Liquidity thins; Rite Aid secured notes pop on bankruptcy news; funds lose $1.17 billion

By Paul A. Harris and Abigail W. Adams

Portland, Me., Aug. 25 – The dollar-denominated junk primary market ended a dormant week on Friday and will likely remain dormant in the week ahead, sources said.

The market is expected to see a meaningful reactivation in September, according to a debt capital markets banker who looks for $8 billion to $10 billion of issuance in the month ahead.

A trader said that given a supportive backdrop – stability in equities and risk-free rates, in particular – a single full week in September could generate $10 billion of issuance.

September will be a somewhat truncated month, the trader added, noting that the extended Labor Day holiday weekend gets underway following the Friday, Sept. 1, close and that market activity will not resume until Tuesday, Sept. 5.

Secondary sleepy

Meanwhile, it was a sleepy day in the secondary space on Friday with Federal Reserve chair Jerome Powell’s highly anticipated comments from Jackson Hole doing little to clarify the ambiguity surrounding the Fed’s next rate move.

While markets have largely anticipated an end to the Fed rate hike campaign, the continued strength of the labor market has raised bets for a future increase, a source said.

Powell’s comments left open that possibility, with some market watchers noting that the Fed’s commitment to a 2% inflation target will trump other concerns.

There was some volatility surrounding Powell’s comments, with the market firming after a weak open during Powell’s comments only to quickly give back those gains.

However, buyers reemerged mid-session and lifted the market into the close, a source said.

While the broader market saw a strong finish, liquidity continued to thin with the dog days of summer in full effect.

Large, liquid issues, topical news and earnings continued to drive some movement in the space.

Tenneco Inc.’s 8% senior secured notes due 2028 (B1/B) remained a steady presence on the tape with the notes unchanged early in the session but improving alongside the broader market into the close.

Rite Aid Corp.’s senior notes diverged following news the struggling retailer was preparing a bankruptcy filing with its 8% senior secured notes due 2026 (Caa3/CCC-/B) making large gains while its 7.7% senior notes due 2027 (Ca/CCC-) plunged.

Victoria's Secret & Co.’s 4 5/8% senior notes due 2029 (B1/BB-) were down in active trade with expectations for the retailer’s upcoming earnings report low.

Fund flows

High-yield ETFs saw a big $938 million of daily cash outflows on Thursday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds saw positive flows on Thursday, posting $75 million of inflows on the day.

News of Thursday’s daily cash flows followed a Thursday afternoon report that the combined high-yield funds sustained $1.17 billion of net outflows in the week to the Wednesday close, according to fund-tracker Refinitiv Lipper.

It was the fifth consecutive weekly outflow ($4.2 billion, total) from the junk funds, for which year-to-date flows ended the week at negative $12.9 billion, the market source said.

Tenneco moves with market

Tenneco’s 8% senior notes due 2028 remained actively traded on Friday, with the notes unchanged early in the session but improving alongside the broader market into the close.

The 8% notes were marked at 81¾ bid, 82¼ offered, flush with Thursday’s close, early in the session.

However, they gained ¼ to ½ point as the session progressed and ended the day in the 82 to 82½ context, a source said.

There was $10 million in reported volume.

The notes were trading in line with the broader market, a source said.

While the notes notched steady gains after bottoming out on an 81-handle the previous week, they gave back much of those gains under Thursday’s heavy market conditions.

Tenneco priced a $1.9 billion issue of the 8% notes at 85 on Aug. 15.

Rite Aid diverges

Rite Aid’s secured and unsecured notes diverged following news the struggling retailer was preparing a bankruptcy filing, with its secured notes popping 3 to 5 points as its unsecured notes plunged 6 points.

The 8% senior secured notes due 2026 traded as high as 62 during Friday’s session, although they settled in the 60 to 61 context heading into the close, a source said.

There was $5 million in reported volume.

The notes were trading around 57 heading into Friday’s session.

While volume was light with only one trade on the tape, Rite Aid’s 7.7% senior notes due 2027 plunged 6 points to close the day at 11¼.

The movement in the notes was triggered by media reports that the company was preparing to file for bankruptcy within the next few weeks.

The 8% notes were on the rise following the news with the recovery prospects for the notes higher.

“They’ll get more value out of the company,” a source said.

Victoria’s Secret lower

Victoria’s Secret’s 4 5/8% senior notes due 2029 were lower in active trade on Friday.

The 4 5/8% notes were down ¾ to 1 point to trade in the 71¾ to 72 context heading into the market close, a source said.

The yield rose to 11 3/8%.

There was $11 million in reported volume.

The notes were under pressure with the lingerie and beauty retailer set to report earnings next week.

Retailers have largely disappointed with their earnings results, and expectations for Victoria’s Secret are low, a source said.

Indexes

The KDP High Yield Daily index inched up 2 basis points to close Friday at 50.07 with the yield unchanged at 7.64%.

The CDX High Yield 30 index gained 38 bps to close Friday at 102.34.

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