Morning Commentary: Staples unsecured paper stages recovery; funds see Thursday inflows

By Paul A. Harris

Portland, Ore., April 12 – Although they were said to have been nursed across the finish line in a dramatically downsized tranche, with a coupon that soared high above the initial guidance and a raft of covenant changes, the Staples, Inc. 10¾% senior unsecured notes due April 2027 (B3/B-) were up and running in the secondary market, traders said on Friday.

The notes, which priced at par on Tuesday, were 102 bid, 102½ offered Friday morning.

They were 99 7/8 bid, par 3/8 offered on Wednesday.

Part of the story is the coupon, the trader said, suggesting that investors see decent or better value in the Staples 2027 unsecured notes at 10¾%.

In a broader context, however, the market has run pretty hard, the trader said, noting that the Barclays high-yield index has returned a whopping 8.21% thus far in 2019.

Amid this rally in high yield, lower quality paper has begun to outperform.

Whereas earlier in the year the gunsights of junk bond investors were fixed on double B paper, they have lately migrated to single B bonds, the trader said.

Issue size may also have something to do with the success of the Staples unsecured bonds, sources say.

Staples cut the unsecured tranche to $1 billion from $1.375 billion and shifted the proceeds to the upsized secured tranche, which was further upsized with the shift of $900 million of proceeds from the concurrent term loan to the secured bonds.

So, the secured tranche, the Staples 7½% senior secured notes due April 2026 (B1/B+), which started out sized at $750 million, cleared the market at $2 billion.

And at 99½ bid, par offered on Friday morning, the Staples secured bonds were not trading nearly as well as the unsecured bonds.

Energy on the move

Although they are high-grade names, news that Chevron Corp. has agreed to buy Anadarko Petroleum Corp. in a deal valued at $33 billion gave a solid boost to high-yield energy names on Friday, sources said.

The energy sector had already been the beneficiary of recent vigor in the price of crude oil, they added.

The barrel price of West Texas Intermediate (WTI) crude for May 2019 delivery was up half a buck on Friday at $64.08, 0.79% higher on the day, but off of earlier highs.

WTI crude started the year under $45.50 per barrel.

The California Resources Corp. 8% senior secured second-lien notes due December 2022, a big, liquid issue employed by high-yield bond investors for the purpose of tracking crude oil prices in the index, were up ¾ of a point at 82¾ bid, 83½ offered on Friday morning, a trader said.

With the health of crude oil prices, that paper has been trading in the 82-range for a while, the trader remarked, noting that in the middle of March the California Resources 8% notes were trading in the mid-70s.

The primary

The new issue market was set to head into the weekend quietly.

One deal, Australia-based Mineral Resources Ltd.'s $750 million offering of eight-year senior notes (Ba3/B+), is expected to clear the market ahead of the Friday close, sources say.

However, there were no updates, such as official price talk and timing, in the early going on Friday, they said, adding that the deal has initial guidance of 7¾% to 8%.

Looking to the week ahead, Natural Resource Partners LP is set to start a roadshow on Monday in New York for a $275 million offering of six-year senior notes.

Early guidance has that deal shaping up in the 9% area, a trader said.

The offer, via bookrunner Citigroup Global Markets Inc., is expected to price on Wednesday.

The Houston-based master limited partnership plans to use the proceeds to refinance its 10½% senior notes due in 2022.

Meanwhile Vizient, Inc. is in the pipeline with a $300 million offering of unsecured notes.

That deal is expected to surface during the April 15 week via J.P. Morgan Securities LLC, an investor said.

Thursday inflows eyed

The daily cash flows of the dedicated high-yield bond funds were substantially positive on Thursday, a trader said.

High-yield ETFs saw $371 million of inflows on the day.

Actively managed high-yield funds saw $255 million of inflows on Thursday, the source added.

News of Thursday's daily flows trails a Thursday afternoon report that the combined high-yield funds saw $655 million of net inflows in the week to Wednesday's close, according to Lipper US Fund Flows.

That's the 12th consecutive positive week in the past 14 weeks, a market source said.

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