Junk bonds fall post-earnings; Carvana scrapes bottom; Carnival mixed; funds out $652 million

By Paul A. Harris and Abigail W. Adams

Portland, Me., July 14 – The secondary space had a heavy day on Thursday with the cash bond market falling ½ point as earnings season picks up steam – with the initial results disappointing.

JPMorgan Chase and Morgan Stanley became the latest to fall short of expectations with their earnings, reigniting fears stoked by Wednesday’s Consumer Price Index report with an inflation reading that blew past expectations.

Inflation, recession and fund flows remain the dominate movers of the secondary space, a source said.

However, the mixed views surrounding the macro backdrop continue to be a contributing factor to the volatility of recent sessions.

Views about recession have varied as the economic indicators have been mixed.

The yield curve continued to sound the recession alarm although the labor market remains strong with unemployment at historic lows.

While JPMorgan Chase’s second-quarter earnings disappointed, the bank stated it has seen few signs of an imminent recession.

And while the cash bond market was heavy on Thursday, liquidity remained thin with few real money accounts making moves.

Large, liquid issues continued to dominate the tape with CCC credits again feeling the brunt of the selling pressure.

Carvana Co.’s 10¼% senior notes due 2030 (Caa2/CCC) set a new all-time low on Thursday with the notes down more than 4 points on the week.

Carnival Corp.’s senior notes have remained level for much of the week. However, the cruise line operator’s capital structure was mixed on Thursday with its unsecured notes (B2/B) hitting fresh lows while its secured paper improved.

Meanwhile, outflows resumed after high-yield mutual and exchange-traded funds saw their first inflow since early June the previous week.

Funds lost $652 million in the week through Wednesday’s close, according to the Refinitiv Lipper Fund Flows report.

Upcoming

The new issue market passed a quiet Thursday, with no deals pricing and no new deals announced.

The active forward calendar features just one offer.

Camelot Return Merger Sub Inc. is on the road with $600 million of six-year non-call-two 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%.

Should the deal end up yielding 10½% investors would extract a market concession of about 120 basis points, according to a sellside source who spotted the yield to worst of the single-B portion of the high yield index at 9.3% on Thursday afternoon.

The market is hearing that there are a couple of anchor orders for the new Cornerstone secured notes, and that the order book is around one-third done, the sellsider said.

Meantime the Cornerstone Building Brands 6 1/8% senior unsecured notes due January 2029 are trading deep in distressed territory, and presently yielding around 13%, the sellsider noted.

There were a couple of round-lot trades in those unsecured notes on Thursday, the source noted, marking that paper 71 bid, unchanged on the day.

Meantime Pegasus Merger Co., an affiliate of Apollo, is expected to show up during the last half of July with a deal backing the buyout of Tenneco Inc.

Last week dealers began pre-marketing $2 billion of secured notes and $1 billion of unsecured notes, sources say.

However after generating a significant amount of buzz in the market late last week and early in the present week the Tenneco deal has gone “radio silent,” suggesting it might be delayed, sources say.

Carvana’s new low

After a brief reprieve from selling pressure, Carvana’s 10¼% senior notes due 2030 were again on the decline with the notes setting a new all-time low on Thursday.

The 10¼% notes sank another 1 point on Thursday after breaking below an 80-handle the previous session.

The notes fell to a 78-handle and were changing hands in the 78¼ to 78½ context heading into the market close.

The yield on the notes broke 15% on Thursday.

The 10¼% notes have drifted lower throughout the week although selling in the name intensified over the past two sessions.

The notes closed the previous week in the 82½ to 83 context.

Carnival mixed

Carnival’s capital structure was mixed on Thursday with its unsecured notes hitting fresh lows while its secured paper improved.

Carnival’s most recently priced 10½% senior notes due 2030 sank 1½ points on Thursday to a new bottom level.

The notes fell to an 81-handle and were changing hands in the 81 3/8 to 81 5/8 context heading into the market close, according to a market source.

The yield on the notes rose to 14½%.

Carnival’s 6% senior notes due 2029 and 5¾% senior notes due 2027 were also under pressure on Thursday.

The 6% senior notes fell 1½ points to a 70-handle.

They were changing hands in the 70 to 70½ context heading into the close with the yield on the notes about 12¾%, a source said.

The notes were retesting their all-time low of 70 set in late June and early July.

Carnival’s 5¾% senior notes due 2027 were also down 1½ points.

The notes were changing hands in the 70¾ to 71¼ context heading into the market close with the yield also about 14½%.

However, Carnival’s 9 7/8% senior secured second-priority notes due 2027 improved in high-volume activity.

The 9 7/8% notes climbed ½ point to close the day at 96 with the yield just shy of 11%.

Cruise line operators have become the market’s de facto recession indicators, sources have said.

Indexes

The KDP High Yield Daily index fell 24 points to close Thursday at 55 with the yield now 7.38%.

The index was down 13 points on Wednesday after gaining 8 points on Tuesday and 16 points on Monday.

The ICE BofAML US High Yield index fell 41.2 basis points with the year-to-date return now 12.978%.

The index was down 11.4 bps on Wednesday after rising 9.8 bps on Tuesday and 12.1 bps on Monday.

The CDX High Yield 30 index sank 27 bps to close Thursday at 97.83.

The index fell 52 bps on Wednesday, 17 bps on Tuesday and 46 bps on Monday.

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