Zayo deal is Zensational, shoots up after pricing; Nokia knocked lower; funds up $568 million

By Paul Deckelman

New York, June 14 - The high-yield primary market was firing on all cylinders on Thursday after spending several sessions getting its ducks in a row. Zayo Escrow Corp. priced Junkbondland's first mega-deal in a month, an eagerly awaited $1.25 billion two-part offering of senior secured and senior unsecured notes.

Execution was crisp, with the big new offering coming in on time, heavily oversubscribed and actually inside of pre-deal market price talk on both tranches. And when the company's new issue hit the aftermarket, the results were just as spectacular, with traders seeing both halves of the deal trading strongly higher.

Some in the market expressed the hope that Zayo's bravura performance on both the primaryside and in the secondary might be a turning point of sorts for junk, which started the year strongly but then seemed to lose its way about a month ago amid rising volatility and investor jitters over Europe's debt crisis and a U.S. economy that can't seem to get out of its own way.

Those concerns are still there despite the successful pricing of one new issue, however large.

But junk players got some more good news in the form of the weekly release of flow numbers for high-yield mutual funds and exchange-traded funds. Both of the major fund-tracking agencies reported that the funds - which had been hemorrhaging cash at an alarming pace over the past four weeks - broke that losing streak, each reporting inflows of several hundred million dollars.

Statistical measures of junk market performance were meantime seen mixed for a fourth consecutive session.

Among specific issues away from the new deals, cellphone maker Nokia Corp. was a big loser, its bonds dropping by almost 7 points after the company warned of new job cutbacks and cost reductions and lowered revenue and earnings projections in response to sagging sales.

Zayo zooms

The watchword of the day in the junk market was "Zayo" as everyone waited for telecommunications services provider Zayo Group LLC to come to market - and they were not disappointed.

It brought in a solidly oversubscribed, well-received $1.25 billion two-part junk bond offering. It was the first genuine junk pricing so far this week, which earlier saw two deals price off the high-grade desks of their respective banks that were aimed at crossover high-grade investors.

But there was no mistaking the junk content of this deal. Zayo priced $750 million of 7.5-year senior secured notes (B1/B) at par to yield 8 1/8% and $500 million of eight-year senior unsecured notes (Caa1/CCC+) at par to yield 10 1/8%.

Both halves of the Rule 144A deal got done inside of the price talk heard in the market on Wednesday, which envisioned a yield in the 8¼% area for the secured notes and in the 10¼% area for the unsecured paper, and both traded up handsomely in the aftermarket.

A market source, who said the new deal went "extremely well," said the fact that Zayo was able to price its offering inside of talk "is a testament to the 3.5 times oversubscribed book."

A secondary market trader, noting the heavy interest in the deal that produced such a solidly oversubscribed offering, said that "there's been demand for a while for this one. It shows that the market is still open for things that people want to buy. It's just a little more difficult [than it was earlier in the year]. It's not just show up at the door and get a deal done. But clearly, if you bring a deal that people seem to like, you can still get it done and it can still do well."

Another market participant noted that the most recent deals in the junk arena have been quasi-investment-grade offerings aimed more at the crossover players such as Tuesday's split-rated (Ba1/BBB-BBB-) transaction from Newark, Del.-based education financing company SLM Corp. or Tuesday's offering from Bellevue, Wash.-based utility operator Puget Sound Energy Inc., nominally junk-rated (Ba1/BB+) but like SLM priced off the high-grade desks.

The trader said that clearly, Zayo was "a little bit further down the ratings spectrum" but showed that a deal can still get done if the coupon is right and people like the company's story.

Long time coming

There had been speculation in the junk market as far back as mid-April that Zayo, a provider of fiber-based bandwidth infrastructure and network-neutral collocation and interconnection services, would be doing a billion-dollar-plus bond deal and also lining up nearly $2 billion of bank debt financing to fund its planned $2.2 billion acquisition of AboveNet, Inc. a White Plains, N.Y.-based provider of high-bandwidth connectivity solutions for businesses and carriers. The $84 per share cash acquisition was announced March 19 and was approved by an overwhelming majority of AboveNet's shareholders at a special meeting last week.

Zayo launched a $1.75 billion senior secured credit facility last Wednesday. Then on Monday came the formal launch of the bond deal via conference call and a New York luncheon with potential investors. During the week, syndicate sources reported that the marketing campaign was going well, and the deal was ultimately more than 3.5 times oversubscribed by potential buyers.

The bonds came to market via the company's Zayo Escrow unit, which will be merged with and into parent Zayo Group and Zayo Capital, Inc. when the AboveNet acquisition closes, which is expected some time around the middle of the year.

The secured notes were brought to market via joint book-running managers Morgan Stanley & Co. LLC, Barclays Capital Inc. and UBS Securities LLC, along with co-managers Goldman Sachs & Co., RBC Capital Markets Corp. and SunTrust Robinson Humphrey Inc.

The unsecured notes were done through bookrunners Morgan Stanley, Barclays and SunTrust Robinson Humphrey, along with co-managers Goldman Sachs, RBC and UBS.

Stars in the secondary

A market source said that he saw the deal breaking at about 100¾ bid, "and then it has come up since then," rising to 101½ bid on both tranches and then well beyond that, "so it seems to be trading well." He said the deal was priced "to give the buyside a little bit of a concession on it."

"It looks like everybody is happy on this one," he said.

A second source saw the secured bonds at 101½ bid and the unsecured notes at 102½ bid, 103 offered, while a trader at yet another desk declared that "they're doing very, VERY well," with the secured notes wrapped around 102½ bid and the unsecured notes around 103.

A little later on as things were closing down for the day, a trader pegged the new notes at 102½ bid, 103½ offered for the 8 1/8% secured paper and at 102 5/8 bid, 103 5/8 offered for the 10 1/8% unsecured notes.

Turning point for market?

The new Zayo deal is the first purely junk issue bigger than $1 billion since May 15, when Inmet Mining Corp., a Toronto-based global metals mining concern, priced an upsized $1.5 billion of 8¾% notes due 2020. That big deal priced at 98.584 to yield 9%, generating proceeds of $1.48 billion. The deal was upsized from an originally announced $1 billion.

Since Inmet priced, conditions have become more unsettled in the junk arena, whose strong momentum from the beginning of the year began to slow in mid-May under the pressure of the bad news coming out of Europe and, domestically, the economy and the resulting violent gyrations of the stock market, which, like junk, is considered a risk asset class. Junk came off the high returns it had been posting for the year earlier in May, liquidity, as reflected in mutual fund and ETF inflows, seemed to dry up, and the new-issue market became less inviting.

The biggest deal before Thursday since Inmet was Molycorp Inc.'s $650 million of 10% notes due 2020. The Greenwood Village, Colo.-based miner of rare-earth oxides priced its deal at par on May 18, just three days after Inmet - and it's been all downhill since then, including the cancellation or postponement of at least a half- dozen prospective junk deals. The most recent was the decision by Las Vegas-based gaming concern American Casino & Entertainment Properties LLC to not try to gamble on getting its planned $310 million offering of seven-year senior secured notes done in the current environment.

A market source said that perhaps the big, liquid, well-received Zayo transaction "will maybe get the buyside excited again. Hopefully, the next deals that come to market can fare the same."

AMG rebounds

As the junk market basked in the warm glow of the success of Zayo Group's big deal, it got some more welcome good news. Market participants familiar with the weekly AMG high-yield mutual fund flow statistics said that in the week ended Wednesday, $568 million more came into those funds than left them.

That was a considerable improvement over the debacle seen the previous week, which ended June 6, when AMG saw the funds having suffered a whopping $2.9 billion outflow - the third largest on record since Arcata, Calif.-based AMG, a unit of Thomson Reuters' Lipper/FMI division, began tracking fund flows some years ago. In all of that time, only two other outflows were larger - the $3.43 billion cash bleed seen in the week ended June 22, 2011 and the nearly identical $3.42 billion lost during the week ended Aug. 10, 2011.

The inflow in the latest week snapped a four-week string of outflows dating back to the week ended May 16. During that stretch, which also included another mammoth outflow, the $2.46 billion cash drop seen in the week ended May 23, the junk funds had seen an estimated $6.43 billion of outflows, according to a Prospect News analysis of the figures.

On a year-to-date basis, the latest inflow pulled the cumulative net inflow figure up a bit to around the $18.2 billion mark, up from $17.7 billion the week before, according to the analysis. The year-to-date figure counts monthly reporting funds as well as the weekly reporters, according to AMG.

However, the cumulative net inflow figure remains well below its peak level for 2012 of an estimated $24 billion seen in the week ended May 9, according to the analysis.

Including an outflow seen earlier in the year - the $1.29 billion recorded in the week ended April 11 - there have now been just five outflows seen so far this year, while inflows have now been seen in 19 out of the 24 weeks since the start of the year, the analysis said - although before this week, the momentum had decidedly turned negative after long stretch of big inflows being seen week after week.

EPFR: Funds up $391 million

The turnaround in the fund-flow trajectories was confirmed by a rival fund-tracking service, Cambridge, Mass.-based EPFR Global , which reported that in the week ended Wednesday, about $391 million more came into the funds it follows than left them.

As was the case with the AMG Lipper numbers, EPFR - which uses a different methodology, but whose numbers usually point in the same direction as AMG - reported that this was the first inflow after four straight weeks of sizable outflows, including the $3.6 billion that had left the funds in the week ended June 6.

The latest inflow lifted EPFR's year-to-date total return to about $18.9 billion, according to a Prospect News analysis of the figures.

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

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new-deal borrowing binges seen in both 2009 and then in 2010, as well as the robust secondary market seen both years, and continued to be the driver behind 2011's near-record issuance.

Those fund flows are also seen as the key element behind the high-yield secondary market's relatively strong performance during the first few months of this year versus other fixed-income asset classes and its relatively active new-deal pace, with issuance volume remaining not too far behind last year's totals.

Junk signs get better

Away from the primary realm, statistical indicators of junk market performance meantime were improved Thursday after having been mixed for three consecutive sessions before that.

A trader saw the Markit Group CDX North American Series 18 High Yield index up by ½ point on Thursday to end at 94 5/16 bid, 94 9/16 offered after having been down by 1/8 point on Wednesday.

The KDP High Yield Daily index broke out of a three-session slump on Thursday, gaining 5 basis points to end at 72.26. It had dipped by 4 bps on Wednesday. Its yield narrowed by 5 bps to 7.11% after having crept up by 1 bp on Wednesday.

And the widely followed Merrill Lynch U.S. High Yield Master II index posted a second straight gain on Thursday, when it rose by 0.067%. This was on top of Wednesday's 0.115% gain.

The latest gain lifted its year-to-date return to 5.224% on Thursday from Wednesday's 5.154% rise. However, it remains still well down from its peak level for 2012 so far, 6.80%, set on May 7.

Tech names see some pain

With much of the junk bond market's attention focused on the new-issue sphere with the big Zayo Group deal coming, an analyst said that about the only thing doing otherwise was a steep fall in Nokia's bonds after the struggling Finnish cell phone manufacturer announced another big round of job reductions and other cost reductions in response to sagging sales and lowered its overall earnings guidance.

The company's 5 3/8% notes due 2019 were among the busiest bonds in the junk space, with round-lot volume of over $20 million, a source said, and overall volume, including numerous smaller trades, almost double that.

The bonds, which had been trading around an 83-84 context on Wednesday, opened around there on Thursday but quickly nosedived down to below 77 bid and never recovered. They were seen going home around 76 5/8 bid, down nearly 7 points on the session.

Also in the tech space, a trader said that Avaya Inc. paper "fell 3 to 5 points today. They apparently had a breakfast [investor] meeting, and it didn't go so well."

The Basking Ridge, N.J.-based computer networking, information technology and telecommunications company's 10 1/8% notes due 2015 slid to 83 bid on more than $12 million traded. Its 9¾% notes due 2015 lost more than 4 points on the day to go home at 80¾ bid on turnover of more than $6 million.

However, the trader saw a little bounceback in Alion Science & Technology Corp.'s 10¼% notes due 2015, which had fallen sharply late Tuesday and gain on Wednesday to levels around the 30-31 mark from around 40 previously.

The McLean, Va.-based employee-owned research and development and information technology government contractor's bonds firmed from those lows, he said, to go out on Thursday at 34 bid.

Away from the tech names, a trader said that Rotech Healthcare Inc. "took it on an ugly stick today," seeing the Orlando, Fla.-based medical products and services provider's 10½% notes trading down to the 43-44 level, down 6 or 7 points on the day.

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