Seadrill prices; secondary gains continue; Level 3 resumes rally; funds down $379 million

By Paul A. Harris and Abigail W. Adams

Portland, Me., July 13 – Seadrill Ltd. priced July’s first dollar-denominated junk bond deal on Thursday.

An upsized $500 million issue of seven-year senior secured second-lien notes (B2/BB/B+) from Seadrill Finance Ltd. priced at par to yield 8 3/8%.

The issue size was increased from $450 million.

The yield printed at the tight end of yield talk in the 8½% area. Initial guidance was in the 8¾% area.

It was heard to be playing to $2.7 billion of demand on Thursday morning, at which time 10 accounts were expected to take down 50% of the issue, sellside sources said.

And to the astonishment of some market watchers, Seadrill emptied the active forward calendar when its deal cleared on Thursday.

The week’s major financial reports, especially the Consumer Price Index on Wednesday and the Producer Price Index on Thursday, kindled rallies in the stock market and provided a supportive backdrop for speculative-grade bonds, a trader said.

People have cash to put to work, and they are lifting bonds in the secondary market because there is no calendar, the trader said.

There is a deal pipeline, the source asserted, expressing some astonishment that none of it (save for Seadrill) materialized during the present week’s rally.

One inhibiting factor is the extent to which rates have already backed up, a portfolio manager said.

The ICE BofA US High Yield Index effective yield stood at 8.19% at Wednesday’s close. On July 12, 2021 it was 3.94%.

Although investors presently have the initiative, the dramatically higher yields also come as compensation for risking capital against a rising default rate and a potential economic downturn, as higher rates continue to bite into the economy, the source said.

Strong day in secondary

Meanwhile, it was another strong day in the secondary space with the cash bond market adding another ¼ point after surging about 1 point the previous session as Treasuries continued their steep descent.

The two-year Treasury yield fell 10 basis points to 4.649% and the 10-year Treasury yield fell 9.4 bps to 1.768% at the market close.

While the cash bond market continued to rise, the CDX index was off about 1/8 point.

There was some selling of the index amid the renewed risk-on sentiment in the market with the risk hedge provided by the CDX not as important as rates come in, a source said.

While the broader market continued to add to the strong gains of the previous session, topical news was again the driver of the day’s major gainers.

After dipping the previous session, Lumen Technologies subsidiary Level 3 Financing, Inc.’s senior secured notes (Ba2/BB-) continued to shoot higher. A pending overseas asset sale has sparked the notes’ explosive gains over the past week.

Coinbase Global, Inc.’s senior notes (B1/BB-) continued their upward momentum after a partial win for the crypto industry in the Securities and Exchange Commission suit against Ripple Labs.

Meanwhile, while there have been strong inflows over the past few sessions, high-yield mutual funds and exchange-traded funds still saw an outflow of $379 million for the week ended Wednesday, according to the Refinitiv Lipper Fund Flow report.

Level 3 rises

Level 3’s senior notes were again on the rise on Thursday after taking a breather the previous session. The notes added another 2 to 3 points to the strong gains made on the week.

The Lumen subsidiary’s 4 5/8% senior notes due 2027 (B1/B) added another 2 points.

They traded as high as 75 5/8, although most trades were in the 74 to 75 context, a source said.

The yield was about 12½%.

There was $6 million in reported volume.

The 3 7/8% senior secured notes due 2029 (Ba2/BB-) also added 2 points, with the notes trading in the 84½ to 85½ context heading into the close.

The yield was about 6 7/8%.

There was $12 million in reported volume.

The 4 5/8% notes have added 6 points and the 3 7/8% senior secured notes have added 5 points on the week with Level 3 seeing a surge in buying interest.

The notes were on the rise in anticipation of the closing of an overseas asset sale, a source said.

Win for Coinbase

Coinbase’s senior notes were once again on the rise after a federal judge partly ruled against the SEC in its suit against crypto company Ripple Labs.

Coinbase’s 3 3/8% senior notes due 2028 added 2½ points in heavy volume.

The notes traded up to a 70-handle and were changing hands in the 70 1/8 to 70 3/8 context heading into the close.

The yield was about 11%.

There was $17 million in reported volume.

Coinbase’s 3 5/8% senior notes due 2031 added 2 points.

The notes were trading in the 63 to 63½ context heading into the market close.

The yield was about 10 3/8%.

There was $13 million in reported volume.

In a judgement touted as a win for the crypto industry, a federal judge ruled that Ripple token XRP did not constitute a security when sold to retail investors.

However, the judge ruled that it did constitute a security when sold to institutional investors.

The ruling further fueled the bull run in Bitcoin, which hit a new 52-week high of $31,748 on Thursday.

Coinbase is facing a similar suit from the SEC.

However, Coinbase’s capital structure has eliminated all losses since the SEC filed suit accusing it of selling unregistered securities in early June.

The Bitcoin ETF applications of institutional investors have fueled strong gains in the crypto sphere with Coinbase’s 3 5/8% notes adding 3 points and the 3 3/8% notes adding 5 points on the week.

Indexes

The KDP High Yield Daily index gained 32 points to close Thursday at 51.18 with the yield 7.09%.

The index added 41 points on Wednesday, 17 points on Tuesday and 7 points on Monday.

The CDX High Yield 30 index fell 16 bps to close Thursday at 103.13.

The index rose 56 bps on Wednesday, 50 bps on Tuesday and 40 bps on Monday.

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