Dun & Bradstreet, Energizer on tap; Targa up; PG&E mixed; energy rally ends; Bausch down

By Paul A. Harris and Abigail W. Adams

Portland, Me., Jan. 11 – The high-yield primary market is poised to return to action with new paper from Targa Resources Partners LP and Targa Resources Finance Corp. topping expectations.

After radio silence for nearly six weeks a calendar of new deal activity is starting to form.

Dun & Bradstreet Corp. is expected to bring $850 million of senior notes and Energizer Holdings Inc. is expected to bring $600 million of senior notes in late January or early February, or both.

Meanwhile, after a strong week, the secondary space was backing off its gains on Friday.

The energy sector was leading the space lower with crude oil futures declining for the first time in nine sessions.

However, new paper from Targa Resources was untouched by the downward trend with both tranches trading sharply higher in high-volume activity.

After a strong rally earlier in the week, California Resources Corp.’s 8% senior notes due 2022 continued to give back those gains during Friday’s session.

Pacific Gas & Electric Co.’s senior notes continued to see active trading accounting for at least $500 million of the $4 billion on the tape by the late afternoon.

The capital structure remained mixed with some issues continuing to decline while others continued to gain.

After posting gains earlier in the week, Bausch Health Cos. Inc.’s 6 1/8% senior notes due 2025 were losing ground in high-volume activity on Friday.

A good start with Targa

Targa Resources became the first issuer to price a junk deal in five weeks of utter silence in the high-yield primary market when it priced an upsized $1.5 billion of senior notes (Ba3/BB) late Thursday.

On Friday, both tranches of the highly oversubscribed deal were trading well, according to an investor who participated.

The 6½% notes due July 2027 were 101½ bid,101 7/8 offered, at mid-morning Friday. The Targa 6 7/8% notes due January 2029 were 101¾ bid, 102¼ offered.

Both tranches priced at par.

Thursday morning Targa kicked off with $750 million of 8.5-year paper (the 6½% notes). Later in the day the company added a $500 million tranche of 10-year notes which it ultimately upsized to $750 million (the 6 7/8% notes).

Targa was the right deal to restart a new issue market that spent more than a month in the freezer, sources say.

Demand was huge and allocations were dear, the investor said.

All told the $1.5 billion deal played to $8 billion of demand from more than 240 accounts, the investor said – with $5.7 billion of orders in the book for the 2027 notes, and $2.3 billion for the 2029 paper.

Primary sets sail in 2019

With the Targa deal topping expectations, the primary market is ready to fire up in 2019, the investor said, but added that the expectation is the build-up will likely be steady rather than precipitous.

“I don't exactly think we're going to be off to the races,” the source remarked.

A pipeline of deals has become visible, whereas a week ago there was no pipeline to speak of, sources say.

On Thursday, Prospect News learned that Dun & Bradstreet is expected to bring $850 million of senior notes as part of a financing that also includes $3.53 billion of bank debt set to launch in late January or early February.

Energizer Holdings is expected to bring $600 million of senior notes in the same timeframe.

There are also other opportunistic financings like Targa waiting to hit the market, the investor said, adding that Targa's execution should provide some encouragement for those issuers.

Junk off to big start

The high-yield index, which bled out its meager gains for 2018 in the final weeks of the year to end 2018 with negative returns, has come roaring into 2019, the investor said.

The junk index returned 2.8% in the year to Thursday's close, the source said, adding that junk has now made back everything it lost in December.

A tamer Fed, as well as an expectation that a trade agreement with China might materialize and a U.S. economy that is growing, albeit at a very modest pace, helped to stoke the big start to 2019, the investor remarked.

However, it is important to look at the notable beating the market took in December in context, the source added.

Liquidity was thin, and people were withdrawing from the market because of special circumstances, the investor asserted.

ETFs might be forced to raise cash. However, with ultrathin preholiday liquidity a $100,000 lot of bonds offered by an ETF creates an outsized move in the price of the issue.

Hence, the market's December duck dive was a story of thin liquidity and withdrawals catalyzed by special situations, rather than a wholesale rout driven by broad forced selling, the investor asserted.

And 2019's strong start notwithstanding, some of late 2018's conspicuously leveraged deals, while improving, still have a row to hoe in order to claw their way back to new issuer prices.

Refinitiv’s 8¼% senior notes due November 2026 (Caa2/B-/B+) were trading at 95¼ on Friday morning. After starting the fourth quarter of 2018 at 99½, they fell as low as 90 on Dec. 21.

The $1,575,000,000 tranche priced at par on Sept. 18.

Targa trades up

The demand seen during book building for the new paper from Targa followed it into the secondary space with both tranches trading sharply higher, despite a down day for energy.

The new paper occupied the secondary space with volume eclipsing all other activity, even Pacific Gas & Electric’s senior notes.

The 6½% senior notes due 2027 were trading in a range of par 5/8 and 102 3/8 throughout Friday’s session with the notes poised to close the day around 101 5/8, a market source said.

More than $127 million of the bonds changed hands during Friday’s session.

The 6 7/8% senior notes due 2029 were trading in a range of 101 to 102 5/8 with the notes poised to close the day around 102, a market source said.

More than $119 million of the bonds were on the tape by the late afternoon.

Energy gives back

After nine consecutive trading days of gains crude oil futures posted losses on Friday, dragging down several names in the energy sector.

California Resources’ 8% senior notes due 2022 continued their decline on Friday. The notes dropped 1¾ points.

They were quoted at 79¼ bid, 80 offered and closed the day at 79¾, sources said.

More than $21 million of the bonds were on the tape by the late afternoon.

While the 8% notes made solid gains through Wednesday, they dropped on Thursday on signs the rally in crude oil futures was weakening.

The 8% notes traded as high as 83 on Wednesday after closing last Friday at 76.

Crude oil futures traded as low as $51.18 before settling at $51.59, a decrease of $1 or 1.9%.

PG&E mixed

Pacific Gas & Electric continued to see heavy trading volume on Friday with the capital structure again mixed. It was mixed on Thursday after posting sharp losses on Tuesday and rebounding on Wednesday.

The 6.05% senior notes due 2034 was again the most actively traded issue in the structure with the notes up 2½ points to 88.

More than $106 million of the bonds traded on Friday making it the most active issue outside of the new paper from Targa.

PG&E’s 3½% senior notes due 2020 rose 1 point to 89¾ with more than $44 million of the bonds on the tape.

However, PG&E’s 3¾% senior notes due 2024 dropped 1½ points to 84¾ with more than $40 million of the bonds trading hands, a market source said.

PG&E’s senior notes have dominated activity in the secondary space since Tuesday when S&P Global Ratings downgraded the utility company to junk due to its potential liability from the California wildfires of 2017 and 2018.

Moody’s Investors Service followed suit on Thursday, downgrading the utility company to junk status due to its potential liability and the difficulty the company faces in raising capital.

Bausch drops

Bausch Health’s 6 1/8% senior notes were losing ground in high-volume activity on Friday after posting gains earlier in the week.

The 6 1/8% notes dropped ¾ point to trade down to 93 with more than $31 million of the bonds on the tape, a market source said.

While down on Friday, the notes were still up 1½ points on the week.

The notes were making gains in high-volume activity throughout the week after the specialty pharmaceutical company presented at the JPMorgan health care conference on Monday.

Thursday inflows

The new year brought a sea change in the technical picture of the market, an investor said.

“Cash flows turned on a dime,” the source said, noting that nearly all of the daily cash flows among the dedicated high-yield bond funds have been positive.

They were solid on Thursday, the investor noted.

High-yield ETFs saw $462 million of inflows on the day.

Asset managers saw $445 million of inflows on Thursday, the source added.

That news trailed a Thursday report that the combined funds saw $1.048 billion of net inflows in the week to Wednesday's close, according to Lipper US Fund Flows.

Indexes mixed

Indexes were again mixed on Friday although all posted gains on the week.

The KDP High Yield Daily index dropped 5 basis points on Friday to 68.60 with the yield now 6.54%.

The index rose 5 bps on Thursday, 25 bps on Wednesday, 42 bps on Tuesday and 49 bps on Monday for a cumulative 116 bps gain on the week.

The ICE BofAML US High Yield index rose 9.7 bps with the year-to-date return now 3.202%. The index dropped 3 bps on Thursday, the index’s first decline of the new year.

The index rose 52.8 bps on Wednesday, 52.9 bps on Tuesday and 78.4 bps on Monday for a cumulative 190.8 bps gain on the week.

The index closed 2018 with a year-to-date return of negative 2.265%.

The CDX High Yield 30 index dropped 12 bps to close Friday at 103.9. The index was up 42 bps on Thursday after dropping 25 bps on Wednesday.

The index rose 43 bps on Tuesday and 62 bps on Monday for a cumulative 110 bps gain on the week.

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