Junk secondary holds for a day; Frontier at a premium; Carvana continues to hemorrhage

By Paul A. Harris and Abigail W. Adams

Portland, Me., May 10 – With a background of no primary market news on Tuesday, the junk bond secondary space was in the foreground.

Secondary trading numbers had a momentary reprieve on Tuesday with the market gaining 3/8 point after three sessions of heavy selling, which pushed returns down to almost negative 10% on Monday.

While firmer on Tuesday, with the 10-year Treasury yield falling below 3%, market players were bracing for the latest Consumer Price Index report set for release on Wednesday.

The latest reading on inflation is not expected to be good, sources said.

While the market was firmer on Tuesday, new deals and earnings-related news were the driving forces of activity in the space.

Frontier Communications Holdings, LLC’s new 8¾% first-lien secured notes due 2030 (B3/B/BB+) dominated activity in the secondary space with the notes trading at a large premium to their offer price.

The telecommunications company’s 6% second-lien notes due 2030 (Caa2/CCC+) were slightly improved although they remained near their all-time lows after falling more than 6 points on the heels of the new offering.

While the overall market was firmer on Tuesday, Carvana Co.’s 10¼% senior notes due 2030 (Caa2/CCC) continued to hemorrhage with the notes closing the day on a 91-handle.

Quiet primary

The high-yield new issue market failed to generate news on Tuesday.

The most recent issue to clear the market was the Frontier Communications Holdings, LLC 8¾% first lien secured notes due May 2030 (B3/B/BB+) which priced cheap and traded well, sources say.

It was the first deal in over a week.

The Frontier notes were wrapped around 102 on Tuesday afternoon, a trader said.

The upsized $1.2 billion issue (from $800 million) priced at par, playing to a $4.4 billion book, and came without any apparent reverse inquiry, the trader noted.

Frontier's execution might attract issuers with debt capacity which provides for secured issuance, the source added.

Some of the real money high-yield accounts are presently heard to be running high cash balances, with coupon payments and calls outpacing negative cash flows, the trader said.

Those investors would prefer to put the cash to work on a calendar, the source noted.

Away from the Frontier deal the junk bond market has been on a trip through the grinder, with the composite yield to worst of the high-yield index at 7.53%, its widest since May 2020.

The year-to-date return was negative-9.96% at Tuesday's open, and may have crossed the negative-10% threshold during the session, the trader said.

The composite price of the index at Tuesday's close was a frigid 90.617, the source said.

Frontier at a premium

Frontier’s new 8¾% first-lien secured notes due 2030 dominated activity in the secondary space.

At midday, as mentioned above, the notes were on a 102-handle, with the notes marked at 102 bid, 102¼ offered, a source said.

However, they came in as the session progressed and were seen changing hands at 101 7/8 heading into the market close.

The telecom company priced an upsized $1.2 billion, from $800 million, issue of the 8¾% notes at par in a Monday drive-by.

Pricing came at the tight end of the 8¾% to 9% yield talk.

The deal was heard to have played to $4.4 billion in demand.

Meanwhile, Frontier’s 6% second-lien notes due 2030 were slightly improved in active trading on Tuesday after diving the previous session on the heels of the new offering.

The 6% notes rose 1 point to change hands in the 81½ to 82 context heading into the market close.

The yield on the notes was now about 9 3/8%.

Frontier’s 6% notes fell 6½ points on Monday to 80½, their lowest level since the $1 billion issue priced at par in October 2021.

Frontier’s new offering primed over or pushed down the 6% notes in the capital structure.

The new offering also priced cheap to Frontier’s outstanding issues.

Carvana’s new low

While the secondary space was firmer on Tuesday, Carvana’s 10¼% senior notes due 2030 continued to hemorrhage with the notes hitting a new low.

While the notes started Tuesday on a 93-handle, selling pressure took hold as the session progressed.

The 10¼% notes were off another 1½ points to close the day on a 91-handle.

The notes were changing hands in the 91 to 91½ context heading into the market close, according to a market source.

The $3.275 billion issue, which priced at par on April 27, has been under water since breaking for trade.

While it almost climbed up to par in last week’s post-Fed rally, the notes quickly gave back their gains and set new lows in the past two trading sessions.

Monday fund flows

High-yield ETFs brought in $114 million of daily cash inflows on Monday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds were negative on the day, sustaining $60 million of outflows on Monday.

The combined funds are tracking $364 million of net inflows for the week which will conclude with Wednesday's close, according to the market source.

Indexes

The KDP High Yield Daily index rose 7 points to close Tuesday at 57.37 with the yield now 6.74%.

The index fell 52 points on Monday.

The ICE BofAML US High Yield index gained 5.2 basis points with the year-to-date return now negative 9.903%.

The index fell 80.5 bps on Monday.

The CDX High Yield 30 index gained 41 bps to close Tuesday at 100.54.

The index fell 70 bps on Monday.

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