Junk bond issuance resumes; Yum! holds; Wesco jumps on recapitalization, LABL down

By Paul A. Harris and Abigail W. Adams

Portland, Me., March 30 – In the junk bond primary market on Wednesday, a calendar deal downsized, a drive-by deal upsized and an add-on offering was well-received.

Meanwhile, it was a relatively quiet day in the secondary space with the market pausing after Tuesday’s strong rally.

The cash bond market was unchanged to slightly softer on the day with one session left before accounts close the books on a brutal first quarter.

While the market is set to end the quarter off its lows, returns are still hovering around negative-5%.

Trading activity in the secondary space was light with new issues, topical and earnings-related news the main drivers of activity in the space.

Yum! Brands, Inc.’s 5 3/8% senior notes due 2032 (Ba3/BB) remained active with the notes holding onto their gains from the previous session.

LABL, Inc.’s 8¼% senior notes due 2029 (Caa2/CCC+) were under pressure following earnings.

Wolverine Escrow’s junk bonds (Wesco Aircraft Holdings Inc.) saw a boost following a recapitalization which reduced the outstanding principal amount of the company’s 2024 notes.

The show goes on

Lights came up bright in the on-again, off-again junk bond new issue market on Wednesday, with three issuers pricing $2.83 billion of notes in a total of four tranches.

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

Novolex Holdings LLC priced the only deal to have been marketed on a roadshow—a downsized $1.61 billion amount of sustainability-linked notes in two tranches.

The deal, which was downsized from $1.98 billion, came in a downsized $500 million tranche (from $750 million) of senior secured notes (B1/B) that priced at par to yield 6 5/8%, at the tight end of talk.

It also included a downsized $1.11 billion tranche (from $1.23 billion) of 8¾% senior unsecured notes (Caa2/CCC+) that priced at 93.87 to yield 9 7/8%, in the middle of yield talk.

The secured tranche played to around $3.5 billion of demand, according to a sellside source who added that demand for the unsecured notes, at around $1.8 billion, also exceeded the tranche size.

In drive-by action Churchill Downs Inc. priced an upsized $1.2 billion issue (from $900 million) of eight-year senior notes (B1/B) at par to yield 5¾%, at the tight end of talk.

The deal was heard to be playing to $3 billion of demand.

And after pricing a $125 million tap on Monday, Presidio Holdings Inc. returned two days later with another $25 million add-on to the same issue, the 8¼% senior notes due Feb. 1, 2028 (Caa1/CCC+).

The Wednesday add-on price at 101 – two dollars rich to the Monday deal – in a drive-by execution rendering an 8.028% yield to maturity and a 7.843% yield to worst.

The Presidio Holdings add-on paper to the 8¼% senior notes due 2028, that priced at 99 to yield 8.467% on Monday, were trading at 102.25 on Wednesday morning, heading into the second add-on sale, the sellside source said (see related stories in this issue).

Wednesday's action cleared the active forward calendar.

Yum! holds

Yum!’s recently priced 5 3/8% senior notes due 2032 held onto their nominal gains in active trading on Wednesday with the notes continuing to trade at a slight premium to their issue price.

The 5 3/8% notes were changing hands in the par ¼ to par ¾ context during Wednesday’s session, according to a market source.

There was $19 million in reported volume.

The notes have gained about 1½ points on the week after closing last Friday below par.

Yum! priced a $1 billion issue of the 5 3/8% notes at par on March 24.

However, weak market conditions on Friday and the issue’s $500 million upsize drove the notes under water in initial trading.

However, trading prices have improved as flippers leave the market.

LABL down

LABL’s 8¼% senior notes due 2029 were under pressure on Wednesday following the release of earnings, a source said.

The 8¼% notes were down 1 point in active trading and stood poised to close the day wrapped around 89, according to a market source.

There was $11 million in reported volume.

The label manufacturer’s 5 7/8% senior secured notes due 2028 (B2/B-) were unmoved by the earnings report and continued to trade on a 94-handle.

The 8¼% notes priced at par and the 5 7/8% notes priced at 99.293 to yield 6% in October 2021 as financing for CD&R's acquisition and merger of Multi-Color and Fort Dearborn into a single company.

While both tranches closed 2021 above par, they have been on a steady downtrend alongside the broader market since January with the unsecured, longer duration tranche leading losses.

Incora’s recapitalization

Incora (formerly Wesco Aircraft) saw a large boost to its capital structure on Wednesday following a recapitalization that reduced the principal amount of its 2024 notes.

The company’s 8½% senior secured notes due Nov. 15, 2024, with Wolverine Escrow as the issuing entity, traded as high as 73 on Wednesday with the previous market for the notes at 60, according to a market source.

The 13 1/8% senior notes due 2027 gained 11 points to trade up to 41¼.

The 9% senior secured notes due 2026 gained 5 points to trade at 67.

Incora, which was formed through the merger of Wesco Aircraft with Platinum Equity’s portfolio company Pattonair in 2020, announced an infusion of $250 million following a comprehensive recapitalization.

Participating bondholders, including Silver Point Finance, provided the additional long-term liquidity and exchanged their existing secured and unsecured notes for new secured notes.

Bondholders exchanged about $450 million of the 8½% notes for the 2026 and 2027 notes, Prospect News previously reported.

The aerospace parts company had hired restructuring advisors in February to help it address its debt burden with looming maturities.

Junk ETFs: $1.47 billion inflows

The high-yield ETFs saw a whopping $1.47 billion of inflows on Tuesday, the most recent session for which data was available at press time, according to a market source.

Those inflows parse out as follows: HYG had $838 million of inflows on the day, JNK saw $348 million, short-dated junk bond ETFs saw $214 million, and other constituents of the cohort saw $66 million of inflows on Tuesday, the source said.

Meanwhile, actively managed high-yield funds were negative on Tuesday, sustaining $245 million of outflows on the day, the source said.

A look at the year-to-date cash flows of various asset classes shows that retail cash has decidedly been moving to stocks and leveraged loans, and away from corporate and emerging markets bonds, a market source said.

Thus far in 2022 equities have far and away attracted the most cash from retail investors: $88 billion, the source said.

Bank loans are a pale runner-up at positive-$13 billion.

As for corporate bonds and emerging markets bonds, they have all seen negative flows thus far in 2022, the source said.

Investment grade bonds had seen $11 billion of outflows on the year.

Emerging markets bonds have experienced $16 billion of outflows.

Indexes

The KDP High Yield Daily index was up 14 points to close Wednesday at 61.56 with the yield now 5.45%. The index rose 40 points on Tuesday after shaving off 2 basis points on Monday.

The CDX High Yield 30 index fell 27 bps to close Wednesday at 105.55.

The index jumped 87 bps on Tuesday after falling 35 bps on Monday.

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