Domtar prices; Medline tranches mixed; Exeter at a premium; ConvaTec lags in junk secondary

By Paul A. Harris and Abigail W. Adams

Portland, Me., Oct. 1 – Friday brought the busy September-October crossover week to a relatively quiet close with one deal clearing the market.

Domtar Corp. priced a $775 million issue of seven-year senior secured notes (Ba2/BB+/BB+).

While quiet on Friday, sources anticipate a busy week ahead with $8 billion to $10 billion in supply expected.

Meanwhile, the secondary space firmed on Friday with the market unchanged early in the session but up an 1/8 to ¼ point heading into the close, sources said.

With the 10-year Treasury yield dropping to close the day at 1.469%, rate-sensitive names saw some relief.

However, lower-coupon bonds continued to underperform their higher-coupon counterparts.

Medline Industries’ two tranches of senior notes dominated activity in the secondary space on Friday.

However, their performance was mixed with the secured notes falling flat while the unsecured notes were trading on a 101-handle.

Exeter Finance’s 6 3/8% senior notes due 2029 (B2/B-) and Consolidated Energy’s 5 5/8% senior notes due 2028 (B3/B+) were putting in strong performances.

However, American Finance Trust, Inc.’s 4½% senior notes due 2028 (BB+) were wrapped around par while ConvaTec’s 3 7/8% senior notes due 2029 (Ba2/BB+) lagging their issue price.

Friday’s primary

Friday brought the busy September-October crossover week to a relatively quiet close.

Domtar priced a $775 million issue of 6¾% seven-year senior secured notes (Ba2/BB+/BB+) at par, at the tight end of official talk, but slightly wide to initial guidance.

The deal, which priced at the conclusion of a roadshow, also underwent covenant changes.

Books were heard to be two-times deal size at midday Friday, a trader said.

With Domtar in the tally, the Sept. 27 week finished with $16 billion of dollar-denominated junk having cleared the market, a huge portion of it from Medline Industries which priced $7 billon in two tranches on Thursday.

Notwithstanding turbulence in rates, which have tempered issuance in the investment-grade bond market, and some risk aversion making itself felt in the stock market, the high-yield sector continues to hit on all cylinders, sources say.

There was a modicum of head scratching, on Friday, among market sources when pressed to explain this notable resilience.

One trader pointed to the market's continued technical strength, partly expressed in cash continuing to flow into the high-yield bond funds (see below).

Another pointed out that, although robust, it's not a market willing to take down every deal that's hauled to the block.

Earlier in the week Ahern Rentals, Inc. withdrew its $550 million offering of five-year senior secured second-lien notes (Caa2/CCC+) as pricing talk continued to back up.

It seemed to be born beneath an unlucky star, as the existing bonds, the 7 3/8% senior secured second-lien notes due 2023, were trading at 97 when the deal was announced – never a good sign – then traded lower, sources said.

Look for $8 billion to $10 billion, and maybe more, in the week ahead, a syndicate banker said on Friday afternoon.

“It should be pretty much like the past week, only no Medline,” the syndicate official said, adding that a little more stability in the stock market would not hurt the high-yield new issue market one bit.

Medline mixed

Medline’s two new tranches of senior notes dominated activity in the secondary space with the tranches mixed.

While the 3 7/8% senior secured notes due 2029 (B1/B+/BB-) fell flat in the aftermarket, the 5¼% senior notes due 2029 (Caa1/B-/B-) were changing hands on a 101-handle.

The secured notes were changing hands in the 99 7/8 to par 1/8 context on Friday.

However, the unsecured notes were marked at 101½ bid, 102 offered and were changing hands in between 101 5/8 to 101¾ heading into the market close.

In the largest LBO financing deal since the global financial crisis, Medline priced a $4.5 billion tranche of the 3 7/8% notes and a $2.5 billion tranche of the 5¼% notes at par on Thursday.

The 3 7/8% notes priced at the tight end of the 3 7/8% to 4% yield talk; the 5¼% notes priced at the tight end of the 5¼% to 5½% yield talk.

At a premium

While lower-coupon notes were struggling amid the prospects of rising rates, higher-coupon notes continued to perform well in the aftermarket.

Exeter Finance’s 6 3/8% senior notes due 2029 were changing hands in the par ¾ to 101 context on Friday – a level reached shortly after breaking for trade.

Exeter priced a $400 million issue of the 6 3/8% notes at par on Thursday.

Pricing came in the middle of the 6¼% to 6½% yield talk.

Consolidated Energy’s 5 5/8% senior notes due 2028 were also putting in a strong performance although they remained on a par handle.

The 5 5/8% notes were changing hands in the par ½ to par ¾ context heading into the market close.

Consolidated Energy priced a $460 million tranche of the 5 5/8% notes at par on Thursday. Pricing came at the tight end of talk for a yield in the 5¾% area.

ConvaTec lags

While the majority of new deals were putting in strong performances in the secondary space, ConvaTec’s 3 7/8% senior notes due 2029 were not among them.

The 3 7/8% notes were lagging their issue price and were marked at 99½ on Friday.

ConvaTec priced a $500 million issue of the 3 7/8% notes at par in a Thursday drive-by.

The yield printed at the tight end of yield talk in the 4% area.

$84 million Thursday inflows

The dedicated high-yield bond funds saw $84 million of daily net inflows on Thursday, according to a market source.

Actively managed high-yield funds saw $45 million of inflows on the day.

High-yield ETFs saw $39 million of inflows on Thursday, the source said.

News of Thursday's daily flows trailed a Thursday report that the combined funds saw $196 million of net inflows in the week to the Wednesday, Oct. 28 close, according to the Refinitiv Lipper Fund Flows Report Newsline.

It represented the fifth positive cash flow in six weeks, for the junk funds, and trimmed year-to-date outflows from the combined funds to $11.9 billion, according to the market source.

Indexes

The KDP High Yield Daily index shaved off 1 basis point to close Friday at 69.95 with the yield now 3.69%.

The index fell 3 bps on Thursday, gained 5 bps on Wednesday, sank 26 bps on Tuesday and was down 8 bps on Monday.

The index posted a cumulative loss of 33 bps on the week.

The CDX High Yield 30 index gained 20 bps to close the day at 109.39.

The index dropped 23 bps on Thursday, gained 4 bps on Wednesday, fell 32 bps on Tuesday and gained 3 bps on Monday.

The index posted a cumulative loss of 28 bps on the week.

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