HY primary, secondary close books on historic quarter; cruise lines tank; Rent-A-Center falls

By Paul A. Harris and Abigail W. Adams

Portland, Me., Sept. 30 – The Friday close brought the curtain down on the most anemic third quarter in the modern history of the high-yield bond market.

The quarter concluded with just $20.5 billion of junk-rated, dollar-denominated issuance – 70% below average third quarter issuance of $67.1 billion and 15% below the second most anemic quarter in recent history.

The secondary space also closed the books on a historic Q3 that will long be remembered for its volatility and its losses with the quarter closing at the lows of the year.

Friday marked a fitting end to a whipsaw three-month period with the market strong at the open but in the red by day’s end.

Market players are bracing for an earnings season that could add further pressure with early results disappointing.

Cruise line operators saw outsized losses on Friday after Carnival Corp. reported earnings.

Carnival’s senior notes fell 4 to 7 points in heavy volume after a large earnings miss and below average bookings for the fourth quarter.

The results dragged down Royal Caribbean Cruises Ltd. with the notes issued in 2022 hitting fresh lows.

Rent-A-Center, Inc.’s 6 3/8% senior notes due 2029 (B1/B) also saw large losses after it downwardly revised its third-quarter guidance.

The issue

The quarter beginning July 1, and concluding Friday saw just $20.5 billion of junk-rated, dollar-denominated issuance in 27 tranches, according to Prospect News data.

That total comes a whopping 70% below average third-quarter issuance of $67.1 billion, going back to and including the third quarter of 2010.

The 2022 quarter three total is 15% below that of the second-most anemic third quarter, that of 2011 which saw $24.1 billion in 49 tranches.

The biggest third quarter in the history of the market came in 2020, during which $124.5 billion of issuance cleared the market in 200 tranches.

Heading into Labor Day 2022 (Sept. 5) market sources were anticipating a modest-or-better recovery in what had been a conspicuously sleepy second quarter ($27.3 billion in 42 tranches).

Pre-Labor Day estimates had the month of September coming in with as much as $25 billion of new issue volume.

That, of course, failed to materialize.

September 2022 concluded Friday with just $6.8 billion clearing the market in six tranches.

Beginning in the middle of the past summer, deals, primarily related to mergers and acquisitions, began pricing at steep discounts, as a combination of inflation and risk aversion prompted investors to plant their feet and demand greater compensation for investing in speculative-grade debt.

That trend culminated in the middle of September when Citrix Systems Inc./Tibco Software Inc. priced $4 billion of 6½% senior secured notes due March 2029 (B2/B) at 83.561 (a technically distressed new issue price), a trade said to have cost dealers as much as $600 million.

Nor have there been any visible improvements, as dealers labor to rid their balance sheets of committed buyout debt.

On Thursday a struggling Brightspeed $1.865 billion offering of secured notes – another committed financing related to an acquisition – was withdrawn due to market conditions.

In the wake of these events market-watchers are wondering aloud about the fate of at least two more high-profile acquisition financing deals expected to come in the run-up to 2023: Tenneco Inc. $2 billion of secured notes and $1 billion unsecured notes, and Nielsen Holdings plc bonds as part of the expected debt syndications to take out $2 billion of secured bridge loans and $2.15 billion of unsecured bridge loans.

“Right now, it doesn't seem like a question of when they come, but whether they come,” a sellside source remarked on Friday.

In any case, the first week of the 2022 fourth quarter gets underway on Monday with a thin active forward 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 only remaining dollar-denominated deal left on the active calendar in the wake of the Brightspeed postponement on Thursday 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.

U.S. high-yield accounts that were active in the Latam Airlines debtor-in-possession (DIP) loan comprise a captive audience for the deal, market sources say.

Both tranches are being discussed in a yield range of 13% to 14%, according to a market source.

Cruise lines tank

Cruise lines were under pressure on Friday after Carnival reported a large earnings miss and lower than expected third-quarter occupancy and bookings for the fourth quarter.

Carnival’s senior notes (B3/B) were off 4 to 7 points and its equity was crushed on the earnings disappointment.

Carnival’s 7 5/8% senior notes due 2026 fell 6½ points to close Friday at 76 with the yield cracking 17%, a source said.

There was $19 million in reported volume.

The 10½% senior notes due 2030 fell 5 points to close the day at 81½ with the yield 14½%.

There was $24 million in reported volume.

The 5¾% notes were down 4 points to close at 70½ with the yield 15 1/8%.

There was $16 million in reported volume.

Carnival’s results dragged down Royal Caribbean with occupancy and booking expected to be an industry-wide problem, a source said.

Royal Caribbean’s senior notes issued in 2022 all fell to new lows amid the selling pressure.

Royal Caribbean’s 9¼% senior priority guaranteed notes due 2029 (B3/B+) fell 1 point to trade in the 98¾ to 99 context heading into the market close, a source said.

There was $53 million in reported volume.

The 8¼% senior secured notes due 2029 (Ba3/BB-) fell 1¼ points to close the day on a 97-handle.

The notes were changing hands in the 97 3/8 to 97 5/8 context heading into the market close.

There was $28.5 million in reported volume.

Royal Caribbean’s 11 5/8% senior notes due 2027 (B3/B), which have been under pressure since its most recent offering, sank 4 points to close the day on a 91-handle.

The notes were changing hands in the 91 to 91¼ context heading into the market close with the yield rising above 14%.

Royal Caribbean priced a $1 billion issue of the 8¼% notes and a $1 billion issue of the 9¼% notes at par on Sept. 22.

It priced a $1.25 billion issue of the 11 5/8% notes at par on Aug. 15.

Rent-A-Center’s guidance

Rent-A-Center’s 6 3/8% senior notes due 2029 also saw heavy selling pressure after the company downwardly revised its third-quarter guidance.

The notes fell 4 points to close the day at 78 with the yield 11 3/8%, a source said.

There was $25 million in reported volume.

The company cited inflation, reduced consumer demand and other macro challenges as it revised its revenue forecast below estimates.

Inflows

The dedicated high-yield bond funds saw $198 million of net daily inflows of cash on Thursday, according to a market source.

High-yield ETFs saw $132 million of inflows on the day.

Actively managed high-yield funds saw $66 million of inflows on Thursday, the source said.

News of Thursday's daily cash flows followed a Thursday report that the combined funds sustained $3 billion of net outflows in the week that concluded with the Wednesday, Sept. 28 close, according to fund tracker Refinitiv Lipper.

It was the fifth outflow in the past six weeks, for a total of negative-$15.8 billion, or 6.9% of assets under management, according to the market source.

The combined high-yield funds have now sustained $53.6 billion of net outflows for the year 2022 to Thursday's close, the source added.

Indexes

The KDP High Yield Daily index fell 4 points to close the day at 51.47 with the yield now 8.1%.

The index dropped 32 points on Thursday, 2 points on Wednesday, 23 points on Tuesday and 45 points on Monday.

The index posted a cumulative loss of 106 points on the week.

The CDX High Yield 30 index fell 16 basis points to close Friday at 95.81.

The index was down 31 bps on Thursday, rose 108 bps on Wednesday and fell 162 bps on Tuesday and 69 bps on Monday.

The index posted a cumulative loss of 197 bps on the week.

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