Primary sells just under $2 billion; calendar grows; AMC still surges; CHS lags; Aethon comes in

By Paul A. Harris and Abigail W. Adams

Portland, Ore., Jan. 27 – With a sell-off in equities underway Wednesday the high-yield new issue market continued to crank, with a pair of issuers raising $1.085 billion in two dollar-denominated tranches.

Meanwhile, the secondary space was soft on Wednesday as equities saw their worst session in months amid fear of a slower economic recovery than previously anticipated.

However, as equity losses accelerated following statements from Federal Reserve Chair Jerome Powell about the state of the economic recovery, the junk bond market held up relatively well.

“The market’s definitely soft but it’s not as volatile as equities. There’s still a lot of money to be put to work,” a source said.

CHS/Community Health Systems, Inc.’s 4¾% senior secured notes due 2031 (Caa1/B-/B) saw a lackluster reception in the secondary space with the notes at times lagging their issue price in high-volume activity.

While Aethon United BR LP and Aethon United Finance Corp.’s 8¼% senior notes due 2026 (B3/B/B) were coming in from the heights reached after breaking for trade, the notes continued to trade with a healthy premium.

Outside of recent issues, the frenzy surrounding AMC Entertainment Holdings Inc.’s junk bonds continued on Wednesday with the notes continuing to rocket higher as the company’s equity surged more than 300%.

Endure, calendar

Executions remained sharp on Wednesday.

Witness Endure Digital which priced an upsized $685 million issue (from $640 million) of 6% eight-year senior notes (Caa2/CCC+) at par, 25 basis points inside of talk.

Early Wednesday, before the 6¼% to 6½% official talk came out, the deal was in the market with early guidance all the way up in the 7% area.

Hence, in the space of a day pricing took a dramatic fall to 6% from 7%, a trader noted, adding that the deal was heard to be playing to $3 billion of orders on Wednesday morning.

The notes were trading par ¼ bid, 101¼ offered at Wednesday's close, the trader said.

Meanwhile a sizable active calendar continued to take shape, with another $3.6 billion poised to clear the new issue market in the final two sessions of the week.

For the second time in a week dealers rolled out a PIK toggle holdco deal backing a dividend, one of the market's most aggressive structures, often said to be an indicator of a market that is red hot.

White Cap Supply Holdings, LLC plans to price a $300 million issue of White Cap Parent, LLC/White Cap HoldCo five-year senior PIK toggle notes (Caa1/CCC+) on Thursday, with the proceeds to fund a dividend to owners Clayton Dubilier & Rice and the Sterling Group.

White Cap follows US LBM which priced a $400 million issue of BCPE Ulysses Intermediate, Inc. 7¾% holdCo PIK toggle notes due April 2027 (Caa3/CCC+/CCC-) last Thursday (see stories on all of Wednesday's primary market action in this issue).

Biggest outflows since October

The dedicated high-yield bond funds sustained $800 million of net outflows on Tuesday, the most recent session for which data was available at press time, according to a market source.

High-yield ETFs sustained $875 million of outflows on the day.

Actively managed high-yield funds were positive on the day, having $75 million of inflows on Tuesday, the source said.

Taken in conjunction with the $754 million of net outflows sustained by the combined funds on Monday, it represents the biggest combined daily outflows over a two-day period since last October, the source said.

Notwithstanding this latest withdrawal of retail money from the asset class, sources tell Prospect News that there remains plenty of cash to be put to work in high-yield bonds.

Given that, what these outflows tell you is that junk isn't the bargain it was a few months ago, an investor said.

Pointing to the ICE BofA Merrill Lynch U.S. High Yield Constrained Index the investor noted that at its present value of 4.1101%, the index's yield to worst is now the lowest it has been in 10 years.

With absolute yields so low, high yield is fair value at best, the investor asserted.

Investors can still make money on new issues as they are offered with some yield premium but their upside is quickly exhausted, the source added.

That explains the recent parade of “hairy deals,” lately coming into the market, offering investors willing to shoulder elevated risk (even by junk bond standards) a better return, sources say.

Such deals include offerings with triple-C ratings on one or both sides of the split – some of them mid- and low triple-C ratings – as well as deeply subordinated structures and aggressive structures including PIK toggle holdco notes backing shareholder dividends.

What was once a shadowy corner of the market contoured to niche investors has lately become more substantial portion of overall high-yield issuance.

Deals rated below B- by S&P Global Ratings comprise 13.5% of year-to-date issuance, according to Prospect News data.

Deals with that rating profile represented just 8.25% of total issuance in the first month of 2020.

Turn back the calendar to January 2015, and deals rated below B- by S&P represented just 4.9% of overall issuance.

Flat

CHS’ recently priced 4¾% senior secured notes due 2031 saw a lackluster reception in the secondary space with the notes, at times, lagging their issue price.

The notes traded in a range of 99 3/8 to par on Wednesday with more than $45 million in reported volume, a source said.

They were wrapped around par after breaking for trade on Tuesday.

The pricing of the notes was tight given the quality of the credit, a source said.

CHS priced $1.095 billion of the 4¾% notes at par on Tuesday.

Pricing came at the tight end of the 4¾% to 5% yield talk.

The offering was the second from the acute care and outpatient clinic operator in as many weeks.

CHS priced a $1.775 billion issue of 6 7/8% junior-priority secured notes due 2029 (Caa3/CCC-/CC) on Jan. 19.

The 6 7/8% notes 2029 were active in the run-up to CHS’ latest offering and were changing hands on a 101-handle on Tuesday, a source said.

Coming in

Aethon’s 8¼% senior notes due 2026 were coming in from the heights reached after breaking for trade.

However, the notes continued to trade with a solid premium.

The 8¼% notes were changing hands in a 101½ to 102 context heading into the market close.

There was more than $47 million in reported volume.

The notes saw a strong break and traded as high as 103 on Tuesday.

Aethon priced a $750 million issue of the 8¼% notes at par on Tuesday.

Pricing came in the middle of talk in the 8¼% area, which tightened from earlier official talk of 8½% to 8¾%.

The deal was heavily oversubscribed and heard to be playing to $1.6 billion of orders with reverse inquiry driving the deal, a source said.

The short-squeeze

The frenzy surrounding AMC Entertainment’s junk bonds continued on Wednesday with the notes continuing to rocket higher in high-volume activity.

AMC’s 12% senior notes due 2026 were up another 11 points to a 64-handle heading into the market close, according to a market source.

There was more than $122 million of the bonds on the tape.

The notes have gained more than 24 points since Monday.

The activity in the junk bonds on Wednesday comes as the struggling movie-chain operator’s equity skyrocketed more than 300%.

Stock was halted several times during Wednesday’s session due to the volatility, a source said.

An unfolding battle between retail traders and short-sellers was behind the meteoric rise of AMC’s equity.

The surge in AMC’s junk bonds may also be partially due to a short-squeeze, a source said.

Retail traders have been driving up the stock price in heavily shorted names triggering short-squeezes which have driven up stock even further.

Investors may also be more confident in the name after the company announced on Monday that it had enough liquidity to stave off bankruptcy.

The 12% notes offer an enormous yield, which investors have been desperate for.

The notes were trading with a 21% yield on Wednesday.

Indexes down

Indexes were down on Wednesday.

The KDP High Yield Daily index dropped 9 points to close Wednesday at 68.26.

The index shaved off 4 points on Tuesday after gaining 1 point on Monday.

The ICE BofAML US High Yield index dropped 18.3 bps with the year-to-date return now 0.329%.

The index gained 2.3 bps on Tuesday and 4.8 bps on Monday.

The CDX High Yield 30 index sank 48 points to close Wednesday at 107.92. The index dropped 15 points on Tuesday and 11 points on Monday.

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