[This article has been updated since publication with a download link for the latest version of the revolver tracker Excel table.]
The primary high yield market reopened this week, but it looks vastly different from before the pandemic. After one of the worst selloffs in history and a widespread corporate liquidity run, cash-strapped issuers now have access to funding—but at a hefty markup.
Since the selloff began on 21 February, the average yield for bonds in the ICE BofAML index has soared by more than 450bps to 9.6%. That change might seem enormous, but in fact it belies how bad things were a few days ago—the average yield peaked at 11.38% on 23 March.
As money has flowed back into high yield mutual funds in recent days—and as more opportunistic buyers seek extra capital—syndicate bankers boasted of books stuffed full of orders. But the week’s new issues have had mixed fortunes in secondary trading, even after pricing with significant new issue premiums.
Yum! Brands‘ upsized USD 600m 7.75% secured notes due 2025 broke to trade at 105 and changed hands at 104.375 to yield 6.486% today (Friday), according to MarketAxess. The notes priced at par with a more than 10x oversubscribed order book.
But triple-B issuer Carnival Cruises, which pledged nearly all of its assets to its new USD 4bn 11.5% secured bond issue, had a slightly different outcome. Its order book was said to be 3x oversubscribed, but the notes dipped to trade at 98.75 to yield 12% the morning after pricing at 99 to yield 11.9%. They have since inched back to the issue price.
Both deals offered enormous new issue concessions, and came at a significant premium to where their issuer’s debt was trading before the selloff. They show that for a price, investors are willing to throw lifelines to cash-strapped companies—but their divergent aftermarket performance is a reminder of the economy’s highly uncertain outlook, sources said.
Thursday brought deals from aircraft parts supplier TransDigm, hospital operator Tenet Healthcare and Restaurant Brands. With earnings for the first half of the year heavily compromised, all three issuers needed cash to bolster liquidity reserves.
The reopening of the high yield market offers relief for companies that have tapped out other sources of liquidity. Several issuers have partially or fully drawn their revolvers in the past few weeks—Debtwire’s ever-expanding revolver tracker featured more than 250 credits as of Wednesday.
Carnival, for example, fully drew down its revolver before tapping the market. Its newly minted USD 4bn 11.5% secured notes due 2023 and USD 1.75bn convertible notes take the company’s pro forma liquidity to USD 10.518bn. Its revenue, meanwhile, has plummeted due to global restrictions on travel and social gathering.
Yum had nearly tapped out its revolver before its new high yield deal took total liquidity to USD 1.775bn. That cash will be essential as the company confronts a sudden drop in revenue and offers franchisees relief on upcoming payments—but the whopping 7.75% coupon on its new bond will add USD 46.5m to its interest burden.
Big NIC energy
Although investors are starved for paper following a drought since early March—as evidenced by the fact that most deals this week were upsized—the uncertain business outlook for most issuers is driving them to demand huge new issue concessions.
Yum’s deal came at a nearly 200bps premium to its curve, while sources estimated the concessions on Carnival, TransDigm and Restaurant Brands at roughly 100bps.
TransDigm’s upsized USD 1.1bn 8% senior secured bonds due 2025 came at a 100bps premium compared to the yield on the company’s existing USD 4bn 6.25% senior secured bonds due 2026 right before the new deal was announced.
Restaurant Brands’ USD 750m 3.875% senior secured notes due 2028 traded at 94 to yield 4.808% before it announced its new deal. The new USD 500m secured notes—which mature in 2025—priced at 5.75%.
Tenet paid up a little less than the others, but its premium was still sizeable. Its upsized USD 700m 7.5% senior secured bonds due 2025 came at a 50bps premium to its USD 2.1bn 4.875% first lien bonds due 2026, which were yielding 7% before the new deal was announced.
As issuers suspend guidance for the foreseeable future, investors are finding it difficult to map out the uncertain timing and effects of the COVID-19 pandemic. Overall, investors are expecting a weak first half of 2020, especially for the quarter ending 30 June.
Before taking into account the effects of the pandemic, this week’s issuers would boast positive pro forma free cash flow. But if EBITDA falls by about 50% for the year—well within the realms of many analysts’ models—the eye-watering interest expense on the new debt could flip some of them to a cash burn.
For instance, TransDigm’s free cash flow stands at USD 1.541bn (7.9% of total debt), based on USD 2.636bn of LTM EBITDA, USD 105m of capex and USD 990m of pro forma interest expense. The company’s total leverage stands at 7.4x through USD 19.587bn of total debt.
If TransDigm’s EBITDA falls nearly 50%, the company could be burning cash within a few quarters, two of the sources said. The company is suffering from exposure to the airline space and the effects of domestic and international travel bans.
Primary issuance scorecard
Issuers have closed around USD 221.8bn of syndicated institutional leveraged loans so far in 2020, compared to around USD 71.2bn at this point last year, according to Debtwire data.
High-yield bond issuers have closed around USD 71.6bn of paper this year to date, compared to USD 54.9bn at this point in 2019, according to Debtwire data.
Total announced US M&A is now around USD 206.5bn this year to date, compared to around USD 493.2bn at this point last year, according to sister publication Mergermarket.
No loans priced 27 March – 2 April
Bonds priced 27 March – 2 April (USD 6.9bn)