Morning Commentary: Distressed accounts eyeball discounted high grade, crossover paper

By Paul A. Harris

Portland, Ore., March 23 – The latest fusillade from the Federal Reserve Bank, enabling it to ply deeper into assets suffering damage due to the Covid-19 catastrophe, arrested steep drops in futures markets overnight – at which time another trading circuit breaker tripped – but did not appear to be maintaining traction as trading got underway on Monday in the United States, according to a New York-based high-yield bond trader working from home.

Amid continued volatility, with the S&P 500 stock index down 1.8%, the iShares iBoxx $ High Yield Corporate Bd (HYG) was down 0.77%, or 54 cents, at $69.21 at mid-morning.

Among other early Monday moves the Fed announced the Primary Market Corporate Credit Facility to backstop corporate debt issued with a maturity of four years or less by issuers rated at least Baa3/BBB-.

There was not much solace there for the high-yield bond investor, nor was any expected, the trader said, noting that the Fed, representing the American taxpayer, has no appetite for speculative-grade debt.

Opportunities eyed

With high-yield bonds basically “for sale” at present, some investors, particularly those focused on distressed debt, are eye-balling low triple B, crossover and fallen angel paper, the trader said.

Prices of such paper are all over the place, in a manner that makes little sense, the trader said, adding that some offers appear to be signaling that accounts need to raise money and are allowing traders to hit bids at thresholds that represent deep discounts to conventional valuations.

Distressed debt investors appear to be smelling the blood in the water, the source added.

And there is plenty of distress.

Monday's biggest mover was the fallen angel debt of Occidental Petroleum Corp., which Moody's Investors Service downgraded to Ba1 from Baa3 late last week, the trader said.

The Occidental Petroleum 3˝% senior notes due August 2029 were down 5 points on Monday morning at 53 bid, the trader said, noting that the bonds were trading in the high 50s on Friday.

Occidental Petroleum, laboring under $35 billion of debt and $10 billion of preferred stock related to its August 2019 acquisition of Anadarko Petroleum Corp., is very near the center of the bullseye, with respect to the present financial crisis, as it occupies the petroleum portion of the deeply distressed energy index, the trader noted.

The barrel price of West Texas Intermediate crude oil for May 2020 delivery was down another 0.27%, or six cents, at $22.57 at mid-morning on Monday.

Elsewhere the trader reported seeing prices on high-grade bonds that were difficult to reconcile, apart from the possible explanation that people were trying to raise cash in a hurry.

Marriott International Inc.’s bonds due 2020 (Baa2/BBB) were as low as 80 bid, 81˝ offered, well off recent levels, the trader said, adding that the nearness of the maturity notwithstanding, the company has $1 billion of cash.

“You're hearing that some high-grade accounts want to get out, leading to some erratic prints,” the trader said.

“Trades are printing at those levels, and distressed guys are active,” the source added.

Other high-grade names with exposure to Covid-19 beyond the middle range, including Expedia Group Inc., appeared to be trading in similar fashion, the source said.

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