Junk market: Carvana eyed, weaker in secondary; VistaJet under water; Vermilion weakens

By Paul A. Harris and Abigail W. Adams

Portland, Me., April 21 – No new issues priced in the junk bond primary market on Thursday, but one acquisition deal was actively being worked on in the shadows.

Meanwhile, it was a volatile day in the secondary space with the market opening with gains but closing with losses as the 10-year Treasury yield continued to climb.

“We opened with a very firm tone then things came unglued,” a source said.

While the market was up ¼ to 3/8 point at the open, it again succumbed to selling pressure following the latest jobless claims report and comments from Federal Reserve chair Jerome Powell solidifying expectations for a 50 basis points rate increase in May.

However, trading activity in the space remained light and the selling activity that did take place was orderly.

“Things are lower, but it doesn’t feel like a sell-off,” a source said.

Outside of recent issues, Carvana Co.’s 5½% senior notes due 2027 (CCC+) were under pressure in active trading as the company prepares the acquisition deal mentioned above.

From recent issues, VistaJet’s (XO Management Holding, Inc./VistaJet Malta Finance plc) 7 7/8% senior notes due 2027 (Caa1/B-/BB-) were under water in active trading, which sources attributed to the general weakness in the market.

Vermilion Energy Inc.'s 6 7/8% senior notes due 2030 (B3/BB-/BB-) were weaker although they maintained a premium to their discounted issue price.

Meanwhile, high-yield mutual and exchange-traded funds continued to experience outflows following last week’s $4 billion loss, which marked the largest outflow since the week ending February 2.

Funds lost $886 million in the week through Wednesday’s close, according to the Refinitv Lipper US Fund Flows report.

In the shadows

Not much went on in front of the cameras during Thursday's session in the high-yield primary market.

Behind the cameras, however, another big acquisition financing deal is taking shape, sources say.

Carvana Co. is expected to price $1 billion of unsecured notes on Tuesday.

The deal, which is expected to be helmed by J.P. Morgan Securities LLC, comes with initial guidance in the 9½% area, a sellside source said, but added that the guidance might be a mere talking point, as dealers are likely putting out feelers ahead of an official announcement of the deal.

The bond proceeds will be part of the financing for the Tempe, Ariz.-based online car retailer's acquisition of the physical auction business of Adesa, Inc. from KAR Auction Services, Inc., a deal valued at $2.2 billion.

In addition to the junk bonds Carvana is also expected to price a $1 billion amount of perpetual PIK for life preferred notes on Tuesday. The preferred deal is being discussed in a context that would have it coming 250 to 300 bps behind the high-yield notes, and pricing at a discount.

There is heard to be around $2 billion of reverse inquiry across both the notes and the preferreds, the sellsider said.

Carvana's proposed debt financing comes to market on the heels of a wider-than-expected earnings loss reported Wednesday, which sent its share price tumbling on Thursday. The shares fell 10% on Thursday.

The company's existing bonds also took big hits, with the Carvana Co. 5 7/8% senior notes due October 2028 last printing on Thursday at 82, down 2 3/8 points on the day, while the 5½% senior notes due April 2027 last traded at 83, down two points, according to a sellside source.

Carvana's upcoming pass at the high-yield market is unlikely to be a cakewalk, given that the market is being rocked by rising rates and menacing geopolitical headlines, a portfolio manager said.

Issuers that can be patient are being patient, while those bringing acquisition financing deals are unable to exercise much patience, the investor remarked.

VistaJet under water

VistaJet’s 7 7/8% senior notes due 2027 were below their discounted issue price in active trading on Thursday.

The notes stood poised to close the day at 98¼ bid, 98¾ offered, a source said.

The weakness in the notes was the result of weak market conditions on Thursday with the short duration notes offering an attractive yield, sources said.

In a heavily oversubscribed offering, VistaJet priced an upsized $500 million, from $440 million, issue of the 7 7/8% notes at 98.986 to yield 8 1/8% on Wednesday.

The deal was heard to have played to $1.2 billion of demand.

VistaJet was the latest offering to come with a discount, a growing trend in the high-yield market.

The last three deals to clear the primary market – VistaJet’s 7 7/8% senior notes due 2027, Vermilion’s 6 7/8% senior notes due 2030 and Oscar AcquisitionCo LLC’s (Oldcastle BuildingEnvelope) 9½% senior notes due 2030 (Caa1/CCC+) all came with a discount.

The discounted offer price is an “old trick,” that tends to be used in dicey markets, a source said.

Vermilion weakens

Vermilion’s 6 7/8% senior notes due 2030 gave back some of their gains on Thursday although they remained at a premium to their discounted issue price.

The 6 7/8% notes were down about ¼ point.

They were changing hands in the 99 5/8 to 99 7/8 context heading into the market close.

The notes closed the previous session wrapped around par.

Vermilion priced a $400 million issue of the 6 7/8% notes at 99.241 to yield 7%.

Indexes

The KDP High Yield Daily index was down 19 points to close Thursday at 59.6 with the yield now 6.09%.

The index rose 4 points on Wednesday after falling 15 points on Tuesday and 20 points on Monday.

The ICE BofAML US High Yield index fell 17.2 bps with the year-to-date return now 6.626%.

The index rose 17.7 bps on Wednesday after falling 12.6 bps on Tuesday and 18.8 bps on Monday.

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