Trading light as market rout continues; credit spreads widen; Washington Prime Group trades down

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 18 – The domestic high-yield primary market remained shuttered and trading activity in the secondary space muted on Wednesday with the policy response to the coronavirus outbreak doing little to provide lasting relief to capital markets.

Credit spreads continued to blow out with three of the four largest daily spread widenings in history occurring in the last two weeks.

Crude oil futures continued to crater with WTI crude oil futures seeing its third worst day in history on Wednesday.

WTI crude oil futures dropped 24% in intraday trade before settling at $22.39, a decrease of $4.56 or 16.92%.

While the secondary space continued to move lower and returns sank further into negative territory, some sellers were unwilling to offload their positions at Wednesday’s levels, a source said.

“Some people that wanted to sell yesterday won’t sell today at current prices,” the source said.

Washington Prime Group Inc.’s 6.45% senior notes due 2024 were one of the most actively traded issues in the secondary space on Wednesday with the shopping center REIT’s junk bonds trading down.

Dish Network Corp.’s 7¾% senior notes due 2026 also traded off several points in high-volume activity.

TransDigm Group Inc.’s 6¼% senior notes due 2026 moved down to an 89-handle on Wednesday after trading with a premium as recently as last week.

The damage

The high-yield new issue market, which remained closed on Wednesday, has now passed a fortnight since the last issues priced, on Wednesday, March 4.

During that time, high-yield spreads have undergone three of the four largest daily spread widenings in history, as of Tuesday's close: 101 basis points on March 9, 78 bps on March 12 and 86 bps on March 16, according to a market source who cited the JP Morgan Domestic High Yield Index.

By a couple of metrics, however, the high-yield market has not unraveled to the extent that it did in the wake of the 2008 crisis in the financial markets, which got underway with the subprime mortgage meltdown and climaxed with the spectacular collapse of Lehman Brothers.

The composite high-yield spread at Tuesday's close was 909 bps, compared to 1,929 bps on Dec. 15, 2008, the source said.

And the iShares iBoxx $ High Yield Corporate Bd (HYG) ended down 4.41%, or $3.36, at $73 per share on Wednesday, with one market source reporting a high volume of short positions being taken.

On Nov. 1, 2008 HYG, the biggest of the high-yield ETFs, fell as low as $65.25.

Washington Prime active

Washington Prime’s 6.45% senior notes due 2024 were one of the most actively traded issues in the secondary space on Wednesday.

The paper from the shopping center REIT was trading off in the high-volume activity.

The 6.45% notes were down 2 points to 65 in the late afternoon with more than $28 million in reported volume, according to a market source.

The notes were trading in the low 80s at the end of February.

The notes were trading down as several of the REIT’s tenants close their doors to prevent the spread of the coronavirus.

Dish Network drops

Dish Network’s 7¾% senior notes due 2026 were trading off in high-volume activity on Wednesday.

The notes were down more than 4 points to 89¾ by the late afternoon, according to a market source.

The bonds saw more than $26 million in reported volume, making them one of the most actively traded issues in the secondary space.

The 7¾% notes traded as high as 111 as recently as the first week of March.

While the notes were trading off with the overall market, they previously surged following regulatory approval of the Sprint/T-Mobile merger with Dish planning to launch its own wireless network and become the fourth mobile operator in the U.S.

TransDigm down again

TransDigm’s 6¼% senior notes due 2026 continued their downward trajectory in active trading on Wednesday.

The Ohio-based commercial and military aerospace components maker’s 6¼% notes dropped almost 6 points to an 89-handle.

They were seen changing hands at 89¼ in the late afternoon with more than $18 million in reported volume, according to a market source.

The notes were on a 103-handle as recently as March 11.

The company was falling victim to the same pressures that have rocked airlines.

With airlines grounding flights and reducing operations due to the coronavirus, the aerospace industry, as a whole, was seeing a pullback.

The supplier of parts to the industry was also expected to take a hit, a source previously said.

Junk funds see $272 million Tuesday outflows

The dedicated high-yield bond funds sustained $272 million of net outflows, heavily weighted to the real money accounts, on Tuesday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds, the asset managers – said to represent the “real money” in the junk bond market – saw $625 million of outflows on the day.

High-yield ETFs, on the other hand, saw solid inflows of $353 million on Tuesday, the source said.

With only Wednesday's fund flow totals remaining to go into the tally, the combined high-yield funds are tracking around $2 billion of net outflows for the week that concluded with Wednesday's close, according to the market source.

Indexes extend losses

Indexes continued their downward trajectory on Wednesday after a mixed day on Tuesday.

The KDP High Yield Daily index dropped 194 bps to close Wednesday at 58.69 with the yield now 9.17%.

The index was down 10 bps on Tuesday after plummeting 218 bps on Monday.

The ICE BofAML US High Yield sank further into negative territory.

The index sank 303.4 bps with year-to-date returns now negative 16.147%.

The index dropped 80.1 bps on Tuesday and plummeted 317.1 bps on Monday.

It was in positive territory as recently as a week and a half ago.

The CDX High Yield 30 index plunged 305 bps to close Wednesday at 91.2.

The index gained 90 bps on Tuesday after plummeted 452 bps on Monday.

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