Morning Commentary: Market rockets as Fed steps beneath fallen angels; Ford, Carnival up

By Paul A. Harris

Portland, Ore., April 9 – The Federal Reserve Bank’s Thursday announcement creating a special purpose vehicle that can own corporate bonds in fallen angel circumstances hit the junk bond market like high octane fuel poured on a campfire.

The market was unchanged at 8:29 a.m. ET, a New York-based bond trader reflected.

“At 8:31 it was up 3 to 4 points,” the source said, adding that post-Fed trading unmistakably reflects a new-found confidence among high-yield investors.

High-yield ETFs were leading the charge at mid-morning, the trader said.

The new Ardagh Packaging Finance plc/Ardagh Holdings USA Inc. 5¼% senior secured notes due April 2025 (B1/BB/BB+) were up 7 points on the morning at 108 bid, their spread to five-year government paper narrowing to 204 basis points.

The propulsion was being generated by rampant ETF buying, which had lifted the high-yield index 4½ points by mid-morning, the trader said.

This source spoke to Prospect News on background Thursday morning, working from a one-bedroom Manhattan apartment, rather than the customary trading floor, sheltering in place because of the ongoing coronavirus pandemic, participating in company meetings on Zoom, and working on a personal computer in the living room.

The trader took a moment to contextualize the ebullience that had taken hold of the credit markets following the Fed's announcement, noting that beyond the sphere of those markets U.S. weekly jobless claims jumped by an astronomical 6.6 million workers, and it remains dangerous to go outside.

Targeting troubled credits

The new Fed SPV, funded by a whopping $75 billion equity injection from the U.S. Treasury, is able to own bonds with ratings as low as Ba3 from Moody's Investors Service and BB+ from S&P Global Ratings, as long as those bonds were rated at least Baa3 and BBB- as of March 20.

This narrow range of credit ratings is the dwelling place of the so-called “fallen angels” that were recently investment grade but became subject (or are anticipated to become subject) to downgrades owing to circumstances.

These days the circumstances are those of a global economy operating just above the freezing point because of the pandemic, which continues to generate widespread recession and unemployment.

Two such companies, both of which came with low investment-grade ratings, recently priced deals on high-yield syndicate desks, with coupons that reflected the present dire circumstances.

Cruise operator Carnival Corp. sold $4 billion of 11½% first-priority senior secured notes due April 2023 (Baa2/BBB-) on April 1.

Those bonds, which opened at 102½ bid on Thursday, immediately shot up to 106 upon the Fed news, sources said.

High-end retailer Nordstrom Inc. sold $600 million of senior secured notes due May 2025 (Baa2/BBB-) on Wednesday.

Those bonds shot to 106 bid from 104 bid on the Fed news.

Bonds of Ford Motor Co. at the front end of its maturity curve were up 10 points to 15 points on the Fed news, while those toward the long end of that curve were up 25 points, a trader said.

Although the Fed is specifying a narrow range of eligible credits, with respect to the new SPV announced Thursday, the impact is sure to impact the entire junk-rated spectrum, a high-yield syndicate banker said.

“It's helicopter money, and it's going to have an incredible ripple effect,” the banker said, adding that the willingness of the central bank to become involved in this range of the credit spectrum will be a shot in the arm to the high-yield bond market, expected to impact issuers further down the credit spectrum, and decrease their cost of capital.

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