SAIC on tap; Cleveland-Cliffs trades up; Kraft Heinz gains; AA down again

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 3 – The domestic high-yield primary market saw one issuer step forward on Tuesday with a prospective offering.

Science Applications International Corp. took some market watchers by surprise in announcing plans to price a $400 million offering of eight-year senior notes (B1/BB-) on either Wednesday or Thursday.

Meanwhile, it was another volatile day in the secondary space with the market again opening with gains but closing with losses.

While soft overall, the market was mixed with areas of firmness.

The sell-off in risk assets still had not reached the level of panic in high yields with the market largely in wait-and-see mode, a source said.

Cleveland-Cliffs Inc.’s 6¾% senior notes due 2026 (Ba3/BB-) were one of the bright spots of Tuesday’s session with the notes trading at a large premium to their issue price in high-volume activity.

Outside of the new issue, it was the usual suspects on the tape.

Kraft Heinz Foods Co.’s senior notes were again major volume movers in the secondary space with the longer duration notes continuing their upward momentum.

American Airlines Group Inc.’s 3¾% senior notes due 2025 (B1/BB-/BB-) continued their downward trajectory with the notes moving down to an 89 handle.

SAIC brings $400 million

Amid continued capital markets volatility on Tuesday, with the Federal Reserve Bank's Federal Open Market Committee citing possible impacts of coronavirus on the global economy as it slashed the Fed Funds rate by half a percent, Science Applications International took quite a few market watchers by surprise as it disclosed plans to price a $400 million offering of eight-year senior notes (B1/BB-) on either Wednesday or Thursday.

Initial price talk has the notes coming to yield in the 5¼% to 5½% area, a trader said.

Part of the reason that the Reston, Va.-based company chose to brave the present market volatility was $250 million of reverse inquiry at that talk, the trader said, adding that there is a larger book at the wides or slightly wide of that talk.

With respect to the timeline, the company intends to price the deal as soon as possible, the trader added.

Citigroup is the lead bookrunner.

Mixed

The secondary space saw another volatile day with the overall market opening up 1/8 point but closing the day down about ½ point, sources said.

However, the space was mixed with some names firming despite the overall weakness in the market.

While equities saw another intense sell-off in reaction to the Federal Reserve’s ½ point rate cut, the high yield space was largely in wait-and-see mode, a source said.

“No one’s sure what’s going to happen next. There’s a lot of conflicting headlines,” the source said.

Several accounts were still holding and not willing to sell. While bids were lower, not a lot was getting hit.

There have been some “crazy prints,” in the secondary space with large gaps in bid/ask spreads, the source said.

Cleveland-Cliffs trades up

Cleveland-Cliffs 6¾% senior notes due 2026 skyrocketed in the secondary space.

While the notes were coming in slightly from Monday’s close, they continued to trade well above their issue price, a market source said.

The 6¾% notes were wrapped around 101 in high-volume activity on Tuesday.

With more than $70 million in recorded volume on the tape, the notes were the most actively traded in the secondary space, a source said.

Cleveland-Cliffs priced a $725 million issue of the 6¾% notes at 98.783 to yield 7% on Monday.

The yield printed at the tight end of the 7% to 7¼% yield talk with a discount specified.

The offering was revised prior to pricing – a byproduct of the coronavirus-induced volatility that sidelined the primary market for more than a week.

The deal was initially launched as a $950 million two-part offering that also included a $400 million tranche of unsecured notes.

The unsecured tranche was withdrawn and the secured tranche was upsized from $550 million.

In addition to the tranche sizes and tenor, the covenants were revised.

Kraft Heinz up again

Kraft Heinz’s senior notes remained major volume movers in the secondary space with the longer duration notes continuing their upward momentum.

Kraft’s 4 3/8% senior notes due 2046 gained more than 4½ points to close Tuesday at 97½, a market source said.

The bonds saw more than $33 million in reported volume.

The 5% notes due 2035 were up about 3½ points to 111½ with more than $10 million in reported volume.

The notes have been major volume movers since Fitch Ratings and S&P Global Ratings downgraded the company to junk in mid-February.

The activity in the notes was largely due to their large market cap with the longer duration part of the curb getting “whipped around,” a source said.

American Airlines down again

American Airlines 3¾% senior notes due 2025 continued their downward trajectory on Tuesday.

The notes dropped another 1½ points.

They were changing hands on an 89 handle in the late afternoon, according to a market source.

The notes were largely moving with the market, a source said.

The 3¾% notes have struggled since pricing at par on Feb. 20 with the travel industry particularly hard hit by investors’ coronavirus concerns.

Monday fund flows

The daily cash flows of the dedicated high-yield bond funds were mixed on Monday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs, which saw record daily outflows on successive days last week, saw a hefty $821 million of inflows on the day.

This was reflected in Tuesday morning trading, according to the New York-based bond trader who reported seeing a substantial volume of offers-wanted-in-competition (OWICs), primarily from the junk ETFs.

However actively managed high-yield accounts, the so-called real money accounts, sustained $930 million of daily outflows, on Monday, the source said.

Hence the combined funds sustained $109 million of net outflows on Monday, and are tracking $5.2 billion of net outflows, so far, for the week that will conclude with Wednesday's close.

Indexes mixed

Indexes were mixed on Tuesday with some on the rise and others seeing steep losses after all started the week with gains.

The KDP High Yield Daily index gained 33 points to close Tuesday at 69.90 with the yield now 5.6%.

The index was up 23 bps on Monday.

The ICE BofAML US High Yield index gained 59 bps with the year-to-date return now negative 0.498%. The index was up 49.2 bps on Monday.

The CDX High Yield 30 index plummeted 94 bps to close Tuesday at 104.74. The index gained 28 bps on Monday.

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