Largest Weekly High Yield Outflow on Record

This afternoon, Lipper reported that high yield saw its largest weekly outflow EVER, with $3.4 billion leaving high yield funds on the week. To put it in context, here is the updated Top 5 weeks of all times in terms of outflows:

  1. 6/22/2011: $3.4 billion of outflows
  2. 8/6/2003: $2.6 billion of outflows
  3. 5/12/2004: $2.2 billion of outflows
  4. 5/12/2010: $1.7 billion of outflows
  5. 6/15/2011: $1.6 billion of outflows
Apparently in high yield, you should only invest from January until April, go to the Hamptons early, and come back late August (unless of course this is 2008, and then you should come back in October/November).

Most market participants knew the number was going to be big. Rumors swirled on the desk of $2.5B+ so a large number was not a surprise. But I do think THIS large of a number was a surprise. With that said, while it has felt "squishy" throughout the week, it's been quite orderly. The curve has definitely helped, but according to the CS High Yield Index, there hasn't been that much pain:

Of course, I, more so than most, hate when people only show me one year of data. Let's put this chart in perspective a little bit shall we:

This is the same index (CS HY Index II Average Price) over the past 5 years. Our little draw-down looks quite small when you compare it to the carnage of late 2008. And if you look at the underlying statistics, of the most liquid bonds out there, you saw bonds retrace 1-2 points (more spread widening associated though with the move in rates). The cuspier names were definitely hit hardest; names that had the weakest performance over the past five days include names like Verso Paper, MBIA, Realogy, Rite Aid, and Hawker Beechcraft whose bonds dropped 3.5-5.5 points over the past five days.

One of the largest caveats market participants have with analyzing the AMG data is that it is backyards looking. This is true, but I must add that, in my experience, fund flows are a factor in determining how aggressive syndicate desks can be in terms of pricing new issues and covenant negotiations. Weaker flows means wider and sometimes pulled new issues (this week a number of deals were pulled). And because the new issue market is usually used as a comp from IG all the way down to bank debt, a back up in new issue spreads will push secondary spreads wider.

One particular nuance that I have felt throughout the past few weeks is that there is just not a whole lot of sellers of high yield credit. Since mid 2009, a number of players in the primary markets ranging from insurance to pensions to mutual funds have seen very weak allocations on "on-the-run" deals. And when they get these allocations, people are putting the bonds away never to be seen on the street again unless a real panic has set in and weak hands are forced to capitulate. That is definitely NOT happening here. We are still a ways away from that.

So while the AMG number is large, the only takeaway I have is that if you are playing the new issue market, you can use it to your advantage to ask for better terms on covenants and a wider discount to secondaries (in both HY and IG we've seen primary deals come THROUGH secondaries which is a sign of a frothy market). Maybe you pick up an event driven name one to three points cheaper, but nothing out there is indicating to me that people are panicked, or buyers are fully on strike. The meme that defaults will be low in 2012 and 2013 will keep strategist recommending the asset class and certain buyers buying it.

In my office at home, I have framed the cover of the New Yorker from October 20th, 2008. I have reproduced it for you below (the title of the piece is "Red Death on Wall Street":

When you see that sort of cover on major media covers, that's when you buy bonds (and stocks). To me, there are so many other places to find value in the market other than high yield bonds (large cap tech equity for instance), especially when you consider that high yield not only has to contend with a slowing macroeconomic picture, but also the risk that rates rise (not an unfathomable possibility). If I had to bet, I bet the total return on MSFT stock, which I own, will be higher than high yield over the next 5 years. Here is a chart of HYG vs MSFT since the beginning of last year:

But for those that have to put money to work in high yield (like me for instance in certain accounts), you will not get killed, and there are a few interesting situation out there playing make wholes, asset heavy companies as well as smaller issues at the top part of the capital structure (preferably secured bonds), playing the crossover trade (still one of my favorite strategies), and a smattering distressed situations such as Nortel, Capmark, Lehman, and some exit facilities and other off-the-run bank debt names. And of course, the Russell rebalance is tomorrow and a lot of illiquid post-reorg equities will see a nice bid come in from passive players. But for the retail investor, I would not be going out and buying JNK or HYG - there are more compelling ideas out there.



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.