Primary eyed; Ford in focus as fallen angel; TransDigm higher; funds lose $2.03 billion

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 26 – While the domestic high-yield primary market remained shuttered for its third straight week, rumors of life are brewing.

There may be some deals on the horizon provided potential issuers are willing to pay the premium the market will undoubtedly try to extract, sources said.

Meanwhile, the secondary space continued to recover from one of the worst months in its history.

The space was up 3 to 4 points with the imminent passage of Congress’ $2 trillion spending package continuing to buoy markets, sources said.

Higher-quality credits and recent fallen angels remained in focus. However, liquidity continued to be an issue.

Unlike previous sessions where bids were hard to come by, there were a lack of offers on Thursday, a source said.

“People are afraid of selling today then seeing the bond move up a lot tomorrow,” the source said.

Ford Motor Co.’s senior notes were in focus on Thursday with the notes improved after S&P’s downgrade of the automaker solidified its status as a fallen angel.

Occidental Petroleum Corp.’s senior notes were mixed after the oil producer became a fully junk rated company.

TransDigm Group Inc.’s senior notes continued to improve on Thursday with the company expected to be one of the benefactors of the stimulus package.

While the secondary space has seen gains over the past few sessions, high-yield mutual and exchange-traded funds continued to have cash leave the space with outflows of $2.028 billion through Wednesday’s close, according to Refinitiv Lipper Fund Flows.

Maybe next week

Counsel from around the high-yield bond market on Thursday: “Hold the obits.”

Pronouncements of the death of the junk bond market, thundering from the mainstream financial news services, are premature, market insiders say.

Syndicate officials and traders have adapted to the exigencies of social distancing and are continuing to do their work by means of virtual syndicate desks and trading floors.

Traders with video hookups are operating fully functioning virtual trading stations.

An investment banker who picked up on Thursday said the virtual high-yield syndicate desk is functioning quite well.

Given that responses from the elected U.S. government and its financial policy makers to the ongoing Covid-19 pandemic appear to be getting some traction, based on market performances on Wednesday and Thursday, the new issue market might regenerate as early as the March-April crossover week, according to the source.

“There are some situations we're looking at now,” the banker said.

Netflix

One name the market is kicking around in this context is Netflix, Inc.

The Los Gatos, Calif.-based media services provider has been showing up in the high-yield primary market during April, in the past few years (2017-2019, inclusive), mostly to raise capital to fund ongoing content acquisitions and development.

Social distancing and quarantines have, of course, intensified demand for the company's services, as people scramble for alternatives to cinema houses and clubs.

That's reflected in the company's bond prices, the banker said, noting that the Netflix 5 3/8% notes due November 2029, toward the long end of the company's maturity curve, were 99 bid on Thursday, working out to a yield of approximately 5½%.

There is not much doubt that given some stability, for the right credit a deal can be done, the syndicate banker said.

It's the issuer who must decide if the desired capital is worth the premium that the market will extract in order to compensate investors for getting into a deal when spreads have undergone epochal widening (the composite junk spread was 1,084 basis points at Wednesday's close) and defaults appear poised to rocket to double-digits for the first time in over a decade.

As to Netflix, the premium it might face would be around 100 bps to existing bonds, the banker reckoned.

The Netflix April cash raises over the past three years were €1.3 billion in 2017, $1.9 billion in 2018 and $2.24 billion equivalent in 2019.

So, a 100-bps premium is certainly not insignificant.

However, given the present circumstances, it is perhaps not excessive, the banker suggested.

Ford gains as fallen angel

Ford’s senior notes were in focus on Thursday after S&P Global Ratings downgraded the company to junk, solidifying its status as a fallen angel.

Ford’s 3.087% senior notes due 2023 gained 9 points to trade up to 82 in the late afternoon, according to a market source.

With more than $33 million in reported volume, the bonds were among the most actively traded during Thursday’s session.

Ford’s 5.113% senior notes due 2029 rose 3 points to 77 with $25 million in reported volume.

The 2.979% senior notes due 2022 were up 2.5 points to 79½.

However, the 4.346% senior notes due 2026 were largely unchanged at 75.

S&P became the second rating agency to downgrade the struggling automaker to junk.

S&P slashed its rating for Ford to BB+ from BBB- and placed it on watch with negative implications.

The company was borderline prior to the coronavirus outbreak and is unlikely to maintain the necessary credit metrics with the reduced demand caused by the coronavirus, S&P said in a press release. (See related article in this issue)

Ford’s status as a fallen angel was widely anticipated following Fitch Ratings’ downgrade of the company to BBB- with a negative outlook on Monday.

Moody’s Investors Service downgraded Ford to junk in 2019.

Occidental mixed

Occidental Petroleum’s senior notes were mixed on Thursday after the oil producer became a fully junk rated company.

Occidental’s 3.4% senior notes due 2026 were off about 1 point on Thursday.

The notes were changing hands in the 50 to 51 context with $18 million in reported volume, according to a market source.

Occidental’s 2.7% senior notes due 2022 jumped about 2 points.

They were changing hands in the 66¾ to 68 1/8 context during Thursday’s session, according to a market source.

The notes saw $16 million in reported volume.

While volume was light, the 2.9% senior notes due 2024 rose about 2 points to close Thursday at 55½.

S&P slashed Occidental Petroleum’s credit rating to BB+ from BBB and placed it on credit watch with negative implications due to its high debt burden and depressed oil prices.

Fitch lowered Occidental’s rating to BB+ from BBB+ on March 20.

Moody’s downgraded Occidental to Ba1 on March 18.

TransDigm improves

TransDigm’s junk bonds continued to improve on Thursday with the Ohio-based commercial and military aerospace components maker expected to benefit from Congress’ $2 trillion stimulus package.

TransDigm’s 5½% senior notes due 2027 skyrocketed 10½ points to close Thursday at 92½ in high-volume activity, according to a market source.

The bonds saw more than $21 million in reported volume during Thursday’s session.

The 6¼% senior notes due 2026 also continued to improve. The notes rose another 2½ points to close the day at par.

The stimulus package, which is expected to pass the House of Representatives and be signed into law on Friday, includes $500 billion for companies impacted by the coronavirus.

The aviation industry is expected to be one of the benefactors.

Wednesday inflows

The dedicated high-yield bond funds saw positive net cash flows on Wednesday, the most recent session for which daily fund flow data was available at press time, according to a market source.

High-yield ETFs saw a hefty $1.39 billion of inflows on the day.

Actively managed high-yield funds were essentially flat, posting $5 million of outflows on Wednesday, the source added.

The combined funds sustained $2.028 billion of outflows in the week to Wednesday's close, according to information posted late Thursday by Lipper US Fund Flows.

However, owing to procedures for tabulating daily flows, most of the $1.39 billion of Wednesday's ETF inflows was not reflected in that weekly outflow total, but rather will figure into the weekly fund flow totals for the week that will conclude on April 1, the market source said.

Indexes see three back-to-back gains

Indexes posted their third back-to-back gain on Thursday.

The KDP High Yield Daily index jumped 199 bps to close Thursday at 59.81 with the yield now 8.73%. The index gained 156 bps on Wednesday and 78 bps on Tuesday after a 19 bps drop on Monday.

The ICE BofAML US High Yield index rose 275.9 bps with the year-to-date returns now negative 15.571%.

The index gained 140 bps on Wednesday and 92 bps on Tuesday after breaking past the negative 20% year-to-date return threshold on Monday with a 183.3 bps drop.

The CDX High Yield 30 index jumped 309 bps to close Thursday at 97.07. The index jumped 200 bps on Wednesday and skyrocketed 512 bps on Tuesday after dropping 70 bps on Monday.

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