Junk quiet, liquidity thins as SVB implodes; IAA jumps, Richie gains on merger approval

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 10 – The junk bond primary market remained idle on Friday as volatility gripped the capital markets on news surrounding the failure of Silicon Valley Bank.

With liquidity in the high-yield bond market thin to non-existent as the March 6 week wound to a close, the likelihood of new issue activity in the week ahead – especially the early part – seems remote, a trader said.

Meanwhile, the secondary space was quiet with many on the sidelines as SVB imploded, marking the largest bank failure since Washington Mutual’s collapse in 2008.

In less than 36 hours, SVB Financial Group went from an investment-grade rated company to a delisted stock with its subsidiary Silicon Valley Bank in FDIC receivership.

SVB’s perpetual preferred stock plunged 50 to 60 points to close the day in the single digits.

The downfall was triggered by the company’s announcement post-close Wednesday that it had liquidated its $21 billion portfolio of for-sale securities for a $1.8 billion loss and planned to raise $2.25 billion to plug the holes in its balance sheets. (See related article in this issue)

The destruction of the company’s stock and the run on deposits that followed rattled financial markets.

SVB’s portfolio losses were a casualty of the Federal Reserve’s rate hike campaign and shed light on the vulnerability of the banking sector, which had been looked to as a safe haven, a source said.

While the U.S. non-farm payroll report was expected to be the market-moving event of Friday’s session, SVB’s implosion sparked a buying frenzy in Treasuries with investors fleeing to a safer safe haven than the banking sector.

The 10-year Treasury yield fell 22 basis points to close Friday at 3.69% and the two-year yield fell 29 bps to close at 4.58%.

While the secondary space was quiet, the cash bond market was weaker with credit spreads widening.

However, many were waiting to see whether the rate move was just a momentary glitch or would have staying power.

With few making moves amid the uncertainty, topical news remained a driver of activity in the space.

IAA SpinCo.’s 5½% notes due 2027 (B2/B) jumped up to their special redemption price and Ritchie Bros. Auctioneers Inc.’s recently priced tranches improved after Ritchie Bros.’ acquisition of IAA was met with shareholder approval.

Diversey Holdings Ltd.’s 4 5/8% senior notes due 2029 remained one of the top-traded names in the secondary space with the notes again gaining steam as market players assess their take-out potential.

Approved

IAA Spinco.’s 5½% notes due 2027 jumped to their special redemption price and Ritchie Bros.’ recently priced secured and unsecured notes improved after Richie shareholders approved its acquisition of IAA.

IAA’s 5½% senior notes due 2027 jumped more than 4 points to close the day at 102.25.

There was $8 million in reported volume.

Ritchie’s 7¾% senior notes due 2031 (B1/BB-) rose 5/8 point to reclaim a 101-handle.

The notes were wrapped around 101½ at the market close, a source said.

IAA’s and Ritchie’s notes were lifted following news that a majority of Ritchie shareholders approved its $7 billion acquisition of IAA in a cash-and-stock deal.

They were under pressure earlier in the week after two proxy advisory firms recommended the acquisition be rejected.

IAA’s 5½% notes sank 3 points on Monday to a 98-handle as investors questioned the completion of the merger.

However, the news on Friday catapulted the notes towards their special redemption price.

The 5½% notes are subject to a full redemption on March 20 at a redemption price of 102.75 on the condition that the merger is completed prior to the redemption date.

Diversey gains

Diversey’s 4 5/8% senior notes due 2029 continued to gain in heavy volume on Friday as investors continued to assess private-equity firm Solenis’ buyout of the company.

The 4 5/8% notes rose ½ point to the 96½ to 97 context, according to a market source.

There was $25 million in reported volume.

The notes have climbed 15 points since Wednesday when news broke that Solenis would acquire the company in a $4.6 billion all-cash transaction.

The deal is expected to close in the second half of 2023.

Market players have been positioning themselves for either a 101 poison put or a par ¼ make-whole call, sources said.

Fund flows

High-yield ETFs had $344 million of daily cash inflows on Thursday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds sustained $90 million of outflows on the day.

News of Thursday's daily flows follows a Thursday afternoon report that the combined funds saw $10 million of net inflows during the week to the Wednesday, March 8 close, according to fund-tracker Refinitiv Lipper.

These relatively modest weekly inflows follow a three-week stretch of outflows totaling $11.3 billion, according to the market source.

Year-to-date flows of the combined funds are negative $11.8 billion, the source added.

Indexes

The KDP High Yield Daily index fell 11 points to close Friday at 50.76 with the yield 7.62%.

The index was down 12 points on Thursday, 22 points on Wednesday and 19 points on Tuesday after gaining 19 points on Monday.

The index posted a cumulative loss of 64 points on the week.

The CDX High Yield 30 index sank 72 bps to close Friday at 100.08.

The index was down 89 bps on Thursday, 30 bps on Wednesday and 67 bps on Tuesday after gaining 7 bps on Monday.

The index plunged 251 bps on the week.

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