Morning Commentary: Junk opens strong; Recordati on deck with €1.28 billion offering

By Paul A. Harris

Portland, Ore., Oct. 12 – The high-yield bond market staged a strong opening on Friday, following extensive selling earlier in the week, an investor said.

The high-yield CDX index was up ¼ point at mid-morning, the investor said, and reckoned that cash bonds were better than that, perhaps up as much as ½ point.

High-yield EFTs were sharply higher, in line with equities. The iShares iBoxx $ High Yield Corporate Bd (HYG) was up 0.44%, or 38 cents, at $85.07 per share.

Some, if not all of the metrics were supportive.

The barrel price of West Texas Intermediate crude oil for November 2018 delivery was 30 cents better (0.42%) at $71, 27, at mid-morning. The energy component represents 15% of the high-yield index.

The new Millicom International Cellular SA 6 5/8% senior notes due October 2026 (Ba2//BB+) were 101 1/8 bid, 101 3/8 offered Friday morning.

The $500 million issue, which priced at par on Thursday, traded up “out of the box,” the investor said, adding that the new Millicom paper was no doubt benefitting from Friday morning's overall market strength.

Bonds of Intelsat Jackson Holdings SA remain active, sources say.

The Intelsat Jackson 8½% senior notes due October 2024 were par 7/8 bid, 101 3/8 offered.

The same paper was spotted on Thursday at par 1/8 bid, par 3/8 offered.

A $700 million tap priced at 100.75 to yield 8.339% on Oct. 2.

Primary activity muted

Volatility sidelined the new issue market through much of the Oct. 8 week, yet there were issuers such as Millicom that braved the turbulence.

Italy-based Recordati SpA remained on the high-yield road in the face of the chop.

On Friday morning the Milan-based pharmaceutical firm set price talk in its €1.28 billion two-part offering of seven-year senior secured notes (expected ratings B2/B).

The deal features a tranche fixed-rate notes with three years of call protection, talked in the 6¾% area.

The fixed tranche is going well and poised to come at 6¾%, an investor said on Friday morning.

Talk on the fixed-rate tranche widened over the course of the week, as the deal was being shopped. Early guidance was 6% to 6½%, with ensuing indications coming at 6½% to 6¾%.

A tranche of floating-rate notes, which come with one year of call protection, is talked to price with a spread to Euribor in the 625 basis points area, at par.

Final tranche sizes remain to be announced.

The deal is set to price on Friday.

Meanwhile, Uber Technologies Inc., which has undertaken a novel private placement of a $1.5 billion amount of high-yield notes in two tranches, is getting traction, market sources say.

The deal includes a $500 million tranche of five-year notes, which come with two years of call protection, and are in the market with initial talk in the 7½% area, and a $1 billion tranche of eight-year notes with three years of call protection and initial talk in the 8% area.

Order books for both tranches now cover those sizes, a source said on Friday morning.

Initial demand is skewed toward the longer maturity.

Although the market anticipates the bonds will come with “triple hooks” – triple C ratings from both Moody's Investors Service and S&P Global Ratings – there is a possibility that S&P will come with a B- rating, instead, a trader said.

A deal its size, with those anticipated ratings, is a novelty in the realm of true private placements, sources say.

However, with such an execution Uber aims to circle up a limited number of institutional investors and exert greater control over the proliferation of its financial information than would be possible in a more conventional junk bond sale, offered to the wider market, a source said.

Mixed Thursday flows

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

In a distinct reversal of fortune, high-yield ETFs saw $737 million of inflows on the day. In the past week the junk ETFs sustained two of their biggest-ever daily outflows: $1.6 billion last Tuesday and $1.43 billion on Oct. 5.

Meanwhile actively managed high-yield funds sustained notable outflows of $360 million on Thursday, the trader said.

News of Thursday’s daily flows follows a report from Lipper US Fund Flows that, combined, the high-yield funds sustained $4.928 billion of outflows in the week to Wednesday's close, the fourth-largest weekly outflow on record.

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