Morning Commentary: Junk opens 1/8 point lower; airline, cruise line bond prices edge higher

By Paul A. Harris

Portland, Ore., July 12 – The high-yield bond market opened 1/8 point lower on Tuesday, sources said.

With the major U.S. stock indexes turning in mixed performances at midmorning the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was up 0.34%, or 25 cents, at $74.72.

Trading volume remained low, according to a bond trader at work in the New York City area.

The prices of select issues from the travel sector were being marked higher on Tuesday morning, the source said.

The price of bonds issued by American Airlines Group Inc. improved after the Fort Worth-based carrier cited robust demand as it told investors that it expects to report its first pretax quarterly profit since the onset of the coronavirus pandemic.

The American Airlines 11¾% senior secured notes due July 2025 were being marked ¼ point higher, and were wrapped around 106 at midmorning, the trader said, noting that the stock (Nasdaq: AAL) was up nearly 10%.

Prices of cruise line bonds incrementally improved on Tuesday morning as well.

The Carnival Corp. 10½% senior secured second-priority notes due February 2026 were up ¼ point at par bid, par ¼ offered, after closing Monday at 99¾ bid, par offered, the trader said.

The Royal Caribbean Cruises Ltd. 10 7/8% senior secured notes due June 2023 were also incrementally higher at 101¾ bid, 102 offered.

There appeared to be no news other than increased post-Covid demand for travel services, said the trader who saw no evidence that much paper from the travel sector, or any sector, was changing hands on Tuesday morning.

With oil prices slipping more than 7% on Tuesday the Occidental Petroleum Corp. 3½% senior notes due August 2029 were wrapped around 90, down ½ point, the trader said.

At midmorning the barrel price of West Texas Intermediate crude oil for August delivery was down $7.39, or 7.1% at $96.70.

There was no news in the dollar-denominated new issue market on Tuesday morning.

The market continues to anticipate the announcement of a deal backing the leveraged buyout of Tenneco Inc., by Apollo Global Management, Inc.

Pegasus Merger Co., an affiliate of Apollo, began pre-marketing $2 billion of secured notes and $1 billion of unsecured notes last week, sources say.

There appears to be at least a modicum of deal risk, according to the bond trader who had the Tenneco 5% senior notes due July 2026 languishing in the context of 95½ bid.

In addition to the present rugged market conditions Apollo deals customarily encounter a certain amount of apprehension among high-yield investors, the trader said.

Absent deal risk the Tenneco 5% notes should be trading around the 101 change of control price, the source added.

The market also anticipates that Cornerstone Building Brands Inc. will show up soon with an offering of senior secured notes to address at least a portion of the refinancing of a $1.675 billion bridge loan put in place in early March to support the buyout of the company by Clayton, Dubilier & Rice.

$563 million Monday outflows

The dedicated high-yield bond funds sustained $563 million of net daily outflows on Monday, according to a market source.

High-yield ETFs saw $423 million of outflows on the day.

Actively managed high-yield funds sustained $140 million of outflows on Monday, the source said.

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