Oldcastle’s junk deal in focus; secondary tone improves; Delta gains; Rite Aid recovers

By Paul A. Harris and Abigail W. Adams

Portland, Me., April 13 – The only calendar deal left to the clear junk bond primary market before the early weekend was still subject to back-and-forth late on Wednesday, with pricing and terms either imminent or delayed.

Meanwhile, it was a firm day in the secondary space on Wednesday with the market up about ¼ point as Treasuries stabilized, sources said.

Inflation and earnings are the primary focus of the market as investors brace for the impact of inflation on company fundamentals.

The initial earnings the market have been mixed.

Delta Air Lines Inc.’s split-rated 7 3/8% notes due 2026 (Baa3/B+) outperformed the market after a strong earnings beat.

Rite Aid Corp.’s senior notes continued to gain heading into earnings, which will be released prior to the market open on Thursday.

The notes have nearly erased their losses after diving last week in expectation of a disappointing earnings report.

Oldcastle

In a primary market starved for news, the spotlight once again fell on the struggling Oldcastle BuildingEnvelope (Oscar AcquisitionCo LLC) $985 million two-part buyout deal, on Wednesday, sources said.

It's the sole offering on the active forward calendar.

Guidance on the $585 million tranche of eight-year senior unsecured notes (Caa1/CCC+), which moved to 11% from the mid-to-high 9% area on Tuesday, backed up further, with Wednesday conversations taking place in the 11½% context, a market source said.

Meantime there's talk that the $400 million tranche of seven-year senior secured notes (B1/B) might be withdrawn, and the proceeds shifted to the concurrent bank loan.

Terms on the deal were expected on Wednesday, and might still come, the source said, but added that some of the unsecured bond covenants remained under discussion, late Wednesday, so it seems more likely that the deal will price early in Thursday's abbreviated pre-holiday session.

Dealers would naturally prefer not to leave the bond offer hanging in the market over the long weekend, the source added.

The deal comes in support of the buyout of Oldcastle by KPS Capital Partners LP from CRH plc.

Oldcastle is not the first buyout deal to hit stiff headwinds since investors began taking harder looks at risk assets, in earnest, during the late winter, amid mounting inflation, central bank warnings of further rate increases ahead, and an increasingly dour outlook on the global economy suffering from dislocations associated with Russia's invasion of the Ukraine.

In mid-March SPX Flow, Inc. priced a downsized $500 million issue (from $570 million) of 8¾% eight-year senior notes (Caa2/CCC+) at 95.183 to yield 9 5/8%, as part of the financing for the buyout of the company by Lone Star Funds.

A partially syndicated $570 million bridge loan backing the bonds was capped at 8¾%, leaving the dealer and the bridge participants on the hook to cover the discount, sources said.

Delta outperforms

Delta Air Lines’ split-rated 7 3/8% notes due 2026 (Baa3/B+) outperformed the market on Wednesday following a better-than-expected earnings report.

The 7 3/8% notes climbed more than 2 points to change hands in the 108½ to 109 context heading into the market close.

The short-duration notes carried a yield of about 4¾%.

Delta reported revenue of $9.35 billion for the first quarter versus analyst expectations for revenue of $9.04 billion.

The company ended the quarter with $12.8 billion in liquidity and has made debt reduction a top priority as it eyes investment-grade metrics, Prospect News reported. (See related article in this issue.)

Rite Aid gains

Rite Aid’s junk bonds continued to recoup their losses leading into the company’s earnings report after diving last week in anticipation of negative numbers.

Rite Aid’s 8% senior notes due 2026 (B3/CCC) rose 1 point in active trading.

The notes were wrapped around 90 heading into the market close with the yield about 11%, according to a market source.

The notes sank 4 points to an 86-handle the previous week.

Rite Aid’s 7.7% senior notes due 2027 traded up to 74 on Wednesday.

The notes opened the week on a 69-handle.

The pharmacy retailer’s capital structure was under pressure after a Deutsche Bank analyst slashed their price target for stock to $1 from $16 and questioned the company’s future ability to operate.

Rite Aid will need to generate between $400 million to $450 million in adjusted EBITDA to continue to operate, Deutsche Bank analyst George Hill warned.

All eyes will be on the company’s 2023 EBITDA guidance when it reports fourth-quarter earnings on April 14.

Tuesday fund flows

Actively managed high-yield funds sustained $780 million of daily cash outflows on Tuesday, the most recent session for which data was available at press time, according to a market source.

However high-yield ETFs had positive cash flows on Tuesday, posting $90 million of inflows on the day.

The report came on the heels of five consecutive large outflows that ranged from $647 million to $789 million, the market source said.

Indexes

The KDP High Yield Daily index gained 10 points to close Wednesday at 60.1 with the yield now 5.93%.

The index gained 16 points on Tuesday after dropping 46 points on Monday.

The ICE BofAML US High Yield index rose 7.3 bps with the year-to-date return now negative 6.317%.

The index was up 32.1 bps on Tuesday after falling 65.8 bps on Monday.

The CDX High Yield 30 index rose 26 bps to close Wednesday at 104.16.

The index rose 3 bps on Tuesday after sinking 40 bps on Monday.

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