Morning Commentary: Stock sell-off pressures high yield; new Frontdoor bonds improve

By Paul A. Harris

Portland, Ore., Aug. 15 – Stocks slid Wednesday and junk was going along for the ride, in what one trader referred to as a “macro Turkey trade.”

It was a reference to emerging markets, where headlines during the summer have been dominated by ongoing political and financial strife in Turkey, a buyside source explained.

However, it’s really a story about the strong U.S. dollar putting pressure on commodities, and on the currencies of commodities-sensitive emerging markets countries, resulting in falling commodities prices that are lately dragging down European shares, the source added.

With the Dow Jones industrial average down 290 points at mid-morning the CDX HY 30 index was 0.339 lower at 106.48 bid, 106.56 offered, a buyside source said, noting that it was a substantial move.

High-yield ETFs were lower on the morning. The iShares iBoxx $ High Yield Corporate Bd (HYG) was down 17 cents, or 0.19%, at $85.82 per share.

At mid-morning the barrel price of West Texas Intermediate crude oil for September 2018 delivery had fallen 3.4%, or $2.28, on the day, and was selling for $64.76.

The California Resources Corp. 8% senior secured second-lien notes due December 2022, a benchmark issue which is said to trade in close correlation with crude oil prices, was 86¾ bid, 87½ offered, the buysider said, adding that on Tuesday those bonds were 88 bid, 88½ offered.

“It's August, so it doesn't take much to push this stuff around,” the buysider advised.

Recent issues

Among recent issues (and also from the energy/commodities space) the new Denbury Resources Inc. 7½% senior secured second-lien notes due Feb. 15, 2024 (B3/B+) were wrapped around their new issue price on Wednesday, the buyside source said.

The upsized $450 million issue (from $400 million) priced at par in a Tuesday drive-by.

However new eight-year paper issued by Frontdoor, Inc. (ServiceMaster Global Holdings, Inc.), the 6¾% senior notes due Aug. 15, 2026 (B2/B-), was turning in a strong performance in the Wednesday secondary market at 101½ bid, 102 offered.

The $350 million issue priced at par on Tuesday, 12.5 basis points below the tight end of yield talk in the 7% area.

Starwood Property on deck

In a quiet primary market, Starwood Property Trust, Inc. was on deck with a $300 million offering of five-year senior bullet notes (Ba3/BB).

The deal, which was scheduled to be marketed by means of a Tuesday conference call with investors, is expected to price on Wednesday.

Official talk was pending at mid-morning, a market source said.

There are believed to be at least of couple of deals slated to come to market before the extended Labor Day weekend, which gets underway following the Aug. 31 close, a syndicate source said, adding that they will likely be quick-to-market executions.

No more pre-Labor Day roadshows are expected, the source added.

The post-Labor Day new issue market is expected to pick up, with the driving force being a substantial pipeline and merger and acquisition financing.

Mixed Tuesday flows

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

High-yield ETFs saw $119 million of inflows on the day.

However actively managed funds sustained $20 million of outflows on Tuesday, the trader said.

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