Domestic primary pipeline thin, issuance lowest since 2010; Tronox gains, Frontdoor drops post-earnings

By Paul A. Harris and Abigail W. Adams

Portland, Me., Nov. 6 – The domestic primary market saw another quiet session Tuesday with the active forward calendar unchanged with $2.11 billion in two deals in the market.

While the pipeline for new deals is thin heading into the final months of the year, Forest City Realty Trust Inc. and Denbury Resources Inc. are expected to surface with offerings.

New deal activity at the close of October was the lowest it has been in eight years, according to an analysis of Prospect News data.

While the European primary market has €2.23 billion in three deals in the market, Victoria plc withdrew its €450 million offering of five-year senior secured notes after failing to obtain favorable pricing.

With no new paper entering the secondary space on Tuesday, trading activity continued to focus on earnings results with some names receiving a boost and others seeing a marked declined.

Frontdoor Inc.’s 6¾% senior notes due 2026 and Rayonier Advanced Materials’ 5½% senior notes due 2024 were under pressure after their earnings report.

Tronox Inc.’s 6½% senior notes due 2026 saw gains. Gray Television Inc.’s newly priced 7% senior notes due May 2027 (B3/B+/BB-) continued to gain in the secondary space with the notes buoyed by a strong quarter.

Meanwhile, while the overall market continued to show signs of improvement, crude oil futures extended their slide for the seventh consecutive session.

California Resources Corp.’s 8% senior secured second-lien notes due December 2022 again saw high volume activity with the notes losing ground.

Quiet primary

The new issue market remained quiet on Tuesday.

HC2 Holdings, Inc. remains in the market with a $535 million offering of five-year senior secured notes (Caa1/B-), a deal held in the market over the past weekend.

Word in the market is that the deal has been discussed with a 10% coupon, discounted by three to five points, to yield 11½% to 12%, the investor said, adding that covenant changes are expected.

The perception in the market is that the deal is coming from a highly motivated issuer and will price, a trader said.

Meanwhile, RegionalCare Hospital Partners Holdings, Inc. and LifePoint Health, Inc. is marketing $1,575,000,000 of eight-year senior notes (Caa1/CCC+) on a Tuesday through Thursday roadshow.

Initial guidance on the merger financing is in the 9¼% area, sources say.

The word in the market is the deal is attracting big orders at that level, an investor said. However, Tenet Healthcare Corp.’s earnings could register an impact on the demand, the investor said.

The Dallas-based health care services company posted earnings that topped analysts' projections late Monday.

However, full-year guidance came in below the Street's expectations, causing the company's bonds and stocks to trade lower.

The THC Escrow Corp. 8 1/8% senior notes due April 2022 were 1¼ points lower, post-earnings, at 103¾ bid, the source said.

The longer-maturity THC Escrow Corp. III 5 1/8% senior secured second-lien notes due May 2025 were a point lower at 95½ bid, the source added.

A pipeline, but thin

There is a thin pipeline of deals heading into year end, sources say.

It includes Forest City Realty Trust, which is expected to use high yield bond issuance to address a $2.6 billion bridge loan backing its acquisition by Brookfield Asset Management Inc.

The deal is expected to close in the fourth quarter.

Also, Denbury Resources is expected to refinance a $400 million senior secured second lien bridge loan backing its acquisition of Penn Virginia Corp. with a high yield bond.

JP Morgan Securities LLC is expected to lead the deal which could be near at hand, a bond investor said.

In mid-August, Denbury priced a $450 million issue of 7½% second lien bonds due February 2024.

Those bonds have been trading well, according to a sellside source who spotted them at 97½ bid, to yield 8% and change on Tuesday.

Elsewhere, a debt capital markets banker professed visibility on three deals, a mix of new money and refinancing, expected to kick off during the run-up to 2019.

Anemic issuance

At the end of October, the high-yield new issue market was tracking the lowest amount of yearly issuance going back through 2010, according to an analysis of Prospect News data.

The $165.57 billion of 2018 issuance to the Oct. 31 close was 27.4% lower than the average issuance for years to Octobers' ends going back through 2010.

The second lowest year to the end of October, in that period, came in 2011: $187.01, almost $20 billion above the present year.

The biggest year to the end of October came in 2013: $277.53 billion, nearly $112 billion more than the present year.

Political uncertainty – including mid-term elections and trade encumbrances emanating from Washington, D.C. – along with interest rate uncertainty are chief among factors choking off new issue activity, sources say.

From a purely economic standpoint, the outlook for a supportive backdrop for the primary market is not exactly rosy, according to one investment banker's formulation.

Either fears about the economy are overblown, in which case the Fed keeps raising rates, or there is a more severe correction.

Neither is good for the high yield primary market, the banker said.

Europe remains active

With the dollar-denominated market sidelined by political jitters and apprehensions concerning rates, the European new issue market continues to operate.

Verisure is in the market with €1,012,000,000 of debt coming in the form of a bank loan and high-yield notes, which it is bringing in order to refinance debt and fund a dividend.

International Design Group SpA started a roadshow on Monday for a €720 million two-part offering of seven-year senior secured notes backing the buyout of the company.

And Intertrust Group BV started a roadshow on Monday for a €500 million offering of seven-year senior notes, in a debt refinancing effort.

Victoria withdraws

Meanwhile, Victoria plc withdrew a €450 million offering of five-year senior secured notes (BB-/expected BB) after it failed to get favorable pricing.

Initial price talk of 5½% to 5¾% circulated on Monday.

The Kidderminster, England-based flooring company planned to use the proceeds, together with cash on hand, to repay the bridge facility used to fund its acquisition of Spain-based tile manufacturer Ceramica Saloni.

Frontdoor under pressure

Frontdoor’s 6¾% senior notes due 2026 were under pressure on Tuesday after the company released its first earnings report since its spin-off from ServiceMaster.

The notes shaved off about 3 points in active trading on Tuesday, a market source said. They traded as low as 97¾ but stood poised to close the day at 99½.

Prior to the earnings announcement, the notes were trading around 102 5/8, according to Trace data.

While Frontdoor’s revenue of $377 million beat expectations of $370 million, the company reported a narrow miss on its bottom line results.

The home service plan company reported earnings per share of 58 cents versus analyst expectations for earnings per share of 59 cents.

Frontdoor reported adjusted EBITDA of $86 million, a 10% decline year-over-year.

The company also reduced its EBITDA forecast for 2018 to $215 million to $225 million from $245 million to $255 million.

Rayonier drops

Rayonier’s 5½% senior notes due 2024 dropped 1 5/8 points after a third-quarter earnings miss on Tuesday.

The 5½% notes were seen trading down to 92 in the late afternoon, according to a market source.

The chemical company reported revenue of $544 million versus analyst expectations for revenue of $561 million.

The company reported EBITDA of $99 million versus analyst expectations of $105 million.

Tronox climbs

Tronox’s 6½% senior notes due 2026 were making gains after the chemical company involved in titanium products posted third quarter results.

The notes climbed 1½ points to 93½ by the late afternoon, a market source said.

Tronox’s earnings were largely in line with estimates, according to a market source. The company reported revenue of $456 million and EBITDA of $128 million.

While not an earnings beat, Tronox performed better than its competitors who have largely reported earnings misses.

Gray gains

Gray’s newly priced 7% senior notes due 2027 continued to make gains in the secondary space with the notes receiving a boost after the television broadcasting company reported an earnings beat.

The 7% notes were up another 5/8 point to close Tuesday at 102, a market source said.

Gray reported third quarter revenue of $279 million versus an expected $276 million and EBITDA of $125 million versus the consensus estimate of $120 million.

The 7% notes have steadily risen since Gray priced the $750 million issue at par on Nov. 1.

California Resources slides

California Resources’ 8% senior notes due 2022 were trading down in high-volume activity on Tuesday as crude oil futures dropped by more than $1.

The 8% notes slid ½ point to close the day at 89½, according to a market source.

The barrel price of WTI crude oil was down more than $1 in intra-day trading but settled at $62.21, a decrease of 89 cents, or 1.4%.

After a steep sell-off in October on concerns of oversupply, crude oil futures continued to drop on Tuesday on news eight countries were granted waivers to continue oil imports from Iran.

Monday outflows

The daily cash flows of the dedicated high-yield bond funds were negative on Monday, a trader said.

High-yield ETFs sustained $78 million of outflows on the day.

Actively managed high-yield funds saw $65 million of outflows on Monday, the source added.

Those negative daily flows notwithstanding, the combined funds are tracking $250 million of inflows for the week which began at the Thursday, Nov. 1 open.

Interestingly, the dedicated bank loan funds are tracking $60 million of outflows during the same period, the source said, adding that the loan funds sustained $55 million of outflows on Monday.

Indexes gain

Indexes continued to post gains on Tuesday as the secondary space continued to firm after a steep decline the last full week of October.

The KDP High Yield Daily index was up 9 basis points to close Tuesday at 69.27 with the yield now 6.28%.

The index was up 8 bps on Monday after a 13 bps drop on the week last week. The index dropped 60 bps during the Oct.22 week.

The ICE BofAML US High Yield index was up 11.4 bps on Tuesday with the year-to-date return now 1.178%. The index gained 5.8 bps on Monday.

The index gained 24.4 bps on the week last week after a 74.5 bps slide the week before.

The CDX High Yield 30 index gained 18 bps to close Tuesday at 106.09. The index was up 23 bps on Monday after an 89 bps gain on the week last week. The index dropped 92 bps the week before.

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