Morning Commentary: Junk opens unchanged; new Cleveland-Cliffs 6¾% notes trade higher

By Paul A. Harris

Portland, Ore., March 3 – Junk opened Tuesday unchanged, with traders seeing massive volumes, larger-than-normal bid-ask spreads and a manic tendency in trading not seen since the turbulent 2008-2009 period, sources said.

“There was certainly a risk-on feeling last night,” a trader said at mid-morning, with the Dow Jones industrial average down 250 points and sliding lower, at the time.

Investors were unable to buy everything they wanted late Monday, a factor that might cushion the drop of the Dow, the source added.

Soon thereafter the Federal Reserve Bank's Federal Open Market Committee rode to the rescue, announcing at mid-morning Tuesday that it would lower the Federal Funds rate by 50 basis points, to a range of 1% to 1¼%.

“The fundamentals of the U.S. economy remain strong,” the Fed commented in its Tuesday morning statement.

“However, the coronavirus poses evolving risks to economic activity,” the central bank added.

The rate move immediately arrested the sliding Dow, which went from being down 300 points to being up 350 points.

Cleveland-Cliffs climbs

The new Cleveland-Cliffs Inc. senior secured notes due March 2026 (Ba3/BB-) were turning in a solid secondary market performance on Tuesday morning at 101 bid, 101 3/8 offered, according to a New York-based bond trader, who added that it might be going higher.

The $725 million deal priced at 98.783 to yield 7% on Monday, on the heels of concessions to the rocky market conditions that included size (a proposed $400 million unsecured tranche was withdrawn), structure (the tenor fell to six years from eight years and call premiums increased) and covenants.

Cleveland-Cliffs was the first new deal to clear the market since Graphic Packaging International, LLC priced $450 million of 3½% notes (Ba2/BB+) on Feb. 21.

The primary market was rife with question marks on Tuesday, sources said.

In the wake of Cleveland-Cliffs, the active forward calendar was empty, or nearly so.

On Monday Bausch Health Cos. Inc. cited market conditions as it canceled plans for subsidiary Bausch Health Americas, Inc. to sell $3.25 billion of secured debt securities, as well as plans to amend and refinance its existing credit agreement.

Monday fund flows

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

High-yield ETFs, which saw record outflows on successive days last week, saw a hefty $821 million of inflows on Monday.

This was reflected in Tuesday morning trading, according to the New York-based bond trader, who reported seeing a substantial volume of offers-wanted-in-competition (OWICs), primarily from the junk ETFs.

However actively managed high-yield accounts, the so-called real money accounts, sustained $930 million of daily outflows on Monday, the source said.

Hence the combined funds sustained $109 million of net outflows on Monday, and are tracking $5.2 billion of net outflows, so far, for the week that will conclude with Wednesday's close.

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