Market quietly closes out tremendous new-issuance week; secondary softens on day, week

By Paul Deckelman

New York, July 29 - The high-yield primary market essentially took the day off on Friday, but it was a well-earned day of rest after the colossal week that the issuers, underwriters and investors put together. Over $10 billion of new bonds priced, making it one of the busiest weeks of 2011.

The amazing week saw a staggering total of three mega-deals in the billion-dollar-plus range. The biggest of them, and now one of the biggest junk issues of all time, hospital operator HCA Inc.'s $5 billion behemoth, was radically upsized from the originally announced $1 billion.

There were also super-sized transactions from consumer packaging products powerhouse Reynolds Group Holdings, Ltd. as well as from one of the most familiar names in Junkbondland, Ford Motor Credit Co. LLC.

There were also smaller deals from the likes of Academy Ltd., Precision Drilling Corp., Antero Resources Finance Corp., AmeriGas Partners, LP, Fiesta Restaurant Group Inc. and Tempel Steel Co.

With no new deals seen priced or even announced during Friday's session, junk market participants focused mostly on the trading in new issues, most of which have moved up from their respective issue prices and some by more than a point. Only Ford Credit and AmeriGas were seen still just marginally improved from their pricing levels.

Away from the new deals, activity was restrained, partly a function of what traders call the "typical summer Friday" syndrome and partly due to continued investor unease with the uncertainty surrounding what's going to happen with the nation's debt ceiling by the ostensible Aug. 2 deadline.

Statistical performance indicators, after a strong start early in the week, were down on the session and for the week.

A $10 billion-plus week

The week only saw four days in which any pricing took place - but the fifth day was wholly superfluous after what had been accomplished from Monday through Thursday.

According to data compiled by Prospect News, about $10.5 billion of new paper had priced during the week by the time trading wound down on Friday afternoon, consisting of nine deals and a total of 11 tranches.

The issuance over just those four days eclipsed total issuance for the last six weeks and clocks in as one of the busiest weeks of the year so far, exceeded only by the $11.9 billion that priced in the week ended May 13, the $13.57 billion that came to market the following week, which ended May 20, and the grand-daddy of them all for 2011, the week ended Jan. 14, when volume exploded upward to total about $14 billion.

Reflecting the volatile, feast-or-famine nature the junk bond market frequently shows, the big week followed one of the smallest-volume weeks of the year, the week ended July 22, which saw only $1.6 billion of new paper appear. That made it the third-slowest week of this year so far, surpassed in that regard only by the $1.25 billion seen the week ended June 17 and the $1.05 billion that priced in the week ended Feb. 25.

Cash is king

A portfolio manager told Prospect News that at his shop, "we played a lot of these deals more so because we had cash and they were reasonably priced."

He noted that Tuesday's giant-sized transaction from Nashville-based hospital operator HCA jumped to a final size of $5 billion from the originally announced $1 billion, "so I'm thinking there's a lot of cash out there" just waiting to be sopped up.

Over the past four weeks, weekly reporting high-yield mutual funds, considered a good proxy for overall junk market liquidity trends, have racked up cumulative net inflows of about $2.78 billion, according to a Prospect News analysis of the weekly fund-flow statistics generated by Lipper/FMI, with $303.8 million more having come into those funds than left them in the week that ended Wednesday. That followed inflows of $287 million the prior week, which ended July 20, a spectacular $1.3 billion inflow the week before that, which ended July 13 - the biggest single cash infusion seen since June 2010 - and $884 million in the week ended July 6.

Analysts say the mutual funds represent but a small, though observable and quantifiable, percentage of the total amount of money coming in, allowing them to extrapolate and understand overall junk market liquidity trends.

The portfolio manager allowed that those recent inflows "have been positive - but they haven't been huge. But to get deals done like that must mean that people are sitting on a lot of cash. Maybe you're getting inflows to the institutional side or more crossover buying. I'm thinking that cash is probably bigger than people realize."

A trio of titans

Investors flush with cash they wanted to put to work met up with issuers looking to take care of their financing needs now, rather than wait until after the traditional mid-summer hiatus usually seen in the junk market from about the second week of August on.

Additionally, according to observers, those borrowers may have been driven by a special sense of urgency this year due to the putative Aug. 2 deadline for raising the U.S. government's borrowing limit and the parties to those talks continuing to snipe at one another. That's caused those issuers to scramble to market to bolster their cash balances "by borrowing now, when they can, not later, when they have to," a trader said against a backdrop of potentially uncertain market conditions, especially should the major ratings agencies decide to take action against U.S. Treasury ratings either in the form of a full downgrade or a lowering of outlook.

Those factors combined this week to produce the phenomenal volume during what is typically a sedate period in the junk new-deal arena, spearheaded by the week's three huge deals from Reynolds Group, followed by HCA and then by Ford Credit.

Auckland, N.Z.-based Reynolds Group, though its Reynolds Group Issuer LLC, Reynolds Group Issuer Inc. and Reynolds Group Issuer (Luxembourg) SA subsidiaries, priced an upsized $2.5 billion offering on Tuesday, bringing in $1.5 billion of 7 7/8% senior secured notes (Ba3/BB-), which priced at 99.268 to yield 8%, and $1 billion of 9 7/8% senior unsecured notes (Caa1/B-) at 99.318 to yield 10%.

Despite the attraction of a big, liquid issue from a well-known market name in the consumer staples sector - always considered a good defensive area in times of economic uncertainty - the portfolio manager said that he did not play in Reynolds due to the fact that the maker of Reynolds Wrap aluminum foil did its deal to help fund its acquisition of Graham Packaging Co. Inc., a York, Pa.-based maker of customized blow-molded plastic bottles and jars. The increased proceeds from the senior note tranche are earmarked for taking out Graham's senior notes once the acquisition closes.

"I'm a Graham bondholder, and I think they kind of screwed us over," he explained, calling the tender offer that Graham made for its senior notes "lousy" due to the 102 takeout price - several points below where the bonds have been trading. He said that he and other Graham noteholders "have spent the last two weeks cursing Reynolds ... and I said 'There's no way I'm giving them more money.'" He said he would be "interested to see who did play the deal," but for now, he concluded, "I'm just shocked that more people aren't a little more angry at them."

HCA heats up

He had no such reservations, however, about participating in the super-sized HCA deal, which took the market by storm later during Tuesday's session, quickly overshadowing the Reynolds transaction when the hospital operator's opportunistically timed and quickly shopped two-part deal was massively upsized.

What started out as a $1 billion offering of 8.5-year senior secured notes and 10.5-year senior unsecured notes had by late afternoon ballooned up to $5 billion - $3 billion of 6½% senior secured notes due 2020 and $2 billion of 7½% senior notes due 2022. Both tranches priced at par, and proceeds are intended to fund the repayment or redemption of two series of existing HCA 2106 notes, which traded busily at somewhat higher levels on the news.

"That was the one that was a big blowout, not necessarily in price but in size," the portfolio manager explained.

He said that "from the get-go, they planned on growing it." He said that he had been told it was a case of the underwriters saying to investors looking for allocations "you tell us what you want and you'll get it, whatever flavor you want, and we got that pretty good. But I think that from minute one, they wanted to grow it to take out more debt."

By using the new-deal proceeds to take out the company's more than $1.5 billion of 9 5/8% senior PIK toggle notes and its $3.2 billion of 9¼% notes due 2016, "they saved something like 200 basis points of fees on interest per year. So what's $5 billion times 2%? It's a lot of money."

Ford is in focus

And the portfolio manager was also big on the week's other really big deal, Ford Motor Credit's $1 billion of 10-year senior notes (Ba2/BB-), which priced at par on Wednesday to yield 5 7/8%.

He said that Ford " is always a big trader, right? I think you're looking more for the upgrade trade," since the automotive financing arm of Dearborn, Mich.-based Ford Motor Co. is just a step or two away from investment grade now. He predicted that "if they're not investment grade in a year, I think a lot of people will be disappointed."

A market source on Wednesday said that his understanding was that the Ford Credit bonds had been priced off investment-grade desks in recognition of the company's status as a quasi-high-grade credit already and perhaps for real in the future.

The portfolio manager said that it "makes sense" that Ford Credit would in fact be priced that way. "That might be an example of where crossover drove it."

Ford fairly steady, HCA higher

Ford Credit's new bonds were among the most actively traded issues on the week. More than $75 million changed hands during Thursday's session, leading all junk issuers. The bonds were seen ending the week up slightly from their par issue level, with a trader pegging them at 100¼ bid, 100 3/8 offered.

A second trader saw them Friday at 100¼ bid, 100¾ offered.

When HCA's bonds hit the aftermarket after their Tuesday pricing at par, they initially firmed only slightly in the aftermarket but had gained more than a point from those levels by the end of the week. A trader saw the 6½% notes on Friday at 101½ bid, 101¾ offered and the 7½% bonds at 101¼ bid, 101½ offered.

A second trader said the company's two tranches of new bonds "were trading on top of one another" at 101¼ bid, 101¾ offered.

Both tranches of the Reynolds bonds had zoomed to the 102 bid area in initial aftermarket dealings after pricing somewhat below par, and while they came down from those peaks later on in the week, they still held onto some of the gains. The 7 7/8s were seen Friday at 101 bid, 102 offered and the 9 7/8% piece at 100½ bid, 101 offered.

Other deals hold their own

Among other deals that priced during the week, AmeriGas Partners' 6¼% notes due 2019 were trading at 100¼ bid, 100 3/8 offered on Friday; on Wednesday, the King of Prussia, Pa.-based wholesale and retail distributor of bottled propane gas, unexpectedly priced its $4540 million issue at par.

Antero Resources LLC, a Denver-based energy exploration and production company, did a quick-to-market $400 million offering of 7¼% notes due 2019 at par, also on Wednesday. The deal, upsized from $300 million, moved up to around the 101½ bid, 102½ offered level by the end of the week.

Fiesta Restaurant's 8 7/8% senior secured second-lien notes due 2016 were seen by a trader on Friday at 101½ bid, 102½ offered; at another desk, they did even better, quoted at 102 bid, 103 offered. The Syracuse, N.Y.-based restaurant chain operator came to market on Thursday with a $200 million issue that priced at par and moved up to 102 bid, 102½ offered in the immediate aftermarket.

Chicago-based industrial manufacturer Tempel Steel's $135 million of 12% secured notes due 2016 ended the week at 99½ bid, par offered. The bonds priced on Thursday at 97 to yield 12.83%.

Indicators off on day, week

Away from the new-deal precincts, traders noted that market statistical indicators, which had been soft on Thursday for a second straight day, continued to retreat on Friday.

A trader saw the CDX North American Series 16 High Yield index down 5/16 on Friday to finish at 100 1/8 bid, 100¼ offered after having been about unchanged on Thursday.

That left the index down more than a full point on the week from the 101 7/16 bid, 101 9/16 offered level seen the previous Friday, July 22.

The KDP High Yield Daily index plunged by 12 bps on Friday to end at 75.40 on top of the 5 bps loss seen Thursday. Its yield moved up 5 bps to 6.71% after having widened by 2 bps on Thursday.

On a week-over-week basis, that left the index below the previous Friday's 75.67 finish, when its yield was 6.62%.

The Merrill Lynch High Yield Master II index showed its second straight loss on Friday, down 0.041% to end with a year-to-date yield of 6.206%. On Thursday, it had eased by 0.029%, breaking a three-session winning streak, and its year-to-date figure was 6.249%. Friday's finish was also down from Tuesday's 6.032%, its peak level for 2011.

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