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Junk Bond Issuance Has Gained Traction

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Updated

Pricing trends

The primary market saw four deals priced last week, the week ended January 29, 2016. The strong secondary market performance of the junk bond issues priced so far in 2016 built investor confidence. It helped them take positions in low-quality and highly-leveraged junk bonds. The number of issues rose from two in the previous week to four last week.

Mutual funds such as the PIMCO High Yield Fund – Class A (PHDAX) and the Fidelity High Income Fund (SPHIX) invest in junk bonds. The holdings of PHDAX include Citigroup (C) and Lloyds Banking Group (LYG). SPHIX holds junk bonds of Tenet Healthcare (THC) and Citigroup (C).

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Deal highlight of the week

Centene (CNC) is a Fortune 500 company and a multiline healthcare enterprise. It provides programs and services to government-sponsored healthcare programs, focusing on underinsured and uninsured individuals. It issued dollar-denominated junk bonds worth $2.4 billion on January 28, 2016. The Ba2/BB rated two-tranche issue consisted of the following:

  • $1.4 billion in 5.6% senior notes due in 2021. The notes were issued at 100% of the aggregate principal amount at a yield to worst of 5.6%.
  • $1.0 billion in 6.1% senior notes due in 2024. The notes were issued at 100% of the aggregate principal amount at a yield to worst of 6.1%.

Centene (CNC) intends to use the proceeds of the loan to support the acquisition of Health Net.

Issuance by Lamar Media

Lamar Media is a wholly owned subsidiary of Lamar Advertising (LAMR). It issued dollar-denominated junk bonds worth $400 million on January 25, 2016. The senior notes were rated Ba1/BB- and carried a coupon of 5.8%. The bonds will mature in 2026.

Lamar Media intends to use the proceeds of this offering, after the payment of fees and expenses, to repay the following:

  1. $300 million Term A-1 loan, borrowed on January 7, 2016, to fund the acquisition of certain assets of Clear Channel Outdoor Holdings
  2. a portion of the borrowings outstanding under its revolving credit facility
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Issuance by GFL Environmental

GFL Environmental is a Canadian diversified environmental services company. It offers services in solid waste management, liquid waste management, and soil remediation. It issued dollar-denominated junk bonds worth $300 million on January 26, 2016. The senior notes were rated B3/B and carried a coupon of 9.9%. The bonds will mature in 2021.

GFL Environmental intends to use the proceeds of the offering for the acquisition of Matrec solid waste division from TransForce.

In the previous week ended January 22, 2016, Treehouse Foods (THS) issued dollar-denominated junk bonds worth $775 million for the acquisition of the private brands business of ConAgra Foods (CAG). GCP Applied Technologies issued dollar-denominated junk bonds worth $525 million for its spin-off from parent company W.R. Grace (GRA).

In the next article, we’ll look at high-yield bond fund flows and the yield movement of bond funds.

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