Junk secondary losses mount; McAfee, Scientific Games struggle; Prince holds premium

By Paul A. Harris and Abigail W. Adams

Portland, Me., Feb. 4 – The primary market was dormant on Friday as volatility again put the new issue market on hold.

Despite the rally in equities, the secondary space remained heavy on Friday as the 10-year Treasury yield crossed the 1.9% threshold following a better-than-expected jobs report.

While the high-yield market ended the day off of its lows, it still closed the day down 3/8 point, a source said.

New issues were struggling under the heavy market conditions.

Condor Merger Sub, Inc.’s (McAfee Corp.) 7 3/8% senior notes due 2030 (Caa2/CCC+) became the latest LBO deal to struggle in the aftermarket with the notes well below their issue price.

Scientific Games Holdings LP’s 6 5/8% senior notes due 2030 (Caa2/B/B) were also under water in active trading.

However, PMHC II, Inc.’s (Prince International Corp.) issue of 9% senior notes due 2030 (Caa2/CCC+) was an outlier with the notes closing the day at a premium to their issue price although they were well off the high of the day.

Friday’s primary

No issues priced Friday, as capital markets in the United States remain in the throes of volatility.

With Treasury yields gapping higher and a hawkish central bank the new issue market is repricing, sources said on Friday.

To illustrate this a trader pointed to the athenahealth (Minerva Merger Sub, Inc.) 6½% senior notes due February 2030 (Caa2/CCC/CCC+) which priced at par on Jan. 27 in a big $2.35 billion issue: One week and a day later they are wrapped around 97, the trader said.

The athenahealth deal came downsized from $2.5 billion with the shift of $150 million of proceeds to a concurrent term loan B, breaking a path for what has become a formidable exodus of cash to the bank loan market from the bond market.

In three M&A deals that priced on Thursday issuers shifted a combined total of $1.9 billion to bank loans.

The trader who spoke Friday afternoon also pointed to one of those downsized Thursday M&A deals, in order to further illustrate the repricing underway in the new issue market.

The McAfee Corp. 7 3/8% senior unsecured notes due February 2030 (Caa2/CCC+), which priced Thursday at par in a $2.02 billion issue, was trading Friday afternoon with a yield of approximately 7½%, the source said.

McAfee struggles

Condor Merger Sub’s (McAfee Corp.) 7 3/8% senior notes due 2030 became the latest LBO deal to tank in the aftermarket.

The 7 3/8% notes traded down to a 98-handle and were marked at 98¼ bid, 98¾ offered early in the session.

While they improved as the session progressed alongside the broader market, the notes remained under water.

The notes were changing hands in the 99 to 99½ context heading into the market close, sources said.

The deal saw some pushback during bookbuilding and was twice downsized with a $1 billion secured tranche withdrawn.

The deal was part of a leveraged buyout financing packaging that also included an upsized $6.96 billion equivalent term loan, a preferred stock offering and equity contributions from investors.

Proceeds will fund the acquisition of McAfee by an investor group led by Advent International Corp., Permira Advisers LLC, Crosspoint Capital Partners, Canada Pension Plan Investment Board, GIC Private Ltd. and the Abu Dhabi Investment Authority.

Scientific Games under water

Scientific Games’ 6 5/8% senior notes due 2030 sank below par on Friday after trading largely flat on the break.

The 6 5/8% notes were changing hands in the 99¼ to 99¾ context during Friday’s session.

They were holding at par after breaking for trade on Thursday.

Scientific Games priced a downsized $800 million, from $880 million, issue of the 6 5/8% notes at par on Thursday.

The yield printed in the middle of the 6½% to 6¾% price talk and tight to initial guidance in the 7% area.

Proceeds will be used to fund a portion of Brookfield Business Partners LP’s $5.8 billion acquisition of the company’s lottery services and technology business.

Prince at a premium

Prince International’s 9% senior notes due 2030 was an outlier among recent deals with the notes maintaining a premium on Friday, although they closed well off their highs.

The 9% notes were marked at par bid, par ¾ offered on Friday and were changing hands in the par 3/8 to par 5/8 context heading into the market close.

The notes traded up to 101 after breaking for trade.

Prince priced a $756 million issue of the 9% notes at par on Thursday.

The yield printed at the wide of the 8¾% to 9% yield talk.

The deal was decreased from $1.256 billion with a $500 million tranche of secured notes eliminated and proceeds shifted to a concurrent term loan.

Outflows

The cash flows of the leveraged markets mirror Thursday's mass migration of cash to loans from bonds.

In the week to the Wednesday, Feb. 2 close, the dedicated high-yield bond funds sustained a whopping $4.04 billion of net outflows, the largest outflow since March 2021, according to market sources.

In the past four weeks the junk funds sustained outflows totaling $11.2 billion, or 4% of assets under management, the most significant since the week ending Aug. 16, 2014.

The dedicated bank loan funds, meanwhile, saw $1.32 billion of net inflows in the week to the Feb. 2 close.

That follows the back-to-back record weekly inflows of $2.01 billion and $2.25 billion.

In the past four weeks the bank loan funds have seen $7.4 billion of net inflows, or 8.2% of assets under management.

Loan funds saw a record $9.5 billion of net inflows in the month of January 2022.

For the same period the dedicated high-yield bond funds sustained $10 billion of net outflows, market sources say.

The most recent high-yield fund flows news tallies an additional $428 million of daily net outflows from the junk funds on Thursday, according to a market source.

High-yield ETFs saw $328 million of outflows on the day.

Indexes

The KDP High Yield Daily index sank 39 points to close Friday at 63.43 with the yield 4.89%.

The index was down 16 points on Thursday, gained 20 points on Wednesday and 19 points on Tuesday, and shaved off 4 points on Monday.

The index posted a cumulative loss of 20 points on the week.

The CDX High Yield 30 index fell another 34 basis points to close Friday at 106.08.

The index sank 60 bps on Thursday and 19 bps on Wednesday after rising 37 bps on Tuesday and 20 bps on Monday.

The index posted a cumulative loss of 56 bps on the week.

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