Lithia, Encompass, Allegiant price; Acadia, Spirit AeroSystems at a premium; fallen angels active

By Paul A. Harris and Abigail W. Adams

Portland, Me., Sept. 30 – The junk bond primary market was active again on Wednesday with Lithia Motors, Inc., Encompass Health Corp. and Allegiant Travel Co. pricing deals as the secondary space continued to firm following last week’s sell-off.

However, while the secondary market was strong at the start of the session, it grew softer as the session progressed, a source said.

New issues and fallen angels remained the focus of trading activity.

Spirit AeroSystems, Inc.’s newly priced 5½% senior secured first-lien notes due 2025 (Ba3/BB-) dominated the tape with the notes trading with a healthy premium.

While less active, Acadia Healthcare Co., Inc.’s 5% senior notes due 2029 (B3/B-) traded to a higher level with the notes rising to a 101-handle.

Outside of new issues, several fallen angels were active as the notes moved from investment-grade to high-yield hands.

Howmet Aerospace Inc.’s, Ovintiv Inc.’s and Nordstrom Inc.’s senior notes have been major volume movers over the past few sessions.

While the notes were previously trading sideways, Nordstrom’s senior notes were losing ground on Wednesday.

Primary active

Lithia Motors and Encompass Health led new business in the primary on Wednesday.

Lithia Motors, Inc. priced an upsized $550 million (from $500 million) issue of 4 3/8% senior notes due 2031 (Ba2/BB) tight to talk.

The deal had been playing to a decent amount of reverse inquiry, with around $1.5 billion of orders in the book early Wednesday afternoon.

Meanwhile Encompass Health Corp. priced a $400 million issue of 4 5/8% 10.5-year senior notes (B1/B+) at the tight end of yield talk, a deal that was four-times oversubscribed (see related stories in this issue).

Looking to the Thursday session Frontier Communications Corp. will possibly price its $1.15 billion offering of seven-year first-lien senior secured notes (B+/BB+), a trader said.

The deal, which will help to fund the telecom's exit from bankruptcy, was heard to be playing to a $3.1 billion order book on Wednesday afternoon.

As the market awaits official price talk, early guidance is in the mid-6% area.

Spirit AeroSystems at a premium

Spirit AeroSystems’ 5½% senior secured first-lien notes due 2025 were in focus on Wednesday and trading with a healthy premium.

The notes were marked at par ¼ bid, par ¾ offered, a source said.

The bonds had $64 million in reported volume during Wednesday’s session.

While above par, the notes failed to reach the same heights as other recent deals, despite a better credit rating and a heavily oversubscribed offering.

While demand for new issues remains strong, the lack of price appreciation of Spirit AeroSystems’ new notes may be due to the company’s sector, a source said.

The company is an aerospace parts supplier with commercial air an end market.

“People are trying to stay away from anything air related,” the source said.

Spirit AeroSystems priced an upsized $500 million, from $400 million, issue of the 5½% notes at par on Tuesday.

Pricing came tighter than talk for a yield in the 5¾% area. Initial guidance was in the 6% area.

The deal was heard to have played to $2 billion in orders.

Acadia Healthcare trades up

Acadia Healthcare’s 5% senior notes due 2029 traded up to a 101-handle on Wednesday with the notes gaining strength as the session progressed, even as the overall market weakened.

The 5% senior notes traded up to 101¼ bid, 101¾ offered heading into Wednesday’s close, a source said.

The 5% notes ended Tuesday’s session at 101¼ but opened Wednesday weaker.

There was about $28 million in reported volume during Wednesday’s session.

Acadia Healthcare priced a $475 million issue of the 5% notes at par on Tuesday.

Pricing came tighter than talk for a yield in the 5¼% area. Initial guidance was in the mid-5% area.

The deal was also heavily oversubscribed, sources said.

Fallen angels active

Fallen angels remained active as the issues moved to high-yield accounts from investment grade hands.

Howmet Aerospace’s 6 7/8% senior notes due 2025 were changing hands at 110¼ bid, 110¾ offered on Wednesday with more than $27 million in reported volume, sources said.

S&P Global Ratings downgraded the aerospace company’s unsecured debt to BB+ from BBB- on Sept. 9, due to weakened demand as a result of the Covid-19 pandemic.

Ovintiv’s 5 3/8% senior notes due 2026 were also active with the notes closing Wednesday at 94.

There was more than $22 million in reported volume during the session.

Fitch Ratings downgraded the natural gas producer to BB+ from BBB- on Sept. 18 due to its heavy debt load and its refinancing risk.

Nordstrom’s senior notes were also active with the notes starting to bleed on Wednesday after largely trading sidewise.

The luxury department store chain’s 4 3/8% senior notes due 2030 were down ¾ point on Wednesday.

They were marked at 80½ bid, 81 offered heading into the market close.

There was more than $22 million of the bonds on the tape.

While the notes have been active, they were previously trading sidewise.

“High-yield buyers were looking for them, so there was some demand,” a source said. “Today they started to loosen.”

S&P cut Nordstrom’s unsecured notes to BB+ from BBB- in early September.

$119 million Tuesday outflows

The dedicated high-yield bond funds saw $119 million of net outflows on Tuesday, the most recent session for which data was available at press time, according to a market source.

Actively managed high-yield funds were positive on the day, seeing $180 million of inflows.

High-yield ETFs, however, sustained $299 million of outflows on Tuesday, the source said.

With only Wednesday's daily fund flow numbers remaining to go into the tally, the combined funds are tracking $2.4 billion of net outflows in the week to Wednesday's close.

Over the past two weeks the combined high-yield funds have sustained an estimated $6.6 billion of net outflows, following an interval beginning March 25 and ending Sept. 16, during with those funds saw $64.6 billion of inflows.

Meanwhile, the dedicated leveraged loan funds are tracking $504 million of net outflows in the week to Tuesday's close.

With Wednesday's daily flows remaining to go into the total the loan funds are tracking their biggest weekly outflows since June, according to the market source.

Indexes gain

Indexes were on the rise on Wednesday.

The KDP High Yield Daily index gained 7 basis points to close Wednesday at 66.02 with the yield now 5.8%. The index was up 6 bps on Tuesday and 16 bps on Monday.

The CDX High Yield 30 index rose 14 bps to close Wednesday at 104.1.

The index shaved off 39 bps on Tuesday and gained 12 bps on Monday.

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