Wynn Macao, Grace price; PG&E buzz continues; Delta, Level 3 rebound; Hertz in focus

By Paul A. Harris and Abigail W. Adams

Portland, Me., June 12 – The domestic high-yield primary market rounded out an active week with two deals pricing.

Wynn Macau Ltd. priced a $750 million issue of 5.5-year senior notes (existing B1/existing BB-/BB+).

And W. R. Grace & Co. priced an upsized $750 million issue of seven-year senior notes (existing Ba3/existing BB-/BB+).

While PG&E Corp. did not tap the market in the June 8 week as expected, buzz continues about the large capital raise on the horizon.

Meanwhile, the secondary space was volatile on Friday but closed the day with gains, retracing some of its losses from Thursday’s sell-off.

However, trading volume remained light with many still on the sidelines.

The rally in the high-yield market showed signs of fading over the past week with credit spreads widening almost 100 basis points from recent tights.

While volume was light, MGM China Holdings Ltd.’s new 5¼% senior notes due 2025 (Ba3/BB-) were trading with a premium in the aftermarket.

Delta Air Lines Inc.’s new 7 3/8% senior notes due 2026 (Baa3/BB/BB+) remained active with the notes trading off their lows.

CenturyLink Inc. subsidiary Level 3 Financing Inc.’s 4¼% senior notes due 2028 (Ba3/BB/BB) also improved with the notes closing the session above par.

Hertz Corp.’s senior notes were in focus on Friday with the bankrupt car rental agency’s capital structure jumping several points on a potential $1 billion capital raise through a share sale.

Friday’s session

An active Friday session in the new issue market saw Wynn Macau price a $750 million issue of 5.5-year senior notes at par to yield 5½%.

Pricing remained largely unchanged over the two days during which the deal was in the market.

The yield printed in the middle of yield talk in the 5½% area, talk that came in line with initial guidance in the mid 5% area.

The deal was heard to be playing to $1.4 billion of orders early Friday morning, a market source said.

And W. R. Grace & Co. priced an upsized $750 million issue of seven-year senior notes at par to yield 4 7/8%.

The issue size increased from $550 million.

The yield printed in the middle of the 4¾% to 5% yield talk.

PG&E buzz continues

Volatility took hold of the capital markets late in the June 8 week, however it failed to meaningfully deter issuers, a trader said on Friday.

The new issue market ought to remain busy in the week ahead, sources say.

Although it failed to materialize during the past week, as it had been forecasted to do, the market remains keenly focused on new debt in the vicinity of $11 billion from PG&E Corp., sources said on Friday.

That amount of debt is expected to be spread across investment grade bond-, high yield bond- and leverage loan tranches.

J.P. Morgan Securities LLC is expected to lead the high-yield and term loan tranches, and BofA Securities Inc. is expected to lead the investment-grade bonds, sources say.

“Anyone who invests in fixed income is going to be in it,” a junk bond trader said on Friday.

The company plans to hold global fixed income investor calls on Monday for an investment-grade registered benchmark offering of first mortgage bonds (see related story in this issue).

Demand for the high-yield tranche, in whatever size and form it materializes, is going to be huge, the trader asserted.

“It's expected to be big and liquid, and people are also expecting it to be cheap because the company is emerging from bankruptcy.”

Speculation on what interest rate a new PG&E junk bond might bear has circulated the market throughout the week, sources say.

The range has been anywhere from as low as 6% to as much as 7½%.

Accounts have already expressed interest in 10-year junk at 6% to 7%, a New York-based high-yield bond trader said earlier in the week.

If it comes cheap and stays cheap it will be bucking a trend in which deals are introduced with initial guidance representing nice concessions to existing debt, whereupon issuers and their underwriters, most often factoring in heavy demand, screw down pricing tighter and tighter, a market source observed on Friday.

For example, MGM China Holdings Ltd., the past week's other Macau deal in which U.S. high-yield accounts were said to be heavily involved, initially guided its $500 million offering of senior notes due 2025 (Ba3/BB-) in the high 5% area, the source recounted.

When formal price talk came out the rate had been cleaved to the 5 5/8% area.

But when the dust settled the new MGM China five-year paper came bearing interest at only 5¼%.

The widening

The rally in the high-yield market waned over the past week with credit spreads widening from their recent tights.

“The severe market melt-up that has pushed HY spreads to levels implying the end of this default cycle has shown the signs of fatigue in the past few sessions,” analysts wrote in a BofA Global Research report.

Credit spreads widened almost 100 bps through Thursday’s close, a market source said, with spreads returning to the 650 range a little more than one week after they hit 550 bps.

There appears to be a dislocation in the market with the high-yield index never before trading at 550 bps at this phase in the credit cycle, according to the BofA Global Research report.

“One of these sides – the pricing of risk or the assessment of recover – must be wrong,” the report stated.

MGM China trades up

While volume was light, MGM China’s 5¼% senior notes due 2025 were trading with a premium in the aftermarket on Friday.

The notes stood poised to close Friday at par 5/8.

MGM China priced a $500 million issue of the 5¼% notes at par on Thursday.

Pricing came tighter than talk for a yield in the 5 5/8% area.

The deal was heard to have played to massive demand with more than $4.3 billion in orders.

Delta rebounds

Delta’s 7 3/8% senior notes due 2026 traded off their lows on Friday.

The notes gained more than 2 points to top par.

They were changing hands in the 99¼ to par ¼ context during Friday’s session with the final prints between par and par ¼, a source said.

However, volume was light with about $20 million on the tape heading into the close.

The notes rebounded alongside the broader market after Thursday’s sell-off drove the notes as low as 97½.

Delta priced a $1.25 billion issue of the 7 3/8% notes at 99.986 on Wednesday.

Level 3 tops par

Level 3’s 4¼% senior notes due 2028 also improved on Friday.

The notes closed the day above par after trading on a 99-handle during Thursday’s session.

The 4¼% notes were changing hands in the 99¾ to par ½ context and stood poised to close Friday at par ¼, sources said.

The notes had more than $21 million in reported volume heading into the market close.

Level 3 priced an upsized $1.2 billion issue of the 4¼% notes at par on Wednesday.

Hertz in focus

Hertz’s junk bonds were in focus on Friday with the capital structure jumping several points after the company received bankruptcy court approval to sell up to $1 billion in shares through at-the-market transactions.

Hertz’s 6¼% senior notes due 2022 were among the most actively traded issues in the secondary space.

The notes jumped 9 points to trade at 45¼.

There was more than $44 million on the tape by the late afternoon.

Hertz’s 6% notes due 2028 were up 8¼ points to 44 with more than $10.5 million on the tape, according to a market source.

Its 5½% notes due 2024 were up 6¼ points to 42¼ with more than $13 million in reported volume.

Hertz requested the share sale to raise capital for the benefit of its debtors’ estates, Prospect News reported.

Hertz stock has experienced a head-scratching rally over the past week.

Stock went from 56 cents a share after the company filed for bankruptcy in late May to a closing price of $5.53 on June 8. Stock closed June 12 at $2.83.

The run-up in stock was attributed to buying from traders using the online trading platform Robinhood.

Robinhood accounts that owned Hertz shares quadrupled from 45,000 accounts to 160,000 accounts post-bankruptcy, Business Insider reported.

$120 million Thursday inflows

The dedicated high-yield bond funds had $120 million of daily net inflows on Thursday, the most recent session for which data was available at press time, according to a market source.

Actively managed funds saw a hefty $760 million of inflows on the day.

However high-yield ETFs were deeply negative on Thursday, sustaining $640 million of outflows on the day, the source said.

News of Thursday's daily fund flows follows a Thursday report that the combined funds had $5.122 billion of net inflows in the week to the Wednesday, June 10 close, according to Lipper US Fund Flows.

It was the fifth highest weekly inflow on record, the market source said, and noted that all five of the largest weekly inflows on record – and six of the seven largest – have been seen during the past 11 weeks.

The largest weekly inflow on record was the $7.66 billion inflow for the week to April 15.

Indexes gain

Indexes saw nominal gains on Friday, recouping some losses from Thursday’s sell-off.

The KDP High Yield Daily index gained 3 bps to close Friday at 65.89 with the yield now 6.33%. The index dropped 88 bps on Thursday, 21 bps on Wednesday and 17 bps on Tuesday after a 32 bps gain on Monday.

The index posted a cumulative loss of 91 bps on the week.

The ICE BofAML US High Yield index gained 27.5 bps with the year-to-date return now negative 4.043%. The index dropped 143.1 on Thursday, was down 24.3 bps on Wednesday and 34.6 bps on Tuesday.

The CDX High Yield 30 index gained 74 bps to close Friday at 100.57. The index plummeted 231 bps on Thursday after a 50 bps gain on Wednesday.

Cristal Cody contributed to this market commentary

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