Primary quiet amid earnings blackout; PetSmart deal slates; Wynn busy; funds jump $2.94 billion

By Paul A. Harris and Paul Deckelman

New York, Feb. 12 – Things continued to calm down markedly in the high-yield primary market on Thursday, syndicate sources said.

No dollar-denominated, fully junk-rated deals were heard to have priced, the first such shutout since Jan. 27-28. That was down from the $628 million of new paper that had gotten done on Wednesday, which itself was anticlimactic after three straight sessions, from Friday through Tuesday, during which more than $3.5 billion of new junk bonds had priced each day.

The syndicate sources suggested that the onset of earnings season in Junkbondland had stilled new-deal activity, with companies about to report results unable to also market new issues.

The one piece of concrete news coming out of the primary involved PetSmart, Inc.; a $1.9 billion bond deal to help finance the leveraged buyout of the Phoenix-based retailer of pet foods and other animal-care supplies and accessories is expected to hit the road on Friday.

In the secondary realm, traders saw brisk dealings in some of the recently priced new issues, including Wynn Las Vegas, LLC, Ally Financial, Inc. and Gtech SpA. Market participants noted the weakness seen in the latter deal’s several tranches of new paper, which have struggled mightily but have been unable to climb above their par issue prices.

Away from the new deals, Alpha Natural Resources, Inc.’s bonds were seen inching higher on the back of earnings that showed a narrower quarterly loss for the coal operator.

Statistical market performance indicators turned higher across the board on Thursday after having been mixed on Wednesday.

Meanwhile, high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, saw their third consecutive giant-sized inflow in as many weeks, taking in a net $2.94 billion of fresh investor cash and strengthening the year-to-date cumulative inflow number.

PetSmart roadshow

The Thursday session came and went with no deals pricing, sources said.

There was one new deal announcement.

PetSmart plans to start a roadshow on Friday for a $1.9 billion offering of eight-year senior notes (B3/B-).

Joint bookrunner Barclays will bill and deliver for the leveraged buyout deal. Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Nomura Securities International Inc., Jefferies LLC, RBC Capital Markets and Natixis are also joint bookrunners.

The deal is bridged, and the bridge was at least partially syndicated, an investor said on Thursday.

“The early read is that the bond deal will probably do well,” the investor said, adding that the buzz in the market already has it playing to good demand.

Earnings blackouts mute primary

Earnings blackouts are impeding high-yield issuance at present, according to a syndicate banker, who added that deal flow is apt to remain muted until the end of February.

Market technicals are very strong, the source added.

Amid news that dedicated high-yield funds saw $2.94 billion of net inflows for the week to Wednesday, according to a report from Lipper-AMG, was news that recent daily flows have been trending strongly positive.

The outlier is the high-yield ETF category, which saw a slight $2 million outflow on Wednesday, sources said. However, actively managed funds saw $345 million of inflows on Wednesday, the most recent session for which data was available at press time.

Tuesday's numbers were more persuasively positive, sources said, with high-yield ETFs seeing $170 million of inflows while actively managed funds saw a whopping $980 million daily inflow.

“Inflows to institutional accounts suggest that issuance is going to pick up,” an investor observed.

“Right now, the market feels a little sideways,” the source added.

“It's not squishy, but it's also not as robust as you might expect, given the recent strength in equities.”

A sellside source, who saw better buyers in Thursday's market, also expects issuance to pick up in March once the earnings blackout has passed.

In addition to strong technicals driving demand in the United States, there is also demand in Europe, the sellsider said, so look for more issuers to bring deals with euro-denominated tranches as well as dollar-denominated ones.

Recent conspicuous dual-currency deals include Altice International, which priced $4.57 billion equivalent in five tranches that included dollar- and euro-denominated bonds, and GTECH, which priced $3.2 billion and €1.55 billion in a five-tranche dual-currency deal on Feb. 9.

Wynn tops actives

With no new issues having priced during the session, secondary market participants spent much of their time in bonds that have recently come to market.

“Outside of the new deals, it was fairly muted on the secondary flow side today,” a trader said.

He said that the overall market “had a bid under it – but guys were not reaching” to push things higher.

One issue that was seen having improved was the busiest issue of the day, Wynn Las Vegas’ 5½% notes due 2025.

A trader saw those bonds – $1.8 billion of which had priced at par on Wednesday but which hadn’t gone any higher right after that – as having gained 3/8 point on the session to go home at 100 3/8 bid, with over $39 million having changed hands.

The company, a unit of Las Vegas-based gaming giant Wynn Resorts Ltd., priced its issue on Wednesday after upsizing the regularly scheduled forward calendar offering from an original $l.75 billion.

Ally, Gtech active

Also among the actives were Ally Financial’s 4 1/8% notes due 2022. More than $23 million of the bonds traded, although the paper was essentially unchanged at 98½ bid.

Ally, a Detroit-based automotive lender and online banking concern, priced $650 million of the notes at 98.506 on Tuesday to yield 4 3/8%. It was part of a $1.25 billion two-part drive-by deal that also included $600 million of 3¼% notes due 2018 that priced at 99.294 to yield 3½%.

Italian gaming technology company Gtech’s 6¼% senior secured notes due 2022 were seen at 99½ bid, down about 1/16 point, on volume of over $28 million.

A trader said that Gtech’s several series of bonds that it priced on Monday “were still struggling below par.”

Another market source declared that “Gtech is the outlier. Most of the other recent stuff is doing well,” but the Gtech notes were, at best, “straddling their issue price,” leading some in the market to wonder if the company had just pushed too much paper on it all at once.

Rome-based Gtech priced $1.5 billion of the 2022 notes along with $600 million of 5 5/8% senior secured notes due 2020 and $1.1 billion of 6½% senior secured notes due 2025, all at par, along with two sizable tranches of euro-denominated secured paper as well.

Alpha numbers improve

Away from the new deals, Alpha Natural Resources reported a narrower loss for the fourth quarter, pushing its bonds higher.

A trader saw the 6½% notes due 2021 rise 1½ points to 26½ bid, while its 9¾% notes due 2018 were up over 1 point to 40 3/8.

Another market source pegged the 6¼% notes at 26¼ bid, calling that up almost a point.

For the quarter, the Bristol, Va.-based coal and natural gas company reported a net loss of $121.7 million, or 55 cents per share, narrowing from year-earlier red ink of $358.8 million, or $1.62 per share.

Excluding certain items, the loss per share was 50 cents, far smaller than the roughly 70-to-71 cents per share Wall Street had been expecting.

Revenues too topped estimates, coming in at $1.07 billion versus expectations of $985.4 million.

The narrower loss was attributed in large part to cost-cutting efforts. Total costs during the quarter declined 9% to $1.17 billion.

Following in line with its peers, Alpha Natural also said it cut its 2015 capital expenditure budget to $225 million to $275 million from $275 million to $350 million.

Company executives also touted a series of balance-sheet moves last year that they said helped to give the company solid total liquidity of $2.2 billion. (See related story elsewhere in this issue.)

Indicators get better

Statistical indicators of junk performance were higher across the board on Thursday for the second time in the last three sessions after having been mixed on Wednesday.

The KDP High Yield Daily index gained 6 basis points to end at 71.60 after having lost 1 bp on Wednesday. It was the index’s second gain in the last three sessions and its seventh such upturn in last nine.

Its yield meanwhile came in by 3 bps, to 5.27%, after having risen by 1 bp on Wednesday. It was the seventh such narrowing in the last nine sessions.

The Markit Series 23 CDX North American High Yield index was up by ¼ point on Thursday, finishing at 106 9/16 bid, 106 5/8 offered, its second gain in three sessions. On Wednesday, it had lost 3/32 bid.

And the Merrill Lynch U.S. High Yield Master II index notched its 19th consecutive gain on Thursday, advancing by 0.107%, after edging up by 0.001% on Wednesday.

The latest improvement lifted its year-to-date return to 1.819%, its 15th consecutive new peak level for 2015, up from the previous high point, 1.71%, on Wednesday.

Funds see third giant gain

Another numerical indicator – the flow of money into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – saw a third giant-sized inflow in as many weeks, market sources said Thursday.

During the week ended Wednesday, $2.94 billion more came into those funds than left them, according to data compiled by AMG Data Services Inc., a unit of the Lipper analytics division of Thomson Reuters Corp.

That followed similar large net inflows of $2.67 billion during the week ended Feb. 4 and $2.77 billion during the week ended Jan. 28.

This week’s inflow was the biggest seen so far this year and one of the largest of all time. (See related story elsewhere in this issue.)

Stephanie N. Rotondo contributed to this review

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