Credit markets: bankruptcies pile up while leveraged-loan pipeline slows

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Distressed-debt investors will be on the lookout for bankruptcy filings after retailers sought court protection at a record pace in the first half of the year. Meanwhile, a light calendar is expected in the primary markets.

The debt exchange for AMC Entertainment Holdings Inc., the largest U.S. cinema chain, expires this week after the deadline was initially extended. The company will start reopening its theaters on July 30, two weeks later than expected, after Hollywood studios rescheduled the release of nearly every movie that was supposed to come out this month.

NPC International Inc., the largest franchisee of Pizza Hut restaurants in the U.S., filed for bankruptcy last week, as did New York restaurant chain Fig & Olive. Lucky Brand Dungarees LLC and affiliates, known for jeans and other apparel, also sought court protection after the coronavirus pandemic scuttled restructuring efforts.

More U.S. retail companies sought bankruptcy protection in the first half of 2020 than in any other comparable period while energy filings piled up at the fastest pace since oil prices plunged in 2016. Forum Energy Technologies Inc. said Monday morning it may need to consider bankruptcy.

Junk fund outflows
Federal Reserve intervention and strong technicals spurred big inflows into junk bond funds last quarter, but the steady resurgence of virus infections may dampen investor appetite. Debt buyers pulled $5.55 billion from junk funds in the week ended July 1, the most in over two years.

High-yield investors “who have ridden the wave, and those who bought tactically during the selloff, have an incentive to take some money off the table,” said Scott Kimball, a portfolio manager at BMO Global Asset Management.

The leveraged loans market, which saw the best quarterly performance in more than a decade, has no lender meetings scheduled this week. The backlog of leveraged buyouts that were put on pause in March has mostly cleared. U.S. institutional loan volume mandated but yet to launch stood at $7.1 billion at the end of June, down about 55% from the end of May.

Fed backstop
Wall Street’s corporate bond dealers are projecting $15 billion to $20 billion in U.S. investment-grade corporate debt sales this week, around the $16.7 billion sold before the Independence Day holiday. Syndicate desks expect blue-chip companies to sell about $100 billion in bonds this month, in line with the five-year average for July.

Last month’s volume of $169 billion was the sixth-largest monthly haul on record, and the busiest June.

“We are expecting a fraction of what hit in the first half to come to market for the rest of the year,” said Daniel Oh, a portfolio manager at Osterweis Capital Management. “We do have the Federal Reserve buying bonds, which should be a backstop to any major widening.”

Bloomberg News