In junk bonds, Talen in focus on potential bankruptcy filing; Novolex improves; Yum! weakens

By Paul A. Harris and Abigail W. Adams

Portland, Me., April 1 – It was a quiet to start to the quarter in the high-yield primary market with no deals pricing and no deals announced.

The first quarter of 2022 was the lightest volume quarter for new issuance in half a decade. However, a robust calendar may be on its way, a source said.

The secondary space opened the new quarter just as quietly with the cash bond market unchanged in a session with light trading activity.

New and recent issues and topical news were the drivers of trading activity in the space.

Talen Energy Supply LLC’s senior notes dominated the tape on Friday with the notes mixed on news the company was trying to secure debtor-in-possession financing for a bankruptcy filing.

Clydesdale Acquisition Holdings, Inc.’s (Novolex) recently priced tranches remained active with the unsecured notes improving during Friday’s session.

However, Yum! Brands, Inc.’s 5 3/8% senior notes due 2032 (Ba3/BB) gave back their gains with the notes again dropping below par on Friday.

Primary eyed

On the heels of the 2022 first quarter which had the most anemic amount of first-quarter issuance in over half a decade ($45.4 billion), investors are hoping for a meaningful pickup in the active forward calendar, market sources say.

Average weekly issuance through the first quarter of 2022 ended up at $3.8 billion.

By comparison, the record-setting first quarter of 2021 saw $10.2 billion of issuance per week.

In outlook reports, heading into 2022, dealers made issuance projections which, at the outset of the year's second quarter, appear considerably wide of the mark:

• JPMorgan: $425 billion;

• Morgan Stanley: $405 billion to $435 billion;

• Citigroup: $400 billion; and

• Deutsche Bank: $400 billion.

During the past week BofA lowered its 2022 issuance estimate by $55 billion due to rising interest rates and geopolitical volatility, according to a market source.

A vigorous calendar may not be right around the corner, sources say.

When it comes to debt financing commitments in the mergers and acquisitions sphere, the banks are being judicious.

Should a lengthy freeze take hold in the leverage markets the dealers won't be situated beneath a $300 billion avalanche of hung bridge loans, as occurred during the 2007-2008 period, sources say.

The recent past provided a cautionary tale when ongoing market turbulence prompted SPX Flow, Inc. to price a $500 million issue of 8¾% eight-senior senior notes (Caa2/CCC+) at a deep discount on March 18: 95.183 to yield 9 5/8%.

A partially syndicated bridge loan backing the bonds was capped at 8¾%, leaving the dealer and the bridge participants on the hook to cover the discount, sources say.

As to new issue supply driven by refinancing, the pipeline is also comparatively modest, according to a sellside source.

About $57 billion of junk-rated, dollar-denominated bonds are callable through the end of 2022, the source said on Friday.

Talen in focus

Talen Energy’s senior notes dominated activity in the secondary space on Friday with the notes mixed following news the company was considering a bankruptcy filing.

The power producer’s 7¼% senior secured notes due 2027 (B1/B) were up about ½ point in active trading with the notes closing the day at 93¾, according to a market source.

There was $31 million in reported volume.

The 6 5/8% senior secured notes due 2028 (B1/B) were slightly softer to close the day at 93. There was $30 million in reported volume.

The 6½% notes due 2025 (Caa2/CCC) climbed 1 point to close the day at 23½ with $25 million in reported volume.

However, the 10½% senior notes due 2026 were down another 2 points to close the day at 23 3/8 with about $13 million in reported volume.

Talen’s capital structure was active after news broke the power producer was in talks with lenders over a debtor-in-possession loan to help fund a bankruptcy filing, a source said.

The company’s unsecured notes nosedived on Thursday with a large seller in the market.

While the 6½% notes due 2025 were improved on Friday they slid about 6 points the previous session.

The 10½% notes were also under pressure in active trading on Thursday with the notes closing the day down 4 points.

Rumors were circulating about a bankruptcy filing prior to Friday’s news.

Talen’s bankruptcy filing would be an anomaly for the high-yield market with default rates at historic lows, a source said.

Novolex improves

Novolex’s unsecured tranche was improved in active trading on Friday after falling largely flat since breaking for trade.

The 8¾% senior notes due 2030 (Caa2/CCC+) rose about ½ point to a 94-handle.

The notes were changing hands in a tight range between 94 3/8 to 94 5/8 during Friday’s session, a source said.

They were previously marked at 93½ bid, 94½ offered with the majority of prints wrapped around 94.

While Novolex’s unsecured tranche improved, the secured tranche was largely unchanged although they held onto their large premium in active trading.

The 6 5/8% senior secured sustainability-linked notes due 2029 (B2/B) continued to trade on a 101-handle with the majority of prints in the 101¼ to 101½ context.

Novolex priced a $500 million tranche of the 6 5/8% notes at par and a $1.11 billion tranche of the 8¾% notes at 93.87 to yield 9 7/8% on Wednesday.

Yum! weakens

Yum!’s 5 3/8% senior notes due 2032 gave back their gains and again dipped below par during Friday’s session.

The 5 3/8% notes were changing hands in the 99¾ to par context heading into the market close, according to a market source.

While the notes closed last week on a 99-handle, they improved alongside the broader market and were trading at a premium to their issue price throughout the week.

The notes closed Thursday in the par 3/8 to par 5/8 context.

Yum! priced a $1 billion issue of the 5 3/8% notes at par on March 24.

Their lackluster secondary performance was due to their large upsize, with the deal initially announced as a $500 million offering, and tight pricing, a source said.

Inflows continue

The cash flows of the dedicated high-yield bond funds, having spent much of 2022 wallowing deep in negative territory, continued a streak of solid inflows that commenced in the early part of the past week, according to market sources.

The funds saw $293 million of daily net inflows on Thursday.

Actively managed high-yield funds saw $154 million of inflows on the day.

High-yield ETFs saw $139 million of inflows on Thursday.

News of Thursday's daily inflows followed a Thursday afternoon report that the combined funds saw $1.24 billion of net inflows in the week to the Wednesday, March 30 close, according to Refinitiv Lipper.

That inflow came on the heels of 11 consecutive weekly outflows, nine of which were greater than $1 billion, a market source recounted.

Recent positive flows notwithstanding, the cash flows of the junk funds remain deeply in the red, year to date, at negative-$25.3 billion, the source added.

Indexes

The KDP High Yield Daily index fell 39 points to close Friday at 61.24 with the yield now 5.52%.

The index gained 7 points on Thursday, 14 points on Wednesday and 40 points on Tuesday after shaving off 2 basis points on Monday.

The index posted a cumulative gain of 20 points on the week.

The CDX High Yield 30 index gained 7 bps to close Friday at 105.45.

The index fell 17 bps on Thursday, was down 27 bps on Wednesday, jumped 87 bps on Tuesday, and fell 35 bps on Monday.

The index posted a cumulative gain of 15 bps on the week.

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