Starwood prices; junk secondary ‘orderly’ under selling pressure; Ford improves; DISH volatile

By Paul A. Harris and Abigail W. Adams

Portland, Me., Dec. 1 – The first new deal of the week cleared the domestic high-yield primary market on Wednesday with the recent volatility in junkbondland stunting the new issue pipeline.

Starwood Property Trust, Inc. priced a $400 million issue of three-year senior sustainability-linked bullet notes (Ba3/BB+) in a drive-by.

While the short duration of the notes made it attractive despite a 3-handle, the notes were stuck at par on the break.

The new paper was in focus in an aftermarket that remained under pressure on a whipsaw day for risk assets.

While the secondary market opened the day with gains of 1/8 to ¼ point, it closed the day down ½ point.

The Omicron Covid-variant was blamed for Wednesday’s sell-off.

However, Federal Reserve chair Jerome H. Powell’s recent comments left many in the market “flat-footed,” a source said.

While longer-duration, rate-sensitive names remained hard hit on Tuesday, trading volumes remained low with the selling activity orderly.

Activity remained concentrated in large, liquid issues.

Ford Motor Co.’s 3¼% senior green notes due 2032 (Ba2/BB+/BB+) were active with the notes gaining strength as the session progressed, in contrast to the overall market.

DISH DBS Corp.’s 5¾% senior secured notes due 2028 (Ba3/B+) were also improved in active trading. However, the notes closed the day well off their highs.

Starwood breaks dry spell

Starwood Property Trust priced a $400 million issue of three-year senior sustainability-linked bullet notes (Ba3/BB+) at par to yield 3¾% in a Wednesday drive-by.

The yield printed at the tight end of the 3¾% to 4% yield talk, and inside of the 4% to 4¼% initial guidance.

The first dollar-denominated junk bond issue to price since Coty Inc. (HFC Prestige Products, Inc./HFC Prestige International U.S. LLC) priced $500 million of 4¾% secured notes due January 2029 on Nov. 22, the Monday before Thanksgiving, Starwood Property's deal was heard to be four-times oversubscribed, having ridden into the market on around $150 million of reverse inquiry.

However, when price talk dove below the 4% mark, interest in the deal appeared to flag, somewhat, a trader said (see related story in this issue).

The 3¾% notes were active but flat on the break. The notes were marked at par bid, par 1/8 offered, a source said.

While the short duration and the lack of supply made the notes attractive, they were not expected to trade much higher given the low coupon.

November was a rocky month in the junk bond market, the trader noted.

The high-yield index began the month with a 4.06% yield to worst, and ended November at 4.84%, representing a steep climb, the source remarked.

Expectations for issuance during the run-up to 2022 remain muted, at around $10 billion to $15 billion, the trader added.

Volatility returns

The junk bond secondary space remained volatile on Wednesday with the market opening up 1/8 to ¼ point, but closing the day down ½ point.

“That’s a pretty big one-day move,” a source said. While the market also sold off on Tuesday, the high-to-low range was narrower.

While the Omicron variant’s recorded arrival in the United States was cited as the source of Wednesday’s volatility, Powell’s comments on Tuesday left many “flat-footed,” a source said.

Powell’s recent abandonment of the use of the term ‘transitory’ was a surprise reversal of the Federal Reserve’s narrative about inflation.

One source called it “disgraceful” for the about-face on inflation to come after Powell’s nomination to a second term.

Longer-duration and rate-sensitive names continued to see selling pressure as the market again priced in more aggressive rate hikes.

While Wednesday’s early morning rally was considered by some a dead cat bounce, the selling activity that did take place as the session progressed remained orderly.

“The high-yield market is taking it in stride,” a source said. “Things are lower but there’s no real panic.”

Ford gains

Ford’s 3¼% senior green notes due 2032 remained active in the secondary space with the notes improving as the session progressed, in contrast to the broader market.

The 3¼% notes were up about 5/8 point at market close.

The notes were changing hands around par ¼ at the open but gained steam as the session progressed. They were changing hands in the par 5/8 to par ¾ context heading into the market close.

The notes traded down to par on Tuesday.

DISH weakens

DISH’s 5¾% senior secured notes due 2028 also improved in active trading on Wednesday.

However, the notes grew weaker late in the day alongside the broader market.

The 5¾% notes returned to a 99-handle early in the session and were changing hands in the 99½ to 99¾ context.

However, selling pressure returned with the notes changing hands in the 98 7/8 to 99¼ context heading into the close.

The notes fell to a 98-handle on Tuesday.

Outflows

The dedicated high-yield bond funds sustained $528 million of net outflows on Tuesday, according to a market source.

Actively managed high-yield funds saw $305 million of outflows on the day.

High-yield ETFs sustained $223 million of outflows on Tuesday, the source said.

With only Wednesday's daily fund flow numbers remaining to go into the tally the junk funds were poised to sustain their biggest weekly outflows since May, according to the market source.

Those fund flow numbers are expected to be reported on Thursday by Refinitiv Lipper.

For the high-yield ETFs, 2021 has been a year of redemptions, a trader noted.

The HYG High Yield ETF has sustained $7.052 billion of outflows, year to date; JNK has seen $3.47 billion of outflows during the same interval.

Away from retail investors, word is that there is still substantial institutional money looking for a home in junk, the source added.

Indexes

The KDP High Yield Daily index gained 14 points to close Wednesday at 67.16 with the yield 4.28%. The index shaved off 6 points on Tuesday after gaining 10 points on Monday.

The CDX High Yield 30 index fell 27 bps to close Wednesday at 107.39. The index was down 48 bps on Tuesday.

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