Morning Commentary: Junk prices ease as market starts slipping into late-year mode

By Paul A. Harris

Portland, Ore., Nov. 29 – The high-yield bond market was unchanged to slightly lower on Tuesday morning, sources said.

Cash bonds were down 1/8 of a point at mid-morning while the high-yield CDX was 1/8 of a point higher, according to a bond trader, who added that the junk ETFs, which sustained $430 million of daily cash outflows on Monday, were better sellers on the morning.

The market has been sluggish to regain its footing on the heels of the extended Thanksgiving holiday weekend, said a trader, who also remarked that the liquidity of the high-yield market was beginning to have a thin, late-year feel.

With the major U.S. stock indexes mixed and basically unchanged at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was absolutely flat at $74.22.

The new issue market, which was quiet on Monday, remained so on Tuesday morning.

Market watchers have begun to extract the Pegasus Merger Co./Tenneco Inc. $1 billion offering of six-year senior secured notes (B2/B-), backing the buyout of Tenneco by Apollo, from their active calendars, characterizing it as a hung deal.

It has produced very little news since it was announced at the very beginning of the month.

The buyout itself was completed on Nov. 17, with the investment banks ponying up their committed financing even though the bonds and the $1.4 billion term loan await syndication.

Unofficial price talk as low as 84 had circulated the market, a trader said Tuesday, adding that even at that price dealers were unable to get a book.

Away from that situation there is not much motivation for the banks to bring deals in the face of substantial, loss-generating discounts during what's left of 2022, sources say.

It has become reasonable to expect that the market might improve in the new year, a trader said.

Don't look for the primary market to remain totally idle in the final weeks of the year, the source added.

There are deals – even LBO deals coming with reasonable leverage – that can get done, the trader said, adding that there may be reasons, such as an early 2023 acquisition closing, for bringing such a deal during the final weeks of 2022.

And high-yield investors are understood to have cash to put to work on new issues, sources say.

Activity in existing issues was muted on Tuesday morning, a trader said.

Weak oil prices have generally not registered much impact on bonds in the energy sector, the source said.

The Enerflex Ltd. 9% senior secured notes due October 2027 (B2/BB-/BB-) traded Monday at 98½, up a point from the previous week.

The $625 million issue priced at 90.676 to yield 11½% on Oct. 6.

Oil prices staged incremental improvement on Tuesday morning, with the barrel price of West Texas Intermediate crude for January 2023 delivery up 53 cents, or 0.69%, at $77.77.

Trading was active in the cruise line sector, but prices were basically unchanged, the source said.

The Carnival Corp. 10 3/8% senior priority notes due May 2028 (B2/B+) traded at 103, unchanged on the morning, according to the trader.

The Miami-based cruise operator’s $2.03 billion deal came at 98.465 to yield 10¾% on Oct. 18.

Fund flows

The dedicated high-yield bond funds sustained $425 million of net daily cash outflows on Monday, according to a market source.

As noted above, the high-yield ETFs saw $430 million of outflows on the day.

Actively managed high-yield funds were modestly positive on the day, posting $5 million of inflows on Monday.

The combined funds are tracking $96 million of net inflows on the week that will conclude with Wednesday's close, the source said.

And with two daily fund flow numbers remaining to go into the tally, the November-to-date cash flows of the combined funds stood at plus $8.1 billion, rendering the present month the biggest, in terms of cash inflows, since July 2020, according to the market source.

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