Junk volatile post-Fed; Citrix at a premium on debut in secondary; Royal Caribbean gains

By Paul A. Harris and Abigail W. Adams

Portland, Me., Sept. 21 – Market players spent a good part of the day waiting for the Federal Open Market Committee release, a day inconducive to pricing new paper in the junk bond primary market.

Meanwhile, it was a volatile day in the secondary space on Wednesday as the market swung between gains and losses as it digested the FOMC’s 75 basis points rate increase and Federal Reserve chair Jerome Powell’s press conference.

While the market spiked higher midway through Powell’s commentary, the rally gave way to heavy selling into the close, a source said.

The new projected Federal Funds target rate of 4.25% to 4.5% by December was a “little” surprise to the market, a source said.

However, the market has consistently “not really taken the Fed at their word,” the source said. “This is kind of bringing home that regardless of recession or employment the Fed mandate right now is to fight inflation.”

While the market spiked higher and lower surrounding the Federal Reserve announcement, the activity in the space was orderly, a source said.

Citrix Systems Inc./Tibco Software Inc.’s 6½% senior secured notes due 2029 (B2/B) dominated activity on their first full day in the secondary with the notes trading at a healthy premium to their heavily discounted issue price although they closed the day well off their highs.

Royal Caribbean Group’s 11 5/8% senior notes due 2027 (B3/B) bucked the broader market trend and ended the day with gains.

However, Carvana Co.’s 10¼% senior notes due 2030 (Caa2/CCC) were retesting all-time lows with the yield again breaking above 16%.

Citrix/Tibco

Tuesday's massive Citrix Systems Inc./Tibco Software Inc. $4 billion issue of 6½% senior secured notes due March 2029 (B2/B) remained the topic du jour in the otherwise quiet primary market on Wednesday.

The deal, which priced at 83.561 late Tuesday, and was trading higher ahead of Wednesday's FOMC announcement, was heard to have been helped across the finish line by one of the venture capital firms that helped sponsor the buyout, according to a news report.

Elliott Investment Management LP, whose affiliate Evergreen Coast Capital Corp. executed the Citirx buyout in conjunction with Vista Equity Partners, took down about $1 billion of the Citrix/Bidco 6½% bonds, according to a Wednesday report from Bloomberg, citing unnamed sources.

Apollo Global Management Inc. (which had a stake in the buyout, in the form of preferred equity) also bought $500 million of the Citrix/Tibco bonds, Bloomberg reported.

The sponsors may have extended themselves beyond their initial equity investments in order to preserve their relationships with the banks, wanting to be sure that the banks will be there for future transactions, a high-yield portfolio manager who had heard the Wednesday report told Prospect News.

And the bonds came so deeply discounted that any appreciable market recovery will almost certainly increase their value, perhaps dramatically, which will ultimately serve to increase the sponsors' profits from the LBO, the investor added.

In pricing the Citrix/Tibco bonds at what is technically a distressed level the banks that participated in the bridge commitment struck last January to backstop financing for the $16.5 billion buyout are believed to have sustained losses in excess of $600 million, sources said on Wednesday.

In the wake of Citrix only one dollar-denominated deal remains on the active new issue calendar.

Marketing began earlier in the week for the Connect Holding II LLC $1.865 billion seven-year senior secured notes offer (B2//B+) backing the carve-out acquisition of Lumen Technologies’ fixed-line assets by Apollo Global Management.

The broadband and telecom services provider will be rebranded as Brightspeed.

Early guidance has the Brightspeed notes coming with an 8% coupon, at a discount, to yield 10%, sources say.

It is scheduled to price late in the week Sept. 25 week.

Meanwhile, aside from the new issues, Wednesday’s market was focused on the rate increase which was accompanied by a statement riven with a level of determination to stanch inflation which took the capital markets by surprise, sources said.

As stock indexes fell and Treasury yields gapped higher in the wake of the Fed statement, the high-yield bond market dropped right away, according to a sellside source who added that bids-wanted-in-competition lists (BWICs) surfaced on news of the rate hike, and then even more surfaced following the release of the accompanying FOMC statement.

“The committee is strongly committed to returning inflation to its 2 percent objective,” the FOMC statement read, in part.

“Higher, firmer and longer,” the portfolio manager remarked, when asked to parse the Fed's Wednesday actions.

“They're quite determined, and it increases the risk of pain,” the investor said.

Citrix at a premium

Citrix’s 6½% senior secured notes due 2029 dominated activity in the secondary space on Wednesday after dominating the market’s attention for the past three weeks.

While the notes played to weak demand during bookbuilding, they were putting in a strong performance in the aftermarket.

The notes traded up to 2 points above the issue price in intraday activity with the market in positive territory.

While they gave back some of their gains as the market turned negative, the notes were still poised to close the day up 1 point, a source said.

They were marked at 84¾ bid, 85¼ offered heading into the close.

In the largest LBO deal of the year, Tibco Software priced $4 billion of the 6½% notes at 83.561 to yield 10% on Tuesday with proceeds backing the buyout of Citrix Systems.

The notes priced 25 bps beyond the wide end of the 9½% to 9¾% yield talk.

The issue price came more than a dollar cheap to the 84.62 to 85.695 price talk.

The notes played to weak demand during bookbuilding with price talk widening and covenants changed prior to pricing.

However, the notes were performing well in the aftermarket and are expected to perform well over the long-term.

The highly liquid issue will be a “big index bond,” a source said. “And with the deep discount it’s very appealing. Everyone’s going to be involved in this one.”

Royal Caribbean gains

Royal Caribbean’s 11 5/8% senior notes due 2027 bucked the broader market trend and closed Wednesday with gains even as the broader market turned negative.

The 11 5/8% senior notes returned to a 101-handle on Wednesday with the notes trading in the 101 to 101½ context early in the session.

While the notes lost steam as selling pressure took hold, they still ended the day up ½ point with the notes wrapped around 101 at the close.

The high-beta notes have been volatile amid the market swings of the past three weeks with the notes trading as low as 97¼ and as high as a 102¼ handle in September.

Royal Caribbean priced the $1.25 billion issue at par on Aug. 15.

Carvana retests lows

Carvana’s struggling 10¼% senior notes due 2030 were retesting rock bottom on Wednesday.

The 10¼% notes fell 1½ points on Wednesday to trade in the 74¾ to 75¼ context heading into the market close, a source said.

The yield on the notes again broke above 16%.

The notes hit their lowest point last Friday when they first traded down to 74¾.

However, they improved over the past two sessions.

The Federal Reserve’s aggressive rate-hike schedule is reawakening refinancing concerns for heavily indebted lower-quality credits, a source said.

Indexes

The KDP High Yield Daily index rose 4 points to close Wednesday at 53.5 with the yield 7.51%.

The index fell 6 points on Tuesday and gained 5 points on Monday.

The ICE BofAML US High Yield index rose 11.1 bps with the year-to-date return now 11.848%.

The index fell 21.1 bps on Tuesday and gained 24.1 bps on Monday.

The CDX High Yield 30 index fell 41 bps to close Wednesday at 98.56.

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