High yields in distressed territory; Charter in focus, mixed; Occidental Petroleum eyed

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 23 – While the unprecedented stimulus from the Federal Reserve activated new deal activity in the high-grade market, it did little to assuage high-yield investors with the pipeline for new deal activity still cold on Monday.

The cash bond market as a whole remained in distressed territory on Monday, sources said.

While the secondary space continued to struggle, volume remained light with large liquid issues and higher credit quality names in focus.

Charter Communications Inc.’s senior notes continued to see active trading with the company’s split-rated secured notes making gains while its junk-rated notes traded off.

Occidental Petroleum Corp.’s senior notes remained in focus with the notes again trending lower in high-volume activity.

While volume was light, fellow fallen angel Kraft Heinz Co.’s 4 3/8% senior notes due 2046 were on the rise on Monday.

The pipeline

The Federal Reserve Bank plowed deeper into assets suffering damage due to the Covid-19 catastrophe, early Monday, announcing the Primary Market Corporate Credit Facility to backstop corporate debt issued with a maturity of four years or less by issuers rated at least BBB-/Baa3.

On the heels of that announcement high-grade corporate borrowers including General Dynamics Corp., Procter & Gamble Co. and Wells Fargo & Co. stepped forward with new deals on Monday.

However, there was not much solace for the high-yield bond investor in the Fed move, nor was any expected, according to market sources who noted that the Fed, representing the American taxpayer, thus far has no appetite for speculative grade debt.

Hence, junk continued what has been an epic decline, as the first full week of spring got underway.

In the primary market, no high-yield deals were priced or announced. And there are no deals on the active forward calendar.

A source in Europe marked cash bonds lower by 3 points to 5 points depending upon, among other things, the extent to which the company in question has exposure to the ongoing pandemic.

And with the Dow Jones industrial average falling another 3%, the iShares iBoxx $ High Yield Corporate Bd (HYG) closed down 1.72%, or $1.20, at $68.55 per share.

Spreads

The high-yield cash bond market remained in distressed territory on Monday with spreads still widening from the 1,000-bps benchmark it topped on Friday, sources said.

Credit spreads were marked at 1,050 early Monday.

Credit spreads for the energy sector topped 2,261 bps with the consumer discretionary sector seeing the next widest spreads at 1,000 bps, a market source said.

While the Federal Reserve’s stimulus had little immediate impact on the high-yield market, its pledge to back corporate credit markets through the purchase of investment grade bonds may have a trickle-down effect.

The investment grade corporate bond market is expected to see a gradual normalization, including tighter credit spreads, according to a BofA Global Research report.

Currently, about $1 trillion of investment grade bonds are at risk of being downgraded to junk, Forbes reported.

Charter active

Charter’s senior notes continued to see high-volume activity on Monday while overall volumes were light.

However, the notes were following different trajectories with Charter’s split-rated secured notes posting gains and junk-rated unsecured notes seeing losses.

Charter’s 4.8% senior notes due 2050 (Ba1/BBB-/BBB-) gained 5 points to trade up to 90.625 in the late afternoon, according to a market source.

With more than $48 million in reported volume, the notes were the most actively traded during Monday’s session.

While volume was light, Charter’s 6.484% senior secured notes due 2045 (Ba1/BBB-) were up more than 8 points to 104.125 in the late afternoon.

Conversely, Charter’s 5% senior unsecured notes due 2028 (B1/BB) sank 1¼ points to close the day at 84.

Charter’s 4½% senior unsecured notes due 2030 (B1/BB) also continued to lose ground with the notes trading down 2½ points to 84½ in the late afternoon.

Occidental Petroleum eyed

Occidental Petroleum’s senior notes continued to see active trading on Monday with the notes again trading down in the high-volume activity.

The 2.7% senior notes due 2022 dropped 2½ points to close Monday at 60½, according to a market source.

The notes remained active with more than $23 million in reported volume.

Occidental’s 3½% senior notes due 2029 traded off more than 6 points to 51½ late Monday afternoon, according to a market source.

The Houston-based oil company became the latest fallen angel to enter junkbondland after Moody’s Investors Service and Fitch Ratings downgraded the company to junk.

Fitch lowered Occidental’s rating to BB+ from BBB+ on Friday due to depressed oil prices.

Kraft Heinz gains

While volume was light, Kraft Heinz’s 4 3/8% senior notes due 2046 were among the major gainers of Monday’s session.

The notes were up 7¼ points to 77½ in the late afternoon with $5 million in reported volume, according to a market source.

While Kraft Heinz’s senior notes have been slow to trade recently, they dominated activity in the secondary space after S&P and Fitch Ratings downgraded the food manufacturer to junk in mid-February.

$507 million Friday outflows

The dedicated high-yield bond funds sustained $507 million of net outflows on Friday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs saw $48 million of inflows on the day.

However, actively managed high-yield funds, representing the so-called “real money” accounts, sustained $555 million outflows on Friday, the market source said.

Indexes extend losses

Indexes opened the week in the red after all saw steep cumulative losses the previous week.

The KDP High Yield Daily index closed Monday down 19 bps with the yield now 10.10%.

The index posted a cumulative loss of 634 bps on the week last week.

The ICE BofAML US High Yield broke past the negative 20% threshold on Monday.

The index dropped 183.3 bps with year-to-date returns now negative 20.56%.

The index plummeted 958.6 bps on the week last week.

The CDX High Yield 30 index dropped 70 bps to close Monday at 86.76.

The index posted a cumulative loss of 1,041 bps on the week last week.

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