HY/junk people: Does Oaktree's fund raise mean anything? Are we in a junk bubble?
Let's be honest; these guys are not stupid. Read this quote:
“Credit standards have dropped and non-investment grade debt issuances reached record levels,” John Frank, Oaktree’s managing principal, said July 31 on a conference call with investors and analysts. “Aggressive extensions of credit of the sort we’re seeing today have always been a precursor to a substantial distressed-debt opportunity.”
http://www.bloomberg.com/news/2014-09-02/oaktree-said-to-seek-10-billio…
Are we in a junk bond bubble?
The things they say are definitely true-credit standards ARE slipping, though I think most would agree we're not in the same context as things were in 2006/2007. We've also been 2% default rates (ex-TXU) since 2010, which is a fairly long "benign cycle" in the credit world (long-term average is ~3.5-4%).
That said, there's more than meets the eye. While we could see a "mini-bust" cycle ticking things up a bit on HY technicals and company-specific issues (with 2011-2013 vintage LBOs for example), it's hard to see a bigger cycle until 2016/17 (when meaningful maturities of post-crisis issuance starts coming due) without a pretty meaningful recession.
Of course Oaktree knows that-hence raising $3bn now and the bulk in a PE/drawdown-style fund.
A snr sec bond which which was trading at 102 on Friday is now trading at, call it, 38-40, to say people are complacent is an understatement.
Thanks for the comment Oreos, always helpful. Could you please elaborate a bit on your comment? I'm curious because you are only talking about one single security dropping so much; does it tell a lot about the situation in the wider market in terms of over heating? Default rates tend to be pretty low in HY (average for past 10 years being some low single digits ex. one name, in Europe) so I kind of get the seriousness but any comments will be helpful.
For example of issuance, there is a polish telecom business which recently did a divi PIK deal, it’s the 4th largest in Poland and the big lads will ultimately have a price war, crush margins and this business will be decimated, as is standard in telcos. The deal still got done, it’s madness. Yellow pages businesses with net leverage of c.4x are trading at par; BES did a capital raise with its auditors publicly noting they’d found issues in its reporting shortly before it failed and got split into good-bank bad-bank; HY is now commonly seen as >7%. Lending practices are weak and structures poor.
PHONLN, BESPL, ABILSJ, etc. are all relatively isolated events - idiosyncratic reasons for the sell-offs, not necessarily indicative of the broader market. While you're right that lending practices have become more egregious, I think what we're all waiting for is a large beta move (like 3Q11 or 2Q13) where credit spreads widen dramatically and panicked selling leads to a buyer's strike. That hasn't happened yet with HY at sub 6%.
Oaktree is doing the right thing by raising capital now (waiving fees on the undrawn portion) in anticipation of a large credit event in the near to medium term. Raise capital, sniff a rat in advance, and accumulate when the 10c offer side works.
lol @ PHONLN. what a disaster. guess that's what happens when a risk factor becomes real shit
Nothing but cov-lite and deep leverage points now. That being said, I don't seen this bubble popping for a while.
As someone who doesn't follow HY but can (and does) short credit, what are some of the egregious names with too much leverage or awful structures that we should take a look at? Any particularly large issues that stand out?
MMmonkey,
Tough to short US HY/stressed credits today. Free-fall is usually avoided by exchanging into equity, which throws off the upside/downside ratio.
I'd look at the new SGMS deal, if it gets done. Looks particularly egregious to me. Basically financing a sliver of an equity option using a ton of debt. Leverage through each layer of the structure will be way above average - even for LBOs. The synergies may work out - but its a huge trust-me thesis.
Visant is an interest name as well, and you could probably create both a long or a short thesis for their unsecured. Leaning long, but it could definitely go either way.
If you have time and ability to do distressed stuff, CZR has an extremely robust cap structure with lots of stuff to do in it. You will have some catching up to do, though.
For better or worse (and for fewer headaches and heartburn), I just rather avoid Apollo deals, so that leaves me out of CZR.
Thanks for mentioning new SGMS deal
What's the short thesis on Visant. Looks like it has a couple of businesses that quickly help explain historical financials. Has something changed?
Barely covered from a valuation perspective today (based on the 7x price they were willing to pay for AA), revenues and margins will continue to deteriorate, near-term maturity of notes, may not be able to refi, bank loan deal they just did really struggled to get over the finish line, and there are no natural acquirers of this business.
Upside/downside ratio could be favorable on the short side if you think the memory book and scholastic trends continue. You will have to form an opinion on the businesses to figure out if the bonds will still be fully covered when it comes time to refi.
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