New junk issues last week traded down in a sign the prolonged high-yield party is coming to an end, according to investors who say the market is exhibiting what they term typical late cycle behavior. The run on auto suppliers was understandable given General Motors' unexpected earnings warning, but several investors said unrelated credits also traded off on the news, in a sign the change in sentiment is systemic.
Kevin Cronk, portfolio manager at Columbia Management Group in Boston, pointed to poor new issue performance in the secondary market as typical of "deals placed in a market that's turning." US Oncology's $250 million unsecured 10-year floaters, which were priced at LIBOR plus 525 basis points, were bid at 97 1/4 mid-week. DaVita Inc.'s $500 million 6 5/8s of '13 were trading at 99 3/4. "This may be a sign we'll start to see a market that distinguishes between weak and strong credits, not just people buying the entire calendar because they assume it's going to trade up," noted another investor.
And performance in the secondary market turned heads, too, as credits traded down even in the absence of negative news. "The thinking seems to be 'shoot and then ask questions,'" commented one portfolio manager. He highlighted selling of Affinia Group, which provides replacement parts for cars in the aftermarket and whose business is not tied to the big three's performance, following news of GM's earnings warning. Affinia's 9s of '11 were trading at 102 from the start of the month until last week, when its price plummeted to 95-96. "There seems to be more emotion involved--investors are punting on names and don't have confidence in their decisions," the investor added.
The Merrill Lynch High Yield Index was trading around 295bps over Treasuries as BW went to press, over 20bps wider than the previous week.
