Qnity hit the junk bond and leverage loan markets on Tuesday with a US$4.1bn debt package that will fund the electronics unit’s spinoff from its investment-grade parent DuPont.
Ba2/BB+/BB+ rated Qnity found a welcoming audience for its first high-yield bond offering among investors hungry for fresh names given the lack of new money options in a market dominated by refinancings.
“That transaction will create new supply,” said a banker familiar with the deal on Monday. “These corporate spinoffs are the types of transactions that the market has really liked.”
The issuer, which provides materials and component solutions for the semiconductor and electronics markets, was also well positioned to benefit from the growing demand for artificial intelligence and high-performing computers, market participants say.
Pricing progress on the fundraising indicated solid demand for the credit. Lead-left JP Morgan priced a US$1bn seven-year non-call three secured bond, rated Ba1/BB+/BBB-, at a yield of 5.75%, the tight end of initial price talk of 5.75%-6% and inside initial thoughts of low 6% area.
It also printed a US$750m eight-year non-call three unsecured tranche, rated B1/BB/BB+, at 6.25%, or 50bp over the secured offering. That compares to price talk of 50bp-75bp over the secured portion and initial thoughts of 75bp area.
Not all investors were satisfied with the pricing terms, however.
“It tightened up to the point where it did not seem to be worth our time to look [at it] in depth,” said a portfolio manager on Monday.
Even so, comparing Qnity with chemical names Methanex and FMC, analysts at research firm CreditSights said in a note on Tuesday that they would still be buyers of the secured and unsecured bonds at launch levels of 5.75% and 6.25%, respectively.
Qnity is one of the better credits in the chemical space and has lower leverage than its peers, analysts at CreditSights wrote. And rating agencies do not anticipate Qnity carrying out any large debt-funded acquisitions or big dividend or share buybacks in the near future.
Nevertheless, the company is expected to bear some of the costs of DuPont's liabilities related to PFAS, better known as forever chemicals. Earlier in August, DuPont and two of its spinoff companies announced that they would pay US$875m to settle contamination claims in New Jersey.
“PFAS liabilities allocated from DuPont will continue to be a material and hard to quantify risk factor going forward,” Jay Cushing, a senior analyst at Gimme Credit, said on Monday.
Moody’s expects Qnity's adjusted gross debt leverage to be close to 3.5x. That calculation includes pension and lease liabilities, but no potential PFAS liabilities are reflected in the debt ratio, the rating agency said.
The company, meanwhile, enjoys a cash balance of US$750m and its new capital structure will include a US$1.25bn revolving credit facility that is expected to be undrawn when the spinoff is completed in November.
The secured and unsecured bonds were downsized from US$1.5bn and US$1bn, respectively, while a term loan B due 2032 was upsized to US$2.35bn from US$1.6bn.