Morning Commentary: New Targa notes trade higher as junk market gains some traction

By Paul A. Harris

Portland, Ore., Jan. 11 – Targa Resources Partners LP became the first issuer to price a junk deal in five weeks of utter silence in the high-yield primary market when it priced an upsized $1.5 billion of senior notes (Ba3/BB) late Thursday.

On Friday both tranches of the highly oversubscribed deal were trading well, according to an investor who participated in the offering.

The 6½% notes due July 2027 were quoted at 101½ bid, 101 7/8 offered at mid-morning Friday. The Targa 6 7/8% notes due January 2029 were 101¾ bid, 102¼ offered.

Both tranches priced at par.

On Thursday morning, Targa kicked off with $750 million of 8.5-year paper (the 6½% notes). Later in the day the company added a $500 million tranche of 10-year notes (the 6 7/8%), which it ultimately upsized to $750 million.

Targa was the right deal to restart a new issue market that spent more than a month in the freezer, sources say.

Demand was huge, the investor said.

All told the $1.5 billion deal played to $8 billion of demand from more than 240 accounts, the investor said – with $5.7 billion of orders in the book for the 2027 notes and $2.3 billion for the 2029 paper.

Primary sets sail in 2019

With the Targa deal topping expectations, the primary market is ready to fire up in 2019, the investor said, but added that the expectation is the build-up will likely be steady rather than precipitous.

“I don't exactly think we're going to be off to the races,” the source remarked.

A pipeline of deals has become visible, whereas a week ago there was no pipeline to speak of, sources say.

On Thursday Prospect News learned that Dun & Bradstreet Corp. is expected to bring $850 million of senior notes as part of a financing that also includes $3.53 billion of bank debt set to launch in late January or early February.

And Energizer Holdings Inc. is expected to bring $600 million senior notes in the same timeframe.

Junk off to big start

The high-yield index, which bled out its meager gains for 2018 in the final weeks of the year, to end the year with negative returns, has come roaring into 2019, the investor said.

The junk index is returning 2.8% in the year to Thursday’s close, the source said, adding that junk has now made back everything it lost in December.

A tamer Fed, as well as an expectation that a trade agreement with China might materialize, and a U.S. economy that is growing, albeit at a very modest pace, helped to stoke the big start to 2019, the investor remarked.

However, it is important to look at the notable beating the market took in December in context, the source added.

Liquidity was thin, and people were withdrawing from the market because of special circumstances, the investor asserted.

ETFs might be forced to raise cash. However, amid otherwise thin liquidity a $100,000 lot of bonds coming offered creates an outsized move in the price of the issue.

And 2019’s strong start notwithstanding, some of late 2018's conspicuously leveraged deals, while improving, still have a row to hoe in order to claw their way back to new issue prices.

The Refinitiv 8¼% senior notes due November 2026 (Caa2/B-/B+) were trading at 95¼ on Friday morning. After starting the fourth quarter of 2018 at 99½, they fell as low as 90 on Dec. 21.

The $1,575,000,000 tranche priced at par on Sept. 18.

Thursday inflows

The new year also brought a sea change in the technical picture of the market, the investor said.

“Cash flows turned on a dime,” the source said, noting that nearly all of the daily cash flows among the dedicated high-yield bond funds have been positive.

They were solid positive on Thursday, the investor added.

High-yield ETFs saw $462 million of inflows on the day.

Asset managers saw $445 million of inflows on Thursday, the source added.

That news trails a Thursday report that the combined funds saw $1.048 billion of net inflows in the week to Wednesday’s close, according to information posted on the internet by Lipper US Fund Flows.

© 2015 Prospect News.
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