Bonds strengthened in secondary trading, with the average HY effective yield tightening 59bps by Thursday’s close, compared to the start of the week.

In high yield, Truck Hero, Carvana, Macy’s and Staples were some of the biggest movers all gaining more than 4 points on the day.

“Maybe the market is getting a little bit of its confidence back and recognizing that these levels are investible again,” said a syndicate banker said. “One day doesn’t make a trend, but it was a powerful day.”

Market participants are in part reacting to the release of minutes this week from the Federal Reserve’s meeting earlier this month.

In it, members lay out a plan to hike rates by 50bp in June and by the same amount in July, but also an openness to start moderating the rate of hiking in September if inflation starts to come down.

That’s a welcome sign for those looking for a more accommodative Fed after the recent sell off, and those who are wary of stagflation. Those fears were on everyone’s lips earlier this week — check out our piece about how recession fears are sweeping the market.

Obviously it takes more than a day or two of supportive trading to banish such fears, but it’s probably fair to say that not everyone believes a recession is coming. Jamie Dimon and Brian Moynihan, for example, don’t seem to think so.

Still, average HY bond yields are at levels we haven’t seen since mid-2020. Markets are volatile, risk-off sentiment has all but halted primary issuance, and secondary is not particularly liquid.

“Liquidity is not good in the high yield market or the loan market — it’s pretty poor frankly,” said Jim Schaeffer, global head of leveraged finance at Aegon. “There's a lot of uncertainty, there's a lot of movement in price, there’s a lot of outflows.”

Outflows from HY funds totaled $236m for the week ended Wednesday, after a $2.6m outflow the week prior, according to Lipper. Loan outflows improved slightly to $1.16bn, compared to $1.62bn the week prior, according to EPFR.

Sector selloff

Retail names and tech companies continue to sell off in this environment.

The tech sector is a lynchpin of the loan market, and its relative diversity — in the sense that it touches end markets across the spectrum — has traditionally insulated it form a broad selloff.

However, the influx of private credit into the space, as well as generally aggressive leverage, has put a target on the sector’s back.

“The downside is that [tech] is relatively more levered compared to its counterparts,” said Neha Khoda, head of loan strategy at BofA. “That's what makes it attractive to sponsors and private equity, which is the underlying fuel driving leveraged loan issuance.”

A recent spate of high-profile earnings misses and mass layoffs in the tech sector could be a sign of things to come.

As John McClain, a PM at Brandywine Global, put it during this week’s Cloud 9fin podcast: “the bar tab is coming due” after years of excessive spending by tech companies.

In retail, the pressure comes from worries that consumers will tighten their belts to account for inflation.

This is not exactly black and white, and there’s plenty of disagreement; as we mentioned before, the heads of America’s two biggest banks seem to think the consumer is in great shape.

But ultimately, push may come to shove. “If your paycheck doesn't go as far, you're just going to spend less,” said Schaeffer.

All about that OID

In loans, the steep discount on Therm-O-Disc’s term loan B syndication raised eyebrows this week.

The $360m loan, which was slightly upsized to account of the discount, priced at SOFR+600bps with an OID of 92.

That’s a big OID. But in some ways we shouldn’t be surprised — as our table of recent issuance shows, bargain-basement discounts have become commonplace this month.

“It’s ugly out there for new issuance,” one credit analyst said. “People have been digesting the down-trade and looking towards the secondaries for opportunities.”

Refinancings have more or less dropped off the map amid widening spreads, so M&A-driven issuance (and also possibly dividend recaps) is expected to dominate supply for the foreseeable future.

“There's no sense refinancing in this market because of the massive OID,” said Chris Blum, head of leveraged finance at BNP Paribas. “You can get spread back, but not OID.”

Among the few borrowers to clear the market this week were Allspring Global Investments, which raised a $250m TLB to fund a dividend, and Flow Control Group, which raised a $150m add-on TLB to fund acquisitions.

Both priced with an OID of 96, providing yet more evidence of just how disadvantageous pricing has become for new deals.

Still, the market is looking forward to a possible flurry of long-awaited LBO financings after Memorial Day weekend, including debt backing Citrix’s $16.5bn take-private merger with TIBCO Software and a Nielsen’s buyout by Elliott and Brookfield.

Parts of these deals have already been backstopped by private credit firms. The extent to which this will help them clear the market at favorable levels remains to be seen, but bankers seem optimistic that things will improve in the post-holiday period.

“We’re cautiously optimistic about the second half of the year,” said Blum at BNP Paribas. “But if the Fed continues to take a bearish tone and geopolitical issues escalate, that could change.”