Junk: Baytex at a premium; Spirit Aero ails on supply gaffe; Catalent down on profit warning

By Paul A. Harris and Abigail W. Adams

Portland, Me., April 14 – It was a quiet day in the junk bond secondary space with liquidity thin as the risk rally of the past two weeks waned.

The high-yield market has rallied substantially since late March with the long-awaited end to the Federal Reserve’s rate hike campaign in sight.

But while rate risk has been a focal point for the market, it is not the only one with the market now also factoring in the severity of a looming recession and the credit crunch sparked by the turmoil in the banking sector.

“The fact the Fed pauses does not alleviate our key risk considerations: substantial capital flight and high credit stress,” according to a BofA Global Research report.

While the rally surrounding the end of the Fed’s rate hike campaign may continue, BofA is seeing it as an opportunity to reduce risk.

The cash bond market launched the day strong with the market extending its gains from the previous session.

However, selling set in after the strong start with the market closing the day largely unchanged.

“Initially there were OWICs,” a source said. “But then everything became BWICs.”

Trading activity was concentrated in Baytex Energy Corp.’s 8½% senior notes due 2030 (B1/BB-/BB-), which were trading at a strong premium to their discounted issue price.

Outside of Baytex, the slew of recent issues were quiet in the secondary with many leveling off.

However, topical news pushed several outstanding issues to the spotlight.

Spirit AeroSystems Inc.’s senior notes were taking a large hit following news the aerostructure manufacturer was the supplier responsible for the improperly installed parts that caused Boeing Co. to pause deliveries of some of its jets.

Catalent Pharma Solutions, Inc.’s senior notes also dropped in active trade after the company issued a profit warning and announced the departure of its chief financial officer.

More expected

The new issue market remained idle on Friday.

With primary watchers primed for up to $5 billion of new issue business during the post-Easter week, the deal machine came up short, with issuers pricing a $3.73 billion face amount in seven junk-rated, dollar-denominated tranches.

The new issue market is expected to remain active in the week ahead, sources say.

The high yield is wide open to credits from the energy sector, sources say.

Look for a first-time issuer from that sector to appear during the week ahead, a portfolio manager said, declining to furnish any additional information.

A significant number of potential high-yield bond issuers are poised to enter their earnings blackout periods during the April 17 week, a debt capital markets banker pointed out on Friday, adding that blackouts will likely weigh upon the coming week's issuance volume.

Baytex at a premium

Baytex’s new 8½% senior notes due 2030 dominated the tape on Friday with the notes trading at a strong premium to their discounted issue price.

The 8½% notes traded in a tight range in the par 1/8 to par 3/8 context throughout the session.

There was $103 million in reported volume.

Baytex priced an upsized $800 million, from $750 million, issue of the 8½% notes at 98.709 to yield 8¾% on Thursday.

The issue price came cheap to talk for a discount of approximately 1 point. The yield came at the tight end of the 8¾% to 9% yield talk.

Spirit AeroSystems falls

Spirit AeroSystems’ senior notes were hurting in heavy volume on Friday after the aerostructure manufacturer announced it was the supplier responsible for Boeing’s delivery delay.

The company’s unsecured notes were taking the biggest hit with Spirit’s 4.6% senior notes due 2028 (Caa1/CCC+) falling 4½ to 5 points.

The notes sank to an 81-handle and were trading in the 81 to 81½ context heading into the market close, a source said.

The yield rose to 9¼%.

Spirit’s secured notes were faring better with the notes off about 1 to 2 points.

Spirit’s 9 3/8% senior secured first-lien notes due 2029 (Ba2/BB-) fell 2¼ points to close the session at 106 5/8%, according to a market source.

The yield was 7 5/8%.

Spirit’s 7½% senior secured second-lien notes due 2025 (B3/B-) were off about 1 point to close the day at 98 7/8 with the yield 8 1/8%.

There was $8 million in reported volume.

Spirit’s capital structure was under pressure after announcing that it was the supplier responsible for the non-conforming parts that caused Boeing to halt delivery of some of its 737 Max jets.

Catalent down

Catalent’s senior notes were also lower in active trade after the company issued a profit warning and announced the departure of its chief financial officer.

Catalent’s 3½% senior notes due 2030 (B1/BB-) sank 3 points to close the session at 85.

The yield rose to 6 1/8%.

There was $14 million in reported volume.

Catalent’s 3 1/8% senior notes due 2029 were down 2½ points to close the day at 6 1/8%.

There was $13 million in reported volume.

Catalent’s capital structure was under pressure after it announced that productivity issues at three of its manufacturing sites would impact earnings in 2023.

The drug manufacturer is scheduled to report third-quarter earnings in early May.

Fund flows

High-yield ETFs saw a whopping $2.16 billion of daily cash inflows on Thursday, the most recent session for which data was available at press time, according to a market source

Those inflows were evenly split, with JNK seeing $960 million and HYG seeing $955 million of inflows on the day, the source said.

Meanwhile the actively managed high-yield funds sustained moderate outflows of $60 million on Thursday.

News of Thursday's daily flows follows a Thursday afternoon report that the combined funds saw $235 million of net inflows in the week to the Wednesday, April 12 close, according to fund-tracker Refinitiv Lipper.

Indexes

The KDP High Yield Daily index fell 8 points to close Friday at 52.01 with the yield 7.03%.

The index gained 18 points on Thursday, 16 points on Wednesday and 8 points on Tuesday after falling 9 points on Monday.

The index posted a cumulative gain of 28 points.

The CDX High Yield 30 index gained 17 basis points to close Friday at 101.66.

The index rose 67 bps on Thursday, fell 27 bps on Wednesday, and gained 32 bps on Tuesday and 33 bps on Monday.

The index posted a cumulative gain of 122 bps on the week.

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