Morning Commentary: Junk opens flat; primary sidelined; funds see modest outflows

By Paul A. Harris

Portland, Ore., Aug. 23 – Junk opened unchanged on Thursday, according to a New York-based trader, who reported a slight pickup in the liquidity of the market versus recent sessions.

High-yield ETF share prices were slightly better on the morning. The iShares iBoxx $ High Yield Corporate Bd (HYG) was up 7 cents, or 0.08%, at $86.31 per share at mid-morning.

Recent issues were holding in.

The conspicuously leveraged BMC Software (Banff Merger Sub, Inc.) 9¾% senior notes due September 2026 (Caa2/CCC+) were par bid, par ½ offered on Thursday, the trader said.

That was unchanged from the spot given by another trader 24 hours earlier.

The $1,475,000,000 issue priced at par on Aug. 9.

BMC Software is one of two KKR buyout deals struck in the late spring/early summer period, with debt financings featuring high-yield bonds.

The second is the Envision Healthcare Corp. LBO, which includes $2.15 billion of bonds expected to come during the post-Labor Day period.

Both BMC and Envision Healthcare are notably leveraged buyouts, each around 7.5-times debt to free cash, sources say.

And the debt financings of both were aggressively bid by the banks, they add.

Elsewhere, another conspicuously leveraged late summer deal, the Verscend Holding Corp. 9¾% senior notes due August 2026 (Caa2) were holding in well above new issue price at 102¾, 103¼ on Thursday.

The downsized $1.1 billion issue (from $1.15 billion), backing Verscend's acquisition of Cotiviti Holdings, Inc., priced at par on Aug. 10.

Quiet primary

Meanwhile the primary market was quiet on Thursday and was expected to remain so until Sept. 4, when the extended Labor Day holiday weekend concludes.

At that point the new issue market is expected to begin working through a sizable mergers and acquisitions (M&A) deal pipeline, which includes the above-mentioned Envision Healthcare deal.

Pending market conditions there will also be opportunistic deals away from the M&A pipeline, sources say.

Among names in the latter category are two which are ultra-familiar to the high yield market: Charter Spectrum, possibly returning to market to help fund share repurchases, and Netflix, Inc., which simply needs to raise cash.

The dollar prices of liquid issues of both entities are lower on the month, according to a market source.

The CCO Holdings, LLC/CCO Holdings Capital Corp. (Charter Communications, Inc.) 5 1/8% senior notes due May 2027 were marked at 95.13 on Thursday, down 34 cents on the month, the source said.

The Netflix 5 7/8% senior notes due November 2028 were marked at 100.06 on Thursday, down 7 cents on the month.

Those price moves are counter to the broad index, which is 18 cents better on the month, the source added.

Wednesday outflows

The daily cash flows of the dedicated high-yield bond funds were negative on Wednesday, an investor said.

High-yield ETFs sustained $78 million of outflows on the day.

Actively managed high-yield funds saw $45 million of outflows on Wednesday, the source added.

As the market awaits a Thursday afternoon report from Lipper US Fund Flows, giving the weekly cash flows of the asset class, the source was tracking $100 million of net inflows during that period, which concluded at Wednesday's close.

That number factors in $218 million of inflows to the ETFs, the investor added.

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