Morning Commentary: Buyers lift junk ½ point Thursday morning; fund flows moderate

By Paul A. Harris

Portland, Ore., Oct. 11 – Buyers returned to the junk bond market on Thursday, trailing a big Wednesday sell-off that saw traders marking some on-the-run names down as much as 2 points, traders said.

High-yield bonds were ½ point better at mid-morning on Thursday.

“The Bear Market of Oct. 10, 2018 has officially concluded,” one trader quipped.

Active names included Bombardier Inc., in play on news of a merger consolidating two of its suppliers, TransDigm Group and Esterline Technologies. The merger will make it more challenging for Bombardier to push costs, a trader said.

The Bombardier 6 1/8% senior notes due January 2023 were 99¼ bid, unchanged in active trading, the source added.

Some recent issues that had been fully in the grip of Wednesday's sell-off were staging notable recoveries on Thursday, sources said.

The Intelsat Jackson Holdings SA add-on to the 8½% senior notes due Oct. 15, 2024 (Caa2/CCC+) were better, at 100.125 bid, 100.375 offered Thursday morning, after “getting smoked” on Wednesday, a trader said.

The deal was still lagging its reoffer price: the $700 million tap priced at 100.75 to yield 8.339% on Oct. 2.

The AkzoNobel NV (Starfruit US Holdco LLC) 8% senior notes due October 2026 (Caa1/B-/B-) recovered to 98 bid, 98½ offered, after sliding more than 2 points on Wednesday, a trader said.

The $605 million tranche priced at par on Sept. 20.

The Envision Healthcare Corp. 8¾% senior notes due October 2026 (Caa1/B-) also recovered some ground relinquished on Wednesday.

The bonds were 97½ bid, 97¾ offered on Thursday morning, after trading as low as 96¾ on Wednesday.

The $1,225,000,000 issue, backing the buyout of the company by KKR, remains conspicuously below its issue price. It came at par in late September.

Millicom on deck

In the primary market, Luxembourg-based Millicom International Cellular SA, which operates in Latin America and Africa, set final talk on its $500 million offering of eight-year senior notes (Ba2//BB+) at 6 5/8% to 6¾%.

Final talk comes tight to earlier price talk in the 6 7/8% area and at the wide end of initial guidance in the mid 6% area.

The deal is set to launch and price on Thursday.

Although it is dollar-denominated junk, the paper is unlikely to be traded off of the high-yield desk, according to a New York-based trader.

Meanwhile a deal from Uber Technologies Inc., which is undergoing a novel marketing strategy, is going well, sources say.

Uber plans to sell at least $1.5 billion of notes, which are expected to garner triple C ratings; however, the notes could possibly be rated at B- by S&P Global Ratings, sources say.

The deal, which is expected to price during the Oct. 15 week, is coming in tranches of $500 million five-year notes, with initial talk of 7½%, and $1 billion of eight-year notes whispered in the 8% area.

In keeping with the San Francisco ridesharing company’s unorthodox manner of doing business, the deal is being shopped as a quasi-private placement, being marketed to select accounts, sources say. Hence there has been no broad distribution of offering documents or dealer updates.

Nevertheless, the Uber deal is apt to come upsized and tighter than initial guidance, they add.

Mixed Wednesday flows

The daily cash flows of the dedicated high-yield bond funds were mixed on Wednesday, a trader said.

High-yield ETFs, which posted record outflows in two of the past five sessions ($1.6 billion on Tuesday and $1.43 billion last Friday, a record which stood until the Tuesday outflow), saw a comparatively moderate $248 million of outflows on Wednesday.

Activity from the ETFs, which had deluged the market with massive bids-wanted-in-competition (BWIC) lists earlier in the week, was muted on Thursday, a trader said.

Meanwhile, actively managed high-yield funds saw $10 million of inflows on Wednesday.

Nevertheless, the market is braced for news, expected in the form of a report from Lipper US Fund Flows late Thursday, of big outflows from the aggregate dedicated high-yield bond funds now tracking $5.2 billion of outflows in the week to Wednesday's close, including $4.2 billion of outflows sustained by the ETFs during that period.

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