HY Market Weekly Minutes: LBO Deals Return as Market Shrugs Off Rate Jitters (October 25, 2024)
A Brief Recap of Last Week's High Yield Market Performance
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The high yield market sent a clear message last week: don’t write off risk appetite just yet. Despite treasury yields surging to their highest levels since July, primary market activity roared back to life with three LBO financings leading a $5.5 billion deal wave. This resurgence in leveraged buyout activity—the first such deals since mid-summer—suggests PE firms are finding their comfort zone even with the 10-year hovering around 4.20%.
The market’s appetite for risk was particularly evident in the details: R1 RCM’s massive $8.9 billion LBO financing saw its bond component upsized by $300 million while pricing inside initial whispers. Rise Baking and Aquarian Holdings told a similar story, with both deals growing in size and pricing at attractive levels. When issuers are dictating terms in this rate environment, it speaks volumes about the technical backdrop.
Meanwhile, the secondary market continues to show remarkable resilience. While overall returns dipped slightly (-0.37% for the week), CCC-rated paper once again outperformed (-0.13%) and has delivered a staggering +13.24% YTD gain, crushing its higher-rated peers. Spreads remain stubbornly tight at 285bps—a level that would have seemed improbable just months ago given the macro backdrop.
Let’s dive in.
Weekly Performance Recap
For the week ended October 25th, the high yield market posted a modest decline, with the overall index returning -0.37%. This brings month-to-date (MTD) returns to -0.53% and year-to-date (YTD) returns to a still-impressive +7.43%. Despite the negative total return, option-adjusted spreads (OAS) held remarkably steady at 285bps, just 1bp wider on the week. The overall yield to worst (YTW) for the HY market increased 14bps to 7.30%
The market’s performance came amid rising treasury yields, with the 10-year hitting 4.23% and the 2-year reaching 4.10%. Economic data remained mixed, with flash October PMIs showing services strength but continued manufacturing weakness. The all-industry measure held steady at 54.3, suggesting continued GDP growth despite sectoral divergences.
Breaking down performance by rating category:
BBs returned -0.40%, bringing YTD returns to +5.90%
Bs returned -0.38%, with YTD returns now at +6.55%
CCCs showed relative resilience, declining just -0.13% for the week and maintaining an impressive YTD return of +13.24%
Primary Market Activity
The primary market shifted into high gear this week with 9 deals totaling $5.5 billion. Most notably, this week’s calendar included three LBO transactions—the first such deals since July—signaling private equity’s renewed comfort with market conditions despite elevated rates.
Standout Transactions:
R1 RCM priced a $1.3 billion offering of B3/B- seven-year senior secured notes at par to yield 6.875%, upsized from $1 billion. The deal finances the company’s $8.9 billion LBO by TowerBrook Capital and CD&R
Rise Baking placed $900 million of B2/B seven-year senior secured notes at par to yield 8.625%, upsized from $650 million, backing its acquisition by Platinum Equity and Butterfly Equity
Life Time Fitness issued $500 million of B2/BB seven-year senior secured notes at par to yield 6%, upsized from $400 million
Aquarian Holdings priced $750 million of BB+ five-year senior unsecured notes at par to yield 7.875%, upsized from $700 million in its high-yield market debut
Secondary Market Dynamics
The secondary market saw dramatic moves this week, headlined by an extraordinary rally in Spirit Airlines’ loyalty program bonds. The carrier’s 8% notes due 2025 surged over 20 points to ~65 cents on the dollar, marking a remarkable recovery from levels below 45 cents earlier this month. The rally was fueled by two key developments: Spirit’s announcement of plans to sell 23 aircraft to GA Telesis for $519 million, and reports that the airline is in discussions with Frontier about a potential merger through bankruptcy proceedings.
The potential Frontier deal is particularly intriguing, as it would give ultra-low-cost pioneer Bill Franke another shot at combining the carriers after their previous merger attempt fell through. Some participants view a Spirit-Frontier combination as likely to face less antitrust scrutiny than the blocked JetBlue deal, given Frontier’s smaller size and reduced route overlap.
Looking Ahead
We’re about to enter into what could be the most consequential week for markets since the summer. The combination of the October jobs report, FOMC meeting, and escalating election speculation creates a combination of event risk that could challenge the market’s recent composure.
The employment data carries particular weight this time around. With surveys projecting just 110,000 new jobs—heavily impacted by strikes and weather disruptions—and a tick up in unemployment to 4.1%, the Fed’s “higher for longer” resolve could face its first real test. Layer on expectations for Q3 GDP growth of 3.0%, and the policy path becomes even more complex.
Technical signals remain encouraging suggesting investors aren’t heading for the exits despite the rate backup. However, political risk is starting to command a premium, as betting markets price in growing odds of a Republican sweep that could spark fresh volatility in rates markets.
The CCC story also bears watching. While the +700bps outperformance vs. BBs grabs headlines, it masks a widening gulf between thriving and struggling credits within the rating bucket. As spreads hover near post-GFC tights and treasury yields probe multi-month highs, this dispersion could accelerate.
Factor in a jam-packed earnings calendar and election uncertainty, and it’s clear why some investors are keeping their guard up. The market has shrugged off most challenges in 2024, but the coming weeks could put that resilience to its sternest test yet. Time to separate the signal from the noise.
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