Morning Commentary: Tesla earnings-driven bond rally continues; market awaits new supply

By Paul A. Harris

Portland, Ore., Oct. 25 – A surprise third-quarter profit, cash flow that beat analysts’ expectations and an earnings report that glowed in nearly every metric saw the bonds of Tesla, Inc. improve by about 3 points in the past two days, a New York-based bond trader said.

The Tesla 5.3% senior notes due August 2025 were up a point on the day at mid-morning Thursday, at 88½ bid, 89¼ offered, the trader said.

The electric auto maker posted free cash flow numbers, partially a reflection of reduced capital expenditures, that took analysts by surprise, market sources say.

However, Tesla represents a single ray of light in a high-yield automotive sector which is getting crushed, the New York trader said.

For October to Wednesday's close the automotive component of the JPMorgan index was off 2.58%.

Among recent issues, the United Rentals (North America) Inc. 6½% senior notes due December 2026 (Ba3/BB) were par bid, par 1/8 offered at mid-morning, up from 99½ bid, par offered at the open, the trader said.

The $1.1 billion issue priced at par in a Wednesday drive-by that the market had been anticipating since early in October.

And in a deal that generated news headlines beyond the junk bond market, Netflix, Inc.’s new dollar-denominated 6 3/8% senior bullet notes due May 2029 (Ba3/BB-) were holding in Wednesday at par bid, par ½ offered.

The 6 3/8% notes came at par on Tuesday in an $800 million tranche that was part of a $2.06 billion equivalent deal which also included a €1.1 billion tranche of the paper that priced at par to yield 4 5/8%.

Accounts from the United States were also heard to be active in the euro-denominated tranche, an investor said.

Earlier in the year Netflix priced a dollar-only $1.9 billion issue of 5 7/8% senior notes due November 2028 (also 10.5-year paper) at par.

As with Tuesday’s deal, the use of proceeds – the facet that generated news headlines outside the market – was “general corporate purposes,” as Netflix is expected to blow through the cash in its quest for content, in the highly competitive field of video content providers that pits the Los Gatos, Calif., entertainment company against such conspicuous rivals as Amazon Prime and Hulu Plus, sources say.

Primary market

Turning to a new issue calendar that contained as many as five deals expected to clear ahead of the coming weekend, INTL FCStone Inc. talked its $350 million offering of five-year senior secured notes (Ba3/BB-) to yield 8½% to 8¾%, including an original issue discount.

Books close at noon ET on Friday, and the offering is set to price thereafter.

Official talk comes tight to initial guidance in the mid-to-high 8% area, a trader said.

BMO, BofA Merrill Lynch, Jefferies and Capital One are the joint bookrunners.

Elsewhere on the active calendar official talk and timing were pending at press time.

GFL Environmental Inc. is in the market with a $400 million offering of eight-year senior notes (Caa2/CCC+) via left bookrunner Barclays.

The deal, which comes with initial talk in the low-to-mid 8% area, is set to price on Thursday.

KLX Energy Services Holdings, Inc. has been marketing a $250 million offering of seven-year senior secured notes (B3/B) via JPMorgan.

Initial talk is in the mid-to-high 9% area. The deal is expected to price on Friday.

GEP Haynesville LLC has been marketing a $600 million offering of five-year senior notes (B3/B).

Initial talk has this JPMorgan-led deal coming to yield 8½% to 8¾%.

And Netherlands-based Bluewater Holding BV, with operations in the United Kingdom, Angola, Nigeria, China and Brazil, intends to sell $225 million to $250 million of five-year senior notes.

DNB Markets and Pareto Securities are leading the deal, which kicked off with investor meetings earlier in the week.

Mixed Wednesday flows

The daily cash flows of the dedicated high-yield bond funds were mixed on Wednesday, a trader said.

High-yield ETFs saw $275 million of inflows on the day.

However, actively managed high-yield funds sustained $75 million of outflows on Wednesday, the trader said.

As the market awaits a weekly report from Lipper US Fund Flows, expected Thursday afternoon, the combined funds are tracking $2.25 billion of outflows in the week to Wednesday's close, the source added.

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