Carnival in focus post earnings; SVB falls; Square rebounds

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 27 – The dollar-denominated high-yield primary market remained dormant on Monday, for the 17th consecutive session, matching the length of the Covid shutdown during the late winter and spring of 2020, market sources say.

With the continued shutdown of the junk new-issue market, attention has reliably turned to liability management.

Lumen Technologies, Inc. is working an exchange via subsidiary Level 3 Financing, Inc. which would see eight series of unsecured notes issued by Lumen exchanged for up to $1.1 billion of new 10½% senior secured notes due 2030 issued by Level 3.

And Carvana Co. is in the market with a distressed exchange offer for five series of its senior notes, offering to exchange the existing notes for up to $1 billion of new 9%/12% cash/PIK toggle senior secured second-lien notes due 2028.

Elsewhere on Monday a group of dealers led by Goldman Sachs is preparing to sell approximately $4 billion of second lien debt from the LBO of Citrix Systems Inc. that was hung up during the second half of 2022.

Meanwhile the euro-denominated high-yield market continues to trickle news.

Nexans (BB+) was scheduled to participate in conference calls with fixed-income investors on Monday.

The Paris-based manufacturer of copper and optical fiber cable products is contemplating bringing its inaugural sustainability-linked deal which would come in the form of a €325 million offering of five-year senior SLB notes, subject to market conditions.

Meanwhile, it was a quiet day in the secondary space with trading activity light as market players assess their next move in an uncertain market.

While volume was light, the tone improved as the banking sector stabilized on the heels of First Citizens Bancshares’ acquisition of Silicon Valley Bank.

The cash bond market added 1/8 to ¼ point while the CDX index added ½ point, a source said.

However, the clarity the market was hoping for from the Fed announcement the previous week did not transpire.

Financial markets and the Federal Reserve remain at odds over economic projections and the future trajectory of rates with the bond market pricing in a recession and calling for steep rate cuts by the year’s end while the Federal Reserve remains committed to a restrictive monetary policy until inflation hits the 2% target.

The market has long fought the Fed, sources said.

However, given the potential for more fallout and instability in the banking sector, the Fed’s hand may be forced, a source said.

With few making moves on Monday, topical news was the driving force of activity in the space.

SVB Financial Group’s senior notes were lower following First Citizens deal to acquire the deposits and loans of Silicon Valley Bank.

Carnival Corp.’s senior notes were on the rise after a surprise earnings beat although enthusiasm waned as the session progressed with the notes closing well off the highs of the day.

Block Inc.’s, formerly known as Square, Inc., 3½% senior notes due 2031 (Ba2/BB) pared their losses from the previous week when a short-seller report sparked heavy selling in the name.

SVB lower

While news that First Citizens struck a deal to acquire Silicon Valley Bank helped lift broader markets, parent company SVB Financial Group’s senior notes were under pressure.

SVB’s 3½% senior notes due 2025 fell 3 points to close Monday at 61½, according to a market source.

The 1.8% senior notes due 2026 were off 3½ points to close the day at 60½.

The 2.1% senior notes due 2028 sank 2½ points to 56¾.

The 1.8% senior notes due 2031 were also down 2½ points to close the day at 55.

News broke over the weekend that First Citizens would acquire $56 billion in deposits and $72 billion in loans from the Silicon Valley Bridge Bank established by the FDIC for $16.5 billion.

The deal did not affect parent company SVB Financial Group, which filed for Chapter 11 bankruptcy protection on March 17.

SVB’s senior notes jumped to the mid- to high 60s on news of the bankruptcy filing with holders of the senior notes organizing in preparation for the event.

The expectations of a strong recovery in bankruptcy proceedings helped lift the notes to their current level.

However, recovery expectations are waning, a source said.

Carnival’s earnings

Carnival’s senior notes were lifted after the cruise line operator reported earnings.

The 10½% senior notes due 2030 (B3/B) jumped 3 points early in the session to trade as high as 96½, a source said.

However, the notes gave back much of their gains by the close.

The 10½% notes closed Monday up 1 point in the 94¾ to 95¼ context, a source said.

There was $33 million in reported volume with the notes the most active in Carnival’s capital structure and in the secondary space.

Carnival’s 10 3/8% senior notes due 2028 (B2/B+) gained 1 point early in the session to trade as high as 107 1/8.

However, the notes gave back their gains to close the day largely unchanged in the 106 to 106½ context.

Trading activity in the issue was light.

Carnival bested expectations with revenue of $4.43 billion versus expectations for revenue of $4.32 billion.

However, enthusiasm surrounding earnings was short-lived with EBITDA forecasts coming in below expectations.

Carnival expects EBITDA of $3.9 billion to $4.1 billion in 2023 versus analyst expectations for EBITDA of $4.18 billion.

Square rebounds

Block’s 3½% senior notes due 2031 were on the rebound on Monday after a short-seller report sparked heavy selling in the company’s capital structure.

The 3½% notes climbed 2 points to close the day wrapped around 80 with the yield 6.7%.

There was $10 million in reported volume.

The 3 ½% notes dropped 4 points last Thursday after short-seller Hindenburg Research took aim at the company, accusing it over overstating user accounts, inflating its metrics and catering to criminals.

While the report sparked heavy selling in Block’s capital structure, the fundamentals of the company were solid, a source said.

Indexes

The KDP High Yield Daily index inched up 2 points to close Monday at 50.97 with the yield 7.46%.

The index posted a cumulative gain of 25 points on the week last week.

The ICE BofAML US High Yield index gained 15.1 bps with the year-to-date return now 1.992%.

The index posted a cumulative gain of 34 bps on the week last week.

The CDX High Yield 30 index gained 55 bps to close Monday at 99.88.

The index posted a cumulative gain of 46 bps on the week last week.

Fund flows

The dedicated high-yield bond funds sustained $369 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 saw $364 million of outflows on the day.

Actively managed high-yield funds sustained $5 million of outflows on Friday, the source said.

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