Primary prices $1.95 billion led by Frontier; Encompass at a premium; funds lose $3.59 billion

By Paul A. Harris and Abigail W. Adams

Portland, Me., Oct. 1 – Three issuers priced a cumulative $1.95 billion on Thursday with one issuer responsible for the majority of the new supply.

Frontier Communications Corp. priced its highly anticipated $1.15 billion issue of seven-year first-lien senior secured notes as part of its financing to exit bankruptcy.

Friday also promises to be an active session with two issuers set to price a cumulative $1.58 billion.

Meanwhile, the secondary space continued to firm on Thursday.

However, while bids were improving, there were still plenty of offers in the market, a source said.

With the high-yield primary market picking up its pace, new deals were once again the focus of secondary trading activity.

New paper from Cedar Fair, LP saw a weak break with the notes hovering around par.

Lithia Motors, Inc.’s 4 3/8% senior notes due 2031 (Ba2/BB) were trading with a decent premium in the aftermarket.

Encompass Health Corp.’s 4 5/8% senior notes due 2031 (B1/B+) outperformed with the notes jumping to a 102-handle.

Outside of new paper, Bed Bath & Beyond Inc.’s capital structure skyrocketed following positive earnings.

Meanwhile, dedicated bond funds continued to hemorrhage cash with another multibillion-dollar outflow recorded through Wednesday’s close.

High-yield mutual and exchange-traded funds saw $3.589 billion leave the space, according to the Refinitiv Lipper Fund Flow report.

It was the second week in a row funds have seen a substantial outflow with $4.217 billion leaving the space the previous week.

Thursday’s primary

Three issuers priced single-tranche dollar-denominated junk deals on Thursday to raise a total of $1.95 billion.

Two of the deals were drive-bys.

One came upsized.

The executions harkened back to the tight-pricing deals of late July and August, with ultra-tight executions that saw one come tight to talk, and one upsize and price tight to talk.

The day's biggest deal blew right through the price talk.

Frontier Communications priced that deal – a $1.15 billion issue of 5 7/8% seven-year first-lien senior secured notes playing to a book crammed with $5 billion to $6 billion of orders from distressed debt and high-yield accounts, which drove down pricing from early guidance in the mid-6% area, and from official talk of 6% to 6¼%.

There was up to $1 billion of reverse inquiry in the blowout exit financing deal, a trader said.

For the moment liquidity in the high-yield market is very good, an investor said.

Notwithstanding a Thursday report that the dedicated high-yield bond funds sustained a whopping $3.59 billion of outflows in the week to Wednesday's close, according to information posted on the Internet by the Refinitiv Lipper Fund Flow Report Newsline – on the heels of the previous week's $4.22 billion of net outflows – investors still have cash to put to work in the junk bond market.

On deck for Friday, two issuers will attempt to raise $1.58 billion, each with a single tranche of notes (see related stories in this issue).

Cedar Fair’s weak break

Cedar Fair priced a $300 million issue of eight-year senior notes (B3/CCC) at par to yield 6½% in a Thursday drive-by.

The yield printed at the tight end of the 6½% to 6¾% yield talk. Initial guidance was in the high-6% area.

The 6½% senior notes saw a weak break with the notes at times lagging their issue price.

However, they were hovering around par heading into the market close.

The notes traded as low as 99¾ after freeing for trade, a market source said.

However, they stood poised to close the day at 99 7/8 bid, par 1/8 offered.

The notes were active with more than $61 million in reported volume.

Lithia trades well

Lithia Motors’ new 4 3/8% senior notes due 2031 were trading with a healthy premium in high-volume activity on Thursday.

The notes were trading in a tight range of par ¾ to 101¼ throughout the session, according to a market source.

There was more than $51 million in reported volume heading into the market close.

The notes “priced and are trading pretty well,” a source said. However, they didn’t seem to have much more upside potential.

Lithia Motors priced an upsized $550 million, from $500 million, issue of the 4 3/8% at par on Wednesday.

Pricing came tight to talk for a yield in the 4½% area.

The deal was heavily oversubscribed with $1.5 billion in orders early Wednesday afternoon, a source said.

Encompass Health jumps

Encompass Health’s 4 5/8% senior notes due 2031 jumped in the aftermarket with the notes trading up to a 102-handle on Thursday.

They were marked at 102 bid, 102¼ offered heading into the market close.

However, volume was relatively light with $22 million on the tape during Thursday’s session.

Encompass Health priced a $400 million issue of the 4 5/8% notes at par in a Wednesday drive-by.

The yield printed at the tight end of yield talk in the 4¾% area. Initial talk was in the 4 7/8% area.

The deal was 4x oversubscribed, a source said.

Bed Bath & Beyond skyrockets

Bed Bath & Beyond’s capital structure skyrocketed on Thursday after the company beat expectations with its second-quarter earnings report.

The domestic merchandise retailer’s 5.165% senior notes due 2044 (B1/B+) were the most active in the capital structure.

The notes gained more than 7 points to trade up to 81 3/8, according to a market source.

The bonds saw more than $24 million in reported volume during Thursday’s session.

The 3.749% senior notes due 2024 gained about 6½ points to trade up to 99.

The 4.915% senior notes due 2034 gained 5¾ points to trade up to 83¾.

“They had good numbers,” a source said.

Bed Bath & Beyond reported revenue of $2.688 billion, which beat analyst expectations for revenue of $2.622 billion.

The company’s EBITDA of $199.4 million trounced analyst expectations for EBITDA of $51.3 million.

The company announced that it had reduced its debt by 30% through a tender offer for its senior notes and repayment of a bank loan, Prospect News reported.

Approximately $225 million of the 5.165% notes were accepted for the early tender offer price of $770 and $75 million of the 4.915% notes were accepted for the early tender offer price of $820 in August.

Indexes gain

Indexes continued their upward momentum on Thursday.

The KDP High Yield Daily index rose 14 basis points to close Thursday at 66.16 with the yield now 5.75%.

The index gained 7 bps on Wednesday, 6 bps on Tuesday and 16 bps on Monday.

The ICE BofAML US High Yield index gained 15.9 bps with the year-to-date return now negative 0.137%.

The index gained 31.7 bps on Wednesday, 8.1 bps on Tuesday, and 39.9 bps on Monday.

The index turned negative on Sept. 21.

The CDX High Yield 30 index rose 30 bps to close Thursday at 104.4.

The index was up 14 bps on Wednesday, shaved off 39 bps on Tuesday and gained 12 bps on Monday.

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