Morning Commentary: Junk inches higher as equities rally; funds see $842 million inflows

By Paul A. Harris

Portland, Ore., Oct. 24 – A retreat in risk-free rates, which got underway on Monday, set off a rally in the stock market and moved the high-yield bond market 1/8 of a point higher in the early going on Tuesday, sources said.

Cash bonds were trading 1/8 of a point higher, with select names up as much as ½ of a point, according to a bond trader in New York.

The 10-year Treasury yield, which pierced through 5% on Monday – its highest yield in over a decade and a half – was yielding 4.87% at mid-morning on Tuesday, up 0.6% on the morning.

Pointing to Monday’s dramatic fall in Treasury yields, and the Monday release of two Israeli hostages who were being held by Hamas – lending a dim ray of hope that all-out war in the Mideast might be avoided – the junk bond market felt better, but certainly not great on Tuesday morning, the trader said.

Among big liquid issues, the GTCR W-2 Merger Sub LLC (Worldpay) 7½% senior secured notes due January 2031 (Ba3/BB/BBB-) were 98 5/8 bid, up 3/8 of a point on the morning, the trader said.

The $2.175 billion issue priced at par on Sept. 21.

The Shelf Drilling Holdings Ltd. 9 5/8% senior secured notes due April 2029 (B3/B-/B) were up 1/8 of a point at 94 5/8 bid, the source said.

The $1.095 billion issue priced at 98.184 to yield 10 1/8% on Sept. 28.

Meanwhile, the primary market awaited news on three offers currently stationed on the active forward calendar.

A $1.5 billion two-part offering of Borr IHC Ltd./Borr Finance LLC (Borr Drilling) senior secured notes (BB-/B) is on deck to price on Tuesday.

As the market awaited official talk and timing, a tranche of five-year notes is guided to yield in the mid-11% area, while a tranche of seven-year notes is guided in the high-11% area, with both tranches expected to come with original issue discounts, source say.

The Borr bonds in both tranches are callable and come replete with amortization and excess cash flow sweep provisions.

The deal was playing to $2.5 billion of demand across both tranches on Tuesday morning, according to a portfolio manager, who added that demand is skewed somewhat toward the five-year notes.

Slightly later a bond trader heard that demand ballooned to $3.5 billion.

Elsewhere Cetera Financial Group Inc. is marketing a $700 million offering of Aretec Escrow Issuer 2 Inc. senior secured notes due August 2030 (B2/B).

Initial guidance has the notes coming to yield in the high-9% to 10% area.

Demand was heard to be $600 million, with some hearing that orders for the new Aretec/Cetera bonds are running as high as $1 billion.

The brief roadshow is set to wrap up on Tuesday.

Meanwhile the Global Aircraft Leasing Co., Ltd. (GALC) and Global Sea Containers II Ltd. (GSCL II) $1.95 billion offering of five-year senior PIK toggle notes (Ba2//BB-), which has been in the market for a fortnight, is lately heard to be in limbo after the company rejected covenant changes demanded by an investor representing an anchor order, which would have taken the book above deal-size, sources say.

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.

GALC made three PIK payments on those 6½% notes during the height of the Covid shutdown, and investors are keen to incentivize the company to make interest payments on the new notes in cash, sources say.

The issuers addressed that concern in the new deal’s structure, with a novel 200 basis points PIK step-up (the customary PIK step-up has been 75 bps).

However, investors want additional guarantees and pledges of assets, sources say.

Fund flows

The dedicated high-yield bond funds saw $842 million of net daily cash inflows on Monday, according to a market source.

High-yield ETFs saw $703 million of inflows on the day.

Actively managed high-yield funds saw $139 million of inflows on Monday, the source said.

The combined funds are tracking $362 million of net outflows on the week that will conclude with Wednesday’s close, according to a market source.

Amid the geopolitical tensions and gyrating risk-free rates, the buy-and-hold high-yield bond accounts are sitting on slightly more cash than usual, but not dramatically more, according to the portfolio manager.

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