Post-holiday HY issuance a mystery; secondary trading anemic; At Home active post-earnings

By Paul A. Harris and Abigail W. Adams

Portland, Me., July 1 – The new issue bourse remained quiet on Friday as the approaching Independence Day holiday leeched from the high-yield bond market what little liquidity remained in the wake of June's high volatility, sources said.

Friday's only new issue news came out of Europe with the pricing of £600 million equivalent of 888 Acquisitions Ltd. senior secured notes (B1/B) in fixed-rate and floating-rate tranches pushed into the coming week.

There are whispers Tenneco Inc. might tap the market in the week ahead.

Meanwhile, there was little activity in the secondary space although the market firmed after closing the first half of the year at a new low.

The cash bond market has fallen more than 6 points in a single month, a source said.

The late May rally, sparked by optimism about a dovish Federal Reserve, gave way to heavy losses in June with the market pricing itself for a recession.

Recession as a base case will be achieved when the market trades with credit spreads in the 600 to 650 bps range, according to a BofA Global Research report.

The ICE BofAML US High Yield index’s spread to worst was 592 bps at Thursday’s close.

While the future direction of the market remains unclear, few were making moves on Friday.

The lack of liquidity in the secondary space continued to cause large price swings in certain credits, both to the upside and downside.

DCP Midstream Operating, LP’s 5 1/8% senior notes due 2029 (Ba1/BB+) and TransDigm Group Inc.’s 5½% senior subordinated notes due 2027 (B3/B-) made large gains in thin volume.

However, Callon Petroleum Co.’s senior notes saw large losses with the company’s most recently priced 7½% senior notes due 2030 (B3/B/B+) hitting their lowest level since pricing.

Ambience Merger Sub, Inc.’s (At Home Group, Inc.) secured and unsecured notes were active after the company reported earnings.

While the notes remained softer post-earnings, the majority of selling in the tranches occurred earlier in the week, sources said.

Primary eyed

Friday's only high-yield new issue news came out of Europe.

The financing for the acquisition of the non-U.S. assets of William Hill International by 888 Holdings Plc from Caesars Entertainment has been pushed into the week ahead.

The $1.23 billion equivalent of bond and bank debt includes a £600 million equivalent of 888 Acquisitions Ltd. senior secured notes (B1/B) in fixed-rate and floating-rate tranches, which had been expected to clear ahead of Friday's close.

The acquisition, itself, funded on Friday, leaves underwriters on the hook for the debt pending the successful placement of the bonds, as well as $500 million of term loans, sources say (see related story in this issue).

The post-Independence Day week was a question mark at Friday's close, sources said.

There is a whisper in the market that automotive components supplier Tenneco Inc. might show up with a deal in the week ahead, a high-yield portfolio manager said.

On Friday it was announced that the Competition Commission of India approved the proposed acquisition of Tenneco by Pegasus Holdings III, LLC, an affiliate of Apollo Global Management, under the green channel route, indicating that the acquisition does not raise any risk of an appreciable adverse effect on competition.

Meantime, investors endeavor to determine what the new fair price of raising cash in the high-yield bond market should be, the investor said.

There are a number of factors presently impeding such a determination, the source added.

What helped drive the market to all-time tights, in the not-too-distant past, were benchmark interest rates that were so low they drove crossover investors into high-yield bonds merely to get enough of a return to keep the lights on.

Particularly in Europe, where for a time benchmark rates in some places were negative, bond investors were impelled to take closer looks at riskier assets.

Now those investors find themselves in an environment where they can focus on investment-grade paper in order to generate the returns they require.

“They have more options,” said the portfolio manager.

Another impeding factor is the magnitude of risk, itself, the investor said.

Some analysts are making dire predictions that defaults could spike to 10% in 2024.

“Although we don't subscribe to that view it, the outlook on defaults will be a determining factor in pricing the market,” the source said, adding that at its present price – the average high-yield price is now around 85½ – it is pricing in a default rate in the mid-single digits.

Liquidity trades

The lack of liquidity in the secondary space continued to cause large price swings in certain credits – both to the upside and downside.

DCP Midstream’s 5 1/8% senior notes due 2029 jumped 2 points with buyers lifting the notes, a source said.

The notes, which closed the previous session on a 90-handle, closed Friday just shy of 92½.

The notes were yielding 6½%.

TransDigm’s 5½% senior subordinated notes due 2027 rose 1½ points to close the day at 86¼ with the yield now 8¾%.

However, Callon Petroleum’s senior notes saw large losses.

The oil and natural gas company’s 8% senior notes due 2028 fell 4 points to close Friday at 92 with the yield 9¾%.

Callon’s recently priced 7½% senior notes due 2030 held up comparatively well with the notes down about ½ point.

The notes closed Friday at 91¾ with the yield just shy of 9%. The notes are now trading at their lowest level since the $600 million issue priced at par in early June.

At Home Group

At Home Group’s secured and unsecured senior notes were active after the privately-held company reported earnings, a source said.

While the notes were softer post-earnings, the majority of selling in the tranches occurred earlier in the week.

At Home’s 4 7/8% senior secured notes due 2028 (B1/B) were little changed day-over-day with the notes changing hands in the 70 to 71 context.

However, the notes have fallen 6 points over the course of the week.

They were trading on a 77-handle on Monday, a source said.

At Home’s 7 1/8% senior notes due 2029 (Caa1/CCC+) were slightly softer on Friday with the notes trading in the 55½ to 56½ context.

The notes have also fallen about 6 points on the week with the notes opening Monday wrapped around 62.

The notes, which priced as part of a leveraged buyout of At Home Group by private equity firm Hellman & Friedman, have been on a solid downtrend throughout the year, a source said.

$729 million Thursday inflows

High-yield ETFs saw big daily inflows of $729 on Thursday, the most recent session for which data was available at press time, according to a market source.

However actively managed funds were negative on the day, sustaining $102 million of outflows on Thursday, the source said.

News of Thursday's daily fund flows follows a Thursday afternoon report that the combined funds sustained $1.6 billion of net outflows in the week to the Wednesday, June 28 close, according to Refinitiv Lipper.

Indexes

The KDP High Yield Daily index gained 20 points to close Friday at 54.52 with the yield now 7.66%.

The index fell 15 points on Thursday, 43 points on Wednesday and 30 points on Tuesday after adding 4 points on Monday.

The index posted a cumulative loss of 64 points on the week.

The CDX High Yield 30 index inched up 1 bp to close the day at 97.

The index fell 23 bps on Thursday, 30 bps on Wednesday, plunged 125 bps on Tuesday and shaved off 13 bps on Monday.

The index posted a cumulative loss of 190 bps on the week.

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