Junk moves lower on inflation data; TransDigm lower; Medical Properties pressured

By Paul A. Harris and Abigail W. Adams

Portland, Me., Feb. 24 – As more bad news on how inflation figures to influence rates, and dire news on the cash flows of the high-yield retail accounts circulated the market, the primary market remained mostly quiet on Friday.

The sole news nugget concerned Israeli pharmaceutical giant Teva (Ba2/BB-), which is set to do a non-deal roadshow early in the week ahead, likely to address approximately $2 billion equivalent of dollar- and euro-denominated bond maturities that it faces in the coming six months, according to market sources (see related story in this issue).

Meanwhile, the secondary space gave back much of its gains from the previous session after a hotter-than-expected Consumer Price Expenditure report reinitiated the rate concerns that were temporarily appeased by the release of the Federal Open Market Committee minute notes on Wednesday.

The cash bond market was off 3/8 point although volume was light with holders reluctant to sell.

“There hasn’t been that much punting,” a source said.

TransDigm, Inc.’s 6¾% senior secured notes due 2028 (Ba3/B+) were again the top traded issue of the day following the company’s $1.1 billion add-on.

The notes were lower alongside the broader market although they remained at a slight premium to their reoffer price.

Topical news continued to whipsaw Medical Properties Trust Inc.’s senior notes (Ba1/BBB-), which were again under pressure amid investor concern about the financial health of one of the real estate investment trust’s tenants.

TransDigm lower

TransDigm’s 6¾% senior secured notes due 2028 were lower in heavy volume on Friday.

However, the notes maintained a nominal premium to the reoffer price of its $1.1 billion add-on.

The 6¾% notes were off 3/8 to ½ point.

They traded as low as 98 7/8 in intraday activity but closed the day in the 99 to 99¼ context, a source said.

There was $49 million in reported volume with the notes the top trader in the secondary space.

The notes were largely unchanged after TransDigm. priced the $1.1 billion add-on at 99 to yield 6.976% in a Thursday drive-by.

The notes closed the previous session in the 99½ to par context – a level the notes fell to amid heavy selling in the market on Tuesday, a source said.

Prior to Tuesday’s session, the 6¾% notes have largely traded in the par 3/8 to par 5/8 context since the initial $1 billion issue priced at par on Feb. 10.

Thursday’s add-on played to heavy demand with talk tightening from early guidance for a reoffer price in the 98 to 98.5 area to 99.

There was heard to be $3 billion of orders.

The weakness in the notes was a product of conditions in the broader market, a source said.

Medical Properties under pressure

Medical Properties’ senior notes were once again under pressure on Friday following investor concern about the financial health of one of the REITs tenants.

The 5% senior notes due 2027 fell 1¾ points to close Friday at 82¾, a source said.

The yield was 9¾%.

There was $13 million in reported volume.

The 3½% senior notes due 2031 fell 2¼ points to close the day at 68¾.

The yield was 9%.

There was $4 million in reported volume.

Medical Properties’ senior notes were down after the REIT released earnings with forward guidance well below expectations, largely due to unpaid rent from tenant Prospect Medical Holdings in Pennsylvania, a source said.

Medical Properties’ earnings included an impairment of $171 million related to the properties leased to Prospect Medical Holdings and a write-off $112 million in unbilled rent.

The company said it did not expect Prospect Medical Holdings to pay rent in 2023.

Investor concern over revenue lost from the lease agreement weighed on the gains Medical Properties’ senior notes made the previous week after entering into new lease agreements for its Utah properties.

The 5% notes traded as high as 86 on the news although they were dragged down to an 84-handle heading into earnings.

Medical Properties’ senior notes have been whipsawed by topical news over the past month with the notes under pressure at the end of January following a short-seller report from Viceroy Research that alleged fraud.

Fund flows

In the wake of sustaining their third largest weekly cash outflow on record, the dedicated high-yield bond funds saw another $555 million of negative net daily flows on Thursday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs sustained $285 million of outflows on the day, while actively managed high-yield funds saw $270 million of outflows on Thursday, the source said.

Those daily outflows follow a Thursday afternoon report that the combined funds sustained a massive $6.125 billion of net outflows in the week to the Wednesday, Feb. 22 close, according to fund tracker Refinitiv Lipper.

It is the third-largest weekly drain of cash from the junk asset class on record, a bond trader said. The largest ever outflow was $7.1 billion in the week to Aug. 6, 2014.

Boring down into the most recent negative weekly flows, the junk ETFs sustained $4.4 billion of outflows in the most recent week, also a record, a market source said, noting that those weekly outflows encompass $2.29 billion of daily outflows on Thursday, Feb. 16, also a record.

The dedicated high-yield bond funds have seen $9.4 billion of net outflows in 2023 to Thursday's close, according to the source.

Indexes

The KDP High Yield Daily index fell 18 points to close Friday at 51.81 with the yield now 7.52%.

The index added 29 points on Thursday after falling 2 points on Wednesday and 36 points on Tuesday.

The index posted a cumulative decline of 27 points on the week.

The CDX High Yield 30 index fell 50 basis points to close Friday at 101.3.

The index gained 37 bps on Thursday and 20 bps on Wednesday after falling 87 bps on Tuesday.

The index posted a cumulative loss of 80 bps on the week.

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