Giant MetroPCS sale caps $9 billion week, recent deals strong; Penney gyrates on covenant question

By Paul Deckelman and Paul A. Harris

New York, March 8 - MetroPCS Wireless Inc. came a-calling in the high-yield market on Friday with the biggest junk deal of the year so far and one of the biggest in recent memory - $3.5 billion of new senior notes, evenly split into eight- and 10-year tranches.

The pre-paid wireless telecommunications company's massive transaction came to market very late in the day, and was not seen by traders having made it into the secondary arena.

There were two other, considerably smaller pricings - business services provider Stream Global Services did a $30 million add-on to its 2014 secured notes, while final terms were heard on Cornerstone Chemical Co.'s $230 million private placement deal. Neither was seen in the aftermarket.

The day's deals capped off a week which saw some $9.2 billion of new dollar-denominated, fully junk-rated issuance from domestic or developed-country borrowers in 17 tranches, according to data compiled by Prospect News - nearly twice the previous week's $4.9 billion total.

Year-to-date global junk issuance of $77.9 billion in 168 tranches was seen running around 6% off the pace seen a year ago at this point on the calendar, according to the data.

Traders saw some of the recent new deals continuing to mostly hold their own in the aftermarket, particularly offerings like Thursday's issue from Coinstar, Inc., although some new deals, like MasTec, Inc. were trying to gain traction.

Away from the new deals, there was brisk activity in J.C. Penney Co. Inc.'s bonds, particularly its 2023 notes; traders cited speculation among some market participants that the underperforming retailer might be forced by a lending covenant problem to make an offer to buy back those bonds - although several analysts consulted by Prospect News dismiss this as a very unlikely scenario.

Statistical indicators of market performance were higher across the board, both on the session and versus their week-earlier levels.

MetroPCS leads $3.76 billion day

Three issuers raised a total of $3.76 billion on Friday in a combined total of four tranches.

Most of the total was in a single deal: MetroPCS Wireless priced $3.5 billion of senior notes (B1/BB) in two equal-sized tranches.

The deal included $1.75 billion of eight-year notes which priced at par to yield 6¼%. The yield printed at the tight end of yield talk that was set in the 6 3/8% area.

MetroPCS also brought to market a $1.75 billion tranche of 10-year notes at par to yield 6 5/8%, at the tight end of yield talk set in the 6¾% area.

Both tranches were at 101 bid in the secondary market, according to a buyside source.

Reports of the order book size tended toward the stratospheric.

The deal was playing to an $8 billion order book, according to a trader who spoke Friday afternoon with a salesperson from one of the dealers.

Deutsche Bank Securities Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC are the bookrunners.

Proceeds will be used to repay bank debt related to the acquisition of the company by T-Mobile USA, and for general corporate purposes. Proceeds will be held in a restricted account pending the closing of the merger.

Cornerstone upsizes

Cornerstone Chemical has privately placed an upsized $230 million amount of five-year senior secured notes (B3/B) at par to yield 9 3/8%, according to an informed source.

The issue was upsized from $220 million.

The yield printed at the tight end of price talk set in the 9½% area.

Imperial Capital LLC and KeyBanc Capital Markets Inc. acted as joint placement agents for the Regulation D private placement.

Cornerstone, a Waggaman, La.-based producer of critical intermediate and specialty chemicals, plans to use the proceeds from the deal to repay debt and to pay a cash dividend to shareholders.

Stream Global taps 11¼% notes

Stream Global Services priced a $30 million add-on to its 11¼% senior secured notes due Oct. 1, 2014 at 102.

The reoffer price resulted in a 7.454% yield to worst.

Morgan Stanley & Co., Wells Fargo Securities LLC, BofA Merrill Lynch and RBC Capital Markets were the joint bookrunners.

The Boston-based business-to-business software services company plans to use the proceeds to pay down its ABL facility.

McGraw-Hill plans $1.05 billion

The Friday session saw a robust buildup of the forward calendar.

McGraw-Hill Global Education Holdings, LLC plans to start a roadshow on Monday for a $1.05 billion offering of eight-year first lien senior secured notes.

The deal is set to price late in the March 11 week.

Credit Suisse Securities (USA) LLC, Morgan Stanley & Co., BMO Securities, Jefferies & Co., Nomura and UBS Investment Bank are the joint bookrunners.

Proceeds will be used to help fund a leveraged buyout of the company by Apollo Management.

MDC Partners starts Monday

Toronto-based MDC Partners Inc. plans to start a roadshow on Monday for a $500 million offering of seven-year senior notes (existing ratings B3/B).

The deal is expected to price on March 15.

J.P. Morgan Securities LLC and Goldman Sachs & Co. are the joint bookrunners.

The marketing communications services company plans to use the proceeds to redeem its 11% notes due 2015.

Sun Products' $500 million

Sun Products Corp. plans to start a roadshow on Monday in New York and New Jersey for its $500 million offering of eight-year senior notes, which is also expected to price during the week ahead.

Barclays, J.P. Morgan Securities LLC, BofA Merrill Lynch, Goldman Sachs & Co. and Morgan Stanley & Co. are the joint bookrunners.

Proceeds will be used to refinance debt.

Watco lines up 10-year deal

Watco Cos., LLC and Watco Finance Corp. plan to price a $400 million issue of 10-year senior notes during the week ahead.

Wells Fargo Securities LLC is the left bookrunner. J.P. Morgan Securities LLC, Barclays, BMO Securities and US Bancorp are the joint bookrunners.

Proceeds, along with the initial loans under the new senior secured credit facility, will be used to repay the entire outstanding balance of the company's existing senior secured credit facility.

American Apparel to roadshow

American Apparel, Inc. plans to start a roadshow on Tuesday in New York for a $200 million offering of senior secured notes, according to a buyside source.

Cowen & Co. and Seaport Group are the joint bookrunners.

The Los Angeles-based vertically integrated clothing manufacturer plans to use the proceeds to refinance debt and for general corporate purposes.

Cegedim eyes €300 million

There was also primary market news from Europe on Friday.

France's Cegedim SA plans to begin a roadshow during the March 11 week for a €300 million offering of seven-year senior notes (/B/).

BNP Paribas and BofA Merrill Lynch are the joint bookrunners.

Proceeds will be used to fund a tender offer for the company's 7% notes due 2015.

MetroPCS megadeal a no-show

In the secondary market, traders noted that the major activity of the day seemed to be sitting around waiting for the new MetroPCS two-part offering to show up - which it finally did very late in the day, too late for any real aftermarket activity, they said.

The Dallas-based wireless telecommunications company's existing bonds were meantime seen under pressure, with a trader pegging its 6 5/8% notes due 2020 at 103 bid, calling them down 1¼ points on the day.

A market source at another desk quoted those bonds at 103¼ bid, while its 7 7/8% notes due 2018 were at 108¾ bid. He said that both were among the busiest purely junk issues during the session, with around $7 million to $8 million of each of them having changed hands by around mid-afternoon, a respectable enough showing for a snowy and slushy winter Friday.

Thursday deals steady

Among the deals which came to market on Thursday, traders saw their Friday trading levels not too far off where they had finished up initially in the aftermarket.

One said that Coinstar's 6% notes due 2019 were trading around 102 bid - actually up a little from the levels around 101½ bid, 102½ offered at which those bonds had been seen going home Thursday. The Bellevue, Wash.-based operator of the popular Redbox movie- and video-game-rental kiosks and other automated retailing systems, came to market with a $350 million issue of those bonds, pricing them at par after having upsized the transaction from an originally announced $300 million.

A second trader, who had also seen the Coinstar bonds finish at 101½ to 102 on Thursday - saw them ¼ point better on the day Friday at 101¾ bid, 102½ offered.

A trader said that Claire's Stores Inc.'s 6 1/8% senior secured notes due 2020 had "traded up to 102 on Thursday" - but he saw them "maybe off a little bit today," while not seeing much activity in the credit.

The Hoffman Estates, Ill.-based specialty retailer had priced its quickly-shopped $210 million of those bonds at par on Thursday, and they were initially seen having moved up to bid levels between 101 3/8 and 101 7/8.

A second trader saw Claire's' bonds down ¼ point at 101 1/8 bid, 101 5/8 offered.

A trader said that Sealed Air Corp.'s new 5¼% senior secured notes due 2023 "did really well," seeing them having moved up to 101 5/8 bid.

The Elmwood Park., N.J.-based producer of plastic packaging materials had priced a quickly shopped $425 million of the bonds on Thursday at par, and they were seen having moved up more than a point in initial aftermarket dealings.

Some deals struggle

However, other deals seemed to be having a little bit of trouble gaining traction.

A trader said that MasTec's 4 7/8% notes due 2023 were "still trading right around par," where the Coral Gables, Fla.-based infrastructure construction company had priced the $400 million of bonds on Wednesday, after upsizing the deal from $350 million.

A second trader meantime said that MasTec "couldn't get out of its own way." He located the new bonds at 99¾ bid, par offered.

He had a similar assessment for both tranches of International Lease Finance Corp.'s $1.25 billion two-part deal, which had also priced on Wednesday, seeing both its $750 million of 3 7/8% notes due 2018 and its $500 million of 4 5/8% notes due 2021 at par bid, 100¼ offered. That was about unchanged from the levels where the Los Angeles-based aircraft leasing arm of insurance giant American International Group had priced those bonds in fly-by deal.

At another desk, a trader saw those 3 7/8s down ¼ point on the day at 99 7/8 bid, 100¼ offered, while the 4 5/8s lost 1/8 point to end at par bid, 100 3/8 offered.

Penney pops on covenant buzz

Away from the new deals, a trader said that J.C. Penney's bonds were "the dominant name here" at his shop, particularly the Plano, Texas-based department store operator's 7 1/8% notes due 2023.

He said that those bonds had risen by as much as 10 points in the past week to a mid-90s context from the mid-80s previously.

He attributed those gains to "a rumor" making the rounds of some quarter of the junk bond market that Penney might have to make an offer to buy back those bonds because of an alleged breach of one of their financial covenants that might occur should the underperforming company be forced to draw down on its revolving credit line in order to be able to maintain adequate liquidity for its operations.

"There are people that say they've breached the covenant or are about to breach it - they've been the buyers," he said.

He said that some of the company's other, shorter bonds, have meantime come under pressure, perhaps from holders rotating out of them to get into the 2023s.

He also said that recent stories about the company - including the terrible quarterly earnings report it posted last week - had created "headline risk" that was scaring some investors off the name.

As to the situation with the 2023s, the trader himself was wary and cautious.

He said that while some people say that there has been, or will be a covenant breach. "Other people say that's exaggerated. I don't see anywhere where they have breached it [the covenant]. I don't know why they are trading like that."

A second trader said that he had also heard rumors about a possible covenant problem scenario, but said his knowledge was "only second-hand."

An analyst called the idea that Penney might have a covenant requiring the repurchase of the bonds should it draw down on its credit line "rather ridiculous," especially since those kinds of clauses are rarely found in bonds issued by investment-grade credits, which Penney was at the time the 2023 bonds were originally sold, only falling into Junkbondland some time after that.

The analyst also opined that Penney's lawyers could probably find a legal way around such an obstacle, should one exist, and called it unlikely that the bondholders would be taken out at or near par.

At Covenant Review LLC, a New York-based advisory service that analyzes the bond indentures and financial covenants of companies in debt, company founder and managing partner Adam B. Shapiro said that "the problem is that people are misreading the indenture." He said that such people "do not understand" how the company's revolving credit line is structured.

His agency put out a lengthy research report several weeks ago which explored the question, noting that the way the indenture is written, borrowing off the revolver would not be counted as long-term debt, since it is structured that such borrowing would have to be paid off in less than a year and would not be automatically rolled over or extended - and only long-term secured debt is counted in calculating whether the company might be in breach of the covenant limiting the amount of such debt it can have versus its net tangible assets.

It called the possibility of a covenant breach "unlikely."

A J.C. Penney spokesman declined to comment, citing company policy to not respond to market speculation.

Overall market firm

A trader said that "generally, the market was pretty firm - it was a pretty quiet Friday, but it was pretty firm, just on stocks and the employment number.

"But nothing really jumped out."

A second trader said that Friday's junk market was "okay - but not as robust as you might have expected," especially given the continued gains in stocks, the bullish economic data - a fall in the February unemployment rate to 7.7% and a stronger-than-expected jobs creation number - as well as Thursday's late-afternoon release of junk market mutual fund and exchange-traded fund flow numbers showing a strong surge of fresh shareholder cash into those funds.

But still, he said "the market is on good, solid ground."

Market indicators improve

Overall, statistical junk performance indicators were higher across the board for the second straight session Friday and the third time in four days. They were also up across the board from the levels they had held at the end of the previous week, ended March 1. It was the fourth consecutive week that those signposts were pointing higher, after having been on the decline for two weeks before that.

The Markit Series 19 CDX North American High Yield Index rose by 3/8 point on Friday to end at 103 15/16 bid, 104 1/16 offered, its second straight advance, after having gained 7/32 point on Thursday.

It was up from its week-ago close at 102¾ bid, 102 13/16 offered.

The KDP High Yield Daily Index was higher for a fourth straight session Friday, gaining 4 basis points to finish at 75.57; on Thursday it was up by 2 bps.

Its yield declined by 2 bps on Friday to 5.53%, its fourth straight narrowing; it had eased by 1 bp on Thursday.

Those levels compared favorably with its week-ago index reading of 75.33 and yield of 5.64%.

And the widely followed Merrill Lynch High Yield Master II index notched an eight straight daily gain, rising by 0.034% on Friday, on top of Thursday's 0.067% advance.

The latest gain lifted its year-to-date return to 2.288%, a new peak level for 2013 so far. That was up from 2.1253% on Thursday, the previous high point for the year so far.

The index had a one-week gain of 0.421%, its fourth consecutive weekly rise. At the close of trading last Friday, it had gained 0.355% on the week, with a year-to-date return of 1.859%.

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