KIK prices; active forward calendar clears; Hill-Rom, Oneok notes trade busily; market slips

By Paul Deckelman and Paul A. Harris

New York, Aug. 19 – Junkbondland on Wednesday saw what some market-watchers believe may have been the final new-deal pricing ahead of the Labor Day break in the United States – a holiday hiatus that is still almost three weeks away.

High-yield syndicate sources said that KIK Custom Products Inc., a Canadian provider of pool-care chemicals and household and personal care products, priced $390 million of eight-year notes at a very steep discount to par after would-be investors apparently held out for a fatter yield than even the hefty 9% coupon itself would deliver and also sought covenant changes.

That transaction – done through KIK’s special-purpose financing vehicle, Kronos Acquisition Holdings Inc. – followed Tuesday’s pricing of $925 million of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers, according to data compiled by Prospect News, which had been the first junk deals to have gotten done after three straight days before that in which nothing had come to market.

Junk-market observers noted that the three deals – KIK Custom Products plus Tuesday’s successful offerings from medical technology provider Hill-Rom Holdings Inc. and energy operator Oneok Inc. – cleared the forward calendar of actively marketed deals, a new status quo that could conceivably hold until after the Labor Day holiday break.

In the secondary market, there was brisk trading for a second straight session in the new Hill-Rom notes, continuing to trade in the same solidly firmer context they had reached during their initial post-pricing aftermarket activity.

The new Oneok notes, which had not come to market in time on Tuesday for much of an aftermarket, were also seen busily traded on Wednesday.

The overall market was seen lower, including energy names like California Resources Corp. and non-energy credits as well such as aircraft and railroad equipment manufacturer Bombardier, Inc.

Statistical measures of junk market performance were lower for a second consecutive session on Wednesday; they had turned lower across the board on Tuesday after having been mixed over the previous three sessions and down all around for two consecutive sessions before that.

Deep discount on KIK

KIK Custom Products priced Wednesday's sole deal, a $390 million issue of 9% eight-year senior notes (Caa2/CCC) that was deeply discounted to 89.57 and came with an 11% yield.

The coupon, yield and price came on top of final price talk. That talk widened from earlier official talk that had the deal coming with a 10½% all-in yield at a discount.

Initial guidance for the buyout deal was in the mid-9% context, market sources said.

There were also covenant changes, including revisions to the restricted payments and permitted liens covenants and changes in the covenant package’s definitions of total consolidated debt, secured debt and fixed charge coverage ratio. Also, language in the change-of-control provision was broadened.

Joint bookrunner Barclays will bill and deliver. BMO Securities, Nomura and Macquarie Capital were also joint bookrunners.

In addition to hiking the price of the bonds, KIK also increased pricing on its $850 million seven-year senior secured covenant-light term loan (B2/B-) to Libor plus 500 basis points from talk of Libor plus 450 bps to 475 bps, cut the price to 97.5 from 99 and extended the 101 soft call protection to one year from six months.

Active calendar cleared

In the wake of KIK, the active deal calendar is cleared and might remain so until September, sources say.

Three deals are believed to possibly remain in the market, My Alarm Center ($265 million), Globo plc ($180 million) and Prime Healthcare Services, Inc. ($700 million). However, it has been radio silence on all three for weeks.

The post-Labor Day pipeline might not be all that vast either, a portfolio manager said on Wednesday.

Aside from expected megadeals from Charter Communications Inc. and Frontier Communications Corp., there is a $12 billion to $15 billion calendar, the investor said.

“The market could take that down in two days,” the source remarked.

There are opportunistic financings, the investor said, but the source added that those might be slow in coming to market and could just as easily be October business.

Flows moderate

The Merrill Lynch US High Yield Master II index was priced at 95.50 on Wednesday, according to a trader who added that the number points to a market that has been beaten up soundly.

By comparison, the price in mid-December 2014, with the market in the grip of steeply plummeting crude oil prices, was 97.875, the trader remarked.

A portfolio manager, however, sees opportunity in numbers like these.

“Junk is starting to get interesting again,” the investor said.

“Barring a recession, high yield is becoming attractive.”

The 2015 year-to-date fund flows picture is negative but nowhere near as negative as it was in the year 2014 to mid-August.

Year-to-date outflows come to $4.3 billion, the manager said.

Compare that to the $11.4 billion of outflows in 2014 through mid-August, the source added.

The most recent fund flow information showed both high-yield exchange-traded funds and asset managers seeing inflows on Tuesday, the most recent session for which data was available at press time, the investor said.

High-yield ETFs saw $165 million of inflows on Tuesday.

Asset managers saw inflows of $15 million.

New KIK notes unseen

In the secondary arena, a trader said that he had not seen any initial aftermarket dealings in KIK Custom Products’ new 9% notes due 2023, which had priced fairly late in Wednesday’s session.

A second trader meantime predicted that when the new notes did begin trading, there would likely be solid investor interest in the issue, citing “its pretty attractive coupon,” well above the average junk bond yield of a little over 7%.

Hill-Rom, Oneok trade actively

There meanwhile was considerable trading activity going on in the two new deals that had come to market during Tuesday’s session.

A trader said that for a second consecutive session, the new 5¾% notes due 2023 from Hill-Rom Holdings topped the Most Actives list among the purely junk-rated credits, not counting any split-rated issues such as the bonds that Stamford, Conn.-based cable operator Charter priced some weeks ago or any hybrid issues from otherwise investment-grade financial institutions.

He saw more than $38 million of the new Hill-Rom bonds having changed hands on Wednesday, on top of the more than $43 million traded on Tuesday after the Chicago-based medical technology company priced its regularly scheduled $425 million forward calendar offering at par.

He pegged the bonds on Wednesday afternoon at 101½ bid, calling them down by 1/8 point from their closing peak levels seen on Tuesday, when the new deal jumped to around the 101½-to-101 5/8 level.

Another trader saw the bonds trading during the day between 101 and 101 5/8, with most of the activity taking place late in the day around a 101 3/8-to-101 5/8 context.

Trading was almost as active in the new 7½% notes due 2023 that Tulsa, Okla.-based natural gas company Oneok had priced on Tuesday, with a market source estimating turnover of at least $33 million in the credit.

He saw the bonds at 98 13/16 bid, actually down by nearly ¾ point from earlier high prints above the 99 mark.

Oneok had priced $500 million of the notes in a regular forward-calendar offering on Tuesday at 98.522 to yield 7¾%. Little real aftermarket trading was seen in the name on Tuesday due to the lateness of the hour at which they had priced.

Another trader had seen the bonds moving around a 98¾-to-par context.

Market under pressure

Apart from the trading in Tuesday’s new issues, a trader opined that “for the most part, we were still giving up ground.

“Spreads were gapping out.”

As has been the case so very often in recent months, energy issues were down as world crude oil prices continued to retreat. West Texas Intermediate crude for September delivery, which had gained 75 cents on Tuesday, gave it all back and then some on Wednesday, sliding by $1.82 per barrel, or 4.3%, to settle at $40.80 per barrel, the lowest price level seen in some six years.

That helped to push energy credits like Los Angeles-based California Resources’ benchmark 6% notes due 2024 down another ¾ point to 73¾, with over $32 million traded.

Away from the oil patch, traders saw non-energy names also getting punished, such as Montreal-based aircraft and railroad equipment maker Bombardier, whose 5¾% notes due 2022 lost 1½ points to end at 68 bid, on volume of more than $10 million.

Its 7¾% notes due 2020 were seen down as much as 5 points on the day at 78 bid, with over $13 million of turnover.

Indicators stay lower

Statistical measures of junk market performance were weaker across the board for a second consecutive session on Wednesday; they had turned lower on Tuesday after having been mixed over the previous three sessions and down all around for two consecutive sessions before that.

The KDP High Yield Daily index plunged by 22 basis points on Wednesday to close at 68.12 after having also moved lower by 4 bps on Tuesday.

Wednesday’s loss was its second straight downturn, its eighth loss in the last 11 sessions and its 10th loss in the last 14 trading days.

It established a new 52-week low, eclipsing the old mark of 68.22 that had been set exactly a week ago on Aug. 12, and was the index’s lowest close since it ended at 68.06 on Sept. 15, 2009.

Its yield, meanwhile, rose by 7 bps on Wednesday to end at 6.31%, its third straight widening out; the yield had gained 1 bp on Monday and did so again on Tuesday. Wednesday also marked the fourth such widening in the last six sessions and its seventh rise in the last nine sessions.

The Markit Series 24 CDX North American High Yield index was off by 3/16 point on Wednesday, ending at 104 15/32 bid, 104 17/32 offered. It was the index’s third straight loss, having dipped by 7/32 point on Tuesday and 3/32 point on Monday, as well as its sixth loss in the last seven sessions and its ninth loss in the last 12.

The Merrill Lynch North American Master II High Yield index retreated by 0.203% on Wednesday, its second straight loss, having also eased by 0.064% on Tuesday.

It was also the index’s third loss in the last four and, over the longer term, its 11th loss in the last 13 trading days.

Wednesday’s setback lowered the index’s year-to-date return to 0.184% from 0.388% on Tuesday – its lowest close since Jan. 21, when the index had finished at 0.025%. All of those levels remain well down from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

One of the index’s components, the average price of the paper listed within, fell to new low for the year of 95.21337 from 95.43935 on Tuesday, surpassing the previous low point for the year of 95.4045, set a week ago.

© 2015 Prospect News.
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