Junk back up as markets whipsaw around; Rock Ohio deal prices; CrownRock next; funds fall

By Paul Deckelman and Paul A. Harris

New York, Aug. 11 - The high-yield market's wild ride continued on Thursday as junk bonds, which were routed on Monday, rallied on Tuesday but then retreated again on Wednesday, were once more rebounding on Thursday, along with equities that shrugged off Wednesday's worries about the possible spread of Europe's debt woes and focused instead on improved U.S. jobless claims numbers.

In Junkbondland, this translated to better levels for such familiar credits as health care benchmark issuers Community Health Systems Inc. and HCA Inc.'s big new two-part megadeal, as well as Ford Motor Co.

But not everybody was riding the crest of the wave. Among those left behind was Hawker Beechcraft Acquisition Co., down sharply despite a lack of fresh negative news.

The moribund primary market came back to life on Thursday, not once, but twice, as gaming operator Rock Ohio Caesars LLC priced a $380 million issue of senior secured notes. New dealers also heard that energy company CrownRock LP was shopping a $150 million deal, with pricing expected during Friday's session. If it does price, it would be the first time junk-rated issues priced in the domestic dollar-denominated market on successive days since July 27-28.

While many junk issues were up on the day, some by multiple points, statistical performance indicators continued to have a generally bearish tone.

And, not unexpectedly, high-yield mutual funds - considered a reliable barometer for overall junk market liquidity trends - lurched deeper into the red in the week ended Wednesday, showing near-record outflows as worried investors pulled money out of the junk market.

Funds fall by $3.4 billion

As Thursday's session was wrapping up, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week ended Wednesday, an eye-opening $3.42 billion more left those weekly reporting funds than came into them.

It was the second consecutive large outflow, following and dwarfing the $804.25 million cash bleed seen in the previous week ended Aug. 3.

Over that two-week period, the funds have tallied a net loss of some $4.224 billion, according to a Prospect News analysis of the numbers. That more than offset the $2.775 billion, which had come into the funds in the four weeks dating back to the week ended July 6, according to the analysis.

The latest week's huge outflow total, which really came as no surprise to traders and other market participants who had noted a mounting wave of redemptions from the mutual funds on a day-by-day basis, was the second biggest cash hemorrhage of the year and on record, barely beaten out by the colossal $3.43 billion, which the funds lost in the week ended June 22.

For the year as a whole, inflows have now been seen in 21 weeks versus 11 outflows, but the latest week's mammoth loss essentially wipes out almost all of the remaining net inflow accumulated for the year, dropping that figure to a relatively paltry $56 million from the previous week's still somewhat respectable $3.476 billion, although the latter figure itself was less than half of the peak year-to-date net inflow level of $7.82 billion recorded in the week ended May 25, according to the analysis.

Fund-flow patterns began the new year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year. Then, fund-flow patterns turned choppy, with two or three weeks of declines, followed by several weeks of inflows and going back and forth since then.

EPFR $6.71 billion outflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, reported a $6.71 billion outflow from the funds in the latest week - the single largest loss of cash from those funds since EPFR began tracking fund flows.

It was nearly twice the size of the previous record loss: $3.51 billion in the week ended June 22.

The huge loss followed, and completely overshadowed, the already sizable $1.13 billion outflow the agency recorded in the week ended Aug. 3.

It was the seventh time in the past 10 years that EPFR saw more money exiting the funds than was being put into them. Its calculations now show 23 weeks of inflows so far this year against nine outflows.

The latest week's cash loss more than cut the EPFR year-to-date net inflow number in half, whittling it down to $6.8 billion from about $13.5 billion previously.

EPFR's figures, and those of AMG, generally point in the same direction, although their actual numbers usually differ markedly since they calculate their respective fund-flow totals very differently. EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds, and counts some exchange-traded funds.

Cumulative fund-flow estimates, whether from Lipper/FMI 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. Those trends had pretty much continued into 2011 as well, although the market hit something of a dry patch in June, then seemed to recover in July - only to run into a brick wall so far in August.

Traders expected cash loss

The fact that there would be a huge outflow of cash from the market in the week ended Wednesday was essentially anticlimactic; a trader said he had heard that Wednesday's EPFR number was an outflow of well over $1 billion, "clearly an indicator that you're getting a really big outflow, especially since that followed "consistent" large outflows over the previous several sessions, "fairly large numbers from EPFR."

A second trader opined: "While U.S. funds have lost money, I don't think it's been as cataclysmic as [some] would make it out to be."

Rock Ohio Caesars prices

For the first time in a fortnight, a U.S.-based issuer sold new junk bonds.

Rock Ohio Caesars priced a $380 million issue of 12 1/8% seven-year second lien notes (Caa1/B/) at 98.266 to yield 12½% on Thursday.

The yield printed at the wide end of the 12¼% to 12½% yield talk. The reoffer price came in line with discount talk of 1.75 points.

Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and Citadel Securities LLC were the joint bookrunners.

The Cleveland-based casino entertainment company plans to use the proceeds to fund the development of two casinos.

First deal since July 28

Rock Ohio Caesars became the first U.S.-based issuer to price a deal in 10 market sessions.

On July 28, Tempel Steel Co. priced $135 million of 12% senior secured notes due in 2016 and Fiesta Restaurant Group, Inc. (Carrols Restaurant Group, Inc.) priced a $200 million issue of 8 7/8% four-year senior secured second-lien notes.

CrownRock on Friday

CrownRock LP and CrownRock Finance, Inc. held a Thursday afternoon investor call for a $150 million offering of five-year senior notes.

The deal is set to price on Friday morning.

Credit Suisse is the bookrunner.

The Midland, Texas-based energy company plans to use the proceeds to execute its drilling program for 2011 and 2012, as well as to repay existing debt and for general corporate purposes.

Slow until September

Although high yield improved somewhat on Thursday, the market tone remained soft, according to a syndicate official.

There was some strategic buying taking place, said the sellsider. But there were also plenty of investors out there fishing for bids.

Elsewhere, a senior high-yield capital markets banker said that should market conditions stabilize over the course of a few days, there could be one or two opportunistic issuers hitting the market during the run-up to the three-day Labor Day weekend, which begins on Sept. 2.

For the most part, however, the calendar is not expected to begin filling until the end of Labor Day weekend, the traditional summer-fall threshold in the high-yield market, the banker said.

"During the Labor Day to Thanksgiving timeframe, things could pick up, provided that we see some decent conditions in the markets," the source said.

Rock Ohio rises

When the new Roc Finance LLC/Rock Finance I Corp. secured notes due 2018 were freed for secondary dealings - the first actual dollar-denominated, purely junk bond issue from a domestic borrower in about two weeks - traders saw the Cleveland-based casino development company's paper firm.

One saw the new bonds get as good as 99½ bid, well up from the 98.266 level at which the transaction had priced earlier, although he later saw the bonds come in slightly to 99¼ bid, 100¼ offered.

A second trader also saw the bonds going home at 99¼ bid.

An Elvis sighting

Away from the new issues, a trader, noting the violent roller-coaster ride on which the financial markets generally and in this particular case, junk bonds, have been taking over the past 10 days to two weeks, quipped that "this market has more gyrations than Elvis' hips."

In Thursday's dealings, he said, "You're seeing a kind of a separation between the good names versus the bad names - the bad names, or the riskier, sketchier credits, are getting tossed out [by investors], while folks are still looking to add to the more stellar names."

Another trader characterized the session as "hunt and peck."

He said that "people are just dropping bids because they can. When somebody comes in desperate to sell something, drop your bid as much as possible. That seems to be the trend at some places."

Other places, he said, "are working hard to get good executions for their accounts."

5-Bs, CCCs prove popular

The trader said that "there were decent two-way flows," with "the bulk of the action" in the split-rated 5-B segment, attracting crossover investors to such names as apparel maker Gap Inc.'s 5.95% notes due 2021, which finished at 92 5/8 on volume of over $43 million, leading all junk- or split-rated credits, or Anadarko Petroleum Corp.'s 6 3/8% notes due 2017, trading above the 114 level on volume of about $20 million.

He also saw brisk activity in the CCC segment.

He said that single-Bs "still have a good bid to them, and most people don't want to sell good single-B credits."

HCA hops higher

Among specific issues seen trading around on Thursday, a trader saw Nashville, Tenn.-based hospital operator HCA's new 7½% senior unsecured notes due 2022 start the day at a wide 90 bid, 94 offered spread. But then, he said, "it got to 91-94, then 92-94, then 93-94."

The bonds, he said, had been offered at 94 until around 2 p.m. ET, then "someone lifted the 94 offering, and the next thing, they were 94¼ bid. That gives you an idea of how things traded today."

He also saw the company's new 6½% first-lien senior secured notes due 2020 having "popped again today," rising to late-day levels at 98¼ bid, 98½ offered, up about 2½ points from prior levels at 96 bid, 97 offered.

HCA had priced $3 billion of the 2020s and $2 billion of the 2022s, both at par, in a quickly shopped two-part deal that was radically upsized to $5 billion from $1 billion originally and came to market on July 26.

Other recent deals firm

The trader also saw Reynolds Group Holdings Ltd.'s 9 7/8% notes due 2019 "probably above 90 now," versus previous levels bid below 90.

The New Zealand-based maker of Reynolds Wrap and other consumer packaging materials products had priced $1 billion of the '19s, upsized sharply from $500 million, at 99.318 also on July 26, part of a two-tranche $2.5 billion deal that included $1.5 billion of 7 7/8% senior secured notes due 2019 that priced at 99.268 to yield 8%.

"Deals that came in the last two months that are down anywhere from 5 to 10 points are particularly attractive - especially senior secured stuff."

As an example, he said, Chrysler Group LLC's two tranches of bonds were trading Thursday at 83 bid, 84 offered - well up from 80 bid, 83 offered on Wednesday.

The No. 3 domestic carmaker had priced $1.5 billion of 8% senior secured notes due 2019 and $1.7 billion of 8¼% senior secured notes due 2021 on May 19, with both tranches priced at par.

Most names better

Elsewhere, traders saw Franklin, Tenn.-based hospital operator Community Health Systems' 8 7/8% senior secured notes due 2015 going out at 98¾ bid, 99¾ offered on brisk trading of over $24 million. That was up from 96 bid, 97 offered on Wednesday, although still down from last Friday's levels at 101.

A trader saw Ford Motor Co.'s benchmark 7/45% bonds due 2031 up 1 point at 107 bid, 108 offered.

However, Hawker Beechcraft 8½% notes due 2015 were seen by one market sources down more than 4 points at just under 52 bid. The Wichita, Kan.-based general aviation aircraft manufacturer's 8 7/8% notes due 2015 fell to earth to end at 43 bid, down 9 points on the day.

There was no fresh news out on the company, whose bonds got whacked around last month after it released less-than-stellar quarterly results.

Market indicators turn mixed

Market statistical indicators, which were in negative territory on Wednesday, turned mixed on Thursday.

A trader saw the CDX North American Series 16 HY Index gain 1/8 point Thursday to close at 93 1/16 bid, 93 5/16 offered, after having swooned by 1 7/8 points on Wednesday.

The KDP High Yield Daily Index slid by 20 bps on Thursday to close at 71.48 - its lowest close since 71.41 recorded on July 13, 2010. That followed a 47 bps loss on Wednesday.

Its yield rose by 7 basis points on Thursday, to 8.15%, after having widened by 16 bps on Wednesday.

And the Merrill Lynch U.S. High Yield Master II Index fell by 0.762% on Thursday, its eighth consecutive loss. That followed Wednesday's 0.308% retreat.

That left the index's year-to-date loss at 0.631% - a more than 50% on the session from 1.404% on Wednesday. It was the lowest level for the index since the 0.622% seen on Jan. 5. The peak level for the year was 6.362% on July 26.

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