Venture Global, Global Aircraft deals eyed; junk heavy; Spirit AeroSystem, Frontier lifted

By Paul A. Harris and Abigail W. Adams

Portland, Me., Oct. 18 – The junk bond primary market put up a goose egg on Wednesday.

However, parties are at work on a pair of big deals that have been on trajectories which have them pricing before the end of the week.

Spiking risk-free rates – with 10-year government paper climbing six-plus points on Wednesday to close above 4.9% – have complicated the progress of the Global Aircraft Leasing Co., Ltd./Global Sea Containers II Ltd. $1.95 billion offering of five-year senior PIK toggle notes (Ba2//BB-), sources say.

Also in the market is a massive $4 billion two-part senior secured notes offer from Venture Global LNG Inc.

Meanwhile, it was a heavy day in the secondary space with the cash bond market falling another 3/8 to ½ point as Treasury yields reapproached multi-decade highs.

Treasury yields are expected to continue their climb as the market reassesses rate-hike expectations in the wake of strong economic data.

The market is still anticipating a pause in November. However, bets are increasing for an additional rate hike in December or January, a source said.

The market has now nearly eliminated its gains from the previous week when the market expressed confidence the rate-hike campaign had run its course.

However, spreads have held in comparatively well leaving many to speculate that more pain is in store.

While the broader market was weak amid a reassessment of the macro climate, topical news drove large gains in the space.

Spirit AeroSystems Inc.’s beleaguered senior notes, which have been in a multi-month downtrend due to quality control issues, were the top gainers of Wednesday’s session following a production deal with Boeing.

Frontier Communications Holdings LLC’s senior notes also made large gains after activist investor Jana Partners revealed its stake in the company and its intention to push for a sale.

Global Aircraft sweetens deal

Global Aircraft Leasing/Global Sea Containers’ $1.95 billion offering of five-year senior PIK toggle notes will be used to raise cash to pay off the Global Aircraft Leasing 6½% senior PIK toggle notes due September 2024.

The new offer is playing to between $1.1 billion and $1.5 billion of demand, according to a portfolio manager.

Early price talk has widened somewhat. Under discussion are an 11½% cash coupon and a 13½% PIK coupon, replacing earlier guidance that had a cash coupon coming in the 11% area, with a 200 basis points step-up for a PIK coupon payment.

That novel 200 bps PIK step-up (the customary step-up has been 75 bps) is part of the deal’s announced structure.

It reflects the issuer’s appreciation of the fact that investors are determined to have coupons paid in cash, sources say.

However, investors want more assurance, they add.

Conversations about the deal’s covenant package are currently underway, according to the portfolio manager who is involved in the negotiations.

One covenant tweak under consideration would prohibit the company from making dividend payments during fiscal periods in which it makes a PIK coupon payment on the bonds, the source said.

The parties are reasonably close, according to the portfolio manager who professed confidence that a deal can get done.

Venture Global eyed

Also in the market is a massive $4 billion two-part senior secured notes offer from Venture Global.

That deal (B1/BB/BB-) includes a tranche of 5.25-year bullet notes, initial talk 8¾% to 9%, and a tranche of 8.25-year notes with 3.25 years of call protection, initial talk 9¼% to 9½%.

The combined offering was playing to around $2 billion of demand heading into the New York lunch hour, largely from hedge funds, the portfolio manager said.

That demand is about evenly split between the two tranches, the source noted.

The company continued meetings with investors on Wednesday, and the deal has been on a timeline that has it pricing Thursday.

A modest upsize is possible, sources say.

Spirit AeroSystems lifted

Spirit AeroSystems’ senior notes made spectacular gains on Wednesday after the company inked a new production agreement with Boeing, despite a series of supply issues that impacted Boeing’s delivery schedule.

Spirit AeroSystems’ 4.6% senior notes due 2028 (Caa1/CCC+) made the largest gains in the capital structure.

They shot up 5 points to close the day in the 78¾ to 79¼ context, a source said.

The yield was about 10½%.

There was $15 million in reported volume.

The 9 3/8% senior secured first-lien notes due 2029 (Ba2/BB-) jumped 1½ points to reclaim a 101-handle.

The notes were changing hands in the 101¼ to 101¾ context heading into the market close, a source said.

The yield was about 8 7/8%.

There was $12 million in reported volume.

The 7½% senior secured second-lien notes due 2025 (B3/B-) were up 1½ points with the notes closing the day wrapped around 99.

The yield was about 8¼%.

There was $9 million in reported volume.

The notes have largely traded on a 97-handle for the past two weeks.

However, the recent production deal with Boeing lifted the market’s confidence in the company’s ability to handle the debt upon maturity.

Spirit AeroSystems announced a memorandum of understanding with Boeing on Wednesday that included financial help through price increases for the parts supplied through 2026.

While the increases will become reductions in 2026, the agreement is expected to generate $455 million in revenue through 2025.

The agreement also included a liability release, according to an 8-K filing with the Securities and Exchange Commission.

Spirit AeroSystems has been under pressure since August after the company unveiled a series of problems with parts supplied to Boeing which affected Boeing’s production and delivery schedule.

With Boeing accounting for the lion’s share of Spirit AeroSystems’ revenue, there were concerns about the future relationship of the companies, a source said.

Frontier jumps

Frontier Communications’ senior notes also made large gains despite a heavy day for the market with the notes lifted after activist investor Jana Partners revealed its stake in the company and that it would push for a sale.

Frontier’s 6¾% second-lien secured notes due 2029 (Caa2/CCC+) jumped 2 points.

They traded as high as 81½ in intraday activity but stood poised to close the day in the 80¾ to 81¼ context, a source said.

The yield was about 11½%.

There was $26 million in reported volume.

The 8¾% first-lien secured notes due 2030 (B3/B) also bounced about 2 points to close the day in the 96½ to 97 context.

The yield fell to about 9 3/8%.

There was $18 million in reported volume.

Fund flows

High-yield ETFs sustained big daily cash outflows of $606 million on Tuesday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds posted modest positive flows of $15 million on the day, the source said.

The combined funds are tracking $2.1 billion of net outflows on the week that is set to conclude with Wednesday’s close, according to the market source.

Indexes

The KDP High Yield Daily index gained 17 bps to close Wednesday at 48.54 with the yield 8.27%.

The index was down 18 bps on Tuesday and 14 bps on Monday.

The ICE BofAML US High Yield index fell another 36.9 bps with the year-to-date return now 4.373%.

The index was down 38.2 bps on Tuesday and 12.2 bps on Monday.

The CDX High Yield 30 index fell 62 bps to close Wednesday at 99.63.

The index was down 14 bps on Tuesday and 32 bps on Monday.

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