Junk secondary posts strong weekly gains; CCC credits eyed; AMC gains; Avaya losses mount

By Paul A. Harris and Abigail W. Adams

Portland, Me., Aug. 12 – An increased risk appetite is expected to bring new junk bonds deals in the week ahead, sources said.

Looking at the week just wrapped, the junk bond secondary space posted another week of strong gains with the ICE BofAML US High Yield index returns narrowing to a negative 7% handle and credit spreads the tightest in more than two months.

The snapback in credit markets was largely due to last Friday’s jobs report and Wednesday’s Consumer Price Index report with the strength in the labor market alleviating recession concerns and the latest CPI data supporting the narrative that inflation has peaked.

While higher-quality credits were outperformers as credit recovered, the rally in the BB credit tier may have run its course, according to a BofA Global Research Report.

BB spreads are currently “the tightest segment across all of credit, we think their capacity to outperform has been fully exhausted,” the report stated.

CCC credits outperformed in the rally over the past week, a trend which may continue.

Several badly battered credits made significant improvement over the past week as investors begin to eye the lower credit tiers for their upside potential.

Condor Merger Sub, Inc.’s (McAfee Corp.) 7 3/8% senior notes due 2030 (Caa2/CCC+) and PMHC II, Inc.’s (Prince International Corp.) 9% senior notes due 2030 (Caa2/CCC+), one of the worst performing issues of 2022, gained more than 2 points over the course of the week.

AMC Entertainment Holdings Inc.’s 10% senior secured second-lien notes due 2026 (Caa3/CCC-) added to their strong gains on Friday with the notes up another 1½ points in active trading.

While credit markets have improved substantially over the past two weeks, the rally has been on thin volume, sources said.

And while some market players are eyeing riskier credit tiers, others expect more volatility in the coming month as more economic data comes in, accounts return from the summer doldrums, and trading volumes increase.

Losses continued to mount for Avaya Holdings Corp.’s 6 1/8% senior secured notes due 2028 (Caa2/CCC-) with the company’s credit ratings slashed following its going concern warning earlier in the week.

Upcoming primary

The new issue market, characteristic of a mid-August Friday, remained idle heading into the weekend.

However, a notable appetite for risk has resurfaced in the capital markets, driven by a string of market-friendly economic data and financial headlines that surfaced mid-to-late in the past week.

That risk appetite is expected to translate into primary market business during the week ahead, sources say.

Look for BofA Securities, Inc. to bring three to five deals during the Aug. 15 week, sources said on Friday.

One of those will be from Wilmington, Del.-based specialty chemicals manufacturer Solenis, which has issued bonds in the past as Olympus Water US Holdings Corp.

On Thursday Solenis announced that it has entered into a definitive agreement to acquire Clearon Corp., a specialty chemicals company based in South Charleston, W.Va.

Terms were not disclosed. The deal is expected to close before the end of the year.

Away from the expected BofA deals, B. Riley, seldom seen in the high-yield markets pilot seat, is expected to be the left bookrunner for a $1 billion offering of notes from a company in the energy sector, according to a portfolio manager who declined to identify the issuer.

Meantime there is a $15 billion-plus post-Labor Day calendar taking shape, sources say.

Perhaps the most conspicuous deal is expected to come in support of the leveraged buyout of Citrix Systems Inc. by Vista Equity Partners and Evergreen Coast Capital Corp.

Dealers are canvassing the high-yield accounts in order to measure the market's willingness to take down $7.95 billion of bridged debt in their committed financing for the LBO, sources said on Friday.

However the debt, expected to hit the market following the conclusion of the Labor Day holiday weekend ending Sept. 5 could come in an amount that is significantly less than that of the bridge loan – as much as $3.5 billion less than the $7.95 billion bridge – as dealers are keen to avoid sustaining the kinds of losses they suffered in heavily discounted junk bond deals which came in the teeth of the risk aversion that hobbled the new issue market during the June-July timeframe (see related story in this issue).

CCCs eyed

In secondary trading, CCC credits outperformed over the past week as investors begin to eye lower-quality credit with concerns over inflation, recession and tough credit conditions temporarily alleviated.

CCC spreads have tightened 53 basis points in the week ending Wednesday, compared to 31 bps for B spreads, and 10 bps for BB spreads, according to the BofA research report.

Some of the worst performing deals of 2022 saw meaningful improvement over the past week.

McAfee’s 7 3/8% senior notes due 2030 climbed 2 points over the past week with the notes returning to an 88-handle.

They were changing hands in the 88 to 88½ context in decent volume on Friday, a source said.

Prince International’s 9% senior notes due 2030, one of the worst performing deals of 2022, also climbed 2 points over the past week.

While not active, the notes were marked on a 77-handle on Friday with the yield about 14%.

While the majority of deals of 2022 remain below issue price, Prince’s paper ranks among the top three biggest losers year-to-date.

The notes hit an all-time low of 69 late May and retested that low with the notes on a 70-handle for much of July, according to Trace data.

AMC rally continues

AMC Entertainment’s 10% senior secured second-lien notes due 2026 saw another day of strong gains on Friday.

The notes climbed 1½ points in heavy volume to close the session at 86½ with the yield now 14¾%.

There was $17 million in reported volume with the notes the most active issue of Friday’s session.

AMC’s notes have rallied robustly since reporting earnings late last week and announcing a special dividend that will give the company the ability to raise additional capital.

The 10% notes have climbed 6 points since the company’s Aug. 4 earnings report.

AMC also announced a special dividend in the form of a preferred equity unit, which gives the company the ability to issue more preferred shares.

The market expects the company will issue more shares to reduce their debt burden, sources said.

Avaya losses mount

Losses continued to mount for Avaya’s 6 1/8% senior secured notes due 2028 with the technology company’s credit rating slashed following a going concern warning in its preliminary earnings release.

The 6 1/8% senior notes sank another 3¾ points with the notes closing Friday at 43¼ with the yield 24½%, according to a market source.

The notes were active with $8 million in reported volume.

In the past week, Moody’s Investors Service dropped Avaya to Caa2 from the B3 rating assigned in June when Avaya priced its first-lien term loan.

S&P cut Avaya’s senior secured notes to CCC- from CCC and its unsecured notes to C from CCC.

And Fitch cut Avaya’s issuer rating to CCC- from CCC+ stating that the company has a low margin for avoiding default.

Last week, Avaya announced it had substantial doubt about its ability to continue in its preliminary earnings release.

The announcement came one and a half months after the company completed a series of refinancing transactions including a $350 million term loan.

Fund flows

The dedicated high-yield bond funds saw $235 million of net daily inflows on Thursday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs had $327 million of inflows on the day.

Actively managed high-yield funds were negative on the day, sustaining $93 million of outflows on Thursday.

News of Thursday's daily flows follows a Thursday afternoon report that the combined funds had $27 million of net inflows for the week to the Wednesday, Aug. 10 close, according to Refinitiv Lipper.

Indexes

The KDP High Yield Daily index gained 6 points to close Friday at 57.68 with the yield now 6.34%.

The index gained 7 points on Thursday and 42 points on Wednesday, fell 18 points on Tuesday and gained 18 points on Monday.

The index posted a cumulative gain of 55 points on the week.

The ICE BofAML US High Yield index slipped 7 bps with the year-to-date return now negative 7.527%.

The index gained 28.9 bps on Thursday and 60.7 bps on Wednesday, fell 31.7 bps on Tuesday and gained 35.2 bps on Monday.

The index posted a cumulative gain of 86.1 bps.

The CDX High Yield 30 index jumped 81 bps to close Friday at 103.13.

The index was down 16 bps on Thursday, jumped 151 bps on Wednesday, fell 61 bps on Tuesday and gained 16 bps on Monday.

The index posted a cumulative gain of 171 bps on the week.

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