High yield bonds softened across the board this week as the spread of the coronavirus escalated in regions outside China, said traders and buysiders monitoring the market. However, unlike the equity market, which experienced steep declines yesterday, the macro pressure has caused more muted losses in high yield, and has many investors exploring potential buying opportunities, they said.
Amid the uncertainty, the primary market is subdued, with no bond deals launching yet this week and arrangers planning to wait out the volatility on deals they want to bring to market, said several capital markets bankers. One of the sources said his firm would probably put on pause an opportunistic refinancing for an industrial issuer, which was previously meant to launch today.
“Bonds are lower across the board. Every sector’s gotten hit but higher-quality high yield didn’t get destroyed,” said a trader, observing declines across the board yesterday of a 50bps-75bps.
“There are definitely more sellers in the market, but not a panic selling situation,” a trader said. Trading volumes have remained fairly muted, sources added.
Still, pockets of the secondary market more exposed to earnings hits from coronavirus – like industrial companies with manufacturing facilities in China, and energy broadly – took a harder hit.
Meanwhile, equities took the brunt of investor fears. The Dow Industrial Average posted a 1,031 point drop on Monday, or 3.56%, to 27,961. The benchmark dipped 430 points lower today to 27,530.71.
In tandem, yesterday the S&P 500 fell 3.35% to 3,225.89, and Nasdaq declined 3.71% to 9,221.28. Both have softened further today by 49 points and 128 points, respectively.
“Rate cuts and additional liquidity injections will always serve to bolster markets, but if people can’t go back to work in the next month supply chain issues will continue to be an issue,” a buysider said.
Indeed, issuers linked to travel and shipping such as American Airlines, United Airlines, Viking Cruises and Scorpio Tankers also took a hit, although the names haven’t drifted too far from par, five of the sources said.
Issued just last week, American Airlines’ USD 500m 3.75% senior unsecured notes due 2025 fell to 98.5 to yield 4.084% yesterday from a par issue price last week. The bonds softened further to 98.25 to yield 4.14% today, according to MarketAxess.
United’s USD 350m 4.875% senior unsecured notes due 2025 softened to 105.5 to yield 3.635% yesterday from trades at 107 last week. The notes ticked up to 106 to yield 3.526%, according to MarketAxess.
The Viking USD 825m 5.875% senior unsecured notes due 2027 traded down to 101.25 to yield 5.609% from trades at 103.375 to yield 4.876% on 21 February. The notes fell further today to trade at par, according to MarketAxess.
Scorpio’s USD 203.5m 3% convertible notes due 2022 traded down to 94.05 to yield 5.912% yesterday from trades at 96.361 to yield 4.743%, according to MarketAxess.
Meanwhile, oil prices have declined, pressuring bellwether oil and gas names further. WTI fell 3.65% yesterday to USD 51.43 per barrel and traced nearly 1% lower today to USD 50.93 per barrel.
Chesapeake Energy’s USD 451m 4.875% senior unsecured notes due 2022 traded off to 65 for a 27.653% yield yesterday from trades at 72 to yield 21.08% on 6 February. The notes held in at 65 today.
The USD 2.21bn 11.5% second lien notes due 2025 fell to 75 to yield 19.715% yesterday from trades at 78.5 on 21 February. The notes softened today to 74.5 to yield 19.918%, according to MarketAxess.
Denbury Resources’ USD 456m 9.25% second lien notes due 2022 dipped to 82.75 to yield 19.672% yesterday from trades at 87.25 to yield 16.676% on 20 February. The bonds have retraced to 84.97 to yield 18.189% today, according to MarketAxess.
Transocean’s USD 750m 7.25% senior unsecured notes due 2025 fell to 91.3 to yield 9.25% from trades at 94.75 to yield 8.427% on 20 February, according to MarketAxess.
The primary market is adopting a “wait and see” strategy, six of the sources said. The last two days have resulted in no new issues in the high yield market and at least one delayed commitment deadline for a leveraged loan deal.
UBS-led Astra delayed its commitment deadline to 26 February, from 24 February, and widened pricing. The cloud-based software company is in the market for a USD 325m first lien loan due 2027 to fund Veritas’s acquisition and merger of Campus Management and Edcentric.
“Anyone who really needs the funding has probably already got it, given how markets have been lately. So most of the stuff that is left is just refinancing and opportunistic stuff. Just need to wait it out,” the banker said.
“The commentary from our sales and trading desk has been that some buysiders have been using this as an opportunity to nibble at some of the higher quality HY stuff that had been trading way too tight. It’s been a buying opportunity for some sectors,” the source added.