Morning Commentary: Junk liquidity vanishes ahead of holiday weekend; 888 notes delayed

By Paul A. Harris

Portland, Ore., July 1 – The second half of 2022 got underway in the high-yield bond market amid ultra-low liquidity, according to market sources.

Risk aversion maintains a firm grip on junk, according to a sellside source, who added that in addition to ongoing market volatility draining liquidity, the coming extended Independence Day holiday weekend has emptied trading desks, leaving only junior members of firms holding the baby ahead of Friday's early close (the Securities Industry and Financial Markets Association, “SIFMA,” is recommending an early 2 p.m. ET close on Friday).

Nothing is trading, said the sellsider, who added that high-yield bonds opened 1/8 point lower on Friday and were still around that level at mid-morning.

The FTAI Escrow Holdings, LLC (Fortress Transportation and Infrastructure Investors LLC) 10½% senior secured notes due June 2027 (B2/B-), the most recent deal to clear the market, were being marked at 94 bid, 95 offered, unchanged, according to the source, who added that they had not traded.

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.

Away from the high-yield bond market there have been dramatic gyrations in the yield of the 10-year Treasury, which briefly fell below 2.8% early Friday before rebounding to 2.88% by mid-morning.

It was yielding 3.23% on June 28.

Pressed for an explanation, a high-yield portfolio manager cited a June ISM report that new orders and employment are contracting while order backlogs are growing at a much slower rate, suggesting inflation could be slowing.

While it's far too early to tell, it holds out a ray of hope, said the investor, who added that the report might possibly embolden interest rate doves on the Fed's interest rate setting body, the Federal Open Market Committee.

The dollar-denominated new issue market remained quiet, as expected, on Friday.

However, there was new issue news out of Europe.

The acquisition financing for the acquisition of the non-U.S. assets of William Hill International by 888 Holdings plc from Caesars Entertainment has been pushed into the week ahead.

The $1.23 billion equivalent of bond and bank debt includes a £600 million equivalent of 888 Acquisitions Ltd. senior secured notes (B1/B) in fixed-rate and floating-rate tranches, which had been expected to clear ahead of Friday's close.

The acquisition funded on Friday, leaving underwriters on the hook for the debt pending the successful placement of the bonds, as well as $500 million of term loans, sources say.

ETFs see inflows

High-yield ETFs saw big daily inflows of $729 on Thursday, according to a market source.

However, actively managed funds were negative on the day, sustaining $102 million of outflows on Thursday, the source said.

News of Thursday's daily fund flows follows a Thursday afternoon report that the combined funds sustained $1.6 billion of net outflows in the week to the Wednesday, June 28 close, according to Refinitiv Lipper.

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