Morning Commentary: Volatility rocks junk; oil and auto names drop; GoDaddy improves

By Paul A. Harris

Portland, Ore., May 31 – The volatility that took hold of the global financial markets amid concerns about escalating trade war rhetoric from the president of the United States took a toll on high-yield bonds Friday morning, sources said.

Junk traded ¼ point lower in the early going, a New York-based trader said.

President Trump's threat of a 5% tariff on imports from Mexico, in retaliation for perceived indifference on the part of Mexican authorities to issues surrounding immigration concerns on Mexico's border with the United States, dealt a body blow to already struggling U.S. automakers whose costs for parts from Mexico-based suppliers would go up.

Auto-related junk bonds jammed into reverse, accordingly.

The American Axle Manufacturing Inc. 6½% senior notes due April 2027 were down around 2 points, trading at 94¾, according to the trader.

Goodyear Tire & Rubber Co.'s 5% senior notes due May 2026 traded Friday morning at 91 5/8, down 1 5/8 points, the source said.

Crude oil prices underwent a big decline, Friday morning, compounding the pressure on junk, with energy names representing about 15% of the high-yield index.

The barrel price of West Texas Intermediate crude for July 2019 delivery fell 2.23%, or $1.26, to $55.33.

The California Resources Corp. 8% senior secured second-lien notes due December 2022, a big liquid issue employed by high-yield bond investors for the purpose of tracking crude oil prices in the index, fell 2 1/8 points Friday morning to 70¼ bid.

The Chesapeake Energy Corp. 7% senior notes due October 2024 were down 3 points, while the Chesapeake Energy 8% senior notes due January 2025 were down 2½ points, the trader said.

There was at least one bright spot in Friday's troubled high-yield market news.

Bonds sold Thursday by GoDaddy Inc. were trading at a modest premium to their new issue price.

The Go Daddy Operating Co. and GD Finance Co. Inc. 5¼% senior notes due December 2027 (B1/B+) were par 5/8 bid, par ¾ offered.

The $600 million issue priced at par, the trader recounted, noting that Friday morning’s price improvement came in spite of GoDaddy turning a deaf ear to early whispers in the mid 5% context, eventually managing to get the deal done at the tight end of the 5¼% to 5 3/8% final talk.

Quiet primary

The mainstream dollar-denominated new issue calendar held a single deal Friday morning.

Neiman Marcus Group Ltd. LLC has been in the market with a $550 million offering of five-year second-lien notes, with early guidance specifying a blended 14% coupon that would be comprised of an 8% cash payment, with the remaining 6% to be taken out by means of an in-kind PIK payment.

There have been some obituaries for the deal, which was marketed on a roadshow earlier in May.

However, those obits may be premature, said the New York-based trader.

The Neiman Marcus deal is heard to be backstopped, possibly by a single bidder.

And that bid may get hit, the trader said.

Elsewhere the shadow calendar is clearing as prices have widened, scattering opportunistic issuers that had been having a look, a debt capital markets banker said.

Investors were fleeing risk on Friday, the banker said, noting that 10-year Treasuries were yielding just 2.177%. It yielded 2.52% on May 1.

Germany’s 10-year government bonds were yielding negative 0.2%, on Friday morning, the source added.

Mixed Thursday flows

The daily cash flows of the dedicated high-yield bond funds were mixed on Thursday, a market source said.

High-yield ETFs, which sustained a whopping $1.05 billion of daily outflows on Wednesday, regained some of it on Thursday, with $179 million of inflows on the day.

However actively managed high-yield funds sustained $50 million of outflows on Thursday, the source said.

News of Thursday’s daily flows follows a Thursday afternoon report that the combined junk funds sustained $1.27 billion of outflows in the week to Wednesday’s close, according to Lipper US Fund Flows.

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