Junk bonds unchanged post-Fed; First Republic volatile; Carvana gains on exchange

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 22 – While the dollar-denominated high-yield bond primary market remained dormant on Wednesday, there were signs of life in Europe with France-based telecom Iliad Group setting March 29 meetings with fixed-income investors.

Meanwhile, it was a quiet day in the secondary space as the event the market had been waiting for transpired – the Federal Open Market Committee delivered its rate hike decision and addressed the recent instability in the banking sector.

The committee announced a widely anticipated 25 basis points rate increase, which lifted the federal fund target rate to 4.75% to 5%.

It was a substantial reduction from the 50 bps rate increase policy makers had been prepared for prior to the rapid collapse of Silicon Valley Bank and the instability in the banking sector.

There were dovish overtones to the Fed announcement with policy makers dropping the phrase “ongoing increases” for the more ambiguous “some additional policy firming may be appropriate,” with Federal Reserve chair Jerome Powell highlighting the words “some” and “may” during his press conference.

However, the dot plot plan was little changed in light of the banking crisis with a near consensus that the federal fund rate will need to rise to at least 5.1% and hold there through December.

The projections were a far cry from market expectations for rate cuts to a 3% handle by the year’s end.

There was a mini-surge of buying activity in response to comments made during Powell’s press conference.

However, selling took hold into the close with the cash bond market ending the day largely unchanged but the CDX index driven down about ¾ point.

“The market still doesn’t know what it’s doing,” a source said.

The market has undergone a dramatic repricing over the past two weeks as rates rallied and investors de-risked amid the threat of contagion in the banking sector.

While Powell affirmed the soundness of the banking sector, the situation’s impact on credit and future monetary policy was still unclear.

First Republic Bank’s 4 3/8% subordinated notes due 2046 (B2/B-) were volatile with the notes adding early in the session but closing the day with losses.

DISH Network Corp.’s 11¾% senior secured notes due 2027 (Ba3/B+) gave back gains from the previous session with the notes hitting a new all-time low.

While the broader market was laser-focused on the Fed on Wednesday, topical news pushed Carvana Co. into the spotlight.

News that the struggling used car e-commerce company, which has long been marked as a default candidate, had launched an exchange for five series of notes sent its short-duration notes soaring.

Primary eyed

The dollar-denominated high-yield primary market remained dormant on Wednesday.

However, the euro-denominated market stirred.

France-based telecom Iliad Group set March 29 meetings with fixed-income investors, according to a market source who added that those meetings will be coordinated by BNP Paribas.

Meanwhile, as stocks took a tumble in the wake of another 0.25% increase in short-term rates announced at the conclusion of the March FOMC meeting, on Wednesday, and the high-yield bond market stood unchanged, a trader said that late in the session junk felt as though it wanted to move an eighth of a point higher.

The primary could shrug off Wednesday's Fed move, the trader said, adding that if the market could hold onto gains for a day or two we could see a drive-by deal, or two.

First Republic volatile

First Republic’s 4 3/8% subordinated notes due 2046 were volatile as the Federal Reserve unveiled its path forward in the fight against inflation in light of the instability in the banking sector.

The 4 3/8% notes traded up more than 1 point early in the session to hit as high as 62½, according to a market source.

However, they gave back those gains and closed the day down 1 point.

The notes were changing hands in the 59 to 59½ context heading into the close.

The notes fell following reports that First Republic’s portfolio of loans and securities had loses of $26.8 billion.

The $13 billion capital gap created by those losses would render its shares worthless in a distressed sale or receivership, Bloomberg reported.

DISH’s new low

DISH’s 11¾% senior secured notes due 2027 gave back gains from the previous session and fell to a new low in active trade on Wednesday.

The 11¾% notes fell ¾ to 1 point to trade in the 93½ to 94 context, a source said.

It was a new low for the notes.

DISH’s capital structure has been under pressure since a ransomware attack in late February caused widespread power outages.

However, selling in the name accelerated as markets repriced in the wake of Silicon Valley Bank’s collapse.

The 11¾% notes were trading above par heading into March 8, the beginning of the end for SVB.

DISH priced a $2 billion issue of the 11¾% notes at 98.171 in November 2022 and a $1.5 billion add-on at 102 on Jan. 17.

Carvana’s exchange

Carvana’s short-duration 5 5/8% senior notes due 2025 (Caa2/CCC) jumped on news the ailing used car e-commerce company launched an exchange for five series of notes.

The 5 5/8% senior notes due 2025 (Caa2/CCC) gained almost 15 points after the exchange was announced, although they came in heading into the close.

The 5 5/8% notes were marked at 65 bid, 70 offered early in the session but were dragged down to a 63-handle by the close, sources said.

The 10¼% senior notes due 2030, which priced at par in 2022, were largely unchanged at 50 bid, 55 offered with the longer duration notes not as impacted by the news.

Carvana announced an exchange offer for up to $1 billion in new 9%/12% cash/PIK toggle senior secured second-lien notes due 2028.

The company is offering to exchange from the $500 million outstanding 5 5/8% notes due 2025 for $808.75 of new notes per $1,000 of existing notes and from the $3.275 billion of outstanding 10¼% senior notes due 2030 for $793.75 of new notes per $1,000 of the existing notes.

Carvana has long been marked as a default candidate for 2023.

Notes issued in distressed debt exchanges were the leading source of defaults in 2022.

Fund flows

The dedicated high-yield bond funds saw $218 million of net daily cash outflows on Tuesday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds sustained $155 million of outflows on the day.

High-yield ETFs saw $63 million of outflows on Tuesday.

The combined funds are tracking $625 million of net outflows on the week that will conclude with Wednesday's close.

Indexes

The KDP High Yield Daily index gained 12 points to close Wednesday at 51.05 with the yield 7.44%.

The index gained 20 points on Tuesday and 3 points on Monday.

The ICE BofAML US High Yield index rose 29 bps with the year-to-date return now 2.24%.

The index gained 57.7 bps on Tuesday after falling 12.8 bps on Monday.

The CDX High Yield 30 index dropped 81 bps to close Wednesday at 99.58.

The index jumped 152 bps on Tuesday and was unchanged on Monday.

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