AA in tailspin; Diamond trades off; energy tanks; funds see record $4.2 billion outflow

By Paul A. Harris and Abigail W. Adams

Portland, Me., Feb. 27 – The domestic high-yield primary remained on the sidelines as coronavirus-induced volatility continued to wreak havoc on markets.

There was no word on the timing of the few deals on the forward calendar.

Meanwhile, the sell-off in the secondary space intensified on Thursday with most names and sectors getting hit.

While it was a “tough day” for the market, the selling activity still had not yet crossed the threshold of panic, a market source said.

American Airlines Group Inc.’s recently priced 3¾% senior notes due 2025 (B1/BB-/BB-) continued their tailspin on Thursday.

Diamond Sports Group LLC and Diamond Sports Finance Co.’s 5 3/8% senior notes due 2026 and 6 5/8% senior notes due 2027 hit their lowest level since pricing.

The energy sector took the brunt of Thursday’s sell-off with almost 1/3 of the sector in distressed territory.

Chesapeake Energy Corp.’s 11½% senior notes due 2025, Continental Resources, Inc.’s 4.9% senior notes due 2044 and Whiting Petroleum Corp.’s 5¾% senior notes due 2021 traded down double digits on Thursday.

High-yield mutual and exchange-traded funds saw a record outflow of $4.198 billion for the week through Wednesday’s close, according to Refinitiv Lipper US Fund Flows.

Flight from risk

Through the exceptional volatility that had hold of the capital markets in the early part of the final week of February steady hands had the wheel in the high-yield market, sources reflected.

However, sellers took the wheel on Thursday, a trader said.

Retail investors are persuasively moving away from risk, according to market sources.

For the second consecutive day, the dedicated high-yield bond funds sustained huge daily outflows on Wednesday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs saw $1.87 billion of outflows on the day.

That news follows on the heels of a report that the biggest high-yield ETF, $HYG, saw a record $1.57 billion one-day outflow on Tuesday.

Actively managed high-yield funds sustained $720 million of outflows on Wednesday, the source said.

News of Wednesday's daily flows were followed by a report on Thursday afternoon that the combined high-yield funds sustained $4.198 billion of outflows during the week that concluded with Wednesday's close, according to information posted on the Internet by Lipper US Fund Flows.

It's the biggest weekly outflow since last October, and it left the dedicated junk funds in the red to the tune of negative $1.9 billion, year to date, a buyside source said.

Dedicated equity funds sustained even greater outflows in the week to Wednesday's close: negative $4.276 billion.

Some of the cash exiting risk ended up in corporate investment grade funds, which saw $3.649 billion of net inflows during most recent week, the source said.

In another measure of risk aversion, there was sufficient demand for 10-year Treasuries to drive its yield as low as 1.256%, in intraday trading on Thursday, an all-time low yield for 10-year governments, according to a bond trader in New York.

Primary sidelined

Volatility related to the humanitarian and economic impact of coronavirus sidelined the primary market on Thursday, sources said.

There was no news regarding price talk or timing on a couple of deals in the dollar-denominated market.

The most recent announcement came from Cleveland-Cliffs Inc.

On Wednesday the Ohio-based iron ore pellet producer announced plans to market a $950 million two-part offering of eight-year notes to investors on a Thursday conference call, and aimed to price the deal on Friday.

Meanwhile Advantage Solutions Inc. is in the market with $1.145 billion of notes: $345 million 6.5-year senior secured notes and $800 million seven-year senior unsecured notes.

In the euro-denominated market Netherlands-based geo data services provider Fugro NV was scheduled to start a roadshow earlier in the week for its debut high-yield deal, a €500 million offering of five-year senior secured notes.

However, the high-yield syndicate desks are expected to await a subsidence of volatility (for at least one full market session, a banker said) before making substantive moves on the new issue front.

The sell-off

While the high-yield secondary space has struggled throughout the week, the pace of the sell-off intensified on Thursday.

The Bids-Wanted-in-Competition lists circulating the market surpassed $1 billion with the lion’s share coming from ETFs.

Offers-Wanted-In-Competition, in contrast, were only a few hundred million.

While Thursday was “a tough day,” the sell-off still did not feel panicked, a market source said.

There were still buyers in the market, in particular, for front-end and yield-to-call issues.

Those names, “have their bids where they have them,” and did not move much due to selling pressure, the source said.

Volumes were also relatively light with sellers and buyers both holding back, albeit for opposing reasons.

“Nobody wants to sell into weakness,” especially with many holding onto the belief that the current market condition is momentary and will pass, a source said.

Conversely, buyers were holding out for the market to sink further, the source said.

American Airlines’ tailspin

American Airlines’ recently priced 3¾% senior notes due 2025 continued their tailspin in high-volume activity on Thursday.

The notes traded as low as 89 but popped back as the session progressed and stood poised to close the day down 2 points at 92 bid, 93 offered, a market source said.

With more than $58 million in reported volume, the 3¾% notes were among the most actively traded issue in the secondary space.

The notes were down 1 point on Wednesday.

The 3¾% notes have struggled since they priced at par on Feb. 20 with the travel industry particularly hard hit due to concern over the coronavirus.

Diamond Sports’ new low

Diamond Sports’ secured and unsecured notes both hit their lowest level since pricing.

The 6 5/8% senior unsecured notes due 2027 dropped more than 4 points to an 82 handle in high-volume activity.

The notes saw more than $47 million in reported volume, according to a market source.

The notes were also down 4 points on Wednesday.

Diamond Sports’ 5 3/8% senior secured notes due 2026 dropped 3 points to close Thursday at 94. More than $33 million of the bonds were on the tape by the late afternoon.

The levels are the lowest for the notes since Diamond Sports priced a $3.05 billion issue of the 5 3/8% notes and a $1.825 billion issue of the 6 5/8% notes at par in July 2019.

The 6 5/8% notes are a high-beta name that tends to move with the market, a source said.

However, losses were compounded by a disappointing earnings report from parent company Sinclair Broadcast Group on Wednesday.

Double digits

Losses continued to mount for the energy sector with WTI crude oil futures down almost 5% on Thursday.

Nearly 1/3 of the high-yield energy index is in distressed territory, a market source said.

Several names in the sector were down double digits on Thursday.

Whiting Petroleum’s soon-to-mature 5¾% senior notes due 2021 traded off 14 points in high-volume activity.

The notes closed the day at 54 with more than $30 million in reported volume.

The notes were in focus after the oil exploration and production company reported fourth-quarter earnings.

The company has hired advisers to help it review its capital structure, a market source said.

It is unclear whether the company is considering filing for bankruptcy or is considering a distressed debt exchange, the source said.

Continental Resources’ 4.9% senior notes due 2044 dropped more than 10 points to close the day at 91, a market source said.

The bonds saw more than $28 million in reported volume.

Chesapeake Energy’s 11½% senior notes due 2025 dropped another 8½ points to close Thursday at 59 with almost $30 million in reported volume, according to a market source.

The notes also sank 6 points during Wednesday’s session.

The barrel price of WTI crude oil for April delivery sank to $46.34, a decrease of $2.39, or 4.90% on Thursday.

Indexes extend losses

Indexes saw another steep decline on Thursday.

The KDP High Yield Daily index dropped 70 points to 70.05 with the yield now 5.52%.

The index was down 30 bps on Wednesday, 14 bps on Tuesday and 39 bps on Monday.

The ICE BofAML US High Yield index erased its gains for the year and dropped into negative territory.

The index was down 11.4 bps with the year-to-date return now negative 0.87%. The index dropped 19.7 bps on Wednesday, was down 23.9 bps on Tuesday and sank 73.1 bps on Monday.

The CDX High Yield 30 index plummeted another 127 points to close Thursday at 105.3.

The index dropped 20 bps on Wednesday, was down 60 bps on Tuesday and fell a steep 141 bps on Monday.

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