Why-high-yield issuers coast on “drive-by” and “add-on” deals

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Deals and volumes surge in the high-yield primary market for the week ending June 13

Primary market conditions for high-yield (HYG) debt issuers continued to be good in the week ending June 13. The number of deals in the week increased to 20 from 13 the previous week. Issuance volumes were also stronger at c. $10.4 billion compared to c. $5.4 billion in the week ending June 6. This brought the total issuance in 2014 to c. ~$167.6 billion, compared to c. $167.8 billion clocked in the comparative period of 2013 (source: S&P Capital IQ and LCD).

Why is high-yield debt issuance surging from week-to-week?

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Deals and volumes last week, were primarily affected by the prevalence of low yields and spreads brought on by the Fed’s dovish stance and the recovery in the U.S. economy (a more detailed explanation is provided in the previous section). Yield spreads between HY debt and Treasuries (IEF) has been falling from week to week. Issuers looked to refinance costlier debt at lower yields, due to the falling rates environment.

Part 3

Featured deals of the week

DaVita HealthCare Partners (DVA) and Tenet Healthcare (THC) were among the more prominent HY debt issuers in the week ending June 13. Both DVA and THC are part of the S&P 500 Index (SPY).

Issuers showed preference for “drive-by” and “add-on” deals. There were nine “drive-by” transactions and five “add-on” deals in the week ending June 13.

What are “drive-by” and “add-on” deals?

“Drive-by” transactions are usually conducted by issuers that are well-known. In order to place the debt quickly (a key requirement when issuers are scrambling to take advantage of low yields), marketing these deals often involve just a discourse from the company’s management and a question and answer session with potential investors.

“Drive-by” deal volumes totaled c. $3.5 billion in nine transactions for the week ending June 13, including DaVita’’s $1.75 billion refinancing deal. The company placed $1.75 billion in ten-year senior notes, which were priced at par, at a yield of 5.125%. The notes were rated B1/B+.

“Add-on” deals imply an addition to an existing debt offering. In another refinancing deal, THC issued $500 million in senior notes as an “add-on” to previously issued debt, via private placement. The underlying senior notes were issued on March 10, 2014, at a coupon of 5% and will mature in 2019. The “add-on” senior notes were issued at a yield of 4.64%.

To learn about other major issuers last week and to get an update on the secondary market for HY debt, please continue reading the next section.

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