Junk secondary closes volatile quarter quietly; Novolex, Churchill at a premium; Talen dives

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 31 – Following Wednesday's comparatively busy session which saw $2.83 billion of new issuance, the primary market went back on stand-by Thursday with no deals pricing or announced.

The primary market is closing the books on one of the lowest quarters for new-deal volume since 2010.

Meanwhile, the secondary space ended a volatile quarter quietly with the market largely flat after three months of wild swings.

The secondary space had one of its worst quarters in recent history with returns on the U.S. High Yield Master II Index closing at about negative-4.5%.

However, the high yield market has outperformed other asset classes with the investment grade index down 7.8% and the S&P 500 index down about 5%, according to a market source.

The market is also well off of its lows with returns briefly plummeting past negative-6% in mid-March in the run-up to the Federal Reserve’s rate hike announcement.

While the overall market was quiet on Thursday as accounts closed their books on the quarter, new paper was in focus and putting in a strong performance.

Churchill Downs Inc./CDI Escrow Issuer Inc.’s 5¾% senior notes due 2030 (B1/B) maintained a healthy premium in active trading.

However, Clydesdale Acquisition Holdings, Inc.’s (Novolex) recently priced tranches were mixed with the unsecured notes falling flat while the secured notes climbed more than 1 point.

Meanwhile, outside of new and recent issues, Talen Energy Supply LLC’s distressed 10½% senior notes due 2026 (Caa2/CCC/CCC) nosedived in active trading with a large seller in the market and speculation the company would file for bankruptcy soon.

Meanwhile, high-yield mutual and exchange-traded funds broke their historic streak of outflows with $1.244 billion entering the space in the week through Wednesday’s close, according to the Refinitiv Lipper Fund Flow Report Newsline.

Prior to this week’s inflow, the space had seen 11 consecutive weeks of outflows, the majority of which exceeded $1 billion.

It was the longest streak of outflows the high-yield market had seen since 2007, a source said.

Below $50 billion

The first quarter of 2022 came to a close with $45.4 billion of junk-rated, dollar-denominated issuance, only the second time that first-quarter issuance failed to top the $50 billion mark since the beginning of 2010, according to Prospect News data.

First-quarter issuance came in a staggering 70% below the $150.2 billion of issuance seen in the first quarter of 2021, the biggest first quarter in the history of the market.

The first quarter of 2022 put up the lowest amount of issuance for that interval since the first quarter of 2016, which saw just $36.2 billion.

The first quarter of 2016, in fact, is the only first quarter to see less issuance than the first quarter of 2022, going back to the beginning of 2010.

March 2022 saw just $9.6 billion of issuance, just shy of $50 billion below March 2021's $59.1 billion.

LBOs at a premium

While junk bonds that have been issued over the past year as part of leveraged buyouts rank among the worst performers of the deals of 2022, the deals that priced during Wednesday’s session were not among them.

Churchill Downs’ 5¾% senior notes due 2030 and Novolex’s recently priced tranches were putting in solid performances in the secondary space, although Novolex’s secured tranche outperformed its unsecured counterpart.

Churchill Downs’ new senior notes were trading in a tight range throughout Thursday’s session.

The notes were marked at par ¾ bid, 101¼ offered on Thursday.

In a heavily oversubscribed offering, the company priced an upsized $1.2 billion issue of the 5¾% notes at par in a Wednesday drive-by.

Pricing came at the tight end of the 5¾% to 6% yield talk. The deal was heard to have played to $3 billion in orders.

Proceeds will be used to help fund the acquisition of Peninsula Pacific Entertainment LLC.

In spite of the underperformance of LBOs over the past year, the gaming company was from a sector still coveted by investors, a source said.

The market has also been hungry for new paper.

Novolex’s recently priced tranches were also putting in strong performances in the aftermarket although the secured notes outperformed their unsecured counterparts.

The 6 5/8% senior secured sustainability-linked notes due 2029 (B2/B) were marked at 101 bid, 102 offered at the market close, according to a market source.

The majority of prints were in the 101¼ to 101¾ context.

Novolex’s 8¾% senior notes due 2030 (Caa2/CCC+) were trading at a slight premium to their discounted issue price.

The 8 ¾% notes were marked at 93½ bid, 94½ offered at the market close. The majority of prints were in the 93 7/8 to 94 1/8 context, a source said.

Novolex priced a downsized $500 million, from $750 million, tranche of the 6 5/8% notes at par and a downsized $1.11 billion, from $1.23 billion, tranche of the 8¾% notes at 93.87 to yield 9 7/8% on Wednesday.

Proceeds from the downsized notes were transferred to the concurrent term loan with proceeds to be used to fund Apollo Global Management’s buyout of the packaging products manufacturer from Carlyle.

Talen dives

Talen’s distressed bonds did a nosedive on Thursday with a large seller in the market.

The power producer’s 10½% senior notes due 2026 were down 7 points in intraday activity.

The notes traded as low as 21½ bid, 22½ offered during Thursday’s session before bouncing off their lows to close the day down 4 points at 25 bid, 26 offered.

There was $14 million in reported volume.

The notes were under pressure as a large seller offloaded their holdings, a source said.

There is speculation that the company will file for bankruptcy soon, which would be an anomaly for the high-yield market with the default rate in 2022 below 1%.

First inflow in 11 weeks

The dedicated high-yield bond funds saw $1.244 billion of net inflows in the week to Wednesday's close, according to information posted on the Internet by the Refinitiv Lipper Fund Flow Report Newsline.

That's the first positive weekly flow the funds have seen in 11 weeks, according to a market source.

The junk funds saw $982 million of daily net inflows on Wednesday, the most recent session for which data was available at press time, the source said.

High-yield ETFs saw $848 million of inflows on the day.

Actively managed high-yield funds saw $134 million of inflows on Wednesday, according to the market source.

Cash flows into the junk funds accelerated in the latter part of the week to Wednesday's close.

On Tuesday the funds saw $1.23 billion of net inflows. All of that amount and more, $1.47 billion, went into the ETFs (the actively managed funds sustained $245 million of outflows on Tuesday).

Hence on Tuesday and Wednesday, the final two sessions encompassed in the present week's fund flows report, the junk ETFs saw a total of $2.14 billion of inflows.

Indexes

The KDP High Yield Daily index gained 7 points to close Thursday at 61.63 with the yield now 5.42%.

The index was up 14 points on Wednesday and 40 points on Tuesday after shaving off 2 basis points on Monday.

The CDX High Yield 30 index fell 17 bps to close Thursday at 105.38.

The index fell 27 bps on Wednesday, jumped 87 bps on Tuesday, and fell 35 bps on Monday.

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