Market quietly ends slow week; junk avoids stock slide; Navistar lower on engine cost worries

By Paul Deckelman and Paul A. Harris

New York, July 6 - The high-yield market closed out its quietest week of 2012 so far on Friday. As had been the case on Thursday, there were no pricings seen of junk-rated, U.S. dollar-denominated paper.

With just two very small deals - Hawthorne, N.J.-based commercial and retail lender Community Choice Financial Inc.'s $25 million issue of senior secured notes due 2020 and Palo Alto, Calif.-based specialty finance firm Hercules Technology Growth Capital Inc.'s $38.75 million add-on to its existing 7% senior unsecured notes due 2019 - both of which priced early in the week and then promptly disappeared from the market, the week's issuance came to just $64 million, according to data compiled by Prospect News.

This week thus became the slowest new-issuance week so far this year - even slower than the week ended June 8, the previous slowest week of 2012, during which saw $317 million price in two tranches.

Year to date, $155.973 billion has priced in 335 tranches, running about 19% behind the pace seen a year ago, when $192.631 billion had priced in 432 tranches by this point in the calendar.

As had been the case for most of the holiday-shortened week, there wasn't too much more going on in the secondary market.

Junkbondland largely avoided the sharp slide seen in the equity market after the release of considerably weaker than expected June U.S. job-creation numbers.

Statistical indicators of junk market performance were mixed, with the cash market indexes pointing higher but derivatives on the downside.

Among specific names, though, Navistar International Inc. - junk's most-active issue - was off by several points, in line with its sliding shares, on investor fears on how much money the embattled truck, bus and diesel engine maker will have to spend in order to bring its engines into compliance with federal environmental laws.

Little activity was seen in the bonds of Verso Paper Corp. and NewPage Corp., which rose earlier in the week after Verso offered to acquire the bankrupt NewPage - but they were seen ending the week holding onto most of their initial gains, despite NewPage having spurned Verso's more than $1.4 billion offer.

'Not bad for a vacation week'

With many market players stretching the July 4 Independence Day holiday across the ensuing Thursday and Friday sessions, ranks continued to be thin and activity nonexistent in the primary market Friday.

However the week ahead figures to be a different story, sources say.

Based on Friday conversations, a conservative tally envisions that the week ahead could see around $5 billion in eight deals just in dollar-denominated business, with at least one sell-sider asserting that the July 9 week's issuance could push substantially higher than that mark (see related story in this issue).

One reason for the expected ramp-up in activity is the continuing flow of cash into the asset class.

High-yield mutual funds saw $780 million of inflows for the week ending Wednesday, according to a trader who was citing a weekly report from Lipper-AMG.

"That's not bad for a vacation week," the trader added.

Inflows combined with coupon payments, against a backdrop of a thin late-June early-July calendar, mean that the buyside accounts have cash which needs to be put to work.

Sooner may be better

Given the present volatility in the global capital markets, market conditions cannot be discounted as a potential barrier, sources said on Friday.

Nevertheless, given that there is cash to put to work and a pipeline of deals - some of them bridged financings - it should be a busy week, given a reasonably supportive capital markets backdrop.

And uncertainty ahead with respect to the performance of the U.S. economy and the ability of euro zone countries to deal with their credit problems, could combine to make the ordinarily quiet midsummer interval in the primary market appear to prospective issuers as an island of stability, the trader said.

Hence issuers might be coming to the conclusion that sooner is better than later.

Junk hangs in

A trader said that "we had obviously light volume" on Friday.

"Nobody was in - everybody had just a skeleton crew in to handle phone calls in case there were any blowups," but he saw little real trading.

He said that a check of the Trace system showed that only $444 million of bonds traded on a round-lot basis - and that included such credits as Petroleos de Venezuela SA, that country's state-run oil company, "which is not really high yield," being more of an emerging markets name.

While seeing the CDX index lower, he said the cash market "was relatively unchanged - maybe slightly weaker in some names, but really, there just wasn't enough volume today.

"Nobody was in," he said in explanation why junk bonds did not join in the massive slide seen in the stock market following the release of June job-creation numbers by the U.S. Labor Department.

With Washington reporting that only 80,000 non-farm payroll jobs had been created last month - less than the 100,000 figure analysts were expecting and well down from the 200,000 or so jobs the economy requires creation of each month to stay on an even keel, according to economists, "the non-farm payroll number was worse than anticipated," he said, "which led to that selloff in the equities market initially."

The bellwether Dow Jones Industrial Average dropped by 124.20 points, or 0.96%, to end at 12,772.47, while the broader Standard & Poor's 500 was down 0.94% and the still-broader Nasdaq composite plunged 1.30%.

But in junk market dealings, "nobody was around, so there wasn't that much trading."

Indicators mixed on day, week

Statistical market performance measures were mixed for a second consecutive session on Friday, after having been up across the board for a third straight session on Tuesday.

A trader saw the Markit Group CDX North American Series 18 High Yield Index down by 9/16 point, ending at 96¼ bid, 96½ offered, its second consecutive loss; on Thursday, the index was down by 3/8 point, breaking a string of three consecutive gains.

The index was also down on the week from the 96 3/8 bid, 96 5/8 offered reading seen at the close the previous Friday, June 29.

. However, the KDP High Yield Daily Index notched its seventh straight gain on Friday, albeit a small one; it rose by 1 basis point to close at 73.59, after Thursday's 10-bps gain. Its yield came in by 2 bps on Friday to 6.51%, after having narrowed by 4 bps on Thursday.

The index thus also improved from the 73.20 reading and 6.65% yield seen a week earlier.

And the widely followed Merrill Lynch U.S. High Yield Master II Index was up for a ninth consecutive session Friday, gaining 0.064%, on top of Thursday's 0.086% rise.

Friday's gain lifted its year-to-date return to 7.643%, up from 7.573%on Thursday.

The index showed a one-week gain of 0.551%, its fifth consecutive weekly gain. Its return a week earlier stood at 7.053%

Friday's finish also set a new 2012 high for the index, eclipsing the old mark, set just on Thursday. The index is thus at its highest point since the end of 2010, when it returned 15.19%.

Navistar knocked around

Among specific names, Navistar International Corp.'s 8¼% notes due 2021 stood out on Friday, with the Lisle, Ill.-based truck, bus and diesel engine maker's bonds lower in the day's heaviest trading, with more than $30 million changing hands.

A trader said "there may have more trades getting posted, but it wouldn't be much more, because a lot of people left around noon [ET] or shortly thereafter."

He saw those bonds off about 2 points on the day, finishing in a 94½ to 95¾ context.

He cited the company's announcement - that Navistar - which has had trouble meeting the stringent pollution-control standards promulgated by the federal Environmental Protection Agency, resulting in heavy fines - plans to introduce what it terms its "next generation clean engine solution."

Navistar said that its In-Cylinder Technology Plus, or ICT+ series of engines, will meet the 2010 EPA emissions regulations "and position the company to meet greenhouse gas rules in advance of 2014 and 2017 requirements." Engines so equipped are expected to be available beginning early 2013.

While the announcement by the company that it will add components to its engines in order to finally bring them in line with the EPA standards after more than two years of battling Washington over the failure of its Class 8 heavy truck motors to meet those EPA rules would appear to be a positive - removing a continued source of uncertainty about its business - investors were disappointed. Analysts said that they were expecting a quicker fix on the regulatory problem, such as the recently rumored plan for Navistar to purchase engines from competitor Cummins Inc., which have already met the EPA requirements.

On top of the delays in getting the problem solved, the analysts said that investors also fretted over the likelihood that Navistar will have to incur heavy additional costs to get its new engine approved by federal regulators, at a time when it is already bleeding money - it reported a net loss of $172 million for the fiscal second quarter last month, chiefly due to losses in its engine division.

All of that, the trader said, "triggered the selloff" in the bonds, as well as in Navistar shares; its New York Stock Exchange-traded equity nosedived by $4.37, or 15.18%, to close at $24.42, on volume of 7.2 million shares, more than double the usual volume.

"That was really the only kind of news today," the trader concluded.

Paper names hold most gains

Several traders said that not much else was actually going on Friday.

For instance, they saw no real further movement in the bonds of Verso Paper and NewPage, which had moved up solidly earlier in the week when Memphis-based coated-paper manufacturer Verso made an unsolicited offer to buy its rival, currently restructuring through the bankruptcy courts.

That news caused NewPage's 11 3/8% senior secured notes due 2014 to shoot up to around a 69-70 context, a gain of 8 points, on the news; although they came off those peak levels when NewPage rejected the Verso acquisition effort, they were seen by a trader on Friday finishing out the week still hanging in around 68¼ bid, 69¼ offered, well up from their pre-news levels.

"They're holding right in there," he said. "They're unchanged today. There still could be something to it."

Verso's 11 3/8% senior subordinated notes due 2016 had moved up into the mid 50s from pre-news levels in the upper 40s, and were ending the week still there.

Its 8 3/8% second-lien secured notes due 2019 rose 7 or 8 points on news of the Verso offer, to around the 49 bid level, eventually settling in around 46, where they were on Friday.

Meanwhile, its 11 ¾% first-lien notes due 2019 moved up from 76 bid pre-news to highs around 85, before coming off those peaks to around 81 bid, where they were seen ending the week.

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