Morning Commentary: Junk improves in line with equities; investors eye oversold names

By Paul A. Harris

Portland, Ore., July 18 – With the major stock indexes in the United States and Europe all posting gains on Monday morning, high-yield bonds gapped higher, according to a trader based in New York, who was marking junk 3/8 of a point to as much as ½ point higher at mid-morning.

Investors were on the lookout for bonds that may have been oversold amid the risk-aversion that has gripped the market throughout the late spring and early summer, the source said.

The catalyst for the new week's positive sentiment is a view that the Federal Reserve Bank's zeal to raise interest rates in response to runaway inflation might not last into 2023, the trader said.

Although there is not a great body of evidence to support such an outlook, it nonetheless seems to have some traction as the new week gets underway, the source remarked.

Dollar-denominated bonds of British sports car maker Aston Martin Lagonda Global Holdings plc, including the Aston Martin Capital Holdings Ltd. 10½% senior secured notes due November 2025 and the Aston Martin Capital Holdings 15% senior secured notes due November 2026, were up 3 points to 4 points on the morning, the trader said.

With cruise line stocks among Monday morning's most conspicuous performers, the Royal Caribbean Cruises Ltd. 5½% senior notes due April 2028 were up 1½ points on the morning at 72¾ bid, according to the trader.

Notwithstanding Monday morning's positive investor sentiment, the new issue market remained quiet.

The only announced deal on the active forward calendar is the Camelot Return Merger Sub Inc. $600 million offering of six-year non-call two-year senior secured notes (B2/B) backing the buyout of Cornerstone Building Brands, Inc. by Clayton, Dubilier & Rice.

Initial guidance has those notes coming with an 8¾% coupon at a discount to yield 10½%, sources say.

The roadshow wraps up on Tuesday, with pricing expected to follow later the same day.

Meantime, the market continues to await the announcement of a deal backing Apollo Global Management, Inc.'s buyout of Tenneco, Inc.

Debt financing for the buyout began being telegraphed to the market shortly after the Independence Day holiday weekend, sources say.

Soon after the conclusion of the Independence Day holiday weekend, dealers began pre-marketing as much as $3 billion of bonds from Pegasus Merger Co., an affiliate of Apollo, according to an investor who participated in a call late in the July 4 week.

Early pricing conversations were as follows, according to a portfolio manager: $2 billion secured notes in the context of 9% and $1 billion of unsecured notes at 250 basis points to 300 bps behind the secured notes.

Sources have characterized the Tenneco deal as being “close at hand” since early in the month.

Friday fund flows

The daily cash flows of the dedicated high-yield bond funds were mixed on Friday, according to a market source.

Actively managed high-yield funds sustained $265 million of outflows on the day.

However, high-yield ETFs were positive on Friday, posting $223 million of inflows on the day, the source said.

The combined funds are tracking $448 million of net outflows for the week that will conclude with Wednesday's close, according to the market source.

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