Sell-off intensifies; Science Applications soars; funds see record $5.13 billion outflow

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 5 – Quiet returned to the domestic high-yield primary market on Thursday with the forward calendar thin as volatility continues to whipsaw markets.

The previous session’s rebound proved to be short-lived with the secondary space again selling off on Thursday as the coronavirus spreads through the United States and Europe.

The market, in general, sank 1 to 2 points with the tone of the sell-off becoming more dramatic than it had been previously, sources said.

However, there were still buyers in the market and sellers who were unwilling to hit low bids, a source said.

“In some ways, things are at a bit of a standstill,” the source said.

Despite the weakness in the market, the deals to price during Wednesday’s session were performing well.

Science Applications International Corp.’s 4 7/8% senior notes due 2030 (B1/BB-) maintained their large premium in active trading.

Charter Communications Inc.’s newly priced 4½% senior notes due 2032 were well above their issue price in high-volume activity.

While CCO Holdings LLC and CCO Holdings Capital Corp.’s 4½% senior notes due 2030 were volatile following Wednesday’s add-on, the notes stood poised to close the day above their reoffer price.

While the new paper was performing well, the travel and leisure industries were particularly hard hit in Thursday’s sell-off.

American Airlines Group Inc.’s junk bonds continued to get crushed.

Hertz Corp.’s 7 5/8% senior notes due 2022 and AMC Entertainment Holdings Inc.’s 6 1/8% senior notes due 2027 also took off several points in high-volume activity.

High-yield mutual and exchange-traded funds continued to hemorrhage cash with the combined funds seeing a record $5.126 billion outflow through Wednesday’s close – the fourth largest on record, sources said.

Quiet primary

Ongoing volatility in the capital markets, related to the myriad hazards that coronavirus poses to the global economy, sidelined the high-yield primary market on Thursday, sources said.

A thin and thinning forward calendar features the Del Monte Foods Inc. $575 million offering of seven-year senior secured notes (CCC+), being shopped on the lately rugged high-yield road (last week saw 2020's first postponed deals).

The San Francisco-based food production company plans to use proceeds from the deal now being shopped in an effort to refinance its capital structure.

The offer is playing to mixed reviews, a trader said on Thursday, adding that bank loans expected to be addressed by means of proceeds generated from the Del Monte bond offer are trading in the low-to-mid 90s, signaling that investors expect the new bond deal to face resistance.

Science Applications soars

Science Applications’ newly priced 4 7/8% senior notes due 2030 were one of the few bright spots during Thursday’s session.

After a strong break on Wednesday, the notes held on to their large premium.

The 4 7/8% notes were trading in the 102 to 102½ context in the late afternoon, according to a market source.

The bonds saw more than $25 million in reported volume during Thursday’s session.

While Science Applications’ new paper was performing well, there was a degree of caution, especially in relation to the amount being bought, a market source said.

“People are definitely more cautious on size,” the source said.

Science Applications priced a $400 million issue of the 4 7/8% notes at par on Wednesday.

Pricing came tighter than talk for a yield in the 5¼% area and well inside of initial talk for a yield in the 5¼% to 5½% area.

Charter in focus

Charter’s senior notes were in focus on Thursday after the communications company priced a $2.5 billion two-tranche megadeal.

Charter’s new 4½% senior notes due 2032 were trading at a large premium to their issue price.

They were changing hands in the 101 to 101½ context, a market source said.

The bonds saw more than $57 million in reported volume.

Charter’s 4½% senior notes due 2030 were seen at a slight premium to their reoffer price.

The notes were changing hands in the 102½ to 103 context with more than $75 million in reported volume, sources said.

While the 4½% notes due 2030 were “doing okay,” they were still trading at a lower level than they were prior to the add-on, a source said.

Charter priced a $2.5 billion two tranche offering (B1/BB/BB+) in a Wednesday drive-by.

The deal included an upsized a $1.4 billion tranche of the 4½% notes due 2032, which priced at par.

The tranche was upsized from $750 million.

The yield printed at the tight end of talk for a yield of 4½% to 4 5/8%.

The deal also included a downsized $1.1 billion tap of the 4½% senior notes due 2030, which priced at 102½.

The add-on was downsized from $1.25 billion.

Pricing came at the rich end of talk for a reoffer price of 102¼ to 102½.

American Airlines crushed

American Airlines’ junk bonds continued to get “crushed” as concern over the coronavirus sparked an intense sell-off in the high-yield market on Thursday.

The recently priced 3¾% senior notes due 2025 (B1/BB-/BB-) sank more than 6 points to trade in the 82 to 83 context, a market source said.

With more than $45 million in reported volume, the bonds were one of the most active in the secondary space.

The 3¾% notes priced at par on Feb. 20.

American Airlines’ 5% senior notes due 2022 sank more than 8 points to trade as low as 91¾ on Thursday.

They were changing hands at 92½ heading into the market close with more than $23 million in reported volume.

The 5% notes were above par heading into Thursday’s session, a source said.

Travel and leisure

Travel and leisure names were among the heaviest hit during Thursday’s sell-off.

Hertz’s 7 5/8% notes due 2022 traded off more than 3 points, a market source said. They were moving in a 99 to par context in active trading.

The 7 5/8% notes saw more than $20 million in reported volume by the late afternoon.

AMC’s 5¾% notes due 2025 were down more than 4 points to a 77 handle with more than $32 million in reported volume, sources said.

The movie theater chain operator’s stocks and bonds fell after it announced it was pushing back the release of the latest James Bond movie due to the coronavirus.

Fund flows

The dedicated high-yield bond funds saw $483 million of net inflows on Wednesday, the most recent session for which data was available at press time, according to a market source.

All of that, and more, flowed into high-yield ETFs, which saw $713 million of inflows on the day.

The actively managed high-yield funds, on the other hand, sustained $230 million of daily outflows on Wednesday, the source said.

For the week to Wednesday's close, the combined funds sustained $5.126 billion of outflows, according to Lipper US Fund Flows.

It's the fourth biggest weekly outflow on record and the biggest outflow since March 2017, sources say (the three largest outflows on record are negative $7.1 billion for the week to August 6, 2014, negative $6.3 billion for the week to Feb. 14, 2018 and negative $5.7 billion for the week to March 15, 2017).

In Europe, the dedicated high-yield bond funds sustained successive daily outflows averaging €364 million in the five sessions leading up to and including March 4, a source there said.

The largest of these daily outflows was €476 million on Feb. 28.

For the most recent five sessions, the European funds saw €1.819 billion of net outflows.

Year-to-date flows for the European dedicated high-yield bond funds were €1.814 billion to Wednesday's close, representing 4.08% of assets under management, the European market source said.

Indexes erase gains

Indexes largely erased their gains from Wednesday’s session with some closing Thursday with dramatic losses.

The KDP High Yield Daily index dropped 20 points to close Thursday at 70.04 with the yield now 5.55%.

The index gained 34 bps on Wednesday, 33 bps on Tuesday and 23 bps on Monday.

After briefly returning to positive territory, the ICE BofAML US High Yield index sank back to the red on Thursday.

The index dropped 59.5 bps with the year-to-date return now negative 0.58%. The index gained 51.3 bps on Wednesday, 59 bps on Tuesday and 49.2 bps on Monday.

The CDX High Yield 30 index plummeted 180 bps to close Thursday at 103.78.

The index jumped 84 bps on Wednesday, plummeted 94 bps on Tuesday and gained 28 bps on Monday.

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