Lennar drives by with upsized deal; retail issues rocked by Macy’s move; funds up $734 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 5 – The high-yield market saw its second quickly-shopped new issue price in as many days on Thursday, as homebuilder Lennar Corp. brought in an upsized $600 million of five-year notes.

That transaction followed Wednesday’s pricing of the first new deal of the year, a quick-to-market $200 million add-on to cement products producer U.S. Concrete Inc.’s existing June 2024 bonds.

Traders said the new Lennar paper was trading slightly above its issue price, though volume in the credit was light.

Away from the new deals, retailing sector names such as Neiman Marcus Group Ltd. and L Brands Inc. remained under pressure in the wake of negative news coming from sector peers such as investment-grade department store behemoth Macy’s Inc. and the underperforming junker Sears Holding Corp., both of which announced the closing of dozens of stores of their respective iconic chains due to weak sales and a need to cut costs. Sears’ own bonds, however, did not see much activity.

Elsewhere, hospital operator Community Health Systems Inc.’s bonds were up by multiple points in active trading in the wake of this week’s announcement that it had completed the sale of a majority interest in its Home Health division, with the $128 million of proceeds slated for debt reduction.

High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – opened 2017 on a positive note on Thursday, reporting the first weekly net inflow of the year and second consecutive cash gain overall.

Some $734 million more came into those weekly-reporting-only domestic funds than left them in the form of investor redemptions during the reporting week ended Wednesday, which followed a $592 million inflow reported last Thursday for the seven-day period ended Dec. 28 (see related story elsewhere in this issue).

Lennar upsizes

Lennar priced Thursday’s sole deal, an upsized $600 million issue of five-year senior bullet notes (Ba1/BB/BB+) that came at par to yield 4 1/8%.

The issue size was increased from $350 million.

The yield printed on top of yield talk that had been set in the 4 1/8% area and in line with early guidance in the low 4% area.

From the perspective of one portfolio manager who stayed on the sidelines for the Lennar deal, a high-yield bond that comes at 4 1/8% does not have much room to run.

The new Lennar five-year bullet was trading at par 1/8 bid, par 3/8 offered, the manager said.

J.P. Morgan, Deutsche Bank, BofA Merrill Lynch, Mizuho, Goldman Sachs, RBC and Wells Fargo were the joint bookrunners for the merger financing.

Wednesday inflows

The daily cash flows for dedicated high-yield bond funds were positive on Wednesday, according to the portfolio manager.

High-yield ETFs saw $353 million of inflows on the day.

Asset managers saw $5 million of inflows on Wednesday.

And continuing a trend which started taking hold early last autumn, when investors began positioning for the more aggressive inclinations then being telegraphed by the Fed, dedicated bank loan funds saw far greater inflows than the high-yield ETFs and asset managers combined, as cash continues to look for a home in floating-rate assets, the manager said.

The dedicated loan funds saw $592 million of inflows on Wednesday.

New Lennar notes modestly higher

In the aftermarket, traders saw Miami-based homebuilder Lennar’s new quick-to-market deal at slightly higher levels, after the upsized issue of 4 1/8% notes had priced at par.

But they did not report much in the way of initial dealings in the credit.

One trader heard the bonds quoted in a par to 100¾ bid context, while a second pegged them around 100 3/8 bid, 100½ offered.

A third trader located the bonds trading between 100 1/8 and 100½ bid.

Noble firms again

Among the recently priced names, Noble Holding International Ltd.’s 7¾% notes due 2024 firmed for a third straight session on Thursday, clawing their way out of the hole which those bonds had been in ever since they priced at a discount in mid-December.

A market source said that the bonds had edged up by around ¼ point to 98¼ bid, with over $19 million traded.

That improvement came on the heels of a nearly 2 point gain on Tuesday and another 1¼ points on Wednesday.

Noble Holding – the wholly owned Cayman Islands-based unit of offshore energy drilling company Noble Corp. – had priced $1 billion of those notes in a regularly scheduled forward calendar deal back on Dec. 14. The issue priced at 98.01, yielding 8 1/8%, after being doubled in size from an originally announced $500 million.

However, despite the investor interest that warranted an upsizing, the Noble deal has struggled in the secondary market since then, initially retreating from its issue price and remaining well below it on most days.

The issue had recently bottomed out at just above 94 bid this past Friday, though it has since rebounded off that low point in this week’s dealings, a surge that brought it back up to its issue price on Wednesday and pushed it further upward on Thursday.

Retailing names retreat

Away from the new or recently priced names, market participants saw retailing sector names falling back as investors shunned the sector following the news that upscale department store operator Macy’s – considered an industry bellwether – will close 68 underperforming stores.

Adding to the bad karma was the news that Sears Holdings, the operator of the Sears and Kmart store chains, will close 150 more of its outlets, on top of previously announced closings.

Sears also announced plans to sell its Craftsman tools unit – a brand identified with Sears for many decades – to toolmaker Stanley Black & Decker in a transaction valued at around $900 million. The move was widely interpreted as a desperate bid to buy the company some breathing room.

A trader said those developments illustrate the point that “e-commerce is making [brick-and-mortar] retail selling space redundant” – even at longtime iconic store chains like Macy’s Sears and Kmart.

Amid that negative industry news, a trader said that upscale retailer Neiman Marcus’s 8% notes due 2021 lost nearly ½ point, closing at 69 5/8 bid, on volume of over $12 million.

“They’ve been a falling knife,” he said, noting that the bonds had been trading around 80 bid at the beginning of December and had begun the new year around 74½ bid, falling to around 70 bid in Wednesday’s dealings.

The Dallas-based store chain’s 8¾% senior PIK notes due 2021 dropped more than 2½ points on Thursday to 65 7/8 bid, with about $7 million traded.

Columbus, Ohio-based retailer L Brands’ 5 5/8% notes due 2022 were down a deuce on the day at 105 bid, with around $11 million traded.

However, traders did not see very much activity in Sears Holdings’ own bonds, its 6 7/8% notes due 2017 at 94 5/8 bid, on just over $1 million of volume.

Community Health robust

In the healthcare sector, Community Health Systems’ 8% notes due 2019 shot up by 3½ points to 88¼ bid, with over $29 million traded.

The Franklin, Tenn.-based hospital operator earlier this week announced that it had completed the sale of 80% of its Home Health unit for $128 million – one of a number of asset sales the company has recently announced as it attempts to pare down its sizable debt load.

Indicators turn mixed

Statistical market performance measures turned mixed on Thursday after having been stronger across the board over the previous four consecutive sessions.

The KDP High Yield Index jumped by 20 basis points on Thursday to end at 72.08, its sixth consecutive advance after one loss and its ninth gain in the last 10 sessions. It had also zoomed by 23 bps on Wednesday.

Its yield came in by 16 bps to 5.14%, its third straight narrowing and fifth such tightening in the last six sessions, including Wednesday’s 8 bps yield decline.

But the Markit Series 27 CDX Index lost nearly 3/32 point on Thursday, closing at 106 13/16 bid, 106 27/32 offered. Before that, the index had risen over two straight sessions and in four days out of the previous five, including its gain of 5/16 point on Wednesday.

However, the Merrill Lynch High Yield Index remained a bulwark of strength, posting its 12th straight advance on Thursday as it moved up by 0.229%, on top of gains of 0.268% on Tuesday, the first trading session of the year, and 0.365% on Wednesday.

That moved its year-to-date return up to 0.865%, a second consecutive new high for the new year, eclipsing the prior cumulative mark of 0.634%, set on Wednesday.

The index had closed out 2016 with a total return of 17.489% - its best showing since 2009’s record-setting 57.512% jump. In 2015, the index had lost 4.643% on the year.

© 2015 Prospect News.
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