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Feelin' the love, US junk bond market off to strong start

The US junk bond primary market sprung back to life Monday with borrowers looking to sell debt for the first time this year following a strong rally in spreads to near post-crisis tights.

[NEW YORK] The US junk bond primary market sprung back to life Monday with borrowers looking to sell debt for the first time this year following a strong rally in spreads to near post-crisis tights.

Fashion group L Brands is slated to price the first deal of 2018 later on Monday, while petroleum distributor Sunoco is selling a US$1.75 bn three-part bond that is due to price Tuesday. Both deals will refinance existing debt.

The reopening of the junk bond market follows a 22bp tightening in average spreads in the first week of the year to 336bp over US Treasuries, ICE BAML data shows.

That's just 1bp shy of post crisis tights last seen in June 2014, and a complete reversal of a sell-off in November which briefly saw spreads widen to almost 400bp.

Even more stressed parts of the market have been swept up in the rally. Triple C bond spreads have tightened a massive 60bp since the start of the year, partly driven by a rebound in energy bonds as oil prices have risen.

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"Given last week's price action in all risk markets it is not surprising we are starting to see a bit of a calendar," said Greg Zappin, a portfolio manager at Penn Mutual Asset Management.

"The market is off to a great start." L Brands - best known for its Victoria's Secret lingerie brand - set price talk of 5.25 per cent to 5.5 per cent on a new US$500m 10-year bond sale.

Its stock took a hit last week after its fourth quarter earnings guidance missed estimates. But the company's bonds have been more resilient, falling by a point at most that day, according to MarketAxess.

The timing of the new offering comes amid a brighter outlook for the sector in general. A number of other retailers have had better-than-expected earnings, pushing spreads in the high-yield retail sector 28bp tighter so far this year.

Ken Monaghan, co-head of high yield at Amundi Pioneer, said retail had got very oversold.

"We increased our exposure to retail in December. We felt that a lot of bad news had been priced in," he said.

Analysts do still expect more defaults in the sector; Moody's said last week defaults will peak at 11 per cent in March. But the agency predicts that will drop to 5 per cent in October from 9 per cent currently.

"There seemed to be selling taking place without any acknowledgement that the whole industry is not going to disappear," said Mr Monaghan.

"Not everything will be taken over by Amazon." Acquisition finance bonds for media conglomerate Meredith and Arby's Restaurant Group are also expected to price in coming days. Both companies are also selling leveraged loans.

Meredith announced plans Monday to issue a US$1.4bn eight-year bond to help finance its purchase of Time. The notes are expected to be rated Single B.

Further down the ratings spectrum, Arby's is expected to issue US$485m of Triple C rated notes to help finance its acquisition of Buffalo Wild Wings.

"It's good that there are some new money deals, but they are not necessarily the type of sectors that we like," one high-yield investor said.

Both Arby's and Meredith are in more challenging sectors - restaurants and media. But some on the buyside believe both deals will be absorbed by a yield hungry market.

"Even in sectors that are a bit more secularly challenged, if a deal is structured well and priced appropriately I don't think it will have a problem," said Mr Zappin.


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