Secondary catches a bid; Nordstrom, Ferrellgas trade up; fallen angels skyrocket

By Paul A. Harris and Abigail W. Adams

Portland, Me., April 9 – The domestic high-yield primary market was quiet on Thursday following an active week that had almost $3 billion in new deals price.

However, the Federal Reserve Board’s latest round of stimulus is expected to have an enormous impact on the high-yield primary market by decreasing the cost of raising capital for issuers from all rungs of the credit spectrum.

Meanwhile, the secondary space skyrocketed on Thursday following the Federal Reserve’s announcement.

While the Federal Reserve’s previous measures to shore up markets had little impact on the high-yield space, the $2.3 trillion the central bank plans to inject into the market allows for the purchase of bonds from fallen angels that were downgraded after March 22.

“Everything was instantly bid up,” a market source said.

Bonds in the ETF basket, in particular, were up 5 to 7 points.

Ford Motor Co.’s, Continental Resources Inc.’s and Western Midstream Operating, LP's junk bonds, which are eligible to participate in the Federal Reserve’s program, skyrocketed.

While Occidental Petroleum Corp.’s junk bonds are not eligible for participation, they also jumped on the news.

With the overall market catching a bid on Thursday, the deals to price during Wednesday’s session were trading with steep premiums.

Ferrellgas, LP’s 10% senior notes due 2025 (B3/CCC) and Nordstrom Inc.’s 8¾% senior notes due 2025 (Baa2/BBB-) were several points above their issue prices in active trading on Thursday.

Meanwhile, with investors’ appetite for risk returning, high-yield mutual and exchange-traded funds continued to experience inflows with $214 million entering the space through Wednesday’s close, according to Refinitiv Lipper US Fund Flows.

Fed to impact primary market

The Federal Reserve’s creation of a special purpose vehicle (SPV) that can own corporate bonds in fallen angel circumstances immediately made itself felt in big positive price moves in the junk market on Thursday, sources said.

The iShares iBoxx $ High Yield Corporate Bd (HYG) massively outperformed equities, staging a 5¾% rally, up $4.43 to $81.73 per share.

Names in the inner ring of the Fed's initial $75 billion SPV scope – bonds that were rated at least Baa3/BBB- on March 22, and that have gone no lower than Ba3/BB- in the interim – were on the march, following the Thursday announcement, sources said.

These include Carnival Corp. and Nordstrom Inc., which recently priced high-coupon investment-grade bonds on high-yield syndicate desks.

They made big upward moves on the day, sources reported.

Going forward the Fed's new SPV will open up similar issuing opportunities in the high-yield market, a syndicate banker said, but added that the action will also make itself felt well down the credit spectrum.

High-yield investors are bound to have looks at similar names from investment-grade-land, attempting to raise cash by means of high-yield-style executions, according to the official.

But the impact of the Fed's action won't be confined to crossover bonds and fallen angels.

“It's helicopter money, and it's going to have an incredible ripple effect,” the banker said, adding that it will impact issuers further down the credit spectrum, and decrease their cost of capital.

Meanwhile there was no primary market news on Thursday, according to the banker who added that none was expected, given the early close ahead of the extended Easter holiday weekend that gets underway on Good Friday.

For a great many of the market's participants that early close represented a chance to get up from the computer in the home office or living room, and perhaps step over to a window to stretch and look out at streets that have all but emptied due to shelter-in-place regimes in effect because of the ongoing coronavirus pandemic, sources noted.

No one professed visibility on what the week ahead might actually come to look like in the primary market.

Catching a bid

While the Federal Reserve’s previous stimulus efforts had little to no immediate impact on the high-yield market, the secondary space soared following Thursday’s announcement.

The Federal Reserve detailed a new $2.3 trillion stimulus package which included up to $750 billion for a primary and secondary market corporate credit facility that will purchase bonds from fallen angels that carried investment-grade ratings as of March 22.

The high-yield secondary space skyrocketed following the announcement.

Names in the ETF basket were up 5 to 7 points, a market source said. “They ripped hard today,” the source said.

Single-B credit spreads narrowed by as much as 500 bps, another source said. “It was a massive move.”

Many were interpreting the latest announcement from the Federal Reserve as an indication the central bank was willing to put a floor below risk assets, a source said.

Fallen angels skyrocket

The Federal Reserve announcement sent the capital structures of several fallen angels skyrocketing.

However, only a select number of the fallen angels that have descended into junkbondland over the past few months are eligible to participate in the facilities.

Ford Motor’s junk bonds were up 10 to 25 points in high-volume activity, a market source said.

Ford’s 4.75% senior notes due 2043 rose almost 20 points to close Thursday at 75¾.

The bonds dominated activity in the secondary space with more than $77 million in reported volume.

The 7.45% senior notes due 2031 jumped 18½ points to close the day at 89½ with more than $38 million in reported volume.

Ford’s 5.113% senior notes due 2029 jumped more than 10 points to close Thursday at 94½ with more than $24 million in reported volume.

Continental Resources’ recently downgraded senior notes were up 12 to 17 points.

The 4.9% senior notes due 2044 rose more than 12 points to close Thursday at 73 3/8 with more than $29 million in reported volume.

The 4 3/8% senior notes due 2028 jumped 17½ points to 82.

The 4½% senior notes due 2023 jumped 12¼ points to 90¼.

While volume was light, Western Midstream’s junk bonds were up 5 to 10 points.

The 3.1% senior notes due 2025 rose 6 points to close Thursday at 90.50.

The 5¼% senior notes due 2050 jumped 10 points to 75½.

Both issues were trading in the 40s as recently as March 30.

Occidental Petroleum “missed the cut” and will not be eligible to participate in the facilities, a source said.

However, the oil and gas producer’s junk bonds were still trading up in sympathy.

Occidental’s 2.9% senior notes due 2024 rose more than 12 points to close Thursday at 82 5/8 with more than $42 million in reported volume, according to a market source.

The 2.7% senior notes due 2023 gained more than 10 points to close Thursday at 84.

Ferrellgas jumps

Ferrellgas’ recently priced 10% senior notes due 2025 continued to gain in active trading on Thursday after a strong break.

The 10% notes gained another 2 points to close Thursday at 106, according to a market source.

The bonds had more than $16.5 million in reported volume during the session.

The notes traded up to 104 soon after breaking for trade on Wednesday, which sources attributed to the high coupon and the fact they were secured.

Ferrellgas priced $575 million of the 10% notes at par on Wednesday.

The yield printed at the tight end of the 10% to 10¼% yield talk. Early guidance was 10½% to 11%.

The deal was heard to be as much as 10x oversubscribed.

Nordstrom jumps

Nordstrom’s 8¾% senior notes due 2025 also skyrocketed on Thursday.

The notes closed the day at 106¾, a market source said.

While the notes carried investment-grade ratings, they priced off the high-yield desk.

The Seattle-based luxury department store chain may currently carry-high grade ratings, however, “the market says its going high-yield sooner rather than later,” a market source said. “Regardless of the [rating agencies] criteria, the market is telling you it’s a risky asset.”

The high coupon for the secured notes and the trading level of Nordstrom’s outstanding bonds were all indicators of the company’s future credit ratings, the source said.

Nordstrom priced an upsized $600 million issue of the 8¾% notes at par in a Wednesday drive-by.

Pricing came tighter than talk for a yield of 9% to 9¼%.

The issue size increased from $500 million.

The deal was “crowded,” a source said, and was heavily oversubscribed.

$434 million Wednesday inflows

The dedicated high-yield bond funds had $434 million of net inflows on Wednesday, the most recent session for which data was available at press time, according to a market source.

The high-yield ETFs saw $299 million of inflows on the day.

The actively managed high-yield funds had $135 million of inflows on Wednesday, the source said.

The combined funds also had $214 million of net inflows for the week that ended on Wednesday, according to a late Thursday afternoon report posted on the Internet by Lipper US Fund Flows.

Indexes jump

Indexes closed out a strong week with substantial gains.

The KDP High Yield Daily index rose 228 bps to close Thursday at 63.4 with the yield now 7.51%.

The index gained 28 bps on Wednesday, 59 bps on Tuesday and 17 bps on Monday.

The index was up 332 bps on the week.

The CDX High Yield 30 index gained 386 bps to close Thursday at 98.86. The index was up 252 bps on Wednesday, 53 bps on Tuesday and 283 bps on Monday.

The index shot up 974 bps on the week.

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