Morning Commentary: Global Aircraft Leasing PIK toggle on deck; junk opens unchanged

By Paul A. Harris

Portland, Ore., July 26 – A stronger-than-expected report on the recent performance of the American economy from the U.S. Commerce Department failed to dim expectations that the Fed will cut interest rates in the week ahead, market sources say.

Junk was unchanged to slightly better on the morning.

On Friday the Commerce Department reported that the gross domestic product grew at 2.1% in the second quarter of 2019, topping expectations that the rate of growth would come in at 1.8%.

Consumer spending for the second quarter also topped expectations, growing by 4.3%, versus analysts' expectations of 4%.

The U.S. GDP Price Index advanced 2.4%, versus estimates of 2%.

Despite these numbers painting a picture of an American economy that is not as dire as some anticipated, sources roundabout the market expect that the Federal Reserve Bank's Federal Open Market Committee will cut its benchmark Fed Funds rate when the committee meets in the week ahead.

A portfolio manager, speaking on background, said that the market's certainty about that cut is absolute: “One hundred percent,” the manager said, adding that 84% of the market anticipates a cut of 25 basis points, while 16% expect a 50 bps cut.

On the heels of the Commerce Department report, there was a pickup in offers-wanted-in-competition (OWICs), mainly from the high-yield ETFs, according to a bond trader in New York.

High-yield ETF share prices were better at mid-morning. The iShares iBoxx $ High Yield Corporate Bd (HYG) was up 15 cents, or 0.18%, at $87.14 per share.

The CDX HY32 index of high-yield credit default swaps was 108.04 bps bid, 108.13 bps offered, up 0.135 bps, a hedge fund manager said.

New issues

Global Aircraft Leasing Co., Ltd., a holding company which has a 70% ownership stake in Dublin-based aircraft leasing firm Avolon, set 6¼% to 6½% cash pay price talk on its $1.5 billion offering of five-year cash contingent PIK toggle notes (Ba2) on Friday.

The rate would increase by 75 basis points in the event of a PIK payment.

Official talk comes tight to initial guidance in the mid 6% area, a trader said.

The debt refinancing/general corporate purposes deal, via bookrunner Morgan Stanley, is set to price on Friday.

Uncertainty prevailed regarding other dollar-denominated issues on the late-week active calendar.

Nesco Holdings I, Inc./Capital Investment Corp. IV's $475 million offering of five-year second-lien notes may still be on track to price before the weekend, sources say.

However, whereas the deal had been whispered in the 9% area, it appears to have gotten traction at a much higher rate.

There are $650 million to $700 million of orders at 10%, sources say.

The deal is also expected to undergo covenant changes.

The market also awaits word on the Advisor Group Inc. $400 million offering of eight-year notes (Caa1/B-). The deal was marketed on a roadshow throughout the July 22 week and was expected to price on Friday but might be pushed into the July 29 week, sources say.

Initial talk was in the 10% area.

The Phoenix-based wealth management platform company may also have to sweeten pricing on its concurrent term loan, sources say.

Meanwhile in Europe, Sweden’s Oriflame Holding AG set price talk in its €775 million equivalent offering of five-year senior secured notes (B1//B+).

The deal is coming in dollar-denominated notes talked at 9¼% to 9½%, versus initial talk in the low 9% area, and euro-denominated notes talked at 7% to 7¼%, versus initial talk in the low-to-mid 7% area.

Tranche sizes remain to be determined.

Citgo performance eyed

Among recent junk issues the Citgo Holding, Inc. 9¼% senior secured notes due August 2024 (Caa1/B/B+) continued to hold in at a handsome premium to the new issue price on Friday, albeit at a slightly softer level than that seen 24 hours previous.

The new Citgo paper was 103½ bid, 103 5/8 offered on Friday, a trader said.

Those bonds were seen at 103 5/8 bid, 103¾ offered on Thursday.

The $1.37 billion megadeal priced at par, through the price talk, earlier in the week.

Crude oil prices were better at mid-morning.

The barrel price of West Texas Intermediate crude for September 2019 delivery was up a dime, or 0.18%, at $56.12.

The California Resources Corp. 8% senior secured second-lien notes due December 2022, a big, liquid issue employed by high-yield bond investors for the purpose of tracking crude oil prices in the index, were 69 bid, 70 offered, unchanged, the trader said.

Mixed Thursday flows

The daily cash flows of the dedicated high-yield bond funds were mixed, and mostly flat, on Thursday, according to a market source.

High-yield ETFs sustained $8 million of outflows on the day.

However actively managed high-yield funds saw $50 million of inflows on Friday.

News of Thursday's daily flows follows a late Thursday afternoon report that the combined high-yield funds saw $1.3 billion of net inflows in the week to Wednesday's close, according to Lipper US Fund Flows.

That's the seventh consecutive positive weekly flow, according to the market source, totaling $8.7 billion, as the market anticipates that the Fed will further fuel the present rally by means of a rate cut in the week ahead.

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