Yum! below par; junk secondary soft amid Treasury rout; Ford weakens; Owens & Minor holds

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 25 – In the wake of a $3.3 billion midweek burst of issuance, the high-yield primary market remained on standby, Friday, with no issues pricing and no deals announced.

And although the active forward calendar ended the March 21 week empty, Novolex Holdings LLC is expected to announce a $1.98 billion two-part offering of notes in the coming week.

Meanwhile, the secondary space had another volatile session with the market strong at the open but weak at the close with a major flattening in the front end of the Treasury curve.

“It was a weak tape today with Treasuries going nuts,” a source said.

However, while the secondary space closed Friday on weak footing, credit spreads have nearly snapped back to their range prior to Russia’s invasion of the Ukraine on February 24, according to a BofA Global Research report.

And whereas the high-yield market continues to sustain substantial and record-setting outflows, ETF selling has been muted considering the amount of money that has left the space.

The new paper to price over the past week was putting in mixed performances.

Yum! Brands, Inc.’s newly priced 5 3/8% senior notes due 2032 (Ba3/BB) sank below par in high-volume activity with the large upsize and tight pricing reducing the appeal of what initially looked like an attractive offering.

Ford Motor Credit Co. LLC’s 4.95% senior notes due 2027 (Ba2/BB+/BB+) were slightly softer in high-volume activity.

However, Owens & Minor, Inc.’s 6 5/8% senior notes due 2030 (B2/B/BB-) continued to hold onto a 101-handle despite the weakness in the market.

Friday’s primary

The Wednesday-Thursday primary deals, from Embecta Corp., Ford Motor Credit, Owens & Minor and Yum! Brands, demonstrated that institutions continue to have cash to put to work on new issues, market sources say.

However, with rates gapping higher, prospective high-yield issuers – keen to circumvent voyages of price discovery in the debt capital markets – are in no hurry to address investors' demand for new issues, a sellside source said on Friday.

Lately the market has supplied a few cautionary tales, the source said.

SPX Flow completed just such a voyage on March 18 when it priced a $500 million issue of 8¾% eight-senior senior notes (Caa2/CCC+) at 95.183 to yield 9 5/8%.

While that discount makes a persuasive play for attention, the bonds ultimately priced far rich to early guidance that had the deal pricing slightly below 92.

A partially syndicated bridge loan backing the SPX Flow bonds was capped at 8¾%, leaving the dealers and the bridge participants on the hook to cover the discount, sources say.

Also, Embecta's $200 million issue of 6¾% eight-year senior secured notes due February 2030 (Ba3/B+) priced at a significant discount: 98.517 to yield 7%.

And although the active forward calendar ended the March 21 week empty, the big deal being telegraphed to the market – expected in the week ahead – also contemplates sizable OIDs.

Novolex Holdings LLC is expected to make a $1.98 billion two-part offering of notes during the March to April transition week, in support of the buyout of the company by Apollo.

Early expectations have the deal coming with a $750 million tranche of 6¾% secured notes to price at a 97.5 discount and yield in the low-7% area, and a $1.23 billion tranche of 8¾% unsecured notes to price at a discount of 96 and yield in the mid-9% area.

Investors are clamoring to become involved, sources say.

Though not yet officially announced, reverse inquiry on the secured notes already exceeded the expected size of the tranche on Thursday morning, according to the sellside source who added that the unsecured tranche is already 50% spoken for in reverse inquiry, at its expected size.

However, the ultimate cost of capital will almost certainly exceed that which had been under consideration when participants undertook plans for the debt financing backing the buyout, the source noted.

Treasury rout

The secondary space saw another volatile session on Friday with the market opening the day with gains but closing with losses as the front end of the Treasury curve flattened.

The 10-year Treasury yield jumped more than 10 basis points. It climbed as high as 2.503% before settling at 2.482%.

The five-year Treasury yield jumped more than 14 bps. It climbed as high as 2.579% before settling at 2.544%.

The yield on the five-year Treasury note has pushed out 100 bps since March 1, a source said.

“That has major effects on HY given the similar duration of the index,” the source said.

The high-yield market has also been setting records with outflows after 11 consecutive weeks of funds leaving the space, nine of which were outflows greater than $1 billion.

The market has not seen 11 consecutive weeks of outflows since 2007, a source said.

However, the selling activity in the space has been orderly with ETF selling tame compared to the outflows.

And high-yield credit spreads are hovering around the levels seen prior to Russia’s invasion of the Ukraine.

However, credit spreads remain rich with fair value credit spares marked in the 425 bps to 450 bps context, according to a BofA Global Research report.

Yum! below par

Yum! Brands’ 5 3/8% senior notes due 2032 dropped below par on Friday after holding a minor premium on the break and at Friday’s open.

The 5 3/8% notes were on a 99-handle heading into the market close; they were marked at 99½ bid, 99¾ offered, a source said.

The notes were marked at par bid, par ½ offered on the break and were holding onto a par-handle early in the session.

However, the notes fell below par with selling pressure taking hold as Friday’s session progressed.

There was $87 million in reported volume.

The deal initially looked attractive with early guidance for a yield in the mid-to-high 5% area.

However, the large upsize and tightening of talk took away much of the offering’s upside, a source said.

Yum! doubled the size of its notes offering and priced $1 billion, from $500 million, of the 5 3/8% notes at par on Thursday.

Pricing came at the tight end of yield talk in the 5½% area; initial guidance was in the mid-to-high 5% area.

The deal was heard to have played to a $2 billion order book.

Ford weakens

Ford’s 4.95% senior notes due 2027 were softer on Friday although the notes were holding onto a nominal premium.

The 4.95% notes were off about ¼ point to close Friday in the par-to-par ¼ context, according to a market source.

There was $20 million in reported volume.

The notes closed the previous session in the par 3/8 to par 5/8 context, a level they held early in the session before the market turned south.

Ford Motor Credit priced a $1.5 billion issue of the 4.95% notes at 99.987 to yield 4.95% on Wednesday.

Owens & Minor

Owens & Minor’s 6 5/8% senior notes due 2030 were the best performing new issue of the week with the notes maintaining a 101-handle on Friday despite the weak market conditions.

The market for the 6 5/8% notes appeared to level off around 101 3/8 bid, 101 5/8 offered, a source said.

However, activity in the notes was fading.

The notes put in a strong performance despite upsizing and pricing tight, a source said.

In a heavily oversubscribed offering, Owens & Minor priced an upsized $600 million, from $500 million, issue of the 6 5/8% notes at par on Wednesday.

Fund flows

High-yield ETFs had $364 million of inflows on Thursday, the most recent session for which data was available, according to a market source.

However actively managed high-yield funds saw negative cash flows on Thursday, sustaining $141 million of outflows on the day, the source said.

News of Thursday's daily cash flows follows a Thursday afternoon report that the combined funds sustained $2.698 billion of net outflows during the week to the Wednesday, March 23 close, according to Refinitiv Lipper.

That was the ninth outflow in the past 11 weeks to top the $1 billion mark, according to the market source who added that the cumulative total during that period is negative-$24.2 billion, or 9% of assets under management for funds that report to Lipper on a weekly basis. a new record for that interval, surpassing the $20.1 billion of outflows sustained in the period ending March 25, 2020.

Indexes

The KDP High Yield Daily index shaved off 8 points to close Friday at 61.11 with the yield now 5.63%.

The index fell 12 points on Thursday, 1 point on Wednesday, 22 points on Tuesday and 11 points on Monday.

The index posted a cumulative loss of 54 points on the week.

The CDX High Yield 30 index fell 32 basis points to close Friday at 105.3.

The index was up 21 bps on Thursday, sank 43 bps on Wednesday, rose 44 bps on Tuesday and fell 37 bps on Monday.

The index was down 46 bps on the week.

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