One of the largest high-yield municipal bond borrowings this year, a $610 million deal for a series of New Jersey behavioral health centers, failed to clear the market Tuesday despite offering yields as high as 8.25%.

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Underwriter KeyBanc Capital Markets said the deal is on hold while it restructures to appeal to more investors and satisfy the transaction’s buyer and seller. Bankers attributed the struggles to investor unfamiliarity with the nascent behavioral health sector, which they hope to build into a larger muni asset class, rather than concerns about the credit itself.

The financing, originally sized at $610 million and later trimmed by $20 million, would finance the purchase of 48 behavioral health facilities by Georgia-based nonprofit QCF/I, Inc. from private equity firm Clearview Capital. Clearview invested in the company in spring 2025. The New Jersey Economic Development Authority is the conduit issuer. 

Despite dangling yields as high as 8.25% on Tuesday — up by more than 50 basis points from 7.5% offered last week — the transaction failed to garner enough interest from investors, some of whom said it was too highly leveraged.

“There was no level that would have made us comfortable with the fundamentals of the project,” said a portfolio manager. “The business itself seems good … but we thought the leverage multiple on their cash flow margin was too high and they would not be able to pay for debt service.”

A second investor who declined to participate said the business lacked a long enough track record given Clearview’s quick sale, and that assets backing the bonds totaled only $14 million.

“It’s really not a price issue, it’s more of a credit and structure issue,” the buyer said. “The municipal market is being asked to accept that this [private equity company] has bought it and grown it very quickly and now wants to sell it in a huge up trade — the track record for the business is pretty short.”

KeyBanc said it got close to building a full book.

“We had a large number of investors who participated, and major institutional bond funds placed very large orders, but we couldn’t get what we needed,” said Bart Plank, managing director at Cain Brothers, which is a division of KeyBanc. “We’re taking what we’ve learned from that and figuring out the best way to reposition the transaction for a transaction that works for the buyer, seller and the investors.”

The deal was brought amid heavy supply and recent outflows in the high-yield market, and some buysiders said they’re being more careful about what they’re buying.

“Judging by the deal cheapening by over 50bps from last week … it does point to investors being more selective about credits especially with outflows,” said a third investor, who added that the QFC deal was not indicative of overall weakening demand. “This is definitely the first one at this size that has taken some time to build a book.”

The second investor warned that a successful pricing may open the door for other bankers and businesses who would like to tap the tax-exempt market with similarly leveraged or risky structures.

“People say it will be a benchmark because it’s a $600 million new issue,” the source said. “But if you cave on something that’s a credit fundamental on this one, you give license to underwriters to bring the next deal,” the investor said. “We’re holding the line on things we think are important.”

KeyBanc managing director Matt O’Grady said the task now is solving a “math equation” that works for the buyer, seller and investors. Many investors are unfamiliar with the behavioral health sector, which is poised to grow, O’Grady said. He likened it to the beginning of the senior living sector, which has grown into a major corner of the high-yield market.

“It’s not a credit issue, it’s an early life-cycle sector issue,” he said. “I compare behavioral health today to the senior living sector in its early years. Behavioral health is still in the early stages of development as a defined municipal asset class,” he said.

“Behavioral health differs from more traditional municipal sectors because these businesses often generate strong revenue and EBITDA but lack the hard collateral investors typically expect in sectors like hospitals, senior living, or infrastructure,” O’Grady said. “The challenge is primarily one of market education and investor familiarity with a developing asset class rather than concerns about the quality of the underlying business.”

Behavioral health has a large potential pipeline of deals that KeyBanc is working to develop, Plank said. The bank has done five deals so far in the space.

Those deals include: $145 million of unrated senior and subordinate for QFC priced in August 2024 for Las Vegas-based Desert Parkway; $141 million for New Jersey-based Absolute Awakenings treatment center priced in June 2025; $35 million for the Colorado-based Moore Center in November 2025; and two deals totaling $290 million for the human services nonprofit Inperium Project.

All the previous deals were financed through Wisconsin conduit issuer Public Finance Authority.

 “Our work in behavioral health is part of a deliberate, years-long strategy and not a one-off transaction or opportunistic deal,” Plank said.

The timing to come back to market is uncertain and the New Jersey EDA may need to sign off on the revised structure, Plank said.

“The process depends on discussions with key investors, bond counsel, the New Jersey EDA, and any approvals required for a revised structure,” he said.