Carnival rebounds, outstanding issues improve; Avaya tanks; HY funds lose $2.6 billion

By Paul A. Harris and Abigail W. Adams

Portland, Me., May 19 – The primary market remained sidelined on Thursday.

The forward calendar stood empty at the close, as risk aversion continues to hold sway in the capital markets.

Meanwhile, the secondary space was quiet on Thursday after the previous session’s sell-off pushed the market to new lows.

While activity was light, there was a great deal of apprehension in the market with players reluctant to make moves “until we get real clarity on what’s going to happen with the economy,” a source said.

The selling activity in the space remained largely driven by exchange-traded funds which logged another multibillion-dollar weekly outflow.

Real money accounts continued to make defensive plays and cherry-pick their positions with short-duration notes in demand.

However, some of the higher-quality credits trading at deep discounts were beginning to attract opportunistic buyers, a source said.

Carnival Corp.’s capital structure was in focus on Thursday with the cruise line operator’s new 10½% senior notes due 2030 (B2/B) staging a rebound.

After a weak break that saw the notes sink to a 98-handle, the notes ended Thursday’s session wrapped around par.

Carnival’s outstanding issues also improved after selling off in the wake of the new offering.

In a carryover from the previous session, Triumph Group, Inc.’s senior notes continued to fall after a disappointing earnings report.

Avaya Holdings Corp.’s 6 1/8% senior notes due 2028 (B2/B+) led losses during Thursday’s session with the downward spiral of the notes accelerating.

Meanwhile, high-yield mutual and exchange-traded funds continued to see outsized outflows with $2.605 billion leaving the space in the week through Wednesday’s close, according to the Refinitiv Lipper Fund Flow report.

Carnival’s comeback

Carnival’s new 10½% senior notes due 2030 staged a rebound on Thursday after falling 2 points on the break.

The 10½% notes, which priced at par, opened Thursday on a 98-handle.

However, they gained steam as the market firmed and closed the day wrapped around par, according to a market source.

The notes dominated activity in the secondary space with $86 million in reported volume.

Carnival priced a $1 billion issue of the 10½% notes at par in a Thursday drive-by.

The yield printed at the wide end of talk for a yield of 10¼% to 10½%.

While the deal was heard to have played to heavy demand, its secondary market activity suggested otherwise.

“It wasn’t well placed,” a source said.

Short-sellers may have had a hand in driving the notes down with underwriters stepping in on Thursday to support it.

Carnival’s outstanding issues were also improved on Thursday after selling off the previous session on the heels of the new offering.

The 6% senior notes due 2029 climbed 1 3/8 points to close the day at 83 3/8. The yield on the notes was about 9 3/8%.

There was $23 million in reported volume.

The 7 5/8% senior notes due 2026 climbed ¾ point to close the day at 93¾ with a yield of about 9 5/8%.

There was $20 million in reported volume.

The 5¾% notes were largely unchanged to close the day at 85½ with the yield also about 9 5/8%.

There was about $15 million in reported volume.

Carnival’s latest offering carried a yield 100 basis points greater than its outstanding issues.

However, Carnival’s lower yielding notes were still in demand with not as much selling to switch into the new issue as would be expected.

While the new notes gave you a 10½% coupon, they had to be purchased at par, a source said.

Buying a bond with a deep discount was more attractive to some market players.

Even with a lower yield, “for 80 cents on the dollar, the total return is too compelling,” a source said.

Triumph down again

Triumph’s senior notes continued to trend lower after falling the previous session on weak earnings.

The 7¾% senior notes due 2025 (Caa3/CCC+), which led losses in the secondary space on Wednesday, fell another 3½ points to close the day at 80½, according to a market source.

The yield was now 15 5/8%.

There was $20 million in reported volume.

The notes sank 6½ points on Wednesday after the aerospace company reported earnings.

Several issuers have seen their capital structures decimated after reporting disappointing earnings results.

“That’s going to continue,” a source said. “Bad earnings or negative headlines, there’s not going to be a bid.”

Avaya tanks

Selling in Avaya’s 6 1/8% senior notes due 2028 accelerated on Thursday with the notes leading losses in the secondary space.

The notes were down 6¾ points during Thursday’s session.

They opened the day on a 70-handle and steadily trended lower despite a firming market.

The notes closed the day at 67½ with a yield of 14%.

There was $16 million in reported volume.

The notes have fallen more than 12 points since the company reported a large earnings miss and lowered its forward guidance to well below analyst expectations.

The company’s entire capital structure has been under pressure.

The communication technology company’s first-lien notes fell 8 points last week.

The company’s 2.25% convertible notes due June 15, 2023 have also fallen more than 10 points over the past week with investors beginning to question the company’s ability to pay off the short-duration notes at their maturity.

Fund flows

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

Actively managed high-yield funds saw $148 million of inflows on the day.

However high-yield ETFs sustained $342 million of outflows on Wednesday.

The combined funds sustained $2.61 billion of net outflows in the week to Wednesday's close, according to a Thursday report by Refinitiv Lipper.

It represents the first outflow to top the $2 billion mark in a month following a run of more moderate weekly flows: $168 million inflows for the week to May 11, $1.1 billion outflows in the week to May 4, $118 million outflows in the week to April 27, and $886 million outflows in the week to April 20, according to the market source.

Indexes

The KDP High Yield Daily index shaved off 6 points to close the day at 56.17 with a yield of 6.96%.

The index fell 47 points on Wednesday, 48 points on Tuesday and 2 points on Monday.

The ICE BofAML US High Yield index was down 15 bps with the year-to-date return now negative 10.987%.

The index sank 63.9 bps on Thursday, slid 0.7 bps on Tuesday and 2.8 bps on Monday.

The CDX High Yield 30 index inched up 3 bps to close Thursday at 99.34.

The index plunged 132.8 bps on Wednesday, gained 33 bps on Tuesday, and fell 34 bps on Monday.

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