Morning Commentary: Junk bonds slide as investors shed low-liquidity issues

By Paul A. Harris

Portland, Ore., June 30 – June was poised to end with a whimper in the junk bond market, according to sources.

The market opened ½ point lower. However, some cash bonds were down 1 point to 2 points (and some considerably more) as market liquidity continues to dry up ahead of the holiday weekend to come, traders said.

Investors are taking flight from low-liquidity issues, with the result being that such bonds have sustained more dramatic price drops.

For example, the Forestar Group Inc. 3.85% senior notes due May 2026, a $400 million issue that priced in April 2021, was down 4 points on the morning, with no buyers in sight, a trader said.

Another trader proffered the Oregon Tool Inc. (OT Merger Corp.) 7 7/8% senior notes due October 2029, a $300 million issue that priced last October in support of the Platinum Equity LBO, down 5 points on the day.

That bond has gone from the 70s to the 50s, the trader said.

These illiquid bonds are trading in the hole at prices that should attract bids, a trader said.

However, the offers don't seem to be attracting bidders, but rather enticing other holders to sell, the source added.

Other bonds and sectors were taking outsized hits catalyzed by headline news.

In that category, high-yield names in the cruise line sector were down 3 points to 4 points on Thursday after sustaining sizable losses on Wednesday.

An analyst from Morgan Stanley drew attention to the cruise sector earlier in the week by reporting that Carnival Corp.’s stock could drop to zero if the cruise industry is forced to ride out another demand shock and/or the high-yield new issue market fails to reopen for purposes of debt refinancing at sustainable costs of capital, a trader recounted.

The Carnival 10½% senior notes due June 2030, the most recent edition in the Miami-based cruise line's stack of bonds, traded Thursday at 82¾, down from 84 3/8 on Wednesday and 87¾ on Tuesday, the trader said.

The analyst report on Carnival drew attention to an industry which took on a lot of debt during the pandemic and does not appear to be well-positioned to weather an economic downturn, the trader remarked.

Another bond plummeting on the back of headline news is the Bed Bath & Beyond Inc. 5.165% senior notes due August 2044, which traded at 22 on Thursday.

The Bed Bath paper – which began falling earlier in the week after the company reported a big year-over-year sales loss for May, setting in train major leadership changes – was trading in the high 30s prior to the earnings report, the trader noted.

Away from headline news the most recent deal to clear the market was wrapped around its new issue price on Thursday morning.

The FTAI Escrow Holdings, LLC (Fortress Transportation and Infrastructure Investors LLC) 10½% senior secured notes due June 2027 (B2/B-) were being marked 94 bid, 95 offered and had not traded, a trader said.

The downsized $450 million issue (from $500 million) priced at 94.585 to yield 12% on Wednesday in what market sources characterized as a “clubby deal,” which saw participation mainly from investors who intended to hold onto the bonds as opposed to trading them.

Meanwhile in the European market, 888 Acquisitions is shopping an expected £600 million of senior secured notes backing the acquisition of William Hill International from Caesars.

Pending official price talk the six-year floating-rate notes are in the market with initial guidance that has them coming with a 525 basis points to 550 bps spread, discounted into the low 90s, while the five-year fixed-rate paper has early guidance that specifies a 6% to 7% coupon at a discount.

Commitments on a concurrent bank loan were due on Thursday, a trader said.

The market awaits an update on the timing of the bond deal; however, the cash is due to Caesars on Friday, so it has to get done, the trader added.

Fund flows

The dedicated high-yield bond funds sustained $20 million of net outflows on Wednesday, according to a market source.

Actively managed high-yield funds were positive on the day, posting $28 million of inflows on Wednesday.

High-yield ETFs, meanwhile, sustained $48 million of outflows on the day.

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