Risk-on rally ends; new Carnival relinquishes gains, secured notes lower; Carvana crashes

By Paul A. Harris and Abigail W. Adams

Portland, Me., Oct. 19 – The risk-on rally over the past two sessions came to an abrupt end on Wednesday as hawkish comments from a notoriously dovish Federal Reserve official sent Treasuries into a tailspin.

Treasury yields across the curve hit new 52-week highs.

“Every time you think the rally has some teeth...” a source said.

And while there were better sellers in the market, the selling pressure was “not terrible,” the source said.

The cash bond market gave back its gains from the previous session but remained positive on the week.

Carnival Corp.’s 10 3/8% senior priority notes due 2028 (B2/B+) dominated activity in the secondary space with the notes surrendering gains after a strong break but holding at their discounted issue price.

The new paper continued to inflict damage on Carnival’s 9 7/8% senior secured second-priority notes due 2027 (B1/B) with the new notes providing better guarantees, a source said.

And while the notes were relatively unchanged the previous session, Carnival’s 10½% senior notes due 2030 (B3/B-) were taking a hit on Wednesday.

Carvana Co.’s 10¼% senior notes due 2030 (Caa2/CCC) solidified themselves as the worst performing deal of 2022 with the notes erasing gains from the latest rally and reapproaching their all-time low as the company’s legal woes mount and analysts question their profit potential.

Primary market

The high yield primary market was idle on Wednesday, as risk-free rates – with 10-year government paper spiking 11 basis points to reach a 14-year high above 4.13% – continued to throw up blocking signals in front of speculative-grade bond investors, sources said.

The market's latest deal, a $2.03 billion Tuesday drive-by from Carnival Corp., was maintaining a ¼ point premium to its new issue price early Wednesday afternoon, according to a portfolio manager who took part in the transaction.

This investor reported putting in a large order, and ultimately receiving an allocation that came to 20% of that order's size.

The new Carnival 10 3/8% senior priority notes due May 2028 (B2/B+), which priced at 98.465 to yield 10¾%, saw play from existing holders of the cruise line's bonds, representing a sizable amount of reverse inquiry (as much as $750 million, sources said), according to the manager.

There were also large investors who were looking to hold the paper.

And, because of the ongoing paucity of new issuance, there were accounts flush with cash from coupon payments, inflows and redemptions which attempted to seize the opportunity to put some of that cash to work.

To this investor the Carnival deal came a little cheap, but certainly not very cheap.

And unfortunately, there is no visible parade of like-issuers waiting in the wings for opportunities to move into the new issue market, the investor said.

Instability in the risk-free market continues to make it extremely difficult to price risk, the investor said.

Potential issuers that might attempt to brave the present market conditions must reconcile themselves to big coupons and eye-popping discounts, sources say.

Primary market activity could remain muted into the intermediate future, the investor said.

However high-yield companies appear positioned to weather the forbidding circumstances that presently obtain in the primary market until the later part of 2023, the source added.

Carnival in focus

Carnival remained the focus of the secondary space on Wednesday with its new 10 3/8% senior priority notes dominating activity in the space.

While the notes gave back their gains from a strong break, they were able to hold at their discounted issue price despite the down day for the market.

The 10 3/8% notes fell ¾ of a point in heavy volume.

They were marked at 98½ bid, 99 offered heading into the market close.

There was $180 million in reported volume.

The notes traded up to a 99-handle after breaking for trade on Tuesday.

Carnival priced a $2.03 billion issue of the 10 3/8% notes at 98.465 to yield 10¾% in a Tuesday drive-by.

The yield printed at the tight end of the 10¾% to 11% yield talk and towards the rich end of talk for an original issue discount of 2 points.

While sources questioned how much more cruise line paper the high-yield market can absorb – the hefty coupon was attractive, making the notes a difficult short.

While the company currently has negative EBITDA and cash flow, its revenue is projected to nearly double in 2023.

But even with no price appreciation, coupon clipping alone would be a nice way to “juice the portfolio,” and the company is not going to be going out of business soon, a source said.

While Carnival’s new offering was holding its issue price, the new deal continued to inflict damage on its 9 7/8% senior secured second-priority notes due 2027.

The 9 7/8% notes were off another 2 points on Wednesday after a 2-point decline on Tuesday.

They were changing hands in the 90¾ to 91 context with the yield cracking 12½%.

There was $49 million in reported volume.

While Carnival’s 10 3/8% notes are unsecured, they were issued by newly created subsidiary Carnival Holdings (Bermuda) Ltd. which achieved a higher credit rating than its other unsecured notes due to the strength of the guarantees backing the notes.

The new paper has 12 unencumbered cruise ships valued at $8.2 billion serving as collateral for the latest offering, a source said.

While unchanged the previous session, Carnival’s 10½% senior notes due 2030 fell on Wednesday with the notes down 2 points to close the day at 74½ with a yield of 16½%.

There was $15 million in reported volume.

Carvana crashes

Carvana’s 10¼% senior notes due 2030 solidified its placement as the worst performing deal of 2022 with the notes erasing all gains from the market rally over the past two sessions and reapproaching an all-time low.

The 10¼% senior notes fell 3¾ points in heavy volume as the company’s legal woes mount and analysts question its profit estimates.

The notes were changing hands in the 59½ to 60 context on Wednesday with the yield 21¼%.

There was $22 million in reported volume.

The 10¼% notes jumped from their all-time low of a 57-handle to a 63-handle as the market rallied post-CPI report.

However, the notes alongside Carvana’s stock crashed on Wednesday as the used car e-commerce company faces legal challenges over customers’ inability to register cars purchased through the platform.

Carvana’s stock was also downgraded by an analyst questioning previous profit estimates for the company.

While less active, Carvana’s 5 5/8% senior notes due 2025 also fell 3¾ points outright to close at 67 with the yield also 21¼%.

Fund flows

High-yield ETFs saw $440 million of daily cash inflows on Tuesday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds saw negative flows on the day, however, as they sustained $142 million of outflows on Tuesday, the source said.

The combined funds are tracking $115 million of net outflows for the week set to conclude with Wednesday's close, according to the market source.

Indexes

The KDP High Yield Daily index fell 32 points to close Wednesday at 51.28 with the yield now 7.98%.

The index rose 15 points on Tuesday and 28 points on Monday.

The ICE BofAML US High Yield index was down 49 basis points with the year-to-date return now 13.856%.

The index was up 44.9 bps on Tuesday and 50.9 bps on Monday.

The CDX High Yield 30 index fell 45 bps to close Wednesday at 97.86.

The index gained 75 bps on Tuesday and 121 bps on Monday.

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