December 15, 2015

By Ellie Ismailidou

As the junk-bond market undergoes a sharp selloff, which has been described by many as a bloodbath, there is a lot more downside to mutual-fund redemptions, a Bank of America report said Tuesday.

As bond-fund managers continue to report an overwhelming wave of redemptions from retail investors, a few companies whose bonds are most concentrated in mutual funds could see their bond prices plummet.

Sprint S, -3.51% and First Data Corp. FDC, -0.73% are the most exposed companies, according to the report, with at least $450 million and $300 million worth of exposure to retail funds, respectively, in their capital structure.

The top five retail-owned names also include HCA Holdings Inc. HCA, -0.09% Ally Financial Inc. ALLY, -0.42% and HD Supply Holdings Inc. HDS, -0.79%

Company Amount of bonds held by mutual funds Sprint Corp. S, -3.51% $466.1 million First Data Corp. FDC, -0.73% $307 million HCA Holdings Inc. HCA, -0.09% $218.8 million Ally Financial Inc. ALLY, -0.42% $187 million HD Supply Holdings Inc. HDS, -0.79% $173.2 million DISH Network Corp. DISH, -0.90% $168.9 million Tenet Healthcare Corp. THC, -2.70% $162.4 million Cablevision Systems Corp. CVC, -0.05% $138.9 million Vimedimex Medi-Pharma JSC VMD, +0.00% $112.4 million

Source: B. of.A. Merrill Lynch Global Research, Bloomberg

Analysts have been warning that this most recent high-yield fallout is centered around the risk aversion of retail investors, after a series of investment firms, including Third Avenue Management, Stone Lion Capital and London-based Lucidus Capital Partners, blocked investors from withdrawing their money from their high-yield mutual funds.

Year-to-date, the high-yield bond market has seen outflows of $3.6 billion from U.S. high-yield open-end funds, Bank of America analysts said, warning that further unwinding of retail-investor positions could lead to force-selling in open-ended mutual funds.

“In the last few days we have seen how redemptions at one fund with [assets under management] of less than $1 billion have left the market rattled. Tens of billions of outflows then would be hard to absorb without significant price drops, even if spanned over more than a year’s time,” according to the report.

Also read: Here’s one expert’s takeaway for investors as the bloodbath intensifies for junk bonds

Retail investors held more than 45% of the U.S. high-yield market in June 1999, dwindling to less than 20% in 2007. Today retail investors hold about 25% of high-yield bonds outstanding, but their holdings are more concentrated in certain companies’ bonds than others, according to the report.

With liquidity evaporating in the high-yield sector, investors have “a very hard time getting out of a position when they choose to,” said Art DeGaetano, chief investment officer of Bramshill Investments.

“Every day we walk in and we see markets quoted down but nothing is trading,” DeGaetano said.

The vast majority of bonds on the S&P U.S. Distressed High Yield Corporate Bond Index hardly traded at all in November, said J.R. Rieger, managing director of fixed income indices at S&P Dow Jones Indices, in a note Monday.

About 80% of the bonds on the index represented only 14% of the total number and about 25% of the total market value of trades, according to S&P data. This concentrated trading activity indicates that the majority of bonds in that segment are significantly less liquid