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US HY market sees fresh records as yields dip below 5%
September 13, 2012 / 9:07 PM / 5 years ago

US HY market sees fresh records as yields dip below 5%

NEW YORK, Sept 13 (IFR) - Double B rated issuers are again setting records in the US primary market with the average yield-to-worst on the Barclays US high-yield index dipping to its lowest ever level of 6.334% on Wednesday.

That’s nearly 30 basis points (bp) tighter than the 6.615% record set in May of last year.

Against this backdrop, issuers are rushing into the market to lock in incredibly low rates. On Tuesday, homebuilder D.R. Horton grabbed a record low 10-year yield after pricing, via RBS sole books, a US$350m senior bullet offering at 4.375% at par.

That’s the lowest yield on a 10-year note ever priced, according to IFR data. Jabil Circuit, Continental Resources and Ashland Inc are close behind with their 10-year deals priced earlier this summer with yields lower than 5%.

In fact, sixteen out of the top 20 lowest yields ever recorded for new 10-year high-yield paper have priced in 2012.

D.R. Horton’s notes, which are earmarked for general corporate purposes, are rated Ba2/BB-.

Elsewhere, Continental Rubber of America Corp, a unit of German issuer Continental, priced on Wednesday a US$950m seven-year non-call three senior secured notes offering at 4.50% at par, which is the lowest yield on a seven-year note ever seen, according to IFR data.

The Ba3/BB- rated issue was almost doubled from an initial US$500m and priced on the tight end of talk, via JP Morgan, Citigroup, Lloyds and RBS. Proceeds will be used to repay debt.

Some investors have heard that one high-yield issuer may test the market soon with a bond offering in the 3% area range.

The low interest rate environment, which is expected to last through at least mid-2015 according to the latest Fed statement, has led to low rates on riskier assets.

But market participants agree that the high-yield market will still be attractive despite such jaw-dropping low coupons on new issuance.

“We’re likely to stay in this low interest rate environment for awhile, so high-yield is going to have legs for some time. Investors will continue to search for yield,” said Craig Packer, head of leveraged finance in the Americas for Goldman Sachs.

Now, as Double B yields ratchet lower, investors say they expect a greater number of lower rated names to test the waters as investor thirst for new paper goes unabated.

“The market is definitely hot and people are starting to stretch for yield. We’re starting to see higher beta credits come to the new issue market,” said one high-yield investor.

On the riskier end of the spectrum this week, a new US$1.145bn bond deal from Nuveen Investments, a money management firm, proved that investors were willing to dip down for yield.

Underwriters Deutsche Bank, BofA Merrill, Morgan Stanley, Citigroup, RBC, UBS and Wells Fargo priced both Caa2/CCC rated senior unsecured tranches on the wide end of talk, and the notes -- a 9.125% offering due 2017 and a 9.50% tranche due 2020 -- traded at 100-100.50 after pricing at par.

“I think Nuveen is a very interesting deal to watch,” said one high-yield investor ahead of pricing on Wednesday afternoon. “If that stays stable then that would show we are at or near a peak in the market.”

Proceeds from the Nuveen deal will be used for general corporate purposes.

Elsewhere, timeshare resort company Silverleaf Resorts launched a US$175m dividend recap deal, set to price next week, in another sure sign of the strength of the market.

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