Domestic primary stays quiet; Europe sees FTE deal hit the road; Linn Energy off on SEC probe

By Paul Deckelman and Paul A. Harris

New York, July 2 - The high-yield primary arena remained quiet on Tuesday in the run-up to Thursday's July 4th holiday in the United States.

No new developments were reported in the domestic, dollar-oriented segment of the new-deal market.

Syndicate sources in Europe did see German vehicle parts manufacturer FTE Automotive GmbH begin marketing a euro-denominated seven-year deal to would-be buyers, with pricing seen likely sometime next week.

And they said that French video technology provider Technicolor's planned $330 million secured paper deal is still waiting in the wings, apparently unfazed by some tinkering that took place on its pending dollar- and euro-denominated bank loan deal.

Away from the new-deal arena - what there is of it - secondary traders saw some definite downside movement in Linn Energy LLC's bonds, along with a steep fall in its shares, on news that the Securities and Exchange Commission is scrutinizing Linn's proposed acquisition of sector peer Berry Petroleum Co.

Berry's bonds were seen mostly holding steady, although its shares were lower, though not quite as badly as Linn's.

Also on the energy front, traders said that coal names were still topical in the wake of last week's presidential speech laying out plans to combat carbon emissions, plans which opponents criticized as a "war on coal," despite administration denials of any such intent.

Among the names seen in the market, albeit on not much trading, were Alpha Natural Resources, Inc., Arch Coal, Inc. and the bankrupt Patriot Coal Corp.

However, traders said that activity was sparse in general.

Statistical indicators of market performance turned mixed on Tuesday after having firmed across the board on Monday.

FTE Automotive roadshow

FTE Automotive began a roadshow on Tuesday in Frankfurt for its €240 million offering of seven-year notes (expected ratings confirmed B1/expected B).

The deal is expected to price during the middle part of the July 8 week.

Morgan Stanley has the books.

Proceeds will be used to refinance debt incurred Bain Capital's acquisition of FTE from PAI Partners. Proceeds will also be used to refinance FTE's existing debt and for general corporate purposes.

The issuing entity will be Falcon (BC) Germany Holding 3 GmbH, the parent of the Ebern, Germany-based producer of hydraulic actuation systems for passenger cars and commercial vehicles.

Winding down

Primary market activity in Europe and the United States is expected to grind to a halt heading into Wednesday's early close in the States.

Although Friday is not an official holiday in the bond market, it will be used as a vacation day by a wide swath of market participants, rendering a virtual four-day Independence Day holiday weekend, sources say.

Dealers in Europe are not expected to generate any new deal activity until Monday, with so many of their U.S. counterparts on the sidelines until then, a London-based banker said on Tuesday.

Aside from the above-mentioned FTE Automotive deal, France's Technicolor remains in the market with a bond deal.

The company ran a mid-June roadshow for a $330 million offering of seven-year senior secured notes (expected ratings B3/B).

The deal is still alive, according to a source who is watching both the bond and loan transactions.

However, the size and structure of the bond deal may be subject to review, the source added.

On Monday, Technicolor upsized its U.S. seven-year term loan B to around $835 million from $645 million and downsized its euro seven-year term loan B to around €175 million from €250 million, according to a market source.

Recommitments for the loans are due on Monday.

Timing on the bond deal, meanwhile, is still unclear, the source said.

It is being led by joint bookrunners J.P. Morgan, Goldman Sachs and Morgan Stanley.

Summer expectations

Post-Fourth of July primary market volume remained an open question, heading into the Tuesday close, according to a high-yield syndicate official.

There are deals to be done, but among them are opportunistic financings that are likely to await a return to stability in the markets.

Presently the primary market is facing headwinds from two directions, the banker said.

One is Treasuries. The months of May and June brought about a sea change in Treasuries, with a move up of more than 50 basis points, threatening to swamp some long-duration, low-coupon junk bonds that priced in the white hot high-yield primary market of early 2013.

"The market now seems to be getting comfortable with a 10-year Treasury yield around 2½%," the syndicate official said on Tuesday.

The other source of headwinds is redemptions.

High-yield funds have sustained five straight weeks of big outflows, the banker recounted.

The effect has been to redirect attention to the secondary market, where bonds that were "priced on the screws" in February, March and April have lately been selling at sweet discounts to their new issue prices.

A buyside that had been selling bonds in order to get in on the big calendar has lately become reticent to do so because selling, in some cases, would mean selling at a loss.

Also, amid the negative flows, the buyside has been hording cash, sources say.

"That's going to slow things down in the new issue market," the official said.

"But late last week we saw a positive sign when EPFR reported a daily inflow of $229 million on Friday," the sellsider said.

"It could be that the tide is turning again."

Holiday holds down action

In the secondary market, a trader said that participants were "definitely going into a holiday mode," winding their activities down ahead of what is expected to be a deadly dull, abbreviated session on Wednesday, preceding Thursday's July 4th holiday - and what is expected to be a snooze-fest on Friday to rival Wednesday.

The Securities Industry and Financial Markets Association has recommended a 2 p.m. ET close on Wednesday for Junkbondland and all other U.S. fixed-income markets.

However, traders said that unofficially, what little activity is expected will probably be over by noon ET at the latest, with people heading for the exists after that.

The trader said that "even in the higher quality high-yield stuff, there was not a lot trading."

Linn leads the way

Probably "the most notable name" in the junk market on Tuesday, a trader said, was that of Linn Energy, whose bonds and shares were both lower on the news that the SEC is probing the Houston-based oil and gas producer's proposed acquisition of sector peer Berry Petroleum.

The trader said that the company's bonds "were somewhat active, trading anywhere between plus or minus 99" on its 7¾% notes due 2021.

He opined, "That's a little bit lower, probably down 1½ to 2 points."

A second trader also saw the bonds at 99 bid, calling them down 3 points on the day.

A market source at another desk said that those Linn bonds "were the most actively traded issue on Trace that was not a 'crossover' name" mostly of interest to high-grade investors, such as Ford Motor Credit Co. or Plains Exploration & Production.

He saw over $13 million of the Linn bonds having changed hands at mid-afternoon and quoted the bonds trading at 981/2, calling that down 2½ points on the day.

He also saw Linn's 8 5/8% notes due 2020 likewise easier, at 102½ bid.

The first trader meantime said that Denver-based Berry Petroleum's 6 3/8% notes due 2022 were "moderately active.

"They were trading right around the same level [where they have recently been], actually," in a 99½ to par "zip code."

About $7 million of the Berry bonds had changed hands at mid-afternoon, a source reported.

Linn disclosed Tuesday that the SEC is looking into the proposed $2.5 billion all-stock deal, which was announced in February. It said that it would cooperate fully with the regulators.

Linn's Nasdaq-traded shares swooned by $6.24, or 18.74% on Tuesday, to end at $22.05. Volume of 26 million shares was over 10 times the norm.

Berry's New York Stock Exchange-traded shares ended down $2.47, or 5.84%, at $39.86. Volume of 5.5 million shares was almost nine times the usual turnover.

Coal names still scrutinized

Away from Cengage, a trader said that "all of the coal stuff has been getting hammered recently, so [Tuesday's activity] is just a continuation."

He saw the sector names, such as Bristol, Va.-based Alpha Natural Resources' 6¼% notes due 2021, about unchanged on the session.

A market source at another shop said the bonds gained maybe a quarter-point, to 80½ bid, and also saw St. Louis-based Arch Coal's 8¾% notes due 2016 steady at 101 7/32. The latter credit saw some $7 million having changed hands, making it one of the busier names in an otherwise dull session.

A trader said that "some of the coal names dropped down," though on "not a lot of volume."

He said that Arch's 7¼% notes due 2020 and 7¼% notes due 2021 were both quoted around an 80 to 82 bid range, which he called "pretty much unchanged, on not a lot of volume".

"They were in the mid-80s a week ago, and now they're in the low 80s."

He said that the bonds "dropped from the mid-80s to 80-82 last week," probably in response to indications the Obama administration will take a tougher line against coal-fired power plants and other coal-fueled facilities as part of what it called a coordinated effort to cut carbon emissions, citing global warming concerns.

Administration critics warned that mounting what they termed a "war on coal" could cost tens of thousands of jobs and damage a key segment of the economy, although its officials denied that there was a war on coal.

Having had their fall, the trader said, the bonds "were just staying there" this week.

Patriot Coal's 8¼% of 2018 were going home in a 45½ to 48½ bid context, although he said that "there was no volume today; it was a lot of nothing."

"They've been in the 40s for two weeks, or three weeks - it might be 48, then 46 - so right now, there's no real difference."

St. Louis-based Patriot, which filed for Chapter 11 protection from its bondholders and other creditors almost exactly a year ago, announced on Tuesday that its recent talks with the United Mine Workers of America union, which represents most of its employees, "have resulted in substantial progress toward a consensual resolution.

On July 1, Patriot exercised the authority granted to it by the bankruptcy court to implement changes to wages, benefits and active employee health care, but chose to implement terms that are significantly improved from those approved by the court. Patriot and the UMWA are continuing to meet in a diligent effort to resolve the outstanding differences and reach a consensual agreement."

The company release also said that the company and the union have additionally reached an agreement through which retiree healthcare will continue to be provided at current benefit levels through July and August.

The company said that its talks with the union "are expected to continue over the coming weeks. The parties are targeting completion of a final resolution to be presented to UMWA members by the end of July."

PetroQuest, Hercules firm

Among recently priced new issues, a trader was quoting PetroQuest Energy Inc.'s 10% notes due 2017 at 104 bid, 105 offered.

It was the first such quote seen on the Lafayette, La.-based independent oil and natural gas company's $200 million issue since it priced on Friday at par.

The deal was structured as a "mirror" tranche to the company's existing bonds.

The trader also saw Hercules Offshore, Inc.'s 8¾% notes due 2021at 101¾ bid, 1021/2, about half a point better than Monday's closing levels.

The Houston-based provider of shallow-water drilling and marine services to the oil and natural gas exploration and production industry had priced $400 million of those notes on Friday at par. They quickly moved above the 101 level in initial aftermarket dealings and then proceeded to hold onto those gains over the next few sessions.

Valeant very steady

Valeant Pharmaceuticals International Inc.'s giant-sized new offering was seen little changed on Tuesday, mostly just holding onto the hefty gains which those bonds had notched after pricing on Thursday and then had built upon on Friday and again on Monday.

A market participant said that its 7½% notes due 2021 were unchanged at 104¼ bid, 104 5/8 offered.

And he saw its 6¾% notes due 2018 also holding in, but not advancing beyond, 103 bid, 103½ offered.

On Thursday, Valeant, a Canadian specialty drug manufacturer, came to market with a $3.225 billion two-part offering, which was both the first megadeal seen in the junk market in over a month and the biggest since late March.

The company priced $1.625 billion of the 7½% notes and $1.6 billion of the 6¾% notes, both at par, and both of those tranches were seen to have traded strongly higher when the new issue was freed for secondary market dealings later Thursday.

Activity in the new Valeant bonds was said to have been busy, with seemingly everyone wanting a piece of the deal, one market participant said.

Market indicators turn mixed

Statistical junk market performance indicators turned mixed on Tuesday, after having been higher across the board on Monday.

The Markit Series 20 CDX North American High Yield index lost 3/8 of a point on Tuesday to end at 103 bid, 103¼ offered. It had risen by¾ of a point on Monday.

The KDP High Yield Daily index notched its fifth consecutive advance on Tuesday, finishing up by 7 basis points at 73.06. That follows a 13-bps rise on Monday. Its yield, meanwhile, fell for a fifth consecutive session, ending down 3 bps at 6.34%, on top of Monday's 4 bps narrowing.

And the widely followed Merrill Lynch High Yield Master II index also recorded its fifth improvement in a row on Tuesday, rising by 0.095%, on top of Monday's 0.139% upturn.

Tuesday's gain lifted the index's year-to-date return to 1.739%, up from 1.642% on Monday, and well up from last Tuesday's 0.384% reading - its lowest level for the year.

Sara Rosenberg contributed to this review

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