Forestar, Tallgrass Energy price; Kraft Heinz in focus, firms; Bombardier gains

By Paul A. Harris and Abigail W. Adams

Portland, Me., Feb. 18 – The domestic high-yield primary market launched the truncated week with two drive-by deals pricing.

Tallgrass Energy Partners LP priced a downsized $430 million issue at a discount and Forestar Group Inc. priced a $300 million issue of eight-year notes.

While only one deal is on the forward calendar, it is a megadeal – Zayo Group Holdings Inc.’s $3.08 billion two-part offering.

Meanwhile, it was a quiet day in the secondary space which was relatively unaffected by the weakness in equities.

While some names were soft, the cash market was mostly unchanged, a market source said.

Kraft Heinz Foods Co.’s senior notes continued to dominate activity following a ratings downgrade that pushed the notes into junk territory.

The longer duration notes were firming in the high-volume activity.

Bombardier Inc.’s 7 7/8% senior notes due 2027 remained active with the notes adding to their gains following news of an asset sale.

Of the recent issues, HCA Healthcare, Inc.’s 3½% senior notes due 2030 (Ba2/BB-/BB) and United Rentals (North America), Inc.’s 4% senior notes due 2030 (Ba3/BB-) remained active in secondary trading.

However, the notes were unchanged with both putting in lackluster performances.

Tallgrass downsized and wide

Tallgrass Energy Partners priced a downsized $430 million issue of 6% seven-year senior notes (B1/BB-/BB) at 98.591 to yield 6¼% in a Tuesday drive-by.

The issue size decreased from $500 million.

The yield printed 25 basis points beyond the wide end of the 5¾% to 6% yield talk.

Forestar drives by

Elsewhere, Forestar Group priced a $300 million issue of eight-year notes (B2/B+) at par to yield 5%, also in a drive-by.

The yield came at the tight end of the 5% to 5¼% yield talk.

The notes saw a strong break and were marked at par ½, 101 Tuesday afternoon.

Upcoming issuance

Despite weaker stocks, the junk bond market was in decent shape on Tuesday, setting the stage for modest or better issuance in the week ahead, sources said on Tuesday.

One deal is on the active calendar.

Zayo Group Holdings is conducting a roadshow for a $3.08 billion two-part offering of notes: $1 billion of seven-year senior secured notes (B1/B) and $2.08 billion of eight-year senior notes (Caa1/CCC+).

Early guidance has the secured notes coming to yield in the mid-4% area, and the unsecured paper coming to yield in the high 6% area,

At Friday's close, junk bond yields and spreads were leaning toward the tight ends of their year-to-date ranges, according to a market source who cited JP Morgan's high-yield index.

The 5.82% composite yield was nearer the tight end of the 5.7% to 6.2% year-to-date range, the source said.

The 435 basis points composite spread was nearer to the tight end of the 410 to 474 bps range.

The index returned 1% for 2020 to Friday's close, the source said.

Kraft Heinz dominates

Kraft Heinz’s senior notes continued to dominate activity in the secondary space with the notes accounting for almost 30% of the total reported volume during Tuesday’s session, a market source said.

However, the downward spiral of the notes on the longer end of the curve was broken.

Kraft’s 4 3/8% senior notes due 2046 and 4 7/8% senior notes due 2049 were firming in the high-volume activity.

The 4 3/8% senior notes due 2046 gained about 3 points to close Tuesday at 94 1/8.

The 4 7/8% senior notes due 2049 gained almost 5 points to close Tuesday just shy of par.

“People are buying in the long end,” a market source said.

The issues saw cumulative reported volume of about $500 million on Tuesday.

Both issues dropped more than 13 points last Thursday and Friday.

Kraft Heinz tanked in high-volume activity on Friday following Fitch Rating’s and S&P Global Rating’s downgrade of the company to junk status.

While the notes are currently split-rated with Moody’s Investors Service maintaining their investment-grade rating, Moody’s has a negative outlook for the company.

Kraft has about $24 billion in dollar-denominated junk bonds outstanding, a market source said.

The company’s bonds will transition to high-yield indexes at the end of the month, according to a BofA Global Research note.

Kraft Heinz is the seventh largest fallen angel on record, as a share of the high yield index, the note stated.

Ford Motor Co. is the only other company outside of the energy sector with $20 billion or more outstanding that is trading significantly wide to the BBB index and carries an elevated risk of downgrade.

Bombardier gains

Bombardier’s 7 7/8% senior notes due 2027 were active and continuing their upward momentum on Tuesday.

The notes rose another 2¼ points to close the day at 105½, according to a market source.

While less active, Bombardier’s 6 1/8% notes due 2023 were up about ¾ point to also close Tuesday at 105½.

The 6% notes due 2022 were up about ½ point to close the day at par ¾.

The Montreal-based transportation manufacturer’s junk bonds have been posting gains since late last week when news broke the company was in advanced talks to sell its rail business to Alston SA for €7 billion.

Market players were speculating which series of notes would be taken out with proceeds from the sale, a market source said.

Unchanged

HCA’s 3½% senior notes due 2030 and United Rentals’ 4% senior notes due 2030 remained active in the secondary space.

However, the notes were unchanged with both continuing to put in lackluster performances, a market source said.

HCA’s 3½% notes continued to lag their issue price with the notes changing hands in the 99½ to 99 5/8 context.

United Rentals’ 4% senior notes continued to trade at par. “They’ve been stuck there since pricing,” a source said.

Sources attributed the poor performance of the notes to their tight pricing.

The coupons were low especially given the note’s 10-year duration, a source recently said.

$477 million Friday outflows

The dedicated high-yield bond funds had $477 million of net outflows from the dedicated high-yield bond funds.

The outflows were more or less evenly spread, with high-yield ETFs sustaining $232 million outflows on the day and actively managed high-yield funds experiencing $245 million of outflows on Friday, the source said.

The combined funds are tracking $166 million of outflows for the week that will conclude with Wednesday's close, the market source added.

Indexes mixed

Indexes were mixed at the launch of the week after all saw cumulative gains in the previous week.

The KDP High Yield Daily index rose 5 points to close Tuesday at 71.62 with the yield now 4.85%.

The index saw a cumulative gain of 2 bps on the week last week.

The ICE BofAML US High Yield index gained 1 bp with the year-to-date return now 1.132%.

The index saw a cumulative gain of 49.8 bps on the week last week.

The CDX High Yield 30 index dropped 18 bps to close Tuesday at 109.10.

The index saw a cumulative gain of 23 bps on the week last week.

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