Morning Commentary: Junk weakens as Treasury yields spike; Spirit bonds lifted

By Paul A. Harris

Portland, Ore., Oct. 18 – Spiking risk-free rates created a downdraft for junk bonds on Wednesday morning, with cash bonds off 3/8 of a point, and the high-yield CDX index down 1/8 of a point, sources said.

Spotting the 10-year Treasury yielding 4.89% at mid-morning, a bond trader in New York said that it’s just a matter of time before that benchmark rate pushes up through 5%.

Among large, liquid issues that came in the second half of 2023, the GTCR W-2 Merger Sub LLC (Worldpay) 7½% senior secured notes due January 2031 were 1/8 of a point lower on the morning in active trading, according to the trader, who had them at 99 bid, 99¼ offered.

The $2.175 billion issue priced at par in mid-September.

Elsewhere, the Wednesday announcement of a strategic collaboration agreement between Spirit AeroSystems Holdings, Inc. and the Boeing Co. created lift for Spirit’s bonds.

The Spirit AeroSystems Inc. 9 3/8% senior secured first-lien notes due November 2029 were up a point-plus at 101 bid, 102 offered, printing at 101¾, the trader said.

The same issuer’s 5½% senior secured first-lien notes due January 2025 were also up a point-plus at 98¾ bid, 99¾ offered, the source said.

The agreement between Spirit AeroSystems and Boeing, designed to mitigate operational challenges in the supply chain, “enables greater collaboration to achieve improved quality and higher deliveries in the future,” Spirit said in a press release.

Turning to the primary market, there were no new deal announcements in the early going on Wednesday.

However, parties are at work on a pair of big deals that have been on trajectories which have them pricing before the end of the week.

Spiking risk-free rates serve to complicate the progress of the Global Aircraft Leasing Co., Ltd. (GALC)/Global Sea Containers II Ltd. (GSCL II) $1.95 billion offering of five-year senior PIK toggle notes (Ba2//BB-), sources say.

The co-issuers are in the market in order to raise cash to pay off the GALC 6½% senior PIK toggle notes due September 2024.

The new offering is playing to between $1.1 billion and $1.5 billion of demand, according to a portfolio manager.

Early price talk has widened somewhat. Under discussion are an 11½% cash coupon and a 13½% PIK coupon, replacing earlier guidance that had a cash coupon coming in the 11% area, with a 200 basis points step-up for a PIK coupon payment.

That novel 200 bps PIK step-up (the customary step-up has been 75 bps) is part of the deal’s announced structure.

It reflects the issuer’s appreciation of the fact that investors are determined to have coupons paid in cash, sources say.

However, investors want more assurance, they add.

Conversations about the deal’s covenant package are underway, according to the portfolio manager, who is involved in the negotiations.

One covenant tweak under consideration would prohibit the company from making dividend payments during fiscal periods in which it makes a PIK coupon payment on the bonds, the source said.

The parties are reasonably close, according to the portfolio manager, who professed confidence that a deal can get done.

Also in the market is a massive $4 billion two part offering from Venture Global LNG Inc.

That deal (B1/BB/BB-) includes a tranche of 5.25-year bullet notes with initial talk of 8¾% to 9% and a tranche of 8.25-year notes with 3.25 years of call protection and initial talk of 9¼% to 9½%.

The combined offering is playing to around $2 billion of demand, largely from hedge funds, the portfolio manager said.

That demand is about evenly split between the two tranches, the source noted.

The company was set to continue meetings with investors on Wednesday, and the deal is on a timeline that has it pricing on Thursday.

A modest upsize is possible, sources say.

Fund flows

High-yield ETFs sustained big daily cash outflows of $606 million on Tuesday, according to a market source.

Actively managed high-yield funds posted modest positive flows of $15 million on the day, the source said.

The combined funds are tracking $2.1 billion of net outflows on the week that is set to conclude with Wednesday’s close, according to the market source.

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