U.S. High-Yield Market Outlook: Week Ending January 12, 2018

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Includes: ACP, AIF, ANGL, ARDC, BSJP, CIF, CIK, CJNK, DHG, DHY, DSU, EAD, FALN, FHY, GGM, HIX, HYDB, HYG, HYIH, HYLB, HYLD, HYLS, HYT, HYUP, HYXE, IVH, JNK, JQC, JSD, KIO, MCI, MHY, MPV, NHS, PCF, PHF, PHT, SJB, SJNK, UJB, USHY, VLT, WFHY
by: Lighthouse Research
Summary

US high yield is under pressure, down by 11.5 bps.

Higher UST yields following strong inflation data is the main reason.

The communications sector was the worst performer while the energy sector was the only winner due to higher oil prices.

The outlook is based on BOFA 1,870 debt issues, which together represent c. $1.25 trln in principal amount (most of the issues are represented in HYG).

US High Yield Index was down this week, by 11.5 bps. Most of the decline came from Communications this week, which fell by 48 bps and contributed more than 80% of the overall HY decline, as it can be seen from Figure 1. Energy sector gained 32 bps this week. Other sectors slightly declined on 10-15 bps.

Figure 1. Contribution of sectors to changes in BOFA High-Yield Index over the week

Source: Bloomberg Terminal, Lighthouse Research

Figure 2. Change in US Treasury Active Contracts Curve for the last week

Source: Bloomberg Terminal

US Treasury

US Treasury yields increased this week. Two-year note yield increased by 3 bps and rose above 2 per cent for the first time since 2008. Five-year note yield increased by 6 bps this week. The negative effect of higher short-term UST yield on high yield bond prices is approximately 10.5 bps (3Y UST yield increased by 3 bps and average modified duration of high yield bonds is 3.5). Short-term and medium term UST yields increased primarily due to strong economic data in the US, especially US inflation. After the data, investors began increasing their expectations for Federal Reserve rate hikes this year. They now see a hike in March, a second hike in June and a 51 percent chance of a third hike in December, according to the CME's FedWatch tool.

Changes in sectors from High-Yield perspective

Figure 3. Statistics breakdown by sectors

Sector Issues Weight YTM YTW Mdur 5D change
Basic Materials 154 6.97 5.34 3.68 4.00 -0.15%
Communications 278 20.04 6.67 6.15 3.65 -0.48%
Consumer, Cyclical 328 14.56 5.41 4.73 3.40 -0.13%
Consumer, Non-cyclical 259 15.94 6.05 5.37 3.36 -0.02%
Diversified 6 0.27 3.42 1.77 3.22 -0.10%
Energy 313 13.95 6.10 5.44 3.74 0.32%
Financial 190 10.42 4.73 4.10 3.86 -0.09%
Industrial 198 9.33 5.42 3.74 2.99 -0.07%
Technology 93 5.64 5.62 4.26 2.29 -0.15%
Utilities 51 2.89 5.55 4.50 3.26 -0.17%

Source: Bloomberg Terminal, Lighthouse Research

The communications sector was down by 48 bps this week. Altice (OTCPK:ATCEY), Numericable –SFR and Frontier (NASDAQ:FTR) were the worst performers. They lost 3.5%-4.5%, 3.3% and 2.7% respectively. Altice bond declined due to weak revenue guidance made during a call with investors that raised concerns about the heavily leveraged company. We believe other communications bonds were under pressure due to overall UST effect because the industry has one of the highest levels of leverage among peers. Moreover, according to Bloomberg, Communications sector bonds, which represent almost 20% of the BB index, have among the tightest sector-level BB to BBB spread ratios, exceeded only by technology, and are tightest when comparing BB spreads to single Bs. Secular pressures are more evident in single B communications, which include Frontier, CenturyLink (NYSE:CTL), Sprint (NYSE:S) and Windstream (WIN).

The energy sector was the best performer this week. Energy bonds increased by 32 bps this week. Oil prices have been rising since June, supported by supply cuts led by OPEC producers and other countries such as Russia. As a result, oil price almost achieved three-year high of $70 a barrel this week. Noble Holding (NYSE:NE) and Pioneer Energy (NYSE:PXD) gained the most among energy companies (6.6% and 5.9% respectively).

Bonds from other sectors followed UST benchmark and declined approximately in line with UST.

New issues on the U.S. High Yield market (January 8, 2018-
January 12, 2018)
We present new issues on the U.S. High Yield market last week in
the table below.

Figure 4. U.S. High Yield market new issues

Company Industry Yield Maturity Credit rating (S&P/M/F) Net Debt/EBITDA LTM CUSIP
CSC Holdings Communi-cations 5.3 2/1/2028 BB-/Ba2/- 4.8 126307AS6
Moss Creek Energy 7.0 1/15/2026 B+/-/- N/A 61965RAA3
Ensco (NYSE:ESV) Energy 7.5 2/1/2026 BB-/B3/- 4.6 29358QAH2
Marb Bondco (Marfrig (OTCPK:MRRTY) subsidiary) Food 7.1 1/19/2025 B+/-/BB- 4.4 566007AB6
Aramark Services (NYSE:ARMK) Consumer Services 4.8 2/1/2028 BB/Ba3/- 14.2 038522AQ1
Ingevity Corp (OTCPK:NVGT) Chemical 4.5 2/1/2026 -/BB/Ba3 1.6 45688CAA5
Sunoco (NYSE:SUN) Energy 4.5 1/15/2023 BB-/-/BB 7.3 86765LAH0
Jabil (NYSE:JBL) Manu-facturing 3.9 1/12/2028

BBB-/Ba1/

BBB-

1.0 466313AH6
L Brands (NYSE:LB) Retail 5.3 2/1/2028 BB/-/BB+ 2.2 501797AN4

Source: Bloomberg Terminal, Lighthouse Research

Thank you for reading!

BR,

Vladimir Nikulin

P.S.: We welcome your comments and suggestions on other things we can add to the HY report that we intend to publish on a weekly basis.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.