DirecTV, upsized Qwest mega-deals price; secondary market quiet

By Paul Deckelman

New York, June 8 - The high-yield primary market - after weeks of being pretty much forced to make do with crumbs from smallish drive-by deals and add-on pricings -came roaring back into the spotlight Wednesday, pricing two offerings of more than $1 billion each, one for Qwest Communications International Inc., the other for DirecTV Group Inc.

It was the first time in months that two such mega-deals hit in the same session. Indeed Wednesday's issuance of $2.69 billion surpassed the $2.54 billion total for the entire month of May and was more than half the $5.46 billion seen in April.

Two other sizable offerings - one for Service Corp. International and the other for Chiquita Brands International Inc. - were seen climbing onto the forward calendar.

All of that primary market activity pretty much relegated the secondary market to a, well, secondary role. Trading was quiet, in line with a slump in stocks linked to White House forecasts of slower growth than had previously been expected.

Even the big corporate news development of the day - the announcement that billionaire investor Kirk Kerkorian has indeed raised his stake in General Motors Corp. - failed to do much to encourage trading in the recently junked automotive giant's bonds, nor in those of such other recently hyperactive automotive sector names as Delphi Corp. or Visteon Corp.

Qwest was heard by high-yield syndicate sources to have priced an upsized $1.75 billion three-part offering of senior notes, via joint bookrunning managers Merrill Lynch and Deutsche Bank Securities. The deal was increased by $500 million from the originally announced size.

The first tranche, of $400 million 10-year notes issued by the company's regulated operating subsidiary, Qwest Corp., priced at par to yield 7 5/8%, in line with pre-deal market price talk.

The second tranche, of $750 million eight-year floating-rate notes, also issued by Qwest Corp., priced at par to yield 325 basis points over the 3-month Libor rate, also in line with price talk, while the third tranche, of $600 million notes issued by the parent Qwest Communications International, was structured as an add-on to the company's existing $500 million of 7½% senior unsecured notes due 2014. The add-on issue priced at 91.827, to yield 8 7/8%, at the top end of price talk of a yield 100 to 125 basis points off the Qwest Corp 10-year issue, or 8 5/8% to 8 7/8%.

The Denver-based telecommunications company's drive-by deal priced just a day after the company announced that it would sell $1.25 billion of bonds and take out three issues of existing bonds totaling $904 million with a portion of the proceeds. Qwest also said Wednesday that it would use much of the remaining proceeds to pay down the bulk of its 2007 term loan debt.

After Qwest's announcement early Tuesday, the deal was marketed to potential investors that afternoon via an afternoon conference call, during which company executives made the case that Qwest had put its various accounting, legal and liquidity problems behind it and was making progress in bringing down debt levels and leverage ratios and improving cash flow.

A syndicate source said that the deal had been upsized by $500 million because there had been "greater demand across the deal structure" - in other words, for all three tranches - leading Qwest and its underwriters to increase the overall size of the deal.

Interest penalty a complication

Commenting on the fact that the third tranche priced at a steep discount to par in order to produce of yield of 8 7/8%, the source noted that the company has for some time been paying an interest penalty of 50 basis points on the existing 7½% notes because they are not registered. That penalty, specified in the indenture, is scheduled to end after the close of business Thursday and will be gone starting Friday - but it may have muddied the waters a bit when it came to the new issue.

Certainly, by the time the new bonds settle, on June 17, the penalty interest on the existing bonds will be ancient history. However, just for the moment, people were pricing the bonds as though they were carrying an 8% coupon - the nominal 7½%, plus the 50 basis points penalty - pushing the price lower. The syndicate source noted that in the secondary market, for instance, the existing 7½% notes had been trading around 92.25, prior to the deal and he attributed the lower initial price for the add-ons to the confusion over the interest penalty.

"It was a complicated situation for people to get their hands around," he allowed.

Primary "wide open"

With all of that said and done, however, the source said that "the headline here - what we really should talk about - is that the market is wide open. A benchmark issuer was able to bring a deal, upsize it and price within price talk, overnight. That really demonstrates the depth of the bid that there is right now in the high-yield market."

DirecTV sells $1 billion in drive-by

That the market was humming along swimmingly Wednesday could not be denied, with investors snapping up DirecTV's big deal, even as the market was buying the Qwest behemoth.

The El Segundo, Calif.-based satellite broadcasting industry leader announced in the morning that it would sell $1 billion of new 10-year notes - and by late afternoon, the deal was done.

High-yield syndicate sources said that the bonds - which were officially sold in the name of two DirecTV units, DirecTV Holdings LLC and DirecTV Financing Co. - carried a 6 3/8% coupon, and priced at 99.087 to yield 6½%, which was somewhat wide of pre-deal market price talk envisioning a yield in the 6¼% area.

The deal was brought to market by joint bookrunning managers Banc of America Securities and Credit Suisse First Boston.

DirecTV said that it would use about half of the anticipated proceeds to repay $500 million of borrowings under its current senior secured credit facility, and will hold the rest for general corporate purpose.

Service Corp., Chiquita announce deals

Two other well-known names were seen joining the forward calendar.

Houston-based deathcare giant Service Corp. International showed that the market surely has some life in it, by announcing plans to sell $300 million of unsecured senior notes due 2017 and use the deal proceeds, together with available cash, to retire its 7.2% notes due 2006 and 6 7/8% notes due 2007.

Junk market syndicate sources said that the Rule 144A/Regulation S deal will be marketed to potential buyers via an investor call on Thursday, with pricing anticipated on Friday via joint bookrunning managers Merrill Lynch & Co. and JP Morgan.

And Chiquita Brands International Inc. is expected to sell $225 million of 10-year senior unsecured notes, although the timing on that deal and the investment banks involved have yet to be announced. Chiquita's general counsel, Bob Olson, cited the legal confidentiality restrictions associated with Rule 144A bond offerings. Investment banking sources also had no information immediately available.

The deal comes as Chiquita is preparing to launch a new $600 million senior secured credit facility. The Cincinnati-based banana and other fresh produce importer's prospective bond deal is closely tied to the complex credit facility deal structurally, with the bond issue proceeds slated to be used to replace some of one scheduled loan and to completely eliminate a second - which in turn would be available in its entirety should the company for some reason fail to complete the bond issue.

Life returns to primary

With the two billion-dollar-plus deals now in the books, the other deals for Chiquita and Service Corp. upcoming, and still other deals having priced earlier this week for such well-known names as Chesapeake Energy Corp. and Tekni-Plex Inc., it would seem that the primary market has shaken off its recent doldrums.

A buyside source said attributed the sudden revival to "the decline in the Treasury yields again; people are scouring around, looking for yield again, and the high-yield markets have rallied a little bit. The environment that was pretty sloppy has kind of come back a little bit."

Asked whether potential issuers who had recently shunned the junk market might now feel that it was safe to go back into the water, so to speak, he agreed that "yeah, they're going to try. They've seen what's happened to the Treasury market," where benchmark yields have been falling sharply over the last week or so - with the 10-year governments lately dipping below 4%.

"They've got their fingers crossed that there's enough money out there searching for high yields - if not in the high yield funds, in other places - so that they'll be able to get things done now at decent rates."

And some of that money looking to be put to work may even now be in the high-yield mutual funds, which showed a $976 million net inflow in the week ended last Wednesday - the biggest individual weekly inflow since September 2003 and the first inflow of any kind in more than 15 weeks.

The funds "have been showing negative numbers for some time," he said - nearly $7 billion total having hemorrhaged from the funds during those 15 weeks of outflows, "so probably, people were encouraged by it [the massive inflow last week]."

Late-day selling

In the secondary sphere Wednesday, a trader opined that "we definitely saw some selling pressure at the end of the day." He said that the market had been "pretty quiet across the board for the better part of the morning and afternoon, but now [in the later afternoon] "we're seeing some paper definitely weaken up here, some sellers coming in."

However, he said it was more of a case of pushing market quotes down lower rather than "any real super-duper selling;"

He said that some of the issues that had been higher, in the 96 bid, 98 offered area "are now offered where they were [previously] bid."

For instance, he saw Hanger Orthopedic's 10 3/8% notes "got to be a 96 bid, 98 this morning, and now they're 95 bid, 96 offered, so the bid has now turned into the offering. You could say that about a lot of paper today, especially near the end of the day."

The trader, and others, saw things not much changed in the existing bonds of companies heard to be bringing new bond offerings; for instance, he saw Service Corp. International's 6½% notes due 2008 at 101.5 bid, 102.5 offered, and its 6¾% notes due 2016 at par bid, 102 offered, neither of them much changed on the session.

And Chiquita's 7½% senior notes due 2014 were holding steady at 94.5 bid, 95.5 offered, he said, after seeing "some decent two-way flow in that name."

He said that "there's been some sellers out there - but they get absorbed pretty quickly," although he suggested "I'd be interested to see how that trades [Thursday]."

As for Qwest, he saw its bonds "under some pressure" in response to the news of the massive debt sale. He pegged Qwest's 7¼% notes due 2011 as having eased two points to 91.5 bid, 93.5 offered.

Auto sector quiet

Outside of that new-deal-linked area, traders saw not a lot going on in autos, even on the news that billionaire investor Kerkorian's investment vehicle, Tracinda Corp., had raised its stake in GM to 7.2% from 3.89% previously - nearly double - by buying 18.9 million shares tendered by GM's stockholders under its now-ended $31 per share tender offer.

News of Kerkorian's interest in increasing his already substantial stake in GM had boosted its shares when it surfaced last month, but only made the bonds marginally better.

GM's 8 3/8% notes due 2033 "were pretty much unchanged" at 80.5 bid, 81.5 offered, a trader said.

He also saw Delphi's 6½% notes due 2013 down perhaps a point at 73 bid, 74 offered, but saw Visteon's bonds "really not much changed at all."

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