High yield investors assess lower-risk credits for coronavirus opportunities – Mid-Day Commentary

As equity markets continue to yo-yo on the uncertain impact of the spreading novel coronavirus, some high yield investors are placing bets on rate-sensitive issuers whose earnings are less likely to be directly affected by the virus, according to two buysiders and a sellsider.

“The bond market is a touch weaker this morning in response to the lower open from Dow and S&P, but overall, investors are getting into names they’ve wanted to get into from a credit perspective at lower prices,” one of the sources said.

The Dow Jones Industrial Average shed 2.52% or 683 points this morning, compared to yesterday’s gain of nearly 1,200 points. The average spread over Treasuries for bonds in the BofAML ICE HY index widened to 504bps on Friday (28 February) from 357bps on 19 February, before reversing course over the last week to 475bps at yesterday’s close (4 March).

Mortgage servicers such as Nationstar and Freedom Mortgage are expected to benefit from the Fed’s emergency rate cut earlier this week. Rate-sensitive high yield bellwether issuers like HCA Healthcare and Kraft Heinz also bounced this week after the announcement.

Nationstar’s USD 950m 8.125% senior unsecured notes due 2023 initially dropped to 104.625 yielding 5.989% on 28 February from 106.3 to yield 2.252% before the selloff. As buyers came back in this week, the notes have recovered some of the ground, last trading at 105.5 to yield 3.858% yesterday (4 March), according to MarketAxess.

Freedom Mortgage’s USD 700m 8.25% senior unsecured notes due 2025 fell as low as 94.97 to yield 9.51% from trades at par before the selloff. The notes have been bid up to 96.99 to yield 8.994% this week, according to MarketAxess.

HCA’s USD 2.7bn 3.5% senior unsecured notes due 2030 shed several points to trade as low as 97.47 to yield 3.794% on 27 February from levels at 99.5 to yield 3.557% before the selloff. The notes have recovered to trade today at 100.525 to yield 3.437%, according to MarketAxess.

Kraft’s USD 2bn 5% senior unsecured notes due 2042 fell as low as 98.396 to yield 5.121% last week from trades at 104.441 to yield 4.676% before the selloff. The notes have bounced back to 107.354 to yield 4.474% today, according to MarketAxess.

Sources also expect issuers such as Netflix to escape relatively unscathed, on the thesis that if consumers are confined to their homes, they will spend their time streaming movies and TV shows.

The Netflix USD 1bn 4.875% senior unsecured notes due 2030 traded down to 104.72 to yield 4.29% last week from pre-selloff levels of 107.25 to yield 3.991%. The notes have popped up to trade at 109 to yield 3.786% today, according to MarketAxess.

2020 Debtwire

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