from the recent sell-off would typically support some profit taking.

Tuesday’s flurry of activity followed on from last week’s benchmark transaction by HCA, a large hospital operator geographically spread across the US, which is well-liked by domestic US investors. HCA’s unsecured bond, rated BB-, was initially marketed to investors with a size of $1bn and a “low 6%” coupon, but due to strong demand the deal was upsized to $1.5bn and ultimately priced at 5.875%.

Given the name and general support the HCA deal was always going to be well received, but yesterday’s diverse group of issuers was more interesting and indicative of the continued appetite in the US high yield market. There is clearly cash on the sidelines ready to be put to work and investor appetite remains firm, despite adverse geopolitical events and persistent concern about an impending economic downturn.

This latest raft of successful bond issuance is a sign of a supportive technical from the investor community, although the earning seasons for high yield companies has barely kicked off yet and we expect this will be a driving catalyst for sentiment over the coming weeks. The support for high yield issuance is welcome, but heavy issuance can create market indigestion and geopolitical risks remain, so we continue to favour short duration for our credit exposure and are not getting too carried away with this short term exuberance.

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