HY acquisition deal pulled; secondary retreats; Carvana crushed; junk funds out $3 billion

By Paul A. Harris and Abigail W. Adams

Portland, Me., Sept. 29 – An acquisition financing deal was pulled from the primary leveraged markets on Thursday, due to market conditions.

Meanwhile, selling pressure resumed in the junk bond secondary space with the market giving back much of its gains from the previous session.

The market gained steam and closed the day off its lows with the cash bond market off ¼ point.

However, losses for names in the ETF basket and rate-sensitive credits outpaced the broader market, a source said.

Carvana Co.’s 10¼% senior notes due 2030 (Caa2/CCC) were crushed in active trading with the yield breaking above 18%.

The beleaguered used car e-commerce company’s 4 7/8% senior notes due 2029 were also lower in heavy volume following a large earnings miss from an industry peer.

Royal Caribbean Cruises Ltd.’s recently priced tranches were mixed.

While both of the issuer’s newest bonds were lower alongside the broader market, the 9¼% senior priority guaranteed notes due 2029 (B3/B+) held up better than the 8¼% senior secured notes due 2029 (Ba3/BB-).

Ford Motor Co.’s 6.1% senior green notes due 2032 (Ba2/BB+) continued to fall to fresh lows with the notes breaking below an 88-handle in heavy volume.

Meanwhile, outsized outflows continued with high-yield mutual and exchange-traded funds seeing $3.003 billion leave the space in the week through Wednesday’s close, according to the Refinitiv Lipper Fund Flows report.

Withdrawn

Thursday's sole news nugget in the primary market came in the form of negative news.

Connect Holding II LLC, which does business as Brightspeed, cited market conditions as it withdrew a $1.865 billion offering of seven-year senior secured notes (B2/B-/B+) and a $2 billion term loan B (B2/B-) from the market.

Both debt tranches of the acquisition financing struggled to gain any traction with investors, sources said (see related story in this issue).

Of note, one acquisition financing deal remains on the thin new issue calendar.

Villa Dutch Bidco is in the market with a €425 million offering of seven-year senior secured notes (B2/B) backing Bain Capital's acquisition of a majority stake in Belgium-based House of HR.

The deal is expected to price during the Oct. 3 week, sources say.

The only remaining dollar-denominated deal left on the active calendar in the wake of Brightspeed is a Chapter 11 exit financing from Chile-based Latam Airlines Group SA, which is attempting to place $1.5 billion of senior secured notes in two tranches.

The deal, which is slated to price next week, features five-year notes whispered in the low-13% area, and seven-year notes whispered in the low-to-mid 13% area.

Latam Airlines is heard to have come into the junk market riding a wave of reverse inquiry amounting to as much as half the size of its offer – reverse inquiry emanating principally from the Yankee high-yield accounts which participated in the Santiago-based air carrier's debtor-in-possession (DIP) loan, according to sources.

However, that reverse inquiry notwithstanding, the pricing and structure of Latam Airlines’ exit financing remain under discussion, with the initiative squarely in the hands of investors, sources said on Thursday.

Latam Airlines, a credit typically encountered among emerging markets names, claims an audience among U.S. high-yield investors primarily on the basis of that DIP loan participation, sources say.

Carvana crushed

Carvana’s capital structure continued to bleed on Thursday with a large earnings miss from an industry peer sparking a sell-off in Carvana’s equity and senior notes.

The 10¼% senior notes due 2030 broke below a 70-handle, a source said.

The notes traded in a wide range with a low of 65½ and a high of 69.

However, the notes were wrapped around 67 heading into the market close with the yield at 18½%.

There was $11 million in reported volume.

The $3.28 billion issue, which priced at par in April, was the largest issue of 2022 prior to Citrix Systems Inc./Tibco Software Inc.’s $4 billion issue of 6½% senior secured notes due 2029 (B2/B).

Carvana’s 4 7/8% notes due 2029 were also lower although trading in the series was more orderly, a source said.

The 4 7/8% notes were off ½ to ¾ points with the notes trading in the 49 to 49½ context heading into the market close.

The yield on the notes was also 18%, a source said.

Carvana’s capital structure was under pressure following a large earnings miss from industry peer CarMax.

“If CarMax is having trouble, Carvana is having trouble,” a source said, with the market preparing for an earnings disappointment.

With negative EBITDA, a large cash burn, and heavy interest expenses, the company’s future viability is uncertain, the source said.

Royal Caribbean mixed

Royal Caribbean’s most recently priced tranches were mixed on Thursday with its 9¼% senior priority guaranteed notes due 2029 holding up amid the market sell-off while the 8¼% senior secured notes due 2029 revisited a previous low.

The 9¼% senior notes were off ½ point to trade in the 99½ to par context heading into the market close.

There was $37.5 million in reported volume.

However, the 8¼% senior secured notes due 2029 were down 1 point to return to a 98-handle.

The 8¼% notes were changing hands in the 98 3/8 to 98 5/8 context.

There was $18 million in reported volume.

Losses in BB credits outpaced the broader market as investors again reduced their rate risk after piling into it the previous session.

The 9¼% senior notes have also been favored due to their larger coupon and the premier cruise ships that are part of the guarantee of the notes.

The cruise ships have a net book value of $7.2 billion and have been capped in terms of their use as collateral, sources previously said.

Ford’s new low

Ford’s 6.1% senior green notes due 2032 continued to fall to new lows, as another BB credit that was pressured as investors shed rate risk.

The 6.1% notes fell 1½ points with the notes breaking below an 88-hnadle

The notes were changing hands in the 87¾ to 88 context heading into the market close.

There was $19 million in reported volume.

The 6.1% notes have struggled since the $1.75 billion issue priced at par on Aug. 16.

The notes priced at the tail end of the late July/August rally and were expected to struggle if the BB index widened from its recent tight.

Fund flows

The corporate bond market sustained huge outflows of cash during the week to Wednesday's close, market sources said on Thursday afternoon.

The dedicated high-yield bond funds saw $3.003 billion of net outflows on the week.

Meanwhile the investment-grade bond funds sustained a staggering $10.299 billion of net outflows during that period, the third-largest weekly outflow from the high-grade funds on record, according to a sellside source who noted that the two outflows which exceeded the one reported on Thursday afternoon came in the teeth of the coronavirus pandemic.

Turning to the daily cash flows of the junk bond funds, high-yield ETFs finished the hard-rallying Wednesday session having seen $1.21 billion of inflows on the day, according to a market source who specified that the bulk of that total will figure into fund flows to be reported for the week to the Wednesday, Oct. 5 close.

Actively managed high-yield funds sustained $272 million of outflows on Wednesday, the source said.

Amid appearances of a bond market in full retreat, with dealers shelving an attempt to clear their balance sheets of nearly $4 billion of committed acquisition financing debt, and massive withdrawals of cash from the dedicated bond funds, junk outperformed equities on Thursday, according to the sellside source.

With equities taking it on the nose (the S&P 500 index finished 2.11% lower on the day) a lot of high-yield names ended the day unchanged or only slightly lower, the sellsider said.

Indexes

The KDP High Yield Daily index dropped 32 points to close Thursday at 51.51 with the yield now 8.35%. The index was down 2 points on Wednesday, 23 points on Tuesday and 45 points on Monday.

The CDX High Yield 30 index fell 31 bps to close Thursday at 95.97.

The index rose 108 bps on Wednesday after falling 162 bps on Tuesday and 69 bps on Monday.

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