Morning Commentary: Two energy issuers plan drive-bys; new McDermott 10 5/8s trade sharply higher

By Paul A. Harris

Portland, Ore., April 5 – News volume in the primary market saw a moderate pick-up on Thursday as two energy names appeared with what figure to be a.m.-to-p.m. drive by deals.

Targa Resources Partners LP plans to price a $750 million offering of eight-year senior notes (existing ratings Ba3/BB-).

Initial price talk is in the 6% area, a trader said.

BofA Merrill Lynch is leading the deal.

The Houston-based company plans to use the proceeds to repay bank debt and for general partnership purposes, which may include redeeming or repurchasing some of its outstanding notes, as well as for working capital, capital expenditures and acquisitions.

And Resolute Energy Corp. plans to price a $75 million add-on to its 8½% senior notes due May 1, 2020 (Caa1/B-/B+).

Initial price talk is 98.5 to 99, a trader said.

Goldman Sachs is the bookrunner.

The notes are presently callable 102.125. On May 1, 2018 at the call premium decreases to par.

The Denver-based independent oil and natural gas exploration and production company plans to use a portion of the proceeds to repay debt currently outstanding under its senior credit facility, with the remainder to be used for general corporate purposes including capital expenditures related to its previously announced 2018 plan.

American Greetings cut

American Greetings Corp. talked a downsized, restructured $300 million offering of seven-year senior notes (Caa1/CCC+) with an 8¾% coupon at a price of 85.

Books close at 4 p.m. ET Thursday.

The deal was reduced from $325 million, with $25 million shifted to the planned new term loan, increasing the loan size to $470 million from $445 million.

The tenor of the senior notes was decreased to seven years from eight years.

Talk on the deal widened during the time it was on the road, market sources say. Initially talked in the low-to-mid 8% range, guidance blew out to 10½% to 11% early in the April 2 week.

The deal has struggled, according to market sources.

Emanating from the battered retail sector, the company’s greeting cards business is not universally liked among high-yield investors, as American Greetings must compete in an age of e-greetings and emoji-festooned instant messages, a buyside source remarked.

McDermott bonds higher

In the secondary, junk was on firm footing early Thursday, a trader said.

Given present conditions, one might expect a more robust calendar, the source added, although noting that opportunistic issuers are continuing to adjust to the new, higher interest rates now available to junk issuers.

For most of those prospective opportunistic issuers the 4% handle yields seen in 2016 and 2017 are presently unavailable, the trader said.

Among recent issues, McDermott International Inc.’s new 10 5/8% senior notes due May 2024 (B2/B-) were up sharply from their reoffer price, trading at 97 1/8 bid, 97 5/8 offered, a trader said.

The $1.3 billion issue, downsized from $1.5 billion, priced at 94.75 to yield 11.865% on Wednesday after structural revisions and document changes. The yield printed 136.5 basis points beyond the midpoint of official yield talk set in the 10½% area.

Elsewhere Freedom Mortgage Corp.’s new 8¼% senior notes due April 2025 (B2/B-) were turning in a strong secondary market performance as well – albeit a more modest one than McDermott – at 101¼ bid, Thursday morning.

The $700 million issue priced at par on Wednesday, upsized from $500 million, driven into the market on $500 million of reverse inquiry, sources say.

Mixed flows Wednesday

The daily cash flows of dedicated high-yield bond funds were mixed on Wednesday, a trader said.

High-yield ETFs saw $173 million of inflows on the day.

However actively managed funds sustained $45 million of outflows on Wednesday.

Word of the daily flows surfaced as the market awaits a closely watched weekly report from Lipper US Fund Flows tracking the aggregate cash flows of the funds for the most recent week to Wednesday’s close. The Lipper report customarily appears late on Thursday afternoons.

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