Junk bond new deal market revives; sell-off keeps up as Hilcorp, Sealed Air, Hess hold par

By Paul A. Harris and Abigail W. Adams

Portland, Me., April 6 – A reactivated high-yield new issue market saw a second consecutive multiple-deal day, on Wednesday, as three issuers priced a total of four tranches for a combined face amount of $2.26 billion.

The new paper comes amid volatile market conditions with the secondary space down another ¾ to 1 point on Thursday with the minute notes from the Federal Reserve’s March meeting further fueling selling pressure.

The minute notes signaled support for more than one 50 bps rate hike in the coming year and increased its balance sheet runoff to $95 billion a month from the previously expected $50 billion a month.

“That was a little surprising,” a source said.

While the high-yield market took it in stride with selling in the space remaining orderly, sources were apprehensive about whether the market has fully priced in the risks posed by more aggressive monetary tightening.

Further bloodletting may be in store, a source said.

However, the paper to price during Tuesday’s session was holding up well given the market conditions.

While down from the peaks reached on the break, Hilcorp Energy I, LP and Hilcorp Energy Finance Co.’s two tranches of senior notes (Ba3/BB+), Sealed Air Corp.’s 5% senior notes due 2029 (Ba2/BB+) and Hess Midstream Partners LP’s 5½% senior notes due 2030 (Ba2/BB+/BB+) were holding onto par during Wednesday’s session.

While the deals to price on Tuesday were holding up well despite a weak tape, Churchill Downs Inc.’s 5¾% senior notes due 2030 (B1/B) gave back their gains and returned to par in active trading.

Primary looks alive

Two of the three issuers pricing on Wednesday appeared at the drive-through window.

Fortescue Metals Group Ltd. priced $1.5 billion of senior bullet notes (Ba1/BB+) in a two-part drive-by, issuing via FMG Resources (August 2006) Pty Ltd.

The deal included a $700 million tranche of eight-year notes that priced at par to yield 5 7/8%, in the middle of the 5¾% to 6% yield talk, and on top of initial guidance.

It also included an $800 million tranche of 10-year green notes that priced at par to yield 6 1/8%, in the middle of the 6% to 6¼% yield talk, and on top of initial guidance.

Fortescue was playing to $2.2 billion of demand across both tranches, in the early going, according to a portfolio manager, who had both of the new bonds trading at 101 bid, 101½ offered, late Wednesday afternoon.

(A little later a trader had the 5 7/8% notes due 2030 at par ½ bid, 101 offered, and the 6 1/8% green bond due 2032 at par 7/8 bid, 101 3/8 offered).

As to the green tranche, the portfolio manager agreed that an iron ore producer is a lot like Kermit the Frog: It's not easy being green.

In Fortescue’s case, the company plans to apply the green proceeds to its effort to convert to autonomous mining trucks that will run on renewable power, such as ammonia and hydrogen, the investor said.

Elsewhere, Wednesday, Holly Energy Partners, LP and Holly Energy Finance Corp. priced a $400 million issue of five-year senior notes (Ba3/BB+/BB+) at par to yield 6 3/8% in a drive-by.

The yield printed at the tight end of the 6 3/8% to 6½% yield talk, and tight to initial guidance.

And Burford Capital Global Finance LLC priced a $360 million issue of 6 7/8% eight-year senior notes (Ba2/BB-) at 99.242 to yield 7%, on the heels of a brief roadshow.

The deal was upsized from $350 million, with the yield printing in the middle of yield talk in the 7% area, which was also the initial guidance.

Meantime Perrigo Investments, LLC and Perrigo Investments Capital, Inc. withdrew its $500 million offering of eight-year unsecured notes (Ba2/BB-/BB+) from the market on Wednesday, shifting the proceeds to its concurrent secured credit facilities.

With the company electing to sell more secured debt, and withdrawing its unsecured offer, S&P Global Ratings took the occasion to lower its issue rating on Perrigo Investments' secured credit facility to BB+ from BBB-.

Perrigo would likely have had no problem placing the unsecured paper, according to the portfolio manager who recounted that early Wednesday the bond deal was downsized to $400 million from $500 million, before being withdrawn altogether.

By upsizing the bank loans and pulling the notes offer the company positively impacted its cost of capital, which appeared to be the sole reason for the shift, the investor said.

Wednesday's action left just one deal on the active forward calendar.

Debut issuer Earthstone Energy Holdings, LLC started a roadshow for its $550 million offering of five-year senior notes (expected ratings B3/B+/B+), in the market with initial guidance in the 8% area, and expected to price by the end of the week.

Wednesday's session in the primary market came on the heels of an active Tuesday session that saw three issuers price a $1.83 billion face amount of junk, in four tranches.

Across the span of those two days, executions generally saw issuers walk away with attractive yields, especially given the daily doses of hawk-ish Fed news which provided the backdrop.

The market has been rallying hard, the investor said, noting that on March 15 the composite yield to worst was 6.45%, whereas the present yield to worst is 6.12%.

Books for the deals over the past two days have been sizable, the portfolio manager said, adding that the calendar has been light, and owing to coupon payments and bond redemptions investors have cash to put to work.

Hilcorp holds par

Hilcorp Energy’s two tranches of senior notes were holding onto par in active trading on Wednesday, despite heavy market conditions.

The 6¼% senior notes due 2032 and 6% senior notes due 2030 were marked 99 5/8 bid, par 1/8 offered heading into the market close, a source said.

The notes were down about ¼ point to ½ point from the break when they traded as high as par ¼ bid, par ¾ offered.

Hilcorp Energy priced a $500 million tranche of the 6% notes and a $500 million tranche of the 6¼% notes at par.

The 6% notes priced at the tight end of the 6% to 6¼% yield talk; the 6¼% notes printed at the tight end of the 6¼% to 6½% yield talk.

The tranches priced cheap to the BB index which was yielding 5%, a source said.

Sealed Air holds par

Sealed Air’s 5% senior notes due 2029 were also holding onto par in active trading on Wednesday.

While the notes dipped below par early in the session, they were wrapped around par at the market close, a source said.

There was $52 million in reported volume.

The notes gave back their slight premium after trading at par 1/8 bid, par 5/8 offered on the break on Tuesday.

The notes priced in line with the BB index, which was partly responsible for their lackluster secondary market performance.

However, Sealed Air is a well-known and well-liked name in the high-yield market. “They’ve been around for years,” a source said.

The packaging company priced a $425 million issue of the 5% notes at par in a Tuesday drive-by.

The yield printed at the tight end of the 5% to 5¼% yield talk.

Hess Midstream holds par

Hess Midstream’s 5½% senior notes due 2030 were holding onto par in active trading on Wednesday, too.

The notes were marked at 99¾ bid, par ¼ offered heading into the market close with the notes wrapped around par, a source said.

While down from the break when they were marked at par ¼ bid, par ½ offered, the notes were holding up well given market conditions, a source said.

In a heavily oversubscribed offering, Hess Midstream priced a $400 million issue of the 5½% notes at par on Tuesday.

The yield came at the tight end of the 5½% to 5¾% yield talk.

Churchill Downs down

Churchill Downs’ 5¾% senior notes due 2030 were under pressure in active trading on Wednesday.

The notes fell 1 point to trade in the 99¾ to par ¼ context heading into the close, according to a market source.

There was $18 million in reported volume.

The notes were performing well headed into Wednesday’s session.

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