Rite Aid, Michaels, AMC Entertainment bonds improve; distressed returns outpace markets

By Cristal Cody

Tupelo, Miss., Oct. 10 – Distressed retail paper saw some of the biggest gains on Tuesday in overall subdued trading in the first session back after the Columbus Day holiday.

Rite Aid Corp.’s notes rallied about 2 points over the session with the distressed retailer’s paper trading about 2½ points to 3 points better since Thursday.

Michaels Cos., Inc.’s bonds also continued to recover on Tuesday from last week’s losses.

Michaels’ 7 7/8% senior notes due 2029 (Caa2/CCC-) traded about 1¼ points higher on the day.

Market tone was improved on Tuesday with stock indices ticking higher, Treasury yields lower and volatility on the wane.

The CBOE Volatility index dropped 3.79% to 17.03.

The S&P 500 index rose 0.52%, while the iShares iBoxx High Yield Corporate Bond ETF fell 2 cents, or 0.03%, to $73.21.

The S&P U.S. High Yield Corporate Distressed Bond index remained soft ahead of the long holiday weekend, though the distressed space continues to see much higher returns compared to other markets.

Year-to-date distressed total returns were near 15% on Friday, while the U.S. high yield corporate bond index has year-to-date returns of under 5% and the investment-grade corporate bond index has negative returns of more than 1% so far this year.

Meanwhile, Fitch Ratings said in a report on Monday that it has revised its fiscal year 2023 institutional leveraged loan and high-yield bond default forecasts downward in part due to improvement from some of its at-risk issuers on its market concern lists.

The default forecasts were lowered to 3% to 3½% from 4½% to 5% for the junk space and to 3% to 3½% from 4% to 4½% for leveraged loans.

Fitch said its fiscal year 2024 leveraged loan and high-yield default forecasts are unchanged at 3½% to 4½%.

Year to date, there have been $43.5 billion of loan defaults across 54 issuers and $32.3 billion of high-yield defaults across 27 issuers, including some that have defaulted twice, Fitch reported.

Back in the secondary market, bonds from Michaels and AMC Entertainment Holdings, Inc. saw some of the heaviest trading on Tuesday.

AMC’s 10% senior secured second-lien notes due 2026 (Caa3/CCC-) were 2 points higher on nearly $20 million of volume.

Rite Aid higher

Rite Aid’s 8% senior secured notes due 2026 (Caa3/CCC-/B) rallied 2 points to 64 bid in light trading on Tuesday, a source said.

The issue was last quoted on Thursday at 61 bid.

Rite Aid’s 7½% senior secured notes due 2025 (Caa3/C) traded in stronger volume at 63¾ bid on $5 million of supply going out.

The notes have added about 2½ points since Thursday.

Rite Aid has been on bankruptcy watch following a Wall Street Journal report last month.

The company announced in the prior week that it received notice on Sept. 28 that its stock is no longer in compliance with New York Stock Exchange price listing requirements.

The Camp Hill, Pa.-based drugstore chain’s stock (NYSE: RAD) shot up 21.6% on Tuesday to 75 cents.

Michaels active

Michaels’ 7 7/8% senior notes due 2029 (Caa2/CCC-) were trading stronger at 62¼ bid in one of the most active distressed issues on Tuesday, a source said.

Trading totaled $15 million.

On Friday, the bonds had recovered ¾ point to a quote of 60¾ bid after declining 3½ points in the previous session.

The Irving, Tex.-based arts and crafts retailer’s bonds dove over 3 points on Thursday on nearly $40 million of volume following a downgrade from S&P Global Ratings.

AMC extends gains

AMC’s 10% senior secured second-lien notes due 2026 (Caa3/CCC-) held onto Friday’s gains and climbed 2 more points to a 79 bid handle on $18.5 million of volume on Tuesday, a source said.

The bonds had traded Friday 2 points better at 77 bid and went out about 4 points better on the week.

AMC’s 7½% senior secured first-lien notes due 2029 (Caa1/B-) also were quoted about 2¼ points stronger on Tuesday near the 72¾ bid area on $8.6 million of supply.

The bonds were seen ahead of the weekend up ¾ point at 70½ bid and were about 1¼ points stronger on the week.

The Leawood, Kan.-based movie theater owner’s stock rose 1% to $9.92 on Tuesday, still well off the 52-week high of $91.50.

Fitch noted in its lowered default forecast report that AMC recently completed an equity raise for $325 million through the sale of 40 million shares and that its 2023 box office receipts are estimated to be $9.3 billion.

Distressed index softens

S&P U.S. High Yield Corporate Distressed Bond index one-day total returns finished the prior week at minus 0.11% on Friday, compared to 0.06% on Thursday, minus 0.04% on Wednesday, minus 1.68% on Tuesday and minus 0.73% at the week’s start.

Month-to-date total return losses widened to minus 2.49% ahead of the holiday weekend from minus 2.39% on Thursday, minus 2.44% on Wednesday, minus 2.4% on Tuesday and minus 0.73% in the first session of October.

Year-to-date distressed total returns slipped to 14.84% on Friday from 14.96% on Thursday, 14.9% on Wednesday, 14.94% on Tuesday and 16.91% at the prior week’s start.

While year-to-date distressed total returns have softened from 17.77% in September, the space continues to see much higher returns compared to other indices.

The S&P 500 high-yield corporate bond index has year-to-date returns of 1.96% and the U.S. high-yield corporate bond index has year-to-date returns of 4.13%, while the S&P 500 investment-grade corporate bond index has negative returns of 1.44% year to date.

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