Yum Brands May Just Be Start of the Junk Market Reopening

(Bloomberg) -- The junk-bond market showed its first sign of life in nearly a month after investors piled in orders on a new deal on Monday, a sign that this could be the start of more to come.

YUM! Brands Inc. sold $600 million of debt, up from $500 million, in the first high-yield bond offering to hit the U.S. market since Charter Communications Inc. on March 4. The deal received more than $3 billion in orders from investors before noon and more orders came in later in the day, according to people familiar with the matter, who asked not to be named discussing a private transaction. That may encourage other junk-rated companies to come forward, dealers say.

A clear pipeline of new deals has yet to emerge. While investor demand for Yum! may bode well for more junk issuance, expect to see new deals judged on a case-by-case basis, the people added.

While the investment-grade bond market has been pumping out deals in record volumes, the high-yield market has been slower to ignite, with spreads hitting distressed territory earlier this month. After clawing back some losses, companies in both markets are eager to bring deals, but bankers are leading with high-quality issuers to test demand before engaging riskier borrowers, said Richard Zogheb, global head of debt capital markets at Citigroup Inc.

“We’re bringing markets back by starting with strength and hoping to continue to build on that, going wider, deeper and bigger every day,” Zogheb said. “We’re telling companies to be ready to go and assess on a day-to-day basis.”

That’s proving to be a successful strategy so far. While the investment-grade market was shut for much of February and spotty in early March, some of the most credit-worthy companies like Exxon Mobil Corp. and PepsiCo Inc. restarted deals two weeks ago in what’s been a record flood of issuance since. It’s now broadening out to lower-rated, more cyclical investment-grade companies like railroad operator CSX Corp., and food wholesaler Sysco Corp. is marketing a deal Monday.

Companies are offering higher premiums than before the sell-off, especially for shorter-dated maturities and further down the ratings spectrum. Sysco is testing investor demand for securities maturing between five and 30 years at the same risk premium over Treasuries.

For YUM! its bonds due in 2030 are yielding just over 6%. The new five year-notes priced at par with a coupon of 7.75%, the low range of price talk, and down from the mid-8% range where pricing discussions began, the people said.

A representative for Goldman Sachs, the bookrunner on the deal, declined to comment. A representative for the company did not respond to a request for comment.

“Once we saw stabilization in the investment-grade BBBs, it was a matter of time before that would trickle down to high yield,” said Grant Moyer, head of leveraged capital markets at Mitsubishi UFJ Financial Group Inc. “We will see more issues over the next several weeks, but do not expect it to be heavy and will have wide new issue price premiums.”

The owner of the KFC, Pizza Hut and Taco Bell brands said last week it was suspending its share repurchase program and working to assist some franchisees as the coronavirus outbreak erodes sales. It said it has about 7,000 restaurants worldwide that are closed, and that operations are limited to drive-thru, delivery and carryout in the U.S. and some other markets.

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