Bank paper in focus; First Republic down; Atlas Air hits new low

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 20 – The high-yield new-issue market remained quiet on Monday amid ongoing volatility in the financial sector.

The active forward calendar is empty.

Meanwhile, it was a quiet session in the secondary space with the cash bond market either side of unchanged and liquidity thin, a source said.

Bank paper was firmly in focus as investors digested UBS’s emergency buyout of Credit Suisse, which wiped out its AT1 bonds, and First Republic’s slashed credit ratings.

While the market tone improved on Monday, investors remained skeptical that the Credit Suisse deal would prevent further contagion in the banking sector, sources said.

The secondary space has seen a dramatic repricing over the past two weeks as the risk aversion created by the uncertainty in the banking sector converged with a massive rate rally sparked by reduced rate hike expectations.

On March 8, prior to Silicon Valley Bank’s collapse, the market had priced in a terminal Fed Fund rate around 5.5% by the fourth quarter.

The market is now pricing in a terminal rate on a 3% handle by year’s end.

The market will be laser focused on the Federal Open Market Committee’s rate announcement on Wednesday and chair Jerome Powell’s press conference, with volatility expected if market expectations are wrong, sources said.

While the broader market was quiet, Credit Suisse Group AG’s securities were moving with its 6½% senior notes due Aug. 8, 2023 (/BB+) skyrocketing while the bank’s AT1 securities sank to pennies on the dollar.

First Republic Bank’s 4 5/8% subordinated notes due 2047 (B2/B-) were again under pressure after the bank’s credit ratings were slashed.

Rand Parent, LLC’s 8½% first-lien senior secured notes due 2030 (Ba1/BB/BB+), backing the buyout of Atlas Air, continued their downward trend with the notes breaking below a 91-handle.

Credit Suisse in focus

Credit Suisse’s securities were following opposite trajectories following UBS’s emergency buyout of the failing bank.

Credit Suisse’s 6½% senior notes due Aug. 8, 2023 skyrocketed more than 30 points on Monday.

The notes closed the previous week in the mid-50s. They jumped as high as 84 7/8 on Monday, a source said.

However, the issue is Regulation S and traded overseas much like its AT1 bonds, or contingent convertible bonds, which were wiped out in the UBS deal.

In UBS’s $3.3 billion buyout of Credit Suisse, $17 billion of the bank’s AT1 securities will be written down.

UBS 7½% perpetual bond (B1/B) sank 20 points to close Monday at 4¼.

The 9¾% perpetual bond sank 30 points to also close at 4¼.

The decision to wipe out the securities has raised the ire of some investors.

However, the securities are largely traded off of high-yield European desks, a source said.

Credit Suisse announced a tender offer for 10 series of its dollar-denominated notes last Wednesday.

First Republic lower

First Republic’s 4 5/8% subordinated notes due 2047 were under pressure in heavy volume on Monday as the bank’s credit ratings were again slashed.

The 4 5/8% notes fell 10 points on Monday with the rally sparked by last Thursday’s rescue short lived.

The notes closed Monday in the 54½ to 55½ context, a source said.

They shot as high as 70 last Thursday after a consortium of the U.S.’s largest banks provided First Republic with $30 billion in fresh deposits.

However, uncertainty about the bank’s stability remains as withdrawals continue and stock plummets.

Moody’s Investors Service slashed First Republic to B2 from Baa1 on Monday, citing its eroding financial profile.

The $30 billion investment was a positive, but the borrowing costs combined with the fixed-rate assets at the bank will hurt its core profitability, Moody’s said in a press release.

S&P slashed First Republic’s issuer credit rating to B+ from BB+ on Monday after cutting it to BB+ from A- on March 15.

The bank was “likely under high liquidity stress with substantial outflows over the past week,” S&P said in a press release.

Atlas Air’s new low

Atlas Air’s 8½% first-lien senior secured notes due 2030 continued to take a hit amid strong risk aversion in the market.

The 8½% notes fell 2 points to trade as low as 90¾ in intraday activity.

However, the notes improved to close the day in the 91 1/8 to 91 3/8 context, a source said.

There was $17 million in reported volume.

The leveraged buyout deal currently claims the title as the worst performing new deal of 2023.

Rand Parent priced an $850 million issue of the 8 ½% notes at par on Feb. 9 with proceeds funding a portion of the Apollo-led buyout of Atlas Air.

Fund flows

The dedicated high-yield bond funds saw $484 million of net daily cash outflows on Friday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs sustained $459 million of outflows on the day.

Actively managed high-yield funds sustained $25 million of outflows on Friday, the source said.

The combined funds have seen $13 billion of net outflows, year-to-date, according to the market source.

Indexes

The KDP High Yield Daily index gained 3 points to close Monday at 50.73 with the yield now 7.58%.

The index posted a cumulative loss of 16 points on the week last week.

The ICE BofAML US High Yield index was down 12.8 bps with the year-to-date return now 1.373%.

The CDX High Yield 30 index was unchanged and closed Monday at 98.87.

The index posted a cumulative loss of 121 bps on the week last week.

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