Junk secondary losses mount as geopolitical risks weigh on markets; NCL in focus, tranches mixed

By Paul A. Harris and Abigail W. Adams

Portland, Me., Feb. 11 – The high-yield primary market was dormant on Friday amid an empty forward calendar and continued volatility in the secondary space.

However, deals are expected in the week ahead, such as Viasat Inc.’s $1.6 billion offering of unsecured notes.

Meanwhile, “it was like a yo-yo,” in the secondary space, a source said.

While the market saw a momentary reprieve from Friday’s sell-off early in the session, it plummeted in the afternoon.

“The market was up until news came out about Ukraine, then it dropped like a rock,” the source said

Heavy selling took place following U.S. officials warning that Russia’s invasion of the Ukraine was imminent.

The market gave back its early gains and closed down about ½ point, compounding losses from Thursday’s inflation-induced sell-off.

Norwegian Cruise Line Holdings Ltd.’s secured and unsecured tranches were putting in a mixed performance amid the volatility with the higher yielding unsecured notes above water while their lower-coupon secured counterpart sank below.

While the geopolitical news triggered buying in Treasuries with the 10-year Treasury yield dropping below the 2% threshold to settle at 1.943%, rate risk fear was unabated.

Pressure continued to mount on low-yielding credits in the BB index with Netflix Inc.’s 4 7/8% senior notes due 2030 and OneMain Finance Corp.’s 4% senior notes due 2030 down in active trading.

Friday’s primary

The dollar-denominated high yield new issue market remained dormant on Friday, which was no surprise as the session opened with an active deal calendar that is empty, and the capital markets remained volatile over myriad concerns including, but certainly not limited to, the health of the economy and interest rates.

There will almost certainly be new issue activity in the week ahead, a syndicate banker said, adding that the Feb. 14 week could see $5 billion to $6 billion of primary market business.

There are a couple of issuers planning to bring deals on Monday, the banker said, while declining to furnish issuer names or sectors.

Although the cost of capital for speculative-grade borrowers has increased, prospective issuers are being reassured that the market continues to operate at historically decent levels, the syndicate official said.

One deal that is expected in the week ahead is the Viasat’s $1.6 billion offering of unsecured notes with assumed pricing of 5½%, sources say.

The concurrent $700 million term loan B (Ba3/BB/BB+) was scheduled to launch on Friday.

The Carlsbad, Calif.-based communications company is in the leverage markets to raise cash to repay revolver debt and for general corporate purposes.

Norwegian mixed

Norwegian Cruise Line’s recently priced tranches were putting in a mixed performance on a volatile day for risk assets.

The cruise line operator’s higher-yielding unsecured notes were outperforming their secured counterparts.

The 7¾% notes due 2029 (Caa1/B-) remained above water during Friday’s volatility while closing well off the highs of the day.

The 7¾% notes traded as high as 101¾ but came in as selling pressure mounted. The notes were changing hands in the par ½ to par ¾ context heading into the close.

There was $188 million in reported volume.

However, the 5 7/8% senior secured notes due 2027 (B1/B+) sank below par.

While they traded as high as par ¼, they were changing hands in the 99 to 99 3/8 context heading into the close.

There was $134 million in reported volume.

Though both tranches played to heavy demand during bookbuilding, the shorter-duration notes have taken a hit amid rising rates on the short-end of the curve, a source said.

There has also been increased demand for higher-yielding paper as investors reposition themselves for a higher-rate environment

Norwegian priced a $1 billion tranche of the 5 7/8% notes and a $600 million tranche of the 7¾% notes at par on Thursday.

The 5 7/8% notes priced at the tight end of yield talk in the 6% area; the 7¾% notes priced at the tight end of the 7¾% to 8% yield talk.

Under pressure

Netflix’s 4 7/8% senior notes due 2030 and OneMain Finance’s 4% senior notes due 2030 were among the low-yielding BB credits that were taking a hit as investors reduced their rate risk.

Netflix’s 4 7/8% notes fell more than 1 point to close the day at 108 with a yield of 3.72%.

There was $18 million in reported volume.

OneMain’s 4% senior notes due 2030 sank 1¼ points to close the day at 92¼ with the yield now 5.13%.

There was $16 million in reported volume.

Outflows

The dedicated high-yield bond funds sustained $884 million of net daily outflows on Thursday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs saw $863 million of outflows on the day.

Actively managed high-yield funds sustained $21 million of outflows on Thursday.

News of Thursday's daily flows follows a Thursday report that the combined funds saw $1.96 billion of net outflows on the week to the Wednesday, Feb. 9 close, according to Refinitiv Lipper.

The most recent weekly outflow extends the negative cash flows of the high-yield bond funds over the past five weeks to $13.2 billion, the market source noted.

Lest there be any doubt about the level of concern over inflation and higher rates among investors in the leverage markets, during the most recent week the dedicated bank loan funds, by contrast, saw a record $2.29 billion of net inflows, the source said.

Indexes

The KDP High Yield Daily index fell 28 points to close Friday at 62.8 with the yield 5.15%.

The index sank 37 points on Thursday, 13 points on Wednesday and 4 points on Tuesday after sinking 15 points on Monday.

The index posted a cumulative loss of 63 points on the week.

The CDX High Yield 30 index sank 50 basis points to close Friday at 105.35.

The index was down 84 bps on Thursday after gaining 39 bps on Wednesday, 18 bps on Tuesday and 4 bps on Monday.

The index posted a cumulative loss of 73 bps on the week.

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