Secondary rebounds from March lows; U.S. Steel, PPD, Teleflex trade at steep premiums

By Abigail W. Adams

Portland, Me., May 22 – Trailing a four-day period in which the high-yield primary market saw $9.7 billion of junk-rated, dollar-denominated issuance, the new issue bourse went quiet ahead of Friday's early close.

However, the post-holiday week is expected to be active provided market conditions hold, sources said.

While volume was light during Friday’s abbreviated session, the secondary space closed out the week on firm footing, sources said.

The secondary market continued to rebound from its March lows with spreads reaching new post-March tights over the past week, according to a BofA Global Research report.

New paper continued to dominate activity in the secondary space with United States Steel Corp.’s 12% senior notes due 2025 (B2/B+), Pharmaceutical Product Development’s 5% senior notes due 2028 (B2/B), and Teleflex Inc.’s 4¼% senior notes due 2028 (Ba3/BB) trading with steep premiums in high-volume activity.

While volume was light, Clark Equipment Co.’s new 5 7/8% senior notes due 2025 (Ba3/BB+), Northwest Fiber/Ziply Fiber’s 10¾% senior notes due 2028 (Caa1/CCC), and Cooper-Standard Automotive Inc.’s 13% senior notes due 2024 (B1/B-) were also bid up in the aftermarket.

Quiet Friday

Trailing a four-day period in which the high-yield primary market had $9.7 billion of junk-rated, dollar-denominated issuance, the new issue bourse went quiet ahead of Friday's early close which gave way to the extended Memorial Day holiday weekend in the United States.

The week ahead should remain active, with respect to new issues, when the market resumes on Tuesday, a syndicate banker said.

As always, but especially now, the level of new issue activity will be dependent upon market conditions.

Beginning in early April, the high-yield primary became open to issuers that had been rendered desperate because of their exposure to the economic fallout of the coronavirus pandemic.

Those issuers appeared as distressed investment-grade credits, crossovers and fallen angels.

A lot of the issuers in that category have now cleared the market, and might be replaced by the more familiar opportunistic issuers, usually well-known to investors, coming to address maturities or to term out higher rate debt, the syndicate banker said.

“I'm not sure we're going to continue to see the $10 billion to $12 billion weeks that we have been seeing, but the new issue market should remain active,” the official added.

And despite the pandemic and its catastrophic impacts on the global economy, a mergers and acquisitions pipeline is heard to be taking shape, in some cases to effect consolidations that will hopefully enable companies to better operate on the pandemic landscape.

The badly mauled energy sector, already battered before the pandemic took hold, is a candidate ripe for such activity, the banker said.

Memorial Day typically signals the onset of summer in the junk bond market, whereupon a quieter pace of issuance sometimes takes hold.

With prices soaring in the secondary market, the post-Memorial Day 2020 period might not be quite as quiet as summers in the junk bond market of yore tended to be, a trader said on Friday morning.

Add to the mix the fact that the asset class has lately been subjected to an epochal torrent of inflowing cash, the source added.

The rebound

The secondary space continued to rebound from its March lows over the past week.

Credit spreads tightened another 45 basis points to 715 bps, which is the midpoint between the March wides and the January tights, according to a BofA Global Research report.

“Some of these bonds are trading at levels like nothing ever happened,” a source said. “It’s all because of the Federal Reserve.”

U.S. Steel in focus

U.S. Steel’s new 12% senior notes due 2025 dominated activity in the secondary space with the notes trading several points above their deeply discounted issue price.

The notes were wrapped around 99 on Friday, a source said.

With more than $105 million in reported volume heading into the early close, the bonds were the most actively traded issue during Friday’s session.

Sources attributed the strong performance of the notes to their high yield, which was about 12.25% at their current level.

However, the Pittsburgh-based steel manufacturer has a high cash burn rate, a source said.

The company has also stated it intends to complete its acquisition of Big River Steel, which it is currently a partial owner of.

However, the latest offering maxes out the company’s secured debt capacity. “I’m not sure where that leaves them going forward,” the source said.

U.S. Steel priced an upsized $1 billion issue of 12% notes at 94.665 to yield 13½%.

The issue size increased from $700 million.

The coupon came on top of coupon talk.

The yield came in the middle of yield talk in the 13½% area. The issue price came cheap to price talk of approximately 95.

PDD trades up

New paper from Pharmaceutical Product Development, issuing as Jaguar Holding Co. II and PPD Development, LP, was also trading with a steep premium in high-volume activity in the secondary space.

The newly priced 5% notes due 2028 traded up to a 102 handle and were seen changing hands at 102 3/8 heading into the market close.

The bonds had more than $52 million in reported volume.

PDD priced an upsized $1.2 billion two-tranche offering on Thursday.

The deal included a $700 million tranche of the 5% notes and a $500 million tranche of 4 5/8% notes due 2025, both which priced at par.

Pricing of the 5% notes came at the tight end of the 5% to 5¼% yield talk.

The five-year tranche was added subsequent to the deal announcement.

The deal was heavily oversubscribed and played to more than $3 billion in demand, a source said.

The company is working towards a Covid-19 vaccine. “It’s a good business,” a source said. “Especially now.”

Teleflex gains

Teleflex’s new 4¼% senior notes due 2028 were also well above their issue price in the aftermarket.

The notes were changing hands at 101 7/8 heading into the market close with more than $33 million in reported volume, according to a market source.

They saw a strong break after pricing on Thursday and were marked at par ¾ bid, 101½ offered shortly after freeing for trade.

Teleflex priced a $500 million issue of the 4¼% notes at par on Thursday.

The yield printed tighter than talk for a yield talk in the 4½% area. Initial guidance was in the high 4% area.

Light volume

While trading activity was muted in the other deals to price during Thursday’s session, they were all bid well above their issue prices.

Clark Equipment’s 5 7/8% notes due 2025 were marked at 101¾ bid on Friday.

Clark priced a $300 million issue of the 5 7/8% notes at par on Thursday.

The yield came tighter than the 6% to 6¼% price talk.

Northwest Fiber/Ziply Fiber’s 10¾% senior notes due 2028 skyrocketed above their discounted issue price.

The notes traded as high as 105 on Friday although volume was light.

Northwest Fiber priced a $250 million of the 10¾% at 98 to yield 11.131% on Thursday with $25 million done as a private placement.

The coupon and issue price came on top of price talk.

Cooper-Standard Automotive’s 13% senior notes due 2024 were also well above their discounted issue price.

The notes were seen at 101¾ bid on Friday. However, there was almost no trading of the notes, a source said.

With the substantial yield, holders were probably hanging on to the notes, a source said.

Cooper-Standard priced a $250 million issue of the 13% notes at 98 to yield 13.664%.

The coupon and price came on top of talk.

Massive Thursday inflows

The dedicated high-yield bond funds had a massive $2.23 billion of net daily inflows on Thursday, according to a market source.

High-yield ETFs had $1.13 billion of inflows on the day.

Actively managed high-yield funds saw $1.1 billion of inflows on Thursday, the source said.

News of Thursday's daily flows follows a Thursday report that the combined high-yield funds saw $1.637 billion of net inflows for the week to the Wednesday, May 20 close, according to Lipper US Fund Flows.

That extends inflows for the past eight weeks to $29.3 billion, easily erasing the record five-week $19.2 billion hemorrhage that preceded it, the source said.

The combined high-yield funds have seen $8.9 billion of year-to-date net inflows, as of Thursday's close, the market sources said.

Indexes mixed

Indexes remained mixed on Friday although all posted cumulative gains on the week.

The KDP High Yield Daily index gained 14 bps to close Friday at 63.66 with the yield now 7.23%.

The index was up 15 bps on Thursday, 33 bps on Wednesday, 22 bps on Tuesday and 45 bps on Monday.

The ICE BofAML US High Yield index was up 12.4 bps with the year-to-date return now negative 7.401%.

The index gained 33 bps on Thursday, 69.1 bps on Wednesday, was down 28 bps on Tuesday and jumped 103.5 bps on Monday.

The index saw a cumulative gain of 190 bps on the week.

The CDX High Yield 30 index shaved off 25 bps to close Friday at 94.94. The index dropped 20 bps on Thursday, gained 133 bps on Wednesday, shaved off 20 bps on Tuesday and jumped 166 bps on Monday.

The index saw a cumulative gain of 234 bps on the week.

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