Morning Commentary: Block plunges following Hindenburg report; junk unchanged post-Fed

By Paul A. Harris

Portland, Ore., March 23 – An excoriating report on financial technology services supplier Block Inc. from short-seller Hindenburg Research sent Block’s bonds and shares tumbling on Thursday morning, according to market sources.

The Square, Inc. (Block Inc.) 3½% senior notes due June 2031 were off 4 points to 5 points on the morning, according to a bond trader, who marked them at 77¼ bid, 78¼ offered.

Another trader had that paper 77¾ bid, 78 offered, down 4¾ points on the heels of the report.

The company’s shares (NYSE: SQ) were down 10¼% at mid-morning.

The report, published Thursday by Hindenburg – claiming to draw upon information developed in a two-year investigation – states that Block “wildly overstated its genuine user counts and has understated its customer acquisition costs.”

The Hindenburg report also refers to “the company’s willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics.”

Away from headline news, high-yield bonds were largely unchanged on Thursday morning, with the market sounding a positive tone on the heels of what the financial markets are perceiving to be “dovish” indications from the March meeting of the Fed's Federal Open Market Committee, following which the FOMC raised short-term interest rates another 25 basis points.

Traders were plowing through $2 billion of offers-wanted-in-competition (OWICs) versus $300 million of bids-wanted-in-competition (BWICs) on Thursday morning, indicating that the junk ETFs were primarily in the way of acquiring bonds, the trader said.

With the S&P 500 stock index up 1.52% at mid-morning, the Shares iBoxx $ High Yield Corporate Bd (HYG) share price was 0.39% better, up 29 cents, at $74.33.

The most recent issue to clear the market, the Jones DesLauriers Insurance Management Inc. (Navacord Inc.) 8½% senior secured notes due March 2030 (B2/B-/B+) were 103 bid, 103½ offered on Thursday morning, according to the trader.

The $500 million deal, which priced at par on March 2, is the also the best-performing new issue of 2023 to date, the source added.

Meanwhile, the dollar-denominated new issue market remained quiet on Thursday morning, although some players are watching for a moderate reopening, should secondaries hold in.

The euro-denominated primary market continued to sputter to life on Thursday as Germany-based IHO Verwaltungs GmbH, the holding company for Schaeffler AG, started a brief roadshow for a €500 million offering of five-year sustainability-linked senior secured PIK toggle notes (Ba2/expected BB-/expected BB), in the market with initial yield whisper in the mid-to-high 8% area, sources say.

Fund flows

The dedicated high-yield bond sustained $218 million of net daily cash outflows on Wednesday, according to a market source.

Actively managed high-yield funds saw $155 million of outflows on the day.

High-yield ETFs sustained $63 million of outflows on Wednesday, the source said.

As the market awaits a weekly report on the cash flows of the various asset classes, expected Thursday afternoon from fund-tracker Refinitiv Lipper, the combined high-yield funds are tracking $625 million of net outflows for the week that concluded with Wednesday’s close, according to the market source.

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