Tenneco pre-markets LBO deal; junk secondary closes week with gains; CCCs underperform

By Paul A. Harris and Abigail W. Adams

Portland, Me., July 8 – It was another quiet session for the domestic high-yield primary market with the active forward calendar empty heading into the coming week.

However, market players await a large leveraged buyout deal with Pegasus Merger Co., an affiliate of Apollo Global Management, Inc., pre-marketing $2 billion of secured notes and $1 billion of unsecured notes backing the buyout of Tenneco Inc.

Meanwhile, it was a quiet end to the week in the secondary space with the cash bond market largely flat after a strong rally the previous session.

While the market was largely unchanged on Friday, the cash bond market closed the week with cumulative gains with the CDX index returning to a 99 handle and returns for the ICE BofAML US High Yield index again inside of negative 13%.

While the market ended the first week of the second half of 2022 with gains, there remains a great degree of uncertainty in the market, a source said.

The ability of lower-quality credits to refinance their debt is a growing concern in the market and has taken its toll on CCC credits, which have underperformed even as the broader market rallied.

While the overall market firmed over the past week, Carvana Co.’s 10¼% senior notes due 2030 (Caa2/CCC) did not participate in the rally with the notes pinned near their all-time low.

Carnival Corp.’s senior notes (B2/B) also remained near their lows with the ability of the company to refinance its heavy debt burden an ongoing concern.

BB credits were the outperformers of the week with heavy inflows into the BB index, a source said.

Charter subsidiary CCO Holdings LLC’s junk bonds (B1/BB-) were slightly weaker amid the thin liquidity on Friday after a strong week.

Tenneco offering eyed

Amid low liquidity the high-yield new issue market passed a quiet summer Friday, a market source said.

There is new issue business to be done, and it will likely come in pockets of activity in between periods of high volatility, according to a syndicate banker.

Whether the week ahead will provide such a pocket remains to be seen, the official said.

A stronger-than-expected non-farm payroll report on Friday suggested that the U.S. economy maintains resilience, leaving little doubt that the Federal Reserve Board’s interest rate-setting Federal Open Market Committee will go forward with rate increases that it has been telegraphing, a trader said.

If the Fed means to use higher rates as a means of curbing demand it still has some wood to chop, the source remarked.

Rates that are high and climbing are bad news for prospective high-yield issuers in need of sustainable costs of capital, sources say.

That aside, the past week's sole dollar-denominated deal played to an oversubscribed book, priced tight to talk and traded well, demonstrating that the primary market remains open, given the right circumstances.

The Garden SpinCo Corp. (Neogen Corp.) 8 5/8% senior notes due July 2030 (B2/BB), which came at par in a $350 million issue on Wednesday, were 102 bid, 102½ offered on Friday morning, a trader said.

And there are committed financings in the mergers and acquisitions arena that are expected to nudge issuers and their investment banks into the market, uncertainties notwithstanding.

For instance, Pegasus Merger Co., an affiliate of Apollo Global Management, Inc., has been pre-marketing $2 billion of secured notes and $1 billion of unsecured notes backing the LBO of Tenneco, by Apollo.

The notes, along with $2.4 billion of term loan debt, are expected to come before the end of July, and could come as early as the week ahead, sources say (see related story in this issue).

CCCs under pressure

CCC credits underperformed over the course of the week as the broader market rallied with the ability of lower quality credits to refinance their debt burden a growing concern for investors.

The CCC index continued to trade well wide of the overall market with the yield to worst wrapped around 15% and credit spreads hovering around 1,200.

While credit remains available to higher-quality companies albeit at a steep price, “for mid-quality issuers, credit is now constrained. Lower quality credit is in outright distress,” BofA analysts wrote in a BofA Global Research Report.

The pressure on CCC credits remains evident in the trading level of Carvana’s 10¼% senior notes due 2030.

While the notes notched minor gains over the course of the week, they paled in comparison to the gains made by the broader market.

Carvana’s 10¼% notes continued to trade in the 82½ to 83 context on Friday, a level it has been stuck at since Monday.

Carnival’s senior notes also remained near their all-time lows.

The cruise line operator’s most recently priced 10½% senior notes due 2030 saw nominal improvement with the notes closing Friday wrapped around 83 with the yield north of 14%.

However, the notes have been stuck in the 82 to 83 range for the past week despite improvement in the broader market.

While the steep cost of financing has pressured CCC credits, constraints in credit may result in a more dovish approach from the Federal Reserve.

While the Federal Reserve’s June meeting minute notes indicated a continued hawkish approach to curb inflation, the current credit environment may require the central bank to revise its path forward, according to the BofA report.

However, a 75 bps increase is still expected at the Federal Reserve’s July 26 to 27 meeting.

Charter weakens

Following a strong weak, Charter subsidiary CCO Holdings’ senior notes were weaker amid thin liquidity on Friday.

CCO’s 4½% senior notes due 2030 returned to an 86-handle. The notes were changing hands in the 86¼ to 86¾ context heading into the market close.

The notes traded up to an 87-handle on Thursday.

While weaker on Friday, the 4½% notes still logged a 3-point gain on the week.

The company’s 4¼% senior notes due 2034 were off about ½ point in light volume and stood poised to close Friday in the 80 to 80½ context.

While down on Friday, the notes still logged a 2½-point gain on the week.

The paper has been well bid throughout the week with higher quality paper in demand, a source said.

$475 million Thursday outflows

The dedicated high-yield bond funds sustained $475 million of net daily outflows on Thursday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds saw $392 million of outflows on the day.

High-yield ETFs sustained $83 million of outflows on Thursday, the source said.

News of Thursday's daily flows trails a Thursday report that the combined funds saw $889 million of net inflows for the week to the Wednesday, July 6 close, according to Refinitiv Lipper.

That weekly inflow followed three consecutive large weekly outflows totaling $9.9 billion, according to the market source.

Indexes

The KDP High Yield Daily index gained 7 points to close Friday at 55.13 with the yield now 7.41%.

The index gained 34 points on Thursday, 20 points on Wednesday and was flat on Tuesday.

The index posted a cumulative gain of 61 points on the week.

The ICE BofAML US High Yield index added 20.5 basis points with the year-to-date return now negative 12.671%.

The index rose 68.5 bps on Thursday, 23.3 bps on Wednesday and 7 bps on Tuesday.

The index posted a cumulative gain of 119.3 bps on the week.

The CDX High Yield 30 index rose 34 bps to close Friday at 99.25.

The index gained 119 bps on Thursday, 23 bps on Wednesday and 50 bps on Tuesday.

The index posted a cumulative gain of 226 bps on the week.

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