Junk secondary rally cools; new Seadrill trades above issue price; Frontier under pressure

By Paul A. Harris and Abigail W. Adams

Portland, Me., July 14 – The dollar-denominated junk bond new issue market had its first July deal price this past week with more expected in the week to come.

Brand Industries LLC, Beacon Roofing Supply Inc., Arconic Inc., and One Toronto Gaming are some of the potential deals close at hand, sources said.

Meanwhile, the rally in the secondary space cooled on Friday with outflows and profit-taking dragging down the market, a source said.

However, the market closed Friday with strong weekly gains and the cash bond market up 1½ and the ICE BofAML US High Yield index year-to-date returns rising to a 6% handle.

While returns have now broached 6%, the majority of gains were made in the first two weeks of January and the last two weeks of March with a 550 basis points spread the entry point, according to a BofA Global Research Report.

With the market rally taking a breather on Friday, new issues and topical news were the drivers of activity in the space.

Despite some weakness in the broader market, Seadrill Finance Ltd.’s 8 3/8% senior secured second-lien notes due 2030 (B2/BB/B+) were trading at a strong premium to their issue price in heavy volume.

However, topical news dragged down Frontier Communications Holdings, LLC’s senior notes with several tranches hitting new all-time lows following news report of leaching lead cables that were part of early landline networks.

The pipeline

The dollar-denominated new issue market had its first July deal price late in the past week.

The Seadrill Finance Ltd. $500 million issue of 8 3/8% senior secured second-lien notes due August 2030 (B2/BB/B+) priced at par on Thursday, upsized from $450 million.

It came tight to talk and inside of original guidance, traded well on the break, and was a point-plus higher at lunchtime in New York, on Friday.

In the wake of Seadrill the primary market remained idle on Friday, but is expected to reactivate during the week ahead.

Look for Brand Industries to show up with a junk offer during the July 17 week, a trader said.

Also look for Beacon Roofing, a portfolio manager said.

Earlier this week Beacon announced that it completed its acquisition of Crossroads Roofing Supply, Inc.

Also, a deal to address the $900 million senior secured bridge loan backing Apollo’s buyout of Arconic Inc. is possible in the week ahead, the manager said.

J.P. Morgan Securities LLC is likely to emerge as the lead for both Beacon and Arconic, the source added.

Another deal believed to be near at hand is the One Toronto Gaming $400 million offering of senior secured notes coming in support of the company’s effort to refinance its capital structure.

That refinancing effort also includes an $800 million term loan B which launched early in the past week via left lead Barclays.

Seadrill at a premium

Seadrill’s 8 3/8% senior secured second-lien notes due 2030 were trading at a strong premium to their issue price in heavy volume with the market hungry for new paper.

The 8 3/8% notes shot up to a 101-handle and were changing hands in the 101 to 101¼ context heading into the market close, according to a market source.

There was $48 million in reported volume.

In the first new dollar deal of the month, Seadrill priced an upsized $500 million, from $450 million, issue of the 8 3/8% notes at par on Thursday.

The yield printed at the tight end of yield talk in the 8½% area.

The deal was heavily oversubscribed with demand topping $2.7 billion, a source previously said.

Frontier’s new low

Frontier’s senior notes were hard hit as news reports about leaching lead cables dragged down the telecommunications sector.

While the topical news affected several companies in the sector, Frontier’s senior notes were the heaviest sold with the company one of the weaker telecommunications credits, a source said.

Frontier’s 6¾% senior notes due 2029 (Caa2/CCC+) were the most active issue in the debt stack with the notes dropping 2¼ points.

They closed the day at 75¼ with the yield just shy of 13%.

There was $32 million in reported volume.

Frontier’s 8¾% first-lien senior secured notes due 2030 (B3/B) fell about 3 points to close the day at 94¾ with the yield 9 7/8%.

There was $19 million in reported volume.

Frontier’s 8 5/8% first-lien senior secured notes due 2031 (B3/B) fell to their lowest level since pricing at par in January.

The 8 5/8% notes sank 3 points to a 93-handle with the notes trading in the 93 to 93½ context into the close, according to a market source.

There was $17 million in reported volume.

The sell-off was sparked by The Wall Street Journal’s investigative report about toxic lead cables that were part of early landline networks and are now owned by several carriers.

Frontier is a fragile company and investors were concerned about the ability of the company to withstand liability and mitigation costs, a source said.

Inflows

The dedicated high-yield bond funds had $271 million of net daily cash inflows on Thursday, according to a market source.

High-yield ETFs had $171 million of inflows on the day. Those follow the big $1.585 billion of inflows that the junk ETFs had on Wednesday.

Actively managed high-yield bond funds posted $100 million of daily inflows on Thursday, the source said.

News of Thursday’s daily flows follows a Thursday report that the combined high-yield funds sustained $379 million of net outflows in the week to the Wednesday, July 12 close, according to fund-tracker Refinitiv Lipper.

Most of the above mentioned $1.585 billion Wednesday inflow to the ETFs did not factor into Thursday’s weekly fund flows report, but will be carried into the flows that will be reported in the week to come, according to the market source.

Indexes

The KDP High Yield Daily index fell 16 points to close Friday at 51.02 with the yield 7.17%.

The index gained 32 points on Thursday, 41 points on Wednesday, 17 points on Tuesday and 7 points on Monday.

The index posted a cumulative gain of 81 points on the week.

The CDX High Yield 30 index fell 40 basis points to close Friday at 102.73.

The index was down 16 bps on Thursday after rising 56 bps on Wednesday, 50 bps on Tuesday and 40 bps on Monday.

The index posted a cumulative loss of 122 bps on the week.

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