Morning Commentary: Junk off ¼ to ½ point amid more volatility; Freedom Mortgage, McDermott on deck

By Paul A. Harris

Portland, Ore., April 4 – On-the-run high-yield names were down ¼ to ½ point as volatility continued to impact the capital markets on Wednesday morning, according to a bond trader.

With the Dow Jones industrial average down 1.5% at mid-morning and energy prices under pressure, the energy sector of the high-yield index was faring better than might be expected, down ¼ to ½ point in line with other sectors, the trader said.

The California Resources Corp. 8% senior secured second-lien notes due December 2022, which trade in close correlation with the price of crude oil, were 77½ bid, 78¼ offered, down a point at mid-morning, the trader said.

The barrel price of West Texas Intermediate crude oil for May 2018 delivery was down $1.19, or 1.87%, at $62.32.

Among recent issues the Ply Gem Holdings Inc. 8% senior notes due 2026 (Caa1/CCC+) were par ¾ bid, 101 offered, unchanged to slightly lower, the trader said.

The $645 million issue priced at par last Friday.

High-yield ETFs were flat at mid-morning.

The SPDR Blmbg Barclays High Yield Bd ETF (JNK) was down 3 cents, or 0.08%, at $35.65 per share.

The primary market

Turning to pending new issue business, two deals were on deck to price on Wednesday as the session got underway.

Freedom Mortgage Corp.'s $500 million offering of seven-year senior notes (expected ratings B2/B) is shaping up in the 8¼% area, tight to the 8¼% to 8½% early guidance, and could upsize to $600 million, the trader said.

The Mount Laurel, N.J.-based residential mortgage company was drawn into the market by $500 million of reverse inquiry, market sources say.

Meanwhile the struggling McDermott International Inc. $1.3 billion offering of six-year senior notes (B2/B-) is also on a timeline that has it pricing on Wednesday, sources say.

The downsized deal, held over from the last week in March, was launched on Tuesday afternoon with a 10 5/8% coupon in the 94.75 area to yield approximately 11 7/8%.

It widened dramatically from price talk in the 10½% area, which circulated the market on March 28.

Initial chatter had the six-year notes coming in the mid-to-high 8% context, a trader recounted.

There were also changes to the offering document, some of them bearing upon how the company may disburse cash and incur additional debt.

The proposed 10 5/8% coupon matches the bridge cap, according to market sources, who add that the discount will come at the expense of the dealers.

The bridge loan backing the deal was partially syndicated.

Bridge participants are expected to shoulder some portion of the discount, sources say.

The deal is in the market in connection with the merger of McDermott and Chicago Bridge and Iron. Proceeds will be used to repay debt at both entities and for general corporate purposes.

Tuesday outflows

The daily cash flows of the dedicated high-yield bond funds were negative on Tuesday, the trader said.

High-yield ETFs saw $100 million of outflows on the day.

Actively managed funds sustained $105 million of outflows on Tuesday, the trader said.

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