Morning Commentary: Junk holds in as stocks slide; Kraton bridge loan converted to bonds

By Paul A. Harris

Portland, Ore., Jan. 6 – High-yield bonds were outperforming other assets heading at mid-morning Wednesday, according to a trader based on the East Coast of the United States.

With the Dow Jones industrial average down 200 points and the price of crude oil down a dollar and a half on the day, high yield was holding in much better than people might reasonably expect, the trader asserted.

The reason could be pent-up demand, the source suggested.

“There is no calendar, and the accounts appear to have cash to put to work,” the trader said.

Against a backdrop of steep declines in stock prices, high-yield ETFs were flat to slightly lower.

The iShares iBoxx $ High Yield Corporate Bd (HYG) was down 2 cents, or 0.02%, at $80.23 per share. SPDR Barclays High Yield Bond ETF (JNK), at $33.78 per share, was down 3 cents, or 0.09%.

The new Chesapeake Energy Corp. 8% second-lien notes due 2022, which came in a December distressed exchange, were better on the day at 49˝ bid, 50˝ offered.

The notes were 49˝ bid, 50 offered on Tuesday, sources said.

The bonds were quoted at 49.25 on Dec. 23, the day they settled.

Based on the much more deeply distressed prices of the company’s bonds with similar maturities, which are trading in the low 30s, the price improvement of the new second-lien notes demonstrates a modicum of confidence that things could work out, the trader suggested.

Kraton bridge converted

There was no news in the primary market, although a calendar is expected to take shape should capital markets volatility ebb, sources say.

Lenders converted the Kraton Polymers LLC bridge loan into $440 million of 10˝% senior notes due April 15, 2023 (B3/CCC+).

The issue price was 96.225.

A $425 million offering of eight-year senior notes ran an early December roadshow just prior to the high-yield new issue market nearly freezing up due to volatility in the global capital markets, at which point the deal became hung up, sources say.

No official price talk was circulated; however, early guidance had the notes pricing in the mid-10% yield context.

Tuesday outflows

Dedicated high-yield funds saw outflows on Tuesday, according to a market source.

High-yield ETFs sustained $86 million of outflows on the day.

Actively managed funds saw $55 million of outflows on Tuesday.

Bank loan funds, meanwhile, saw $35 million of outflows on the day.

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