Morning Commentary: High yield unchanged after Icahn warning; new issues outperform; fund flows mixed

By Paul A. Harris

Portland, Ore., June 25 – Junk bonds were unchanged to slightly higher on the heels of investor Carl Icahn’s Wednesday warning that it is a “no-brainer” that the high-yield bond market is overheated, market sources said on Thursday.

A junk bond portfolio manager was inclined to take issue with Icahn’s assessment.

“The economy is improving,” the manager asserted, adding the U.S. Labor Department’s Thursday report that unemployment applications came in at 271,000 for the week to June 20 was in line with economists’ forecasts, notwithstanding that fact that it represented an overall 3,000 increase in the number of applications.

The key factor is that claims continue to hold below the closely watched threshold of 300,000, the source contended.

New issues outperform

Recent issues continue to turn in strong performances in the secondary market, sources say.

Endo International plc’s 6% senior notes due July 15, 2023 (B1/B) were at 102 1/8 bid, 102 3/8 offered on Thursday morning, having closed the Wednesday session at 101 7/8 bid, 102 1/8 offered.

The $1,635,000,000 deal, which priced at par on Wednesday, was upsized by $200 million.

It was a blowout, playing to a book containing between $9 billion and $10 billion of orders, sources said.

The new Univar Inc. 6¾% senior notes due July 15, 2023 (Caa1/B) were wrapped around 101 on Thursday morning, a trader said.

The $400 million priced at par on Wednesday.

And CNH Industrial Capital LLC’s 3 7/8% senior notes due July 15, 2018 (Ba1/BB) were at par ¼ bid, par ½ offered on Thursday.

The $600 issue priced at 99.642 to yield 4% on Tuesday.

Coal crushing

Meanwhile news in the high-yield coal sector continues to be dire, a trader said.

Peabody Energy Corp. paper continues to be “crushed,” the trader said, noting that Peabody’s 6% senior notes due November 2018 were at 53 bid on Thursday, down a couple of points on the day.

More dire still, Arch Coal, Inc.’s 9 7/8% senior notes due June 2019 were at 20 bid on Thursday, the trader said, adding that the company’s bonds have been trading in a price range of 15 cents to 25 cents on the dollar.

TI Automotive on deck

The Thursday session opened quietly in the primary market, with just one sizable offer teed up to price by the session’s close.

TI Group Automotive Systems, LLC downsized its offering of eight-year senior notes (Caa1/B) to $450 million from $550 million on Wednesday, as it shifted $100 million of proceeds to its term loan.

At the same time the notes were talked to yield 8½% to 8¾%.

Official talk came well wide of the 7¾% to 8% early guidance, according to a trader.

The downsized $450 million deal is reported to be playing to a $650 million order book, a portfolio manager said on Thursday morning.

Mixed flows

Cash flows for the dedicated high-yield funds were mixed on Wednesday, a market source said.

High-yield ETFs sustained $152 million of outflows on the day.

Asset managers, meanwhile, saw $60 million of inflows on Wednesday.

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