Junk market receptive to new MicroStrategy notes; Sirius XM in focus; Booz Allen gains

By Paul A. Harris and Abigail W. Adams

Portland, Me., June 8 – The junk bond market got an opportunity for a backdoor entry to Bitcoin investing on Tuesday with a novel new issue from MicroStrategy Inc.

Meanwhile, it was another uneventful day in the secondary space with the market largely flat and volume outside of recent issues light.

While the secondary space drifted lower headed into the afternoon, many accounts remained on the sidelines with few sellers in the market.

“Guys aren’t selling because there’s plenty of cash, so there’s no real need to do anything,” a source said.

While the secondary space remained flat on Tuesday, there was still an air of anxiety as the market awaits the latest Consumer Price Index report due on Thursday.

The latest reading on inflation may be the impetus that breaks the secondary space out of its current range, a source said.

However, new issues continued to be the area where accounts were putting their money to work.

Sirius XM Radio Inc.’s 4% senior notes due 2028 (Ba3/BB) were in focus with the notes trading up to a 101-handle.

Booz Allen Hamilton Inc.’s 4% senior notes due 2029 (Ba2/BB-) were also putting in a strong performance in the secondary space.

While activity in the name died down on Tuesday, Marriott Vacations Worldwide Corp.’s 4½% senior notes due 2029 maintained the large premium reached after breaking for trade.

MicroStrategy makes history

On Tuesday MicroStrategy Inc. made junk bond market history, becoming the first issuer to raise cash for the sole purpose of using the proceeds to purchase Bitcoin.

The company priced an upsized $500 million issue (from $400 million) of 6 1/8% seven-year senior secured notes (B1/B-) at par, at the tight end of talk.

The deal was heard to be in excess of four-times oversubscribed, a level of demand which some in the market had been calling into question.

However the deal upsized, priced tight and traded well, according to a bond trader who spotted the new MicroStrategy 6 1/8% notes due June 2028 up 1½ points late Tuesday afternoon.

That speaks to a solid level of demand, the trader asserted.

It was a deal that held appeal, in particular, for the hedge funds, market sources said.

Part of its appeal came from the fact that by giving the bond investor exposure to Bitcoin the deal provides a currency hedge, a market source explained.

High demand for the deal came in the face of notable headwinds.

Less than 24 hours before final price talk (6 1/8% to 6¼%) came out, the publicly traded business intelligence company reported an impairment of at least $284.5 million for the quarter ending June 30, an impairment which it attributed to the fluctuating value of Bitcoin.

And as the deal was being priced the U.S. Justice Department was reporting that it successfully recovered a substantial part of the Colonial Pipeline ransomware loot – a ransom that had been paid in Bitcoin – after convincing a federal judge that department sleuths had successfully tracked a portion of the cryptocurrency to a specific Bitcoin wallet, which they then raided.

The value of Bitcoin tumbled against the dollar, on the heels of that news.

These headlines, however, failed to make high-yield investors flinch.

“It's six-handle paper that the market sees as being highly over-collateralized,” said a trader tracking the deal, when pressed for an explanation.

In spite of the volatility of the cryptocurrency, the market judges that MicroStrategy has way more than it needs to secure this deal, the source added.

The trader drew a comparison between the MicroStrategy deal, where the collateral is cryptocurrency, and last year's airline customer loyalty deals, which were secured by the intellectual property of the airlines' frequent flyer programs.

In both cases investors ultimately had to satisfy themselves as to the value of the collateral, the bond trader said.

And in both cases investors formed a belief that the bonds were ultimately coming cheap.

Sirius XM in focus

Sirius XM’s 4% senior notes due 2029 were putting in a strong performance in the secondary space with the notes rising to a 101-handle in high-volume activity.

The 4% notes stood poised to close the day at 101 bid, 101¼ offered.

The large, benchmark issue may have attracted some crossover investors.

Investment-grade accounts with a charter that would enable them to play the name were most likely eyeing the issue to juice their yield, a source said.

Sirius priced an upsized $2 billion, from $1.5 billion issue, of the 4% notes at par on Monday.

The yield printed at the tight end of yield talk in the 4 1/8% area.

The deal was heard to have played to $2.5 billion of demand.

Booz Allen gains

Booz Allen’s 4% senior notes due 2029 were also putting in a strong performance in the secondary space.

The 4% notes stood poised to close Tuesday at 102.

Booz Allen priced a $500 million issue of the 4% notes at par on Monday.

The yield printed at the tight end of yield talk in the 4 1/8% area.

The deal was heard to have played to $1.9 billion of demand.

Marriott holds

While activity in the name died down on Tuesday, Marriott Vacations’ 4½% senior notes due 2029 held on to the large premium gained after breaking for trade.

The 4½% notes continued to trade around 101 bid, 101¼ offered – a level reached shortly after breaking for trade.

Marriott priced an upsized $500 million, from $450 million, issue of the 4½% notes at par on Monday. The yield printed at the tight end of the 4½% to 4¾% yield talk.

The deal was heard to have played to $1.3 billion of demand.

Monday fund flows

High-yield ETFs saw $326 million of cash inflows on Monday, the most recent session for which data was available at press time, according to a market source.

However actively managed high-yield funds sustained $550 million of outflows on the day, the source said, noting that these outflows were heard to have been concentrated.

The combined funds are tracking $1.06 billion of net outflows for the week that will conclude with Wednesday's close, according to the market source.

Indexes mixed

Indexes remained mixed on Tuesday.

The KDP High Yield Daily index rose 7 points to close Tuesday at 69.8 with the yield now 3.79%.

The index was up 6 points on Monday.

The ICE BofAML US High Yield index gained 13.9 basis points with the year-to-date return now 2.828%.

The index was up 7.2 bps on Monday.

The CDX High Yield 30 index shaved off 2 bps to close Tuesday at 109.85.

The index was down 1 bps on Monday.

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