Upsized American Airlines leads session; recent deals show strength; funds lose $1.19 billion

By Paul Deckelman and Paul A. Harris

New York, Sept. 18 – American Airlines Group, Inc. made an unscheduled landing in Junkbondland on Thursday. The Fort Worth, Texas-based airline giant brought an upsized $750 million of five-year notes to market, syndicate sources said.

That was one of four deals producing a total of $1.6 billion of new dollar-denominated, fully junk-rated paper. The day’s volume was somewhat less than the $2.02 billion that had priced in four tranches on Wednesday, although most of that session’s deal volume was attributable to just one transaction – the two-part megadeal from engineering and construction services provider Aecom Technology Corp.

In contrast, Thursday’s activity was more broad-based. Besides American Airlines, poultry processor and pet foods producer Simmons Foods Inc. did $415 million of secured seven-year notes, wire and cable distributor Anixter Inc. priced $400 million of seven-year paper, and live entertainment producer SFX Entertainment Inc. added an upsized $65 million on to its existing five-year secured issue.

Traders saw the day’s new deals having firmed when they hit the aftermarket, and they said Aecom and Wednesday’s other new deals – York Risk Services, JAC Products and the split-rated Alcoa Inc. – were all up smartly from their respective issue prices.

Away from the new deals, coal names like Walter Energy Inc., Arch Coal Inc. and Alpha Natural Resources Inc. were getting clobbered after Goldman Sachs put out a negative report on the industry.

Rite Aid Corp. posted sharply better fiscal second-quarter results versus a year ago and reported progress on the debt and liquidity fronts as well – but the drugstore chain operator also issued lower full-year sales, EBITDA and earnings guidance, and its bonds were seen lower on the day.

Statistical indicators of junk market performance were higher across the board for a second consecutive session on Thursday after having been mixed on Monday and Tuesday and lower for three sessions before that.

However, another statistical measure – the flow of cash in to and out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – was solidly lower in the latest week, its third straight weekly setback.

Junk funds lose $1.19 billion

As things were winding down on Thursday, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $1.19 billion more left those funds than came in to them in the week ended Wednesday.

A market source said that 24% of that outflow was ETF related, with the remaining 76% attributable to managed junk bond mutual funds.

The week’s outflow was the third in a row reported by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., which last week had seen a $766 million cash loss from the funds during the seven-day period ended Sept. 10. And that downturn had followed a $198 million outflow in the week ended Sept. 3.

The three outflows have amounted to $2.15 billion.

They, in turn, had followed three consecutive weeks of inflows before that totaling $3.58 billion, including the $2.22 billion cash injection in the seven-day period ended Aug. 20, which was the biggest such improvement seen so far this year, according to a Prospect News analysis of the figures.

However, the big outflow in the latest week pulled the flows’ four-week moving average into the red at negative $370 million, versus a positive $483 million reading the week before, the market source said.

On a longer-term basis, although inflows to the weekly-only reporting funds have still now been seen in 24 of the 37 weeks since the start of the year, according to the analysis, against 13 outflows, the year-to-date balance lists well into the red, with the source pegging the cumulative net outflow figure at $4.5 billion; a key factor was four straight weeks of massive outflows between the week ended July 16 and the week ended Aug. 6 – the latter a record $7.07 billion money hemorrhage.

He said that 54% of that 2014 red ink was attributable to the ETFs.

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

In 2013 – which had 53 reporting weeks due to a statistical quirk – inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, the analysis indicated.

The latest week’s outflow was not unexpected. One trader said that it “made sense,” with daily outflows having been seen last Thursday and Friday as well as Monday of this week, adding up to about $1.5 billion. That more than offset the inflows that came along with the improved market tone seen on Tuesday and Wednesday.

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime saw $3.16 billion of outflows in the latest week, according to a market source.

It was the third consecutive outflow seen by EPFR and came on the heels of the previous week’s nearly $2 billion cash bleed and a smallish downturn in the Sept. 3 week. Before that, the service had seen two straight inflows following five straight weeks of massive outflows.

EPFR’s methodology differs from AMG/Lipper’s, as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper’s strictly domestic orientation.

In the latest week, the source said, fully 71.6% of the $3.16 billion outflow was attributable to the non-U.S.-domiciled funds.

While the two services’ respective weekly results usually point pretty much in the same direction, that has not always been the case. In some weeks in which AMG/Lipper showed outflows, EPFR saw overall inflows, or vice versa. EPFR thus has recorded inflows in 26 out of the 37 weeks since the start of the year, against 11 weekly outflows during that time.

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming in to or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable – more so than those of other, larger cash sources – and thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years and which had mostly continued on into this year as well.

A market source meantime said that leveraged-loan funds saw outflows of $583 million in the latest week and a $4.4 billion cumulative 2014 loss so far. Those funds have been struggling mightily since April, when an incredible winning streak of nearly two consecutive years of weekly inflows abruptly came to an end.

Investment-grade bond funds saw a net inflow this week of $371 million, versus the previous week’s $934 million.

American Airlines upsizes

A reinvigorated primary market – spurned by a positive takeaway from Wednesday's largely accommodative FOMC minutes – saw four issuers bring single-tranche deals, generating a total of $1.6 billion of proceeds.

Three came as drive-bys. Two were upsized. All four priced on top of or in the middle of price talk.

American Airlines priced an upsized $750 million issue of non-callable five-year senior notes (B3/B-) at par to yield 5½%.

The general corporate purposes deal was upsized from $500 million.

The yield printed on top of yield talk and on top of initial guidance.

Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., Barclays, BofA Merrill Lynch, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. and J.P. Morgan Securities LLC were the joint bookrunners.

Simmons Foods secured notes

Simmons Foods completed the only deal that was in the market overnight, a $415 million issue of seven-year second-lien senior secured notes (Caa1/CCC+) that priced at par to yield 7 7/8%.

The yield printed in the middle of the 7¾% to 8% yield talk.

Wells Fargo Securities LLC ran the books.

The Fayetteville, Ark.-based poultry processor and pet-food maker plans to use the proceeds to fund the tender offer for its notes maturing in 2017, to redeem or retire any notes not purchased in the tender offer, to pay down bank debt and to fund a $26.5 million dividend to shareholders.

Anixter seven-year bullet

Anixter priced a $400 million issue of non-callable seven-year senior notes (Ba3/BB) at par to yield 5 1/8%.

The yield printed in the middle of the 5% to 5¼% yield talk and in line with earlier guidance in the low 5% yield context, according to a trader.

Wells Fargo was the left bookrunner for the debt refinancing deal. BofA Merrill Lynch, JPMorgan and RBS Securities Inc. were the joint bookrunners.

SFX Entertainment tap

SFX Entertainment priced an upsized $65 million add-on to its 9 5/8% senior secured second-lien notes due Feb. 1, 2019 (Caa1/B-) at par to yield 9.617%.

The reoffer price came on top of price talk.

An additional $10 million of notes with identical terms are being issued to an entity controlled by Robert F.X. Sillerman.

Barclays was the lead left bookrunner. Deutsche Bank Securities Inc., Jefferies LLC and UBS Securities LLC were the joint bookrunners.

The New York-based company plans to use the proceeds for general corporate purposes, including repayment of the $20 million outstanding under its revolver, and for funding acquisitions.

Service King talks 8% area

Service King Collision Repair Centers talked a $200 million offering of eight-year senior notes (expected ratings Caa1/CCC+) to yield in the 8% area.

The talk came wide relative to earlier guidance in the high 7% yield context, according to a high-yield bond trader.

Books were scheduled to close at 5 p.m. ET Thursday, and the deal is set to price on Friday.

JPMorgan, BofA Merrill Lynch, Credit Suisse, Deutsche Bank and Macquarie are the joint bookrunners.

GameStop Corp. is also expected to price its $250 million offering of five-year senior notes (Ba1/BB+) on Friday, sources say.

No price talk was available at press time Thursday. However, the deal has been discussed in a mid-5% yield context, according to a trader.

BofA Merrill Lynch and JPMorgan are the joint bookrunners.

Burger King whisper

The market continued to buzz about the Burger King Worldwide/Tim Hortons, Inc. deal on Thursday.

The $2.25 billion offering of 7.5-year senior notes (Caa1/B-/B) is on a roadshow expected to run into the week ahead, including presentations in Canada.

Talk has yet to surface, but conversations have been taking place in a yield context of 5½% to 5¾%, a trader said Thursday.

The deal figures to get a warm reception because of its size and because of the involvement of Warren Buffett, who is investing in the merger, sources say.

Buffet's involvement in the H.J. Heinz Co. $3.1 billion issue of 4¼% notes due October 2020, which priced in March 2013, served to amplify the buyside's appetite for that deal, a high-yield investor said.

American Air flies high

American Airlines Group’s new 5½% notes due 2019 were seen by traders to have gained some altitude when they hit the aftermarket.

A trader initially said that he had seen the bonds bid at 100 3/8, versus their par issue price, with no offered level. But another trader later saw two-sided markets between 100½ and 101.

At another desk, a market source located the bonds at 100 13/16 bid, with over $67 million having traded, putting American high up on the list of Most Active credits.

Senior analyst Vicki Bryan of the Gimme Credit independent investment advisory service said in research note Thursday that “we would buy” the new offering, calling it “attractively” priced at 5½%.

Bryan said the air carrier’s liquidity picture is already strong and suggested that some of the proceeds might therefore go to debt repayment.

In the meantime, she concluded, “the extra debt will barely move the needle on leverage at 3.7x versus 3.6x as of June 30th on the way to 2.9x by year-end versus 6x in 2013.”

Day’s deals do well

Apart from American, Anixter’s new 5 1/8% notes due 2021 were seen by one market source “wrapped around 100½” after having priced at par earlier.

A second market source said the Glenview, Ill.-based electrical and electronic wire and cable distributor’s deal had firmed to 100 3/8 bid, with over $51 million having changed hands by the close.

The new Simmons Foods 7 7/8% second-lien senior secured notes due 2021 were also seen having actively traded when they were freed for secondary dealings, with volume of over $38 million.

He saw the bonds having gotten as good as 101¼ bid, well up from their par issue price.

Traders did not see any initial aftermarket activity in SFX Entertainment’s add-on to its 9 5/8% senior secured second-lien notes due 2019 following their par pricing.

Wednesday bonds trade well

With a generally better tone in the overall market, traders said Wednesday’s slate of new offerings was doing well on Thursday, with Aecom Technology’s $1.6 billion two-part transaction showing strength on very strong volume.

“Those traded OK,” one market source said, seeing both tranches of the San Francisco-based engineering, construction and technical services provider’s new deal – its $800 million of 5¾% notes due 2022 and $800 million of 5 7/8% notes due 2024 – having opened in a 101-to-102 context, versus Wednesday’s par issue price.

“Then they traded up,” he said, to a 102-to-102½ range for both tranches.

Another trader saw the 2022 bonds going home at 102 3/8 bid, with over $65 million having moved around.

He saw the 2024 notes at 102½ bid, with over $50 million having traded.

At another shop, a source suggested that as many as $60 million of each had changed hands, both at levels north of 102.

Among the day’s other deals, a trader saw York Risk Services’ 8½% notes due 2022 trading around 101, seeing them going home at 100¾ bid, 101¼ offered.

But he said there was only “small” volume in the Parsippany, N.J.-based risk- and claims-management services provider’s notes, $270 million of which had priced at par.

A second trader saw the bonds better than that, quoting them between 101 1/8 and 101 5/8.

As far as Wednesday’s other smallish deal – the $150 million of 11½% senior secured notes due 2019 from JAC Products, a Pontiac, Mich.-based maker of roof rack assemblies for light vehicles – a trader said it “didn’t look like there was a lot of volume to it,” seeing just 500 of the bonds trading at 101¾ bid. “Not a huge amount.”

A second trader quoted them at 101 5/8 bid, 102 5/8 offered.

The bonds had priced at par after the offering was upsized from an original $140 million.

Alcoa trades up

Alcoa’s new 5 1/8% notes due 2024 saw brisk volume of over $65 million, a trader said, seeing the bonds up ¼ point on the day at 101 5/8 bid.

“There was heavy volume,” another trader agreed, seeing the bulk of trades go off at bid levels between 101 and 101½. He quoted them going out at 101¼ bid, 101¾ offered.

The Pittsburgh-based aluminum producer had priced $1.25 billion of the notes at par on Wednesday; they initially rose by about a point in the aftermarket and stayed up there.

The split-rated (Ba1/BBB-/BB+) issue was priced off the investment-grade desks but traded off the junk desks at most shops, attracting considerable interest from high-yield investors.

Coal in a hole

Away from the new-deal arena, coal companies were weaker Thursday following a report from Goldman Sachs that opined that metallurgical coal prices have not yet hit bottom.

If true, that could spell trouble for the sector as it is already dealing with dwindling demand.

Birmingham, Ala.-based producer Walter Energy’s bonds “keep getting beat up,” one trader said, seeing the 9½% notes due 2019 trade down to 91 and the 11% notes due 2020 down to 56.

“There’s more melting down on that one,” a trader said.

Arch Coal was also down, and quite sizably, according to a trader.

“They have been saying they are going to start idling [some operations],” he said.

The trader deemed the St. Louis-based coal producer’s 7¼% notes due 2021 down 2½ points at 59¼, noting that the paper had hit an intraday low of 58½.

The 7¼% notes due 2020 ended off “almost a 5-sky” at 59½, and the 7% notes due 2019 fell a deuce to 62½.

Another trader pegged the 7% notes at 62½, “down a few points.”

In Alpha Natural Resources debt, one trader saw the Bristol, Va.-based coal company’s 6% notes due 2019 declining 4½ points to 66½. A second trader placed the issue in the high-60s, which was “definitely down a couple points as well.”

Rite Aid eases after earnings

Elsewhere, a trader said that Rite Aid’s 6¾% notes due 2021 were down 1¼ points on the day at 103¼ bid, 103½ offered, with over $10 million traded.

He also saw its 9¼% notes due 2020 around 110½, which he called off ¼ point, also on $10 million volume.

The Camp Hill, Pa.-based No. 3 U.S. drugstore chain operator’s bonds eased even after it reported solidly higher fiscal second-quarter sales and earnings – perhaps because it also warned investors that full-year sales and earnings would likely come in below its previous expectations.

The company also announced better liquidity and less debt versus a year ago and outlined plans to call its most expensive piece of debt for redemption next month. (See related story elsewhere in this issue.)

Indicators stay stronger

Statistical indicators of junk market performance were higher across the board for a second consecutive session on Thursday after having been mixed on Monday and Tuesday and lower for three sessions before that. Wednesday’s upturn had been the indicators’ first all-around positive finish in more than three weeks – since Monday, Aug. 25; all of the subsequent sessions until Wednesday had been either mixed or lower.

The KDP High Yield Daily index was up by 7 basis points on Thursday to end at 72.92, its second consecutive gain. On Wednesday, it had risen by 8 bps after having suffered losses in five out of the previous six sessions and in 11 out of the previous 15.

Its yield declined, also for a second straight session, coming in by 3 bps to 5.45%. On Wednesday, it had also been down by 3 bps – its first narrowing after having widened over the previous six sessions and over 13 of the previous 14 sessions.

The Markit CDX Series 22 index posted its third consecutive advance, finishing up 7/32 point at 107 3/16 bid, 107 5/16 offered. On Wednesday, it had risen by 13/32 point.

The widely followed Merrill Lynch High Yield Master II index improved for a second successive session, adding 0.17% on top of Wednesday’s 0.105% gain – its first after six straight sessions on the downside before that.

The new show of strength lifted its year-to-date return to 4.812% from Wednesday’s 4.634% and from its recent low of 4.525% seen on Tuesday. However, it still remained well below its peak level of the year so far, 5.847%, set on Sept. 1, when the index was published even though the junk market was closed for all intents and purposes due to the Labor Day holiday break.

Stephanie N. Rotondo contributed to this review

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