Crown Holdings brings year's first junk deal; market surge slows; funds lose $473 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 3 - The high-yield primary market broke the ice on Thursday, with syndicate sources hearing that packaging maker Crown Holdings, Inc. had priced the first junk bond deal of the new year - an upsized $800 million 10-year offering. The new bonds were quoted higher in initial aftermarket dealings.

Junk players also noted a pair of other pricings on Thursday - split-rated deals from carmaker Ford Motor Co. and communications antenna tower operator American Tower Corp., although they were expected to be of interest mostly to high-grade investors looking for yield in crossover credits rather than to junk accounts.

With Ford planning on using the proceeds from its new deal to redeem some of its existing paper, other established Ford bonds - still officially considered junk by the major indexes - were higher across the board in busy trading.

Traders said that the secondary market remained mostly firm after Wednesday's surge, which had been driven by the resolution - at least for now - of "fiscal cliff"-related concerns. However, they said the momentum was blunted somewhat after the minutes of the most recent Federal Reserve meeting were released at mid-afternoon, showing some of the central bank governors entertaining the possibility of ending the latest round of monetary stimulus later this year, earlier than planned.

They again saw not much standing out in the way of specific issues in the market, with few bond holders putting their paper up for sale.

Statistical indicators of market performance were mixed, after having been higher across the board the previous two sessions.

And flows of funds into and out of the junk market - considered a reliable gauge of overall junk market liquidity trends - were seen having recorded a third consecutive weekly outflow, this time of $473 million, a possible sign of recent lessened investor confidence in the junk market.

AMG sees $473 million outflow

As Thursday's session was winding down, junk market participants familiar with the fund-flow statistics generated by AMG Data Services, Inc. reported that in the week ended Wednesday, $473 million more left those high yield mutual funds and exchange-traded funds than came into them during that time.

It was the third consecutive weekly outflow seen by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., including the $354.9 million outflow recorded the week before, ended Dec. 26. That trio of outflows totals $1.173 billion, according to a Prospect News analysis of the figures.

The outflows have been relatively atypical; during 2012, cumulative net inflows for the year totaled $28 billion, according to the analysis, with inflows to the funds recorded in 39 weeks of the year, and outflows in the remaining 13 weeks.

EPFR marks $265 million inflow

However, another fund-tracking service, Cambridge, Mass.-based EPFR Global, said that in the latest reporting week, also ended Wednesday, $265 million more came into the funds that it tracks than left them during the week ended Wednesday.

It was the second consecutive inflow seen by the service, including the $152 million cash addition notched in the Dec. 26 week.

It was also the second straight week in which EPFR recorded an inflow, while AMG/Lipper reported an outflow. The two agencies' specific numbers are generally quite different, due to the differing methodologies used in their calculations; EPFR's figure includes many non-U.S. domiciled funds in its count, while the AMG number deals strictly with domestic mutual funds and ETFs. But while the numbers mostly diverge, they usually point in the same direction.

EPFR noted that in the latest week, its narrower tally of just U.S. junk funds - more comparable to the Lipper universe - showed a $151 million outflow, even as the overall figure showed an inflow.

In 2012, EPFR's overall figure showed a cumulative net inflow of $72.3 billion. According to a Prospect News analysis of the data, EPFR recorded 42 weeks of inflows last year, against just 10 weeks over outflows.

Cumulative fund-flow estimates, whether from EPFR or from AMG/Lipper, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

The continued flow of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into Junkbondland - has been seen by analysts as a key element behind the high-yield secondary market's strong performance last year versus other fixed-income asset classes, and its record active new-deal pace, which easily topped the $300 billion mark.

A high-yield primary market sellside source said Thursday that he's been hearing that the outflow seen by Lipper and EPFR's count of the U.S.-only funds was "front-loaded" - meaning that outflows were notched each session at the end of last week, when the market had a more neutral-to-negative tone, while the flows this week, including Wednesday's strong market and since the end of the reporting period, have been positive.

He also said that EPFR's most recent daily flow number was positive.

Crown massively upsizes

The 2013 primary market seemed to pick up on Thursday where it left off before the 2012 Christmas recess: Crown Holdings priced a drive-by deal that was massively upsized and came on top of price talk that had been dramatically reduced from initial guidance.

Crown Holdings priced its $800 million issue of non-callable 10-year senior notes (Ba2/BB) at par to yield 4½%.

The yield printed on top of yield talk which came down from earlier guidance of 4 ¾%.

A buy-side source, professing weariness from fielding telephone calls from salesman boasting of gargantuan book-sizes, said that the fact that the deal tightened 25 basis points during the morning tells you all you need to know about the demand: it was big.

A syndicate source said that the deal, which was upsized from $500 million, was well oversubscribed.

Deutsche Bank, BNP, Bank of America Merrill Lynch and Wells Fargo were the joint bookrunners for the offering, sold through issuers Crown Americas LLC and Crown Americas Capital Corp.

Proceeds will be used to redeem the company's $400 million of 7 5/8% notes due 2017, and for general corporate purposes including debt repayment.

Meanwhile a robust session in the high-grade primary market saw a pair of big crossover deals.

Ford Motor priced a $2 billion issue of 4¾% 30-year bonds (Baa3/BB+/BBB-) at Treasuries plus 180 bps, versus guidance that was in the low 200 bps.

Barclays, Citigroup, Goldman Sachs and Morgan Stanley ran the show.

And American Tower priced $1 billion of 3½% 10-year senior notes (Baa3/BB+/BBB-) at a 170 bps spread to Treasuries. Initial talk came in the 185 bps area.

Barclays, J.P. Morgan, RBC and RBS were active bookrunners.

Neither of the crossover deals was believed to have seen much participation among the high-yield accounts, market sources said.

Should get rolling

Syndicate sources declined to rule out a quick-to-market transaction on Friday, but the consensus held that the likelihood is low.

With players still getting back to their desks, returning from holiday vacations, an on-the-run issuer could get a deal done, an investment banker said.

However it's more likely that such an issuer would elect to come in the week ahead, the source added.

Although there was no business on the active forward calendar at Thursday's close, that will soon change considerably, sources said.

One syndicate official professed visibility on four to six deals set to roll out during the week ahead.

Another official said that there would be at least five deals, and likely more. That business will include a mix of drive-by deals and roadshows, the source added.

New Crown bonds seen firmer

The new Crown Americas 10-year notes priced fairly late in the session.

However, a trader said that he heard the packaging products company's new issue being quoted in the aftermarket at 101 bid, for about $1 million to $2 million of the bonds.

Several traders said that the fact that a big new deal would be coming to kick off the 2013 primary season put a damper on other activity in the junk market on Thursday, with everyone "just sitting around, waiting for Crown to come," as one put it.

Existing Ford bonds firm up

With Ford Motor also bringing a new deal - albeit one which was being primarily marketed to high-grade accounts looking to pick up yield, rather than to traditional junk market investors - the Dearborn, Mich.-based automotive giant's existing bonds, and those of its Ford Motor Credit Co. LLC loan financing subsidiary, were actively traded on Thursday. Carrying a split rating - Baa3/BB+/BBB- the bonds are still technically considered junk by the Trace system and most other high-yield indexes and tracking measures.

A trader said that the company's benchmark 7.45% bonds due 2031 jumped 3 points on the session, helped by news of the big new deal, and the fact that Ford would be using the proceeds from the bond offering to take out existing bond debt, specifically including its $592.7 million of outstanding 7½% notes due 2043. He saw the 7.45% paper firm smartly to 129¼ bid, 130¼ offered, well up from its recent range anchored around 126-127.

A market source at another desk said that the 7.45s were the most actively traded junk issue, with over $106 million of the bonds having changed hands, although it should be noted that many of those trades involved high-grade accounts. He pegged the bonds up more than 3 points on the day at 130 bid.

He also saw the Ford Credit 4¼% notes due 2022 firm by several points to 106 bid, on volume of over $50 million.

Ford's 6 5/8% notes due 2028 jumped nearly 4 points, another market source said, driving home at 119 bid.

Ford Credit's 5¾% notes due 2021, though, gained a more conservative ¼ to ½ point, to end at 116½ bid.

Fed has an impact

Apart from new-deal-related names, a trader said that "a lot of people were trying to get stuff done; then the Fed minutes came out, and that kind of put a damper on everything."

The nation's central bank said that during its December meeting, some of the members of its policy-setting Federal Open Markets Committee indicated a growing unease with the way the Fed's balance sheet has swelled due to its quantitative easing program of extensive buying of Treasury securities and mortgage securities - $45 billion a month of the former and $40 billion a month of the latter. Those officials, who were not specifically identified by name, "thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet," the minutes said - which would be a change from the Fed's previously stated policy of continuing to buy all of that paper at least going into 2014, as a means of keeping interest rates low in order to aid the economy.

"That pulls [the possible ending of quantitative easing] forward to mid-to-late 2013 from 2014, so the market reacted poorly to that." The strong advance seen on Wednesday - with many issues quoted up multiple points and index readings sharply higher, was blunted, and junk finished with smaller gains on Thursday.

Secondary stays muted

However, he said that even with nervousness in some quarters about apparently growing hawkish sentiment in some precincts of the Fed, for the junk world, "the reality is that high yield is still the sweet spot out there. You have the defensive characteristics of the big coupon, you have the fact that rates are remaining extremely low, you have a slow-growth economy, and most of the issuers have vastly improved balance sheets and maturity schedules."

But he asked rhetorically, "do you sell a 9% coupon [on existing older bonds] to buy a 4½% coupon?" - of the type Crown Holdings' new deal carries. "I don't think so."

That, he said is why "you've had no selling of high yield at all," muting activity in the secondary market.

For instance, he noted that Dean Foods Co. officially closed its previously announced transaction to sell its Morningstar Foods unit to Saputo Inc. for $1.45 billion, resulting in $887 million of net proceeds, which the Dallas-based foods producer plans to use to fully retire its remaining senior secured term loan debt.

Despite that big dose of positive news, "the bonds were [quoted] up - but you can't find them anyway. There were just odd lots traded." Its 7% notes due 2016 gained about a point on the day to 109¾ bid, but only on light trading in small pieces.

A second trader agreed that volume was pretty light, and "zero, nada, zilch" was going on.

"It's very situational today," he said. "We're hoping that next week, we'll see a breakout session."

Market indicators mixed

Statistical junk market performance indicators were mixed on Thursday, after having been solidly higher on Wednesday, their second straight session of gains.

The Markit Series 19 CDX North American High Yield index -- after having soared by 2 3/32 points on Wednesday - backtracked on Thursday by 3/16 point to end at 102¼ bid, 102½ offered. It was the index's first loss after two gains.

The KDP High Yield Daily Index, however, notched its third straight session on the upside Thursday, gaining 7 basis points to end at 75.65; on Wednesday, it had jumped by 21 bps. Its yield came in by 3 bps on Thursday to end at 5.59%, after having declined by 8 bps on Wednesday.

The widely followed Merrill Lynch U.S. High Yield Master II Index notched its third consecutive gain on Thursday, moving up by 0.211%, on top of Wednesday's 0.417% advance.

That lifted its year-to-date return to 0.629% from Wednesday's 0.417% return, continuing the strong momentum seen at the end of 2012, when it finished with a 15.583% return for the year.

The index's yield to worst meantime came in on Thursday to 5.908%, while its spread to worst versus comparable Treasury issue tightened to an even 500 bps.

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