Morning Commentary: Junk funds see big Wednesday outflows; recent issues continue to outperform

By Paul A. Harris

Portland, Ore., Dec. 10 – High-yield bonds opened a little weaker on Thursday, according to a bond trader on the East Coast of the United States.

The CDX HY 25 index was down 1/8 point at mid-morning.

ETFs were slightly lower. The iShares iBoxx $ High Yield Corporate Bd (HYG), at $81.42 per share, was down 6 cents and the SPDR Barclays High Yield Bond ETF (JNK) was 3 cents lower at $34.49 per share.

Dedicated high-yield funds saw big outflows on Wednesday, according to a high-yield investor.

High-yield ETFs saw $434 million of outflows on the day. Asset managers sustained a whopping $1.75 billion of daily outflows on Wednesday.

Dedicated bank loan funds, meanwhile, saw $240 million of outflows on the day.

News of substantial outflows could hit the market later Thursday, when Lipper-AMG releases its weekly fund flows reports, as it customarily does on Thursday afternoons, the investor said.

Haves and have-nots

The damage continues to pile up on the energy, metals and mining sectors, the investor said.

The energy sector of the Merrill Lynch index is down 5.2% on the month, the source added.

The California Resources Corp. 6% notes due November 2024, which have served as a sector benchmark since the magnitude of the crude oil crash started to become apparent in late 2014, were at 43½ bid, 44½ offered heading into mid-morning.

Although the bonds have not moved very much in the past two days, they were at 60 bid at the beginning of the month, the investor remarked.

There has been some evidence that the damage to energy, metals and mining is spilling over into other sectors of the high-yield bond universe, but that damage in many cases is limited, the investor said.

“This market is a story of the Haves and the Have-nots,” the source commented.

Bonds issued in late October by Level 3 Communications, Inc. are outperforming, the source pointed out.

The Level 3 Financing, Inc. 5 3/8% notes due Jan. 15, 2024 were holding in at 99½ bid, par ½ offered on Thursday morning.

However those bonds are down ½ point over the past two sessions.

Men’s Wearhouse hammered

Men’s Wearhouse Inc.’s 7% senior notes due July 1, 2022 were down 6 points to 66¼ bid on news that sales at Jos. A. Bank, which it acquired last year, dropped 14.6% in the third quarter, according to a trader.

That paper was trading in the low 70s on Wednesday, the trader said.

“When we acquired Joseph Bank, we knew that we needed to correct the promotional model,” Doug Ewert, Men’s Wearhouse chief executive officer, stated in the earnings report. “However, we underestimated the impact to the near-term performance as we began to execute the difficult, but necessary, corrective steps.”

Primary quiet

The primary was quiet on Thursday morning. Three deals remain on the active forward calendar, although only two of those have generated news in the past week.

Clear Channel International BV, a unit of Clear Channel Outdoor Holdings, Inc., has been marketing a $225 million offering of five-year senior notes (B2/B) via bookrunner Goldman Sachs & Co.

The deal, which is set to price this week, has been discussed in a 7% to 8% yield context, sources say.

It appears more likely to shape up around 8%, a trader said on Thursday, adding that there is a good deal of reverse inquiry involved in the deal.

Kraton Polymers, Inc. started a roadshow on Monday for $425 million of eight-year senior notes (B3/CCC+).

The acquisition deal, via Credit Suisse, Nomura and Deutsche Bank, is set to price late this week.

Early guidance had the notes coming in a mid-10% yield context, sources say.

However there has been no recent word on the Kraton deal, the trader said.

There have been no updates in well over a week on NGL Energy Partners LP’s planned $300 million of five-year senior notes (B2/BB-/BB-), a deal that launched at the end of November.

Formal talk has yet to be announced.

While still in the market, the energy sector deal is facing headwinds, market sources say.

Pricing, which started in the 9% area, has been on the march, lately heard in the context 11½% to 12%.

Most recently 12% seems to be the number, a buyside source said.

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