Morning Commentary: U.S. credit rating downgrade pulls junk lower; active primary eyed

By Paul A. Harris

Portland, Ore., Aug. 2 – Tuesday’s downgrade of the United States of America’s long-term foreign currency rating by Fitch Ratings sent the 10-year Treasury yield spiking to its year-to-date high, and pulled the junk bond market lower by ¼ point to ½ point, according to a bond trader in New York.

Some of the bonds most actively traded by the high-yield ETFs were down ½ point to 1 point, the trader noted.

With the 10-year Treasury yielding 4.08% at mid-morning, its highest since last November, and the S&P 500 stock index down 1.1%, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was down 0.59%, or 44 cents, at $74.33.

Bonds priced last week in support of the buyout of Arconic Corp., the Arsenal AIC Parent LLC 8% senior secured notes due 2030 (Ba3/B+/BB+), were 101¼ bid, 101¾ offered at mid-morning, after going out Tuesday wrapped around 102, said the trader, adding that the bond’s move reasonably tracked the trajectory of the market in the early going on Wednesday.

The Arconic deal, a $700 million issue, priced at par last Thursday.

The most recent issue to clear the market, the Carnival Corp. 7% first-priority senior secured notes due August 2028 (Ba2/BB-), was trading slightly higher on Wednesday morning, changing hands at par ¼ after going out Tuesday wrapped around par, the trader said.

The $500 million issue, heard to have been more than eight-times oversubscribed with orders from 188 accounts, priced at par on Tuesday.

In the primary market, the stage is set for three deals to price ahead of Wednesday’s close.

Among the morning’s new issue news items, CDK Global talked the Central Parent LLC/CDK Global II LLC/CDK Financing Co., Inc. $755 million offering of first-lien secured notes due June 15, 2029 (B2/B+) to yield 8% to 8¼%, tight to early guidance in the low-to-mid 8% area, with close-of-books set for late Wednesday morning.

The deal is heard to have generated $1.25 billion of demand, a sellside source said.

Elsewhere, the TriNet Group, Inc. $500 million offering of eight-year senior notes (Ba2/BB) was talked to yield in the 7% area, on top of initial guidance, with order books, which were still lagging deal size at Tuesday’s finish, according to the sellsider, set to close early Wednesday afternoon.

Meanwhile, kdc/one Development Corp., Inc. and KDC US Holdings, Inc. are also in deck with a $500 million offering of senior secured notes due 2028 (B3/B-/B), talked Tuesday afternoon at 9¾% to 10%, also on top of initial guidance.

Looking further ahead, Veritext downsized its offering of VT TopCo, Inc. seven-year senior secured notes (B2/B/B+) to $500 million from $720 million and set talk at 8½% to 8¾%, inside of early guidance, with pricing set for Thursday.

Prior to news of the downsize, (with proceeds shifted to the bank loan) demand for Veritext’s bond offering was heard to be healthy, the trader said.

There were no new deal announcements on Wednesday morning, unsurprising given the unsupportive backdrop in the capital markets, according to the trader.

Fund flows

On Tuesday, the high-yield ETFs saw chunky outflows of $689 million on the day, according to a market source.

Actively managed high-yield funds, however, saw sturdy inflows of $485 million on Tuesday, the source said.

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