Morning Commentary: Rates tug junk downward; debut issuer Earthstone's notes trade to premium

By Paul A. Harris

Portland, Ore., April 8 – The high-yield market opened unchanged on Friday, however by midmorning, as the yield of the 10-year Treasury hits its highest level in three years, and equities eased, junk was slightly softer, according to a bond trader in New York.

High-yield ETFs were doing some selling, but not really pushing the market lower, the trader remarked.

There was a lot competing for investors’ attention on Friday morning, the source added, noting that the New York Yankees will have their home opener against their arch-rival Boston Red Sox, and Tiger Woods is set to tee off in the second round of the Masters Tournament, on the heels of his successful one-under-par first round.

The big news in Junkland is that the primary market is wrapping up its biggest week since January, with eight issuers pricing a combined 10 tranches of dollar-denominated, speculative grade-notes, raising a total of $4.9 billion, the trader asserted.

The most recent deal, the Earthstone Energy Holdings, LLC 8% senior notes due April 2027 (B3/B+/B+), the company's debut issue, were trading at a handy premium on Friday morning, par 3/8 bid, par 7/8 offered, after pricing at par on Thursday in a $550 million issue.

The deal was heard to be four-times oversubscribed at midday Thursday, with significant reverse inquiry.

Although the vagaries of risk appetite have lately been steering investors away from unknown or little-known entities, Earthstone got some serious attention, perhaps because it came with some juice, the trader said.

The yield printed in the middle of initial guidance, and at the wide end of official price talk.

Meantime, bonds recently priced in a $1.5 billion two-part drive-by sale of senior bullet notes (Ba1/BB+) by Fortescue Metals Group Ltd./FMG Resources (August 2006) Pty Ltd eased a bit on Friday morning.

The FMG Resources 5 7/8% notes due April 2030 were 99½ bid, par offered on Friday morning, after trading earlier in the week at par ½ bid, 101 offered. The $700 million tranche priced at par on Wednesday.

The FMG 6 1/8% green notes due April 2032 were par ½ bid, 101 offered on Friday, after trading earlier in the week at par ¾ bid, 101¼ offered.

Combined, the two tranches were heard to have played to around $2.2 billion of demand.

That demand was skewed to the green paper, the trader said, noting its higher coupon, its longer duration and its captive audience of environmentally and socially conscientious investors.

Elsewhere the Sealed Air Corp. 5% senior notes due April 2029 (Ba2/BB+) were a little softer on Friday morning at 99 5/8 bid, par 1/8 offered.

The $425 million issue priced at par on Tuesday, and traded as high as 101 in the aftermath.

Although three round lot trades had taken place by midmorning on Friday, the Sealed Air deal was well-placed, the trader said, adding that there has not been a lot of back-and-forth.

Turning to the new issue market – its biggest week since January under its belt – the primary was resting on it oars on Friday morning.

There is one deal on the active forward calendar.

Oldcastle BuildingEnvelope (Oscar AcquisitionCo LLC) is marketing a $985 million two-part buyout deal, a $400 million tranche of seven-year senior secured notes (B1/B) with initial talk in the mid-to-high 6% area and a $585 million tranche of eight-year senior unsecured notes (Caa1/CCC+) with initial talk in the mid-to-high 9% area, on a roadshow set to run through Wednesday.

Away from that there are no transactions being telegraphed specifically as business for the April 11 week, the source said.

However, it should be a decent-or-better week in the new issue market, the trader remarked, warning that one mitigating factor could be the onset of school vacations in parts of the New York area.

$774 million Thursday outflows

The dedicated high-yield bond funds sustained $774 million of net outflows on Thursday, according to a market source.

High-yield ETFs saw $689 million of outflows on the day.

Actively managed high-yield funds sustained $85 million of outflows on Thursday, the source said.

News of Thursday's cash flows comes on the heels of a Thursday report that the combined funds saw $296 million of net inflows in the week to the Wednesday, April 6 close, according to Refinitiv Lipper.

It was the second consecutive weekly inflow (the previous week saw $1.24 billion of inflows) following an 11-week run of consecutive outflows totaling $24.9 billion, or 9% of assets under management, the market source said.

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