Morning Commentary: Junk weakens amid thin holiday flows; Tendam Brands on deck

By Paul A. Harris

Portland, Ore., Oct. 5 – The high-yield bond market opened weaker on Wednesday amid thin flows, as the ranks of market participants were reduced because of the Yom Kippur holiday, sources said.

With stock prices retreating at mid-morning, junk was down ¼ of a point to as much as ½ point, a portfolio manager said.

In Europe, the closely followed iTraxx Crossover index, comprised of the 75 most liquid sub-investment-grade euro-denominated entities, was 8 basis points wider on Wednesday, a market source said.

With the S&P 500 stock index down 1.59% at mid-morning, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was off a hefty 1.1%, or 81 cents, at $72.71.

The Ford Motor Co. 6.1% senior green notes due August 2032 (Ba2/BB+) were down a point at 91¼ bid, according to a portfolio manager.

Slightly later a sellside source was marking that paper substantially lower, down 1¾ points at mid-morning.

The Ford 6.1% green notes came at par in mid-August in a $1.75 billion high-grade-style execution.

In the primary market, Madrid-based fashion retailer Tendam Brands SAU talked its €300 million offering of 5.5-year senior secured floating-rate notes (B2/B+) at Euribor plus 750 bps to 775 bps at OID 93, with the debt refinancing deal expected to price later on Wednesday.

In the dollar-denominated primary market, the Enerflex Ltd. $625 million offering of five-year senior secured first-lien, second-out notes (B2/BB-/BB-) was heard to be playing to a book that was two-times deal size on Wednesday morning, as the accounts continued to be canvassed, according to a sellside source.

Formal price talk is expected later on Wednesday. Early talk set out a 9% coupon at a to-be-determined original issue discount, to yield in the context of 12% to 13%.

Pricing is expected on Thursday afternoon.

Meanwhile Chile-based Latam Airlines Group SA appears likely to price its $1.5 billion two-part offering of senior secured notes on Thursday, the portfolio manager said.

Recent pricing discussions have the five-year tranche coming to yield 15% and the seven-year at 15¼%, a near-tectonic widening from initial guidance in the low 13% area on the five-year notes and the low-to-mid 13% area on the seven-year notes.

The deal, from an emerging markets corporate issuer, is being tracked on both emerging markets and high-yield desks, sources say.

U.S. high-yield accounts that were active in the Latam Airlines debtor-in-possession loan comprise a captive audience for the deal, according to market sources.

Fund flows

High-yield ETFs saw $610 million of daily cash inflows on Tuesday, according to a market source.

However actively managed high-yield funds sustained substantial outflows on the day: negative $310 million.

The dichotomy might be understood by looking at the actively managed funds as the “real money” faction of high-yield investors, while the ETFs are typically held to represent the faster money, a trader said.

Given that, the actively managed funds, which are structurally more methodical, will be less likely to change directions on a dime, the source added.

Also, as the ETFs react to the day-to-day and hour-to-hour fluctuations in the market with near-instant orders to buy or sell, there are high-yield investors continuing to seize opportunities, such as those presented in the big rallies that opened October, to pare positions, sources say.

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