Junk bonds fall on hawkish Fed; Vericast gains on acquisition buzz; Open Text under pressure

By Paul A. Harris and Abigail W. Adams

Portland, Me., Aug. 26 – The second-to-last pre-Labor Day Friday in the 2022 junk bond market saw the new issue bourse remain idle, as expected.

However, as the curtain appeared to be falling on what has been an anemic summer primary market, by any measure, one market source had a piece of advice for Prospect News on Friday.

“Never say never,” the source admonished, adding that the traditions of the late-summer market notwithstanding, there could indeed be a deal in the U.S. market during the week ahead.

However, the source spoke before Federal Reserve chair Jerome Powell.

Selling pressure returned in full force to the secondary space after Powell’s hawkish Jackson Hole speech.

Rate risk and recession fear drove the cash bond market down 1 to 1½ points following the speech.

The selling over the past week that was fueled by a reconsideration of the interpreted dovish pivot in Powell’s July 26 speech accelerated as the reality of the Federal Reserve’s commitment to fight inflation set in.

“They’re going to keep raising rates,” a source said.

Rate and recession risks were once again weighing on the market.

While the secondary space saw its second consecutive weekly loss on Friday, trading volume was extremely thin during Friday’s session, a source said.

Large, liquid issues and topical news were the drivers of the little trading activity that did occur.

While the broader market was under pressure, Vericast Corp.’s 11% first-lien notes due 2026 (Caa1/B-) made large gains as buzz swept through the market about a potential acquisition of the marketing company.

However, news of Open Text Corp.’s $6 billion acquisition of Micro Focus drove its 4 1/8% senior notes due 2031 (Ba2/BB) down more than 4 points.

Never say never

The market source who said “never say never” spoke shortly before Fed-driven despair sent the Dow Jones industrial average tumbling a whopping 2¼% by midafternoon on Friday, as investors appeared to reconcile themselves to further rate increases from the Federal Open Market Committee (FOMC).

Fed chair Jerome Powell, in comments made Friday at the Jackson Hole economic summit, stated that the FOMC's “overarching focus right now is to bring inflation back down to our 2% goal.”

With the current rate of inflation estimated to be 8.5%, the Fed has some wood to chop, observed a bond trader at work on Friday morning in the New York City area.

In any case, the week came to close with no junk-rated, dollar-denominated new issues having priced.

Earlier in the week a Norway-based subsidiary of U.K. staffing solutions company NES Fircroft, entered the issuance vacuum with a $300 million offering of NES Fircroft Bondco AS senior secured sustainability-linked notes (B2/B), a Nordic deal coming via ABG Sundal Collier and Pareto Securities.

Investor presentations start next week.

Interest in the deal among high-yield investors in the United States appears to be limited at best, market sources say.

Vericast outperforms

Vericast’s 11% first-lien notes due 2026 bucked the selling pressure in the market and posted large gains as a buzz swept through the market that the company may be an acquisition target.

The 11% notes rose 2½ points to break par for the first time since June.

The notes were changing hands in the par ¼ to par ¾ context heading into the market close.

There was $10 million in reported volume.

The notes were the best performers of Friday’s session, a source said.

The notes were driven up by buzz the company may soon be acquired.

The sole holder of the company’s 13% second-lien secured notes due 2027, Chatham Asset Management, LLC, appears to be staging for a consolidation of the company's debt.

The maneuver is similar to the one that accompanied Chatham's takeover of R.R. Donnelley & Sons Co. late last year, a source said.

Open Text falls

While Vericast’s senior notes outperformed on news of a potential takeover, Open Text’s 4 1/8% senior notes due 2031 were among the worst performers on news it was acquiring another company.

The 4 1/8% senior notes sank 4¾ points to close Friday at 83 with the yield now 6.6%.

There was $6 million in reported volume.

The BB index was already under pressure due to rate concerns sparked by Powell’s speech, a source said.

However, Open Text’s 4 1/8% notes were driven down further by its announced acquisition of software company Micro Focus in a $6 billion all-cash transaction.

Fund flows

The dedicated high-yield bond funds sustained $275 million of net daily outflows on Thursday, according to a market source.

Actively managed high-yield funds saw $190 million of outflows on the day.

High-yield ETFs sustained $85 million of outflows on Thursday, the source said.

News of Thursday's daily cash flows followed a Thursday afternoon report that the combined funds sustained $4.568 billion of net outflows in the week to the Wednesday, Aug. 24 close, according to Refinitiv Lipper US Fund Flows.

Indexes

The KDP High Yield Daily index fell 21 points to close Friday at 55.85 with the yield 6.85%.

The index gained 20 points on Thursday after falling 8 points on Wednesday, 13 points on Tuesday and 81 points on Monday.

The index posted a weekly loss of 103 points.

The CDX High Yield 30 index fell 112 basis points to close Friday at 100.05.

The index rose 48 bps on Thursday, 34 bps on Wednesday, was flat on Tuesday and sank 84 bps on Monday.

The index posted a cumulative loss of 114 bps on the week.

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