Morning Commentary: United Site 8% notes 103 bid; PIK toggle dividend deals return

By Paul A. Harris

Portland, Ore., Nov. 5 – Junk opened unchanged on Friday.

By mid-morning as U.S. stock indexes were well into the green, propelled by a non-farm payrolls number that blew estimates out of the water, the iShares iBoxx $ High Yield Corporate Bd (HYG) share price was up two bits, or 0.29%, at $87.42.

At that time bonds priced Thursday by portable toilet supplier United Site Services Co. (USS), in a deal that came truncated from its original size, were turning in a notable secondary market performance, according to a trader, who spotted the PECF Intermediate Holding III Corp. 8% notes due November 2029 (Caa2/CCC) at 103 bid.

The $550 million acquisition financing issue priced at par.

The tranche was downsized from $750 million following a previous decrease in the size of the USS notes offering to $750 million from $1.3 billion, which came earlier in the week when the company withdrew a proposed $550 million offering of secured notes and shifted the proceeds to its concurrent bank loan.

Elsewhere, and from the opposite extreme of the high-yield credit spectrum, notes priced Thursday by DCP Midstream Operating, LP, the 3¼% bullet notes due February 2032 (Ba1/BB+/BB+), were turning in a somewhat more modest Friday morning performance at par bid, par ½ offered.

The $400 million issue priced at par, at the tight end of talk, and were heard to be playing to $1.85 billion of demand late Thursday morning.

Meanwhile the dollar-denominated sustainability-linked junk bonds of Israel-based Teva Pharmaceutical Industries Ltd., which came in the week's highest profile execution – a $5 billion equivalent four-part megadeal – appeared to be grinding higher on Friday morning, the trader said.

The Teva 4¾% notes due 2027 were par ¼ bid, par ¾ offered.

At the same time the 5 1/8% notes due 2029 were straddling par.

Dividend deals return

Activity in the new issue market was muted on Friday morning.

News surfaced on a pair of deals sporting what is likely the market's most aggressive structure: Pay-if-you-can PIK toggle holdco notes backing shareholder dividends.

Aruba Investments, Inc., which does business as Angus Chemical Co., is in the market with $200 million of five-year senior pay-if-you-can PIK toggle notes (Caa2/CCC/CCC) via issuing entity Kobe US Midco 2, Inc.

Initial price talk sets out a 9¼% to 9½% cash yield with a 75 basis points step-up for PIK interest payments, at an original issue discount of 99.

An investor call was scheduled for Friday. The deal is expected to price on Monday.

Noting that Angus Chemical has bank loan debt outstanding, a trader said that there is likely a substantial amount of reverse inquiry at play in the notes offering.

Meanwhile in Europe, Italian gaming operator Lottomatica SpA priced a €400 million issue of Gamma Bondco Sarl five-year pay-if-you-can senior secured holdco PIK toggle notes (Caa1/CCC+) at par, with a cash yield of 8 1/8%, at the tight end talk.

Proceeds from both these transactions go to fund shareholder dividends.

Thursday inflows

The dedicated high-yield bond funds saw $620 million of net daily inflows on Thursday, according to a market source.

High-yield ETFs saw $675 million of inflows on the day.

Actively managed funds were negative on Thursday, sustaining $55 million of outflow on the day, the source said.

News of Thursday's daily flows trails a Thursday afternoon report that the dedicated junk funds sustained $1.27 billion of net outflows in the week to the Wednesday, Nov. 3 close, according to Refinitiv Lipper.

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