Morning Commentary: Junk rally carries into Friday; Hilcorp brings $500 million drive-by

By Paul A. Harris

Portland, Ore., Nov. 3 – The hard-charging high-yield bond market continued to rally in the early going on Friday, according to market sources.

Marking the broad market 1/8 of a point better at the open, a trader in New York noted that junk improved 1 3/8 points on Thursday in elevated volume – its second-best performance of the year, following the 1½ point rally the asset class staged on Feb. 2.

Huge declines in the yield of the 10-year Treasury catalyzed the rally, which was further fueled by the Federal Open Market Committee’s Wednesday decision to leave its benchmark interest rate unchanged, sources say.

The present backdrop poses significant challenges to investors attempting to price assets, they add.

Witness the recently minted Navient Corp. 11½% senior notes due March 2031 (Ba3/B+/BB-).

Those bonds changed hands on Friday morning at 105, according to a trader.

They were spotted on Thursday at 103¾ bid, 104 offered.

The $500 million issue priced at 99.81 on Tuesday!

Should Navient management feel as though this dramatic price improvement suggests the company left too much yield on the table in Tuesday’s execution, chalk it up to Treasuries and the FOMC, a trader asserted.

The company needed to get a deal done and managed to do so, the source added.

Meanwhile the lights in the new issue market flickered up on Friday morning.

Hilcorp plans to price a $500 million offering of Hilcorp Energy I, LP and Hilcorp Finance Co. senior secured notes due November 2033 (expected ratings Ba2/BB+) in a drive-by.

Initial guidance has the deal coming to yield in the 8¾% area.

Sources pressed for new issue color for the week ahead paraded a list of names telegraphed earlier in the Halloween week.

Possibles include Veritiv Corp., with $600 million bonds to support the leveraged buyout by Clayton, Dubilier & Rice LLC, a deal expected to be led by Goldman Sachs.

Also, EG Group is heard to be in the wings with senior secured notes, including some dollar-denominated notes, as part of a $2 billion equivalent debt refinancing.

And Ineos Quattro is also heard to be in the staging area with €800 million equivalent of dollar- and euro-denominated secured notes, part of a debt-refinancing and acquisition funding effort.

Meanwhile, eulogizers of the hard-traveled Global Aircraft Leasing Co., Ltd. (GALC)/Global Sea Containers II Ltd. $1.95 billion offering of five-year senior PIK toggle notes (Ba2//BB-) may yet be premature, a trader asserted on Friday.

The co-issuers are in the market to raise cash to pay off $1.911 billion of GALC 6½% senior PIK toggle notes due September 2024.

On Thursday those 2024 notes traded 1 point to 2 points higher after Dublin-based aircraft leasing company Avolon reported an 8% increase in lease revenue on its Thursday earnings call.

GALC is an indirect, wholly owned subsidiary of Bohai Leasing Co., Ltd., which owns 70% of the Avolon Holding Ltd. outstanding shares (Bohai’s sole asset).

The move in the GALC 2024 bonds, following the Avolon earnings call, suggests that GALC’s proposed junk bond deal is still on the table, the trader said.

Fund flows

High-yield ETFs saw a huge $1.265 billion daily cash inflow on Thursday, their sixth-largest inflow of the year, and the largest since the $1.524 billion inflow of July 12, according to a trader.

Meanwhile actively managed high-yield funds sustained $171 million of daily outflows on Thursday, a market source said.

News of Thursday’s daily flows follows a Thursday afternoon report that the combined funds sustained $953 million of net outflows in the week to the Wednesday, Nov. 1 close, the market source added.

That was the eighth consecutive weekly outflow, totaling $11.9 billion, the source calculated.

That left year-to-date cash flows of the dedicated junk bond funds at negative $23.2 billion, according to the market source.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.