Morning Commentary: Junk opens lower, then steadies; junk funds see sizable outflows

By Paul A. Harris

Portland, Ore., June 14 – Junk opened ¼ point lower on Tuesday on the heels of a Monday rout that saw the high-yield ETFs finish with their largest closing discounts since March 20, 2020, a trader said.

With the approach of mid-morning, and with equities modestly higher, junk felt firmer to another trader, who characterized the market as “very quiet.”

Recently issued bonds that saw sizable price drops on Monday were holding in or trading modestly higher on Tuesday morning.

The CDK Global Inc. (Central Parent Inc./Central Parent Merger Sub Inc.) 7¼% senior secured first-lien notes due June 2029 (B1/B+) were 97¼ bid, up half a point, the trader said.

The $750 million deal came at par last Thursday.

The Maxar Technologies Inc. 7¾% senior secured notes due June 2027 (B2/B) were trading at 98, unchanged, the source said.

The $500 million issue also priced last Thursday at par.

With oil prices rallying to multi-month highs on Tuesday, one might intuitively expect high-yield energy names to substantially improve as well.

However, that has not necessarily been the case, the trader said.

Although the barrel price of West Texas Intermediate crude oil for July 2020 delivery was up a hefty 2.15%, or $2.60, at a staggering $123.53 at mid-morning, commodities watchers expect this fabulous rally to be played out sooner than later, with WTI ultimately retreating into the mid-$70 per barrel context, the trader said.

Hence, fabulous prices notwithstanding, investors are eyeing the high-yield energy space with caution, the source added.

Away from the oil patch, a recent good news, bad news event in the natural gas sector has been substantially eroding natural gas prices.

An explosion last week at the Freeport liquefied natural gas export terminal in Texas initially sent gas prices rallying. However, the explosion freed up gas that was to be liquefied and exported to Europe, ultimately creating a domestic surplus, and causing prices to drop, the trader recounted.

The BTU price of natural gas for July delivery was down a whopping 16.13%, or $1.39, at $7.22, at mid-morning Tuesday.

At that time the Cheniere Energy Partners, LP 3¼% senior notes due January 2032 were down half a point at 80 bid, the trader said.

In the new issue market there was no fresh news on Tuesday morning, sources said.

Only one deal appears on the active forward calendar.

Iris Holdings Inc. has been marketing a $400 million offering of 6.5-year senior notes (Caa2/CCC+) backing the buyout of Intertape Polymer Group Inc. by Clearlake Capital Group LP.

It was expected to price in the early part of the present week; however, there have been no updates since the beginning of the week, sources say.

Initial guidance had the notes coming with a 10% coupon at an issue price in the low 90s with an all-in yield in the high 11% area to the low 12% area.

That early guidance, however, has likely been overtaken by events, as market conditions deteriorated substantially since the deal was announced.

Also, the proposed Intertape Polymer offer was heard to be hitting headwinds late last week, sources say.

Big Monday outflows

The dedicated high-yield bond funds sustained a big $1.696 billion amount of daily net outflows on Monday, according to a market source.

Actively managed high-yield funds saw $985 million of outflows on the day, said the source, adding that those outflows were broad based.

High-yield ETFs sustained $711 million of outflows on Monday.

The combined funds are tracking $2.7 billion of net outflows on the week that will conclude with Wednesday's close, according to the market source.

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