Iliad megadeal prices, trades up on break; rate-sensitive names under pressure in HY

By Paul A. Harris and Abigail W. Adams

Portland, Me., Oct. 13 – After a journey of twists and turns, the latest megadeal in the high-yield market priced on Wednesday, coming from Iliad Holdings SAS.

Meanwhile, the secondary space was a “mixed bag” on Wednesday following the latest Consumer Price Index report and the release of the Federal Reserve meeting minute notes that detailed the plan for bond tapering.

While the 10-year Treasury yield was down on Wednesday, rate-sensitive names remained under pressure with the market grappling with reports that inflation remains a more persistent threat than previously thought.

Several low-coupon, longer-duration bonds remained off several points from mid-September when the 10-year Treasury yield spiked.

Centene Corp.’s 2½% split-rated senior notes due 2031 (Ba1/BBB-/BB+) were a case in point with the notes now trading on a 96-handle after broaching par in early September.

In terms of volume, while there was some selling in rate-sensitive names, trading activity remained muted outside of new and recent issues.

New issues continued to perform well with Iliad’s dollar-denominated bonds seeing a strong break.

However, the pricing of deals is starting to widen, which is helping their secondary market performance, a source said.

Frontier Communications Holdings, LLC’s 6% senior notes due 2030 (Caa2/CCC+) were an exception with the notes continuing to languish below par.

While the notes improved day-over-day, they remained on a 99-handle.

Iliad makes it through

Iliad Holdings SAS completed the market's most recent megadeal, an approximately €3.7 billion equivalent four-part issuance of senior secured notes (B2/B+), on Wednesday.

The dollar-denominated portions included an upsized $1.2 billion tranche (from $1 billion) of 6½% five-year notes and a downsized $900 million tranche (from $1 billion) of 7% seven-year notes.

Both came at par, in the middle of final talk.

However final talk on both tranches widened about 50 basis points from the initial guidance, as the deal was held in the market for at least three days while the issuer made concessions to investors by altering the covenant package, and paying up.

In the end, however, the more investor-friendly deal appeared to play to substantial demand, according to a trader who said that both tranches were notably higher in active trading, with the longer-dated paper, the 7% notes due 2028, driving the highest price in the secondary market at 102½ bid, while the shorter maturity 6½% notes due 2026 were trading at 102¼ bid, late Wednesday afternoon.

There was also a small drive-by deal on Wednesday.

Audacy, Inc. priced a $45 million fungible add-on to the Entercom Media Corp. 6½% senior secured second-lien notes due May 1, 2027 (B3/B-) at 100.75, the rich end of price talk.

Up and coming

The junk market was in better shape on Wednesday than it had been on Tuesday, with bonds generally retracing the lost ground of yesterday, the trader said.

And trading desks were saddled with substantially fewer bids-wanted-in-competition (BWICs) on Wednesday than they had been on Tuesday, the source added.

Meanwhile the active new issue calendar took aboard new offerings.

At least four deals are in the market with timing that implies Thursday executions.

Only one of them, however, has confirmed official talk and timing.

On Wednesday Glatfelter Corp. talked its $500 million offering of eight-year senior notes (Ba2/BB) to yield 4½% to 4¾%, in line with initial guidance, with books set to close late Thursday morning (see related stories in this issue).

Finally, the market awaits word on the Monitronics International, Inc. (Brinks Home) $1.1 billion offering of seven-year first-lien notes (Caa1/B-), which launched into the market last week on a timeline that had it pricing Wednesday.

Initial talk is in the 10% area, but that might not be enough, market sources say.

There appears to be interest in the deal at 10½% to 11%, a trader said.

Or, if the company agrees to tighten up the covenants, they might get out the door with a rate that is closer to the 10% area print they were seeking when the roadshow got underway, the source added.

Rate-sensitive names

There were no significant movements in the secondary space on Wednesday following the release of the latest Consumer Price Index report and minute notes from the Federal Reserve detailing their plan for bond tapering.

The 10-year Treasury yield ticked below the 1.6% threshold to close the day at 1.539%.

However, there was a significant flattening of the curve with the yield on shorter-duration Treasuries on the rise.

The decrease in the 10-year Treasury yield led some to speculate that the Federal Reserve was still shadow-buying to keep markets in line.

While trading activity remained muted, longer-duration, lower-coupon bonds remained under pressure.

Rate-sensitive names are down several points since the 10-year Treasury yield spiked above 1.6%, a 30-bps move in a matter of weeks.

“The market is holding its breath,” a source said. “It’s in a fragile place right now. It’s looking for a reason to go higher but dreading the reason for going lower.”

Centene’s 2½% senior notes due 2031 were among the issues that have succumbed to selling pressure since the move in Treasuries.

While the 2½% notes were hovering around par in early September, they were changing hands on a 96-handle on Wednesday.

Frontier active

Frontier’s 6% senior notes due 2030 were active on Wednesday.

While the notes were improved day-over-day, they remained on a 99-handle and were down on the week.

The 6% notes were up ¼ point. They were marked at 99¼ bid, 99½ offered heading into the market close on Wednesday, a source said.

However, the notes closed out the previous week wrapped around par.

Frontier priced the $1 billion issue at par on Oct. 5 in their first deal since emerging from bankruptcy.

However, their current trading level was more a product of the weakness in the overall market than a commentary on their credit, a source said.

Biggest outflows since mid-July

The dedicated high-yield bond funds saw $553 million of net outflows on Tuesday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs sustained $593 million of outflows on the day. That trails $789 million of outflows that the ETFs saw on Monday.

Actively managed high-yield funds were positive on the day, posting $40 million of inflows on Tuesday, the source said.

Indexes

The KDP High Yield Daily index shaved off 1 point to close Wednesday at 69.44 with the yield now 3.9%.

The index fell 23 points on Tuesday.

The CDX High Yield 30 index gained 16 bps to close Wednesday at 108.67.

The index dropped 34 bps on Tuesday.

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