Junk secondary closes quarter near lows; illiquid issues tank; funds lose $1.59 billion

By Abigail W. Adams and Paul A. Harris

Portland, Me., June 30 – The domestic high-yield primary market remained dormant on Thursday as accounts closed their books on a brutal first half of the year.

The first half of 2022 marked the lowest amount of issuance the market has seen in more than a decade, sources said.

While the domestic market was quiet, the European market has one new offering on deck.

888 Holdings plc (888 Acquisitions) is shopping £600 million of senior secured notes with market watchers awaiting updates on pricing and timing.

Meanwhile, the secondary space closed the last day of the first six months of 2022 near its lows with the cash bond market down another ¼ point and the CDX index retesting its lows.

Small, illiquid issues have been particularly hard hit with liquidity issues compounding recession fears.

With few buyers in the market, small issues such as Forestar Group Inc.’s 3.85% senior notes due 2026 (Ba3/BB-) and Oregon Tool Inc.’s (OT Merger Corp.) 7 7/8% senior notes due 2029 (Caa2/CCC+) have seen outsized losses over the past few sessions.

While trading activity in the overall market was thin, Carnival Corp.’s senior notes (B2/B+) continued to dominate the tape with heavy selling pressure driving the already struggling notes down another 2 to 3 points.

The market continued to see multibillion-dollar outflows with high-yield mutual and exchange-traded funds losing another $1.593 billion in the week through Wednesday’s close, according to the Lipper Refinitiv Fund Flows Report Newsline.

The outflow follows the $2.625 billion that left the space the previous week which was preceded by the historic $5.705 billion that left the space in the week ending June 16.

888 eyed

In the new issue market, 888 Acquisition is shopping £600 million of senior secured notes backing the acquisition of William Hill International from Caesars Entertainment Inc.

The six-year floating-rate notes had been in the market with initial spread guidance of 525 to 550 basis points, discounted into the low 90s, while the five-year fixed-rate paper had initial guidance specifying a 6% to 7% coupon at a discount.

However, that guidance has likely been overtaken by events, sources say.

Commitments on a concurrent bank loan, also part of the acquisition financing, were due Thursday, a trader said.

As the market awaits an update on the timing and pricing of the bond deal the cash is due to Caesars on Friday, the trader said, adding that the deal has to get done.

Lowest issuance in a decade

The first half of 2022 came to a close on Thursday having seen the least amount of new issuance in over a decade: $71.2 billion in 117 junk-rated, dollar-denominated tranches.

That's well less than half of the $155.6 billion average amount of issuance for first halves of years going back to and including 2010.

The second lowest amount of first-half issuance was $102.4 billion in 2010.

The biggest first half, $295.5 billion, came in 2021.

The liquidity trade

Several small, illiquid issues have been particularly hard-hit over the past few sessions.

Forestar Group’s 3.85% senior notes due 2026 have fallen 4 points since Monday.

The notes, which opened the week on an 85-handle, closed Thursday at 81¾ with the yield now 9 5/8%, sources said.

Oregon Tool’s 7 7/8% senior notes due 2029 have sunk more than 10 points on the week.

The 7 7/8% notes, which opened the week on a 68-handle, fell to a 57-handle on Wednesday, a source said.

These illiquid bonds were trading in the hole at prices that should attract bids, but rather than attract bidders, the offers seemed to be enticing other holders to sell, a source said.

Liquidity concerns were beginning to set into the market with accounts punting their illiquid holdings.

With few buyers in the market, holders were selling positions at substantial discounts.

“It’s a liquidity trade,” a source said.

Carnival’s losses mount

Carnival’s senior notes continued to dominate the tape with losses mounting for a capital structure that has seen multipoint drops each session this week.

Carnival’s 6% senior notes due 2029 sank another 2 points to break below 70.

The notes were changing hands in the 69 7/8 to 70 1/8 context heading into the market close, according to a market source.

The notes were now offering a yield of 12 5/8%.

Carnival’s 10½% notes due 2030 were also down 2 points to close the day on an 82-handle. The notes have fallen 10 points on the week.

The notes were changing hands in the 82 3/8 to 82 5/8 context heading into the market close with the yield now 14¼%.

The 5¾% senior notes due 2027 fell 2 points to a 72-handle. The notes were changing hands in the 72¼ to 72¾ context throughout Thursday’s session with the yield cracking 14%.

The notes have lost 6 points on the week.

Carnival’s unsecured notes suffered the heaviest losses over the past week.

However, the cruise line operator’s 4% first priority senior secured notes due 2028 (Ba2/BB-) were also under pressure.

The 4% notes were relatively unchanged in Thursday’s activity with the notes closing the day wrapped around 82 with the yield 7¾%.

However, the notes have dropped 3 points on the week.

Carnival’s senior notes have been under pressure since Monday after bouncing last Friday following a better-than-expected earnings report.

Selling intensified on Wednesday after a Morgan Stanley analyst report questioned the ability of the company to withstand a global economic downturn.

The report also exacerbated fears many have had about the company’s ability to refinance its debt given the current cost of capital raises, sources said.

Indexes

The KDP High Yield Daily index fell 15 points to close Thursday at 54.32 with the yield now 7.75%.

The index was down 43 points on Wednesday and 30 points on Tuesday after adding 4 points on Monday.

The CDX High Yield 30 index fell 23 bps to close the day at 96.99.

The index was down 30 bps on Wednesday, plunged 125 bps on Tuesday and shaved off 13 bps on Monday.

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