Goldman Sachs sees strength in High Yield market

It turns out that the world is not ending. Another datapoint? Goldman Sachs put a note out yesterday observing that the high yield market is rallying along with the equity market (which makes sense btw). 17% implied yields are still higher than a couple of years ago, but the rally gives credibility to the belief that institutions are not running away from the secondary credit markets.

Don’t draw a direct line between strength in the secondary market and your ability to raise new cheap debt, however. At least not just yet. Buyers will tell you that they’d usually prefer existing, liquid, double digit yielding BB+ rated paper over a new issue.

Here’s the skinny from Goldman:

Since March 6th, the high yield market has traded higher every single day, without a down day.

AVG Market Yields
March 6th – 20.21%
Today – 16.79%

That’s over 340 bps in a little over a month!!!!!

The market is so strong that buy-side accounts are unwilling to sell paper into a rallying market and, as a result, all available liquidity is being plowed into the new issue market where Companies are rushing to issue paper. In the past few days we’ve seen HCA and Crown Castle issue $1bn+ deals on a drive-by basis, proving to us that the demand for new issues is very deep.

In addition, the market’s appetite for risk is expanding. While most issuance has come from Companies with bullet-proof balance sheets and business models, we are seeing demand for second-tier credits and believe the market for single-B and even the right CCC credits has opened. We are urging our bankers and clients to take advantage of this opportunity to refinance near-term maturities (by this we mean 2012 and earlier) given that windows in the high yield market have been very fickle and yields are tighter than they have been since October of 2008.

COLOR ON RECENT NEW ISSUES AND DEALS ON THE ROAD

-There is a healthy tone in high-yield again this morning, and new bond issues are grinding higher despite the biggest weekly supply in nearly 18 months.

-Crown Castle International completed an offering of first-lien secured notes yesterday. The bonds priced at 97.09 to yield 8.25% with a coupon of 7.75%. The communications-tower operator’s return to market after just three months was oversubscribed, thanks to issuer familiarity, BB/Ba1 ratings and first-lien security. The $1.2bn deal raised $1.165bn for the company, more than an initial $1.1bn target. The notes were quoted at 99.5/99.75 this morning, versus a break in the 98.5 context and 97.09 issuance.

-HCA priced its $1.5bn sr sec notes offering at 9% with an 8.5% coupon yesterday. The deal was upsized from $500mm and was talked at 9%. The transaction represents the largest HY new issue this year. Pricing was at 96.75, the break straddled 98, and this morning’s markets are 98.75/99.

-Seagate Technology launched its Ba1/BB+ $430mm 5yr NC4 2nd-lien notes Monday. The roadshow was scheduled to start yesterday and pricing is expected this week. Guidance is 11.25-11.5% from 11.75-12% amid heavy demand. Proceeds will be used for GCP, including repayment of Seagate HDD’s extant $300mm FRN 09’s.

-Other recent prints include Frontier Communications 8.25% notes due 2014, which are at 95/96 versus 91.8 issuance; Ventas Realty 6.5% notes due 2016, which are at 87/88 versus a reopening at 84.25; and Toll Brothers 8.9% notes due 2017, which are at 99/99.5 versus 97.98 issuance.

MRM