HY market widens alongside Treasuries; Vistra, NRG cap structures weaken on deep impact from Texas freeze – Mid-Day Commentary

High yield bonds and equities weakened this week following a rapid rise in Treasury yields deterring investors from riskier assets, as the specter of rising borrowing costs for companies and a jump in inflationary concerns mounted.  

The yield on the benchmark 10-year note jumped to a fresh one-year high of as much as 1.6% on Thursday – from 1.37% on Wednesday – before tightening slightly 1.5% today.  

“The market’s suffering in reaction to the wider yields. We’ll see the impact on any companies that are over-levered,” one of the sources said.  

The Nasdaq dropped 3.5% on Thursday for its worst session since October 2020 before recovering 1.1% today. The Dow Jones Industrial Average fell more than 1% today as well. 

High yield bellwethers widened in response to the Treasury dynamics. For example, Ford Motor Company’s USD 637m 6.625% senior unsecured notes due 2028 traded today at 117 to yield 4%, compared to trades at 120 to yield 3.595% on 19 February, according to MarketAxess.   

And Occidental Petroleum’s USD 750m 5.5% senior unsecured notes due 2025 traded today at 106.25 to yield 3.969%, compared to trades at 107.5 to yield 3.822% yesterday (25 February), according to MarketAxess. The USD 1.25bn 6.125% senior unsecured notes due 2031 traded today at 110.75 to yield 4.688%, compared to trades at 112.626 to yield 4.455% yesterday.  

Vistra Energy and NRG Energy bonds and equities are also losing steam, in part relative to Treasuries – and compounded by a storm of revenue and supply hits from the deep freeze in Texas last week. Both companies have exposure to the ERCOT market and may have to purchase power at extremely high prices in order to meet demand. 

After surpassing guidance expectations for 4Q20 and full-year 2020, Vistra is predicting a USD 900m-USD 1.3bn impact from the Texas winter storms. In turn, the company’s shares plummeted 21.5% today to USD 17.87 per share and a market cap of USD 8.737bn.   

Vistra’s USD 1.3bn 5% senior unsecured notes due 2027 traded at 103 to yield 4.048% from trades at 105.5 to yield 2.752% yesterday, according to MarketAxess.  

Earlier this week, NRG postponed its FY20 and 4Q20 results to 1 March, citing a scheduling conflict, while its CEO and President Mauricio Gutierrez was scheduled to appear before the Texas legislature yesterday. 

The storms’ EBITDA impact on NRG could be higher than USD 250m, though not at multiples of that amount, estimated S&P Global in a 24 February report. NRG shares slid 3.4% to USD 36.30 today for a market cap of USD 8.865bn. 

NRG’s USD 1.03bn 3.625% senior unsecured notes due 2031 traded as low as 97 to yield 3.991% today from trades at 100.75 to yield 3.514% yesterday, according to MarketAxess.  

Meanwhile, the USD 500m 3.375% senior unsecured notes due 2029 traded today at 97.625 to yield 3.721%, compared to trades at 100.125 to yield 3.345% yesterday.  

Shares for prison-REIT operator CoreCivic Inc. traded down today after an after-market press release last night announcing that the US Marshals would not renew a contract after its 90-day extension that will begin on 1 March. 

The stock shed 12% today to trade at USD 7.24 (USD 869m market cap) from yesterday’s close of USD 8.23. It’s a continuation of a downward trend since early August when the company announced it would de-REIT and become a C-Corp. 

January executive order from President Biden directed the DoJ not to renew contracts between private prison operators and the US Bureau of Prisons – and whether that order extends to contracts that REITs have with US Marshals is a current focal point for the company and its investors, said a sellside analyst. 

While losing the contract to operate a 2,106 bed facility in Youngstown, Ohio, might not materially impact the company’s operating performance, it does present a flood-gate issue that other contracts the company has with US Marshals could be at risk, said the analyst. 

“There’s a lot of confusion in the industry right now following this announcement. The US Marshals have no place to put those inmates. Where are they going to go?” the source said.  

Despite the bad news, CoreCivic’s USD 250m 5% unsecured notes due 2022 traded up to 100.5 today to yield 4.6% from 98.9 to yield 5.6% on 8 February, according to MarketAxess.

The longest dated maturity is the USD 250m 4.75% senior unsecured note due 2027, which traded at 91 today to yield 6.4%, up from 85.9 to yield 7.4% on 26 January.

2021 Debtwire

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