Valeant sours on subpoena, Fortescue up on debt buyback, cost cuts; funds gain $1.48 billion in week

By Paul Deckelman and Paul A. Harris

New York, Oct. 15 – Valeant Pharmaceuticals International, Inc.’s bonds and shares plunged in heavy trading on Thursday on the news that the Canadian drug manufacturer – already facing congressional scrutiny over its controversial pricing policies for some of its medications – has been issued subpoenas by the U.S. Attorneys in New York and Boston who are also seeking details on its patient assistance programs, drug pricing and distribution practices.

Also on the downside were energy names such as California Resources Corp. and Energy XXI Ltd., which lost ground along with the latest slide in crude oil prices after data showed U.S. oil stockpiles growing.

Wynn Resorts Ltd. was down after the gaming company reported lower quarterly revenue, blaming the slide on continued weakness in its Macau operations – and blaming that on uncertainty caused by Chinese government policies.

On the upside, Fortescue Metals Group Ltd.’s bonds firmed smartly after the Australian iron ore producer reported continued progress in cutting its costs in the face of weak iron ore prices – and said that it had taken advantage of lower prices for its bonds to buy back a sizable chunk of its debt.

Visant Corp.’s bonds added to the gains they had notched on Wednesday on the news that the maker of school yearbooks, class rings and other such educational keepsakes will be acquired by consumer products manufacturer Jarden Corp.

The dollar-denominated primary market remained quiet on Thursday.

Statistical measures of junk market performance turned mixed on Thursday, after having been lower across the board on Wednesday for the first time in more than two weeks.

Thursday was the third such mixed session in the previous four – the indicators had also ended mixed on Friday and again on Tuesday – its fourth mixed finish in the last seven sessions and its sixth in the last 10 trading days.

Another numerical indicator – weekly flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, which is considered a reliable barometer of overall junk market liquidity trends – showed its second straight sizable inflow on Thursday, with $1.476 billion more seen having come into those funds in the latest reporting week. Those flows were bouncing back from the heavy net redemptions reported two weeks ago.

Verisure to roadshow

The primary market remained mostly quiet on Thursday.

Verisure Holding AB plans to start a roadshow on Friday for a €700 million seven-year senior secured notes (B1/B).

The roadshow wraps up on Wednesday and the deal is set to price after that.

Joint global coordinator Goldman Sachs will bill and deliver. Morgan Stanley, BofA Merrill Lynch, Nomura and Nordea Securities AB are also global coordinators.

Barclays, Citigroup, Credit Suisse and Deutsche Bank are joint bookrunners.

Proceeds will be used to help fund the acquisition of a 46% stake in the Malmo, Sweden-based provider of monitored alarm solutions by Hellman & Friedman from Bain Capital, and to refinance debt.

The Verisure news comes one day after Lowell Group sold £795 million of high-yield notes in two tranches via joint bookrunners Goldman Sachs International, Credit Suisse, Citigroup, ING, JP Morgan and HSBC.

Lowell shifted £10 million of proceeds shifted to the secured tranche from the unsecured tranche.

Special purpose vehicle Garfunkelux Holdco 3 SA priced an upsized £565 million tranche of seven-year senior secured notes (B2/B+) at par to yield 8½%. The yield printed at the tight end of the 8½% to 8¾% yield talk.

Garfunkelux Holdco 2 SA, the parent company of Lowell, priced a downsized £230 million tranche of eight-year senior unsecured notes (Caa1/B-) at par to yield 11%. The yield printed in the middle of the 10¾% to 11¼% yield talk.

Aside from Verisure there was only one other high-yield offer on the road at Thursday's close.

Greatbatch Ltd. is marketing $360 million of eight-year senior notes (Caa1/B-), an acquisition financing via Credit Suisse and KeyBanc.

The market awaits official price talk.

Early guidance has the notes coming in a yield range of 8% to 8½%, a trader said.

The deal is set to price early in the week ahead.

At press time there were no deals on deck to price on Friday, sources said.

Valeant falls on federal probe

In the secondary arena, Valeant Pharmaceuticals bonds – which recently fell from levels around par and were gyrating around in the in the 90s after Congressional Democrats talked about issuing a subpoena to force the Montreal-based drug manufacturer to come before Congress to explain its pricing policies on some of its medications – were back on the slide on Thursday, pushed lower by the news that two federal prosecutors had issued subpoenas seeking information.

“They were down a couple of points in pretty active trading,” a trader said, quoting the company’s 6 1/8% notes due 2025 at 94½ bid.

“Last week, they were trading around 95, maybe as high as 96 or 97, so they’re drifting down.”

He also saw the company’s 5 7/8% notes due 2023 also ending at 94½, which he called “down a couple as well” from recent levels.

At another desk, a trader quoted the 6 1/8% notes going home at 94 13/16, calling that down 1 7/16 points on the session.

He said that over $86 million of those notes had changed hands, easily the busiest bonds in Junkbondland on Thursday.

He said that the 5 7/8s were also extremely busy, with over $48 million having traded. He saw them ending at 95 bid, down 1½ points on the day.

Another big loser was Valeant’s 6 3/8% notes due 2020, which fell 1¼ points on the day to end at 99¾ bid, on volume of over $16 million.

And its 5½% notes due 2023 were seen down a deuce on the day at 93 bid on turnover of more than $11 million.

The weakness carried through to the company’s New York Stock Exchange-traded shares, which dropped by $8.42, or 4.75%, to finish at $168.87, on volume of over 10.6 million shares, more than triple the norm.

The bonds and shares slid on the company’s revelation that it had received subpoenas seeking information on its pricing policies, patient-assistance programs and distribution practices from the U.S. Attorney’s offices in both the District of Massachusetts and the Southern District of New York. Valeant said it would cooperate with the prosecutors.

The company came under fire after it tripled the price of its heart drug Isuprel and raised the price for another heart medication, Nitropress, to six times what it had been, after buying the company that makes those remedies in February.

Valeant has been an aggressive acquirer of smaller pharmaceutical makers, but has raised eyebrows by instituting big price hikes on some of the medications it has acquired, while cutting money for research and development.

Senior analyst Vicki Bryan of the Gimme Credit independent investment advisory service said frankly in a research note on Thursday that “we have not been a fan” of Valeant’s business model – she rates it as an underperform – saying it was built around paying excessive multiples for companies and then making up for it by jacking up prices for the acquired medications, bringing official scrutiny down on the company, first in its native Canada and now in the United States.

Bryan speculated that Valeant may be forced by public pressure to rescind some of those price hikes across what she called “its bloated portfolio.”

But should that happen, she warned, “Valeant’s already troublingly high leverage would spike even higher on its massive debt load at the same time its ability to repay that debt becomes impaired and its book value becomes substantially overstated,” causing bondholders to head for the exits.

Oil issues head lower

Elsewhere, energy issues were seen on the slide on Thursday as crude oil prices remained under pressure. The benchmark West Texas Intermediate grade of domestic crude for November delivery settled at $46.38 per barrel, down 26 cents on the day, in trading on the New York Mercantile Exchange.

Not surprisingly, bellwether energy credit California Resources’ 6% notes due 2024 lost more than 1¼ points, finishing at 66 11/16 bid, a trader said, on volume of over $25 million.

The Los Angeles-based oil and natural gas exploration and production operator’s 5% notes due 2020 were likewise off at 71 bid, with more than $17 million having traded.

Hamilton, Bermuda-based Energy XXI’s 11% notes due 2020 lost ¾ point to end at 57¾ bid, with over $11 million traded.

A trader at another desk saw Penn Virginia’s 7¼% notes due 2019 down 1½ points on the day at 27½ bid.

Berry Petroleum’s 6¾% notes due 2020 finished at 37½ bid, while Magnum Hunter Resources’ 9¾% notes due 2020 closed at 42¼ bid, both down 1¼ points on the day.

Wynn ends a loser

Wynn Resorts’ 5½% notes due 2025 were down nearly ½ point on Thursday, finishing at 90¼ bid on volume of more than $25 million, while the Las Vegas-based gaming giant’s 5¼% notes due 2021 plunged nearly 2½ points to 87¾ bid, with over $10 million having changed hands.

That followed the casino company’s report of third-quarter earnings, with net income falling to $73.8 million, or 73 cents per share – down 62% from a year ago. Revenue slid by 27% year-over-year to $996.3 million. Both revenue and per-share earnings fell short of Wall Street’s expectations.

Wynn blamed the disappointing results on weakness in its Macau operations – which it said saw revenues fall nearly 40% due to new official policies put in place by China’s government, ostensibly to curb corrupt practices but which had had the net impact of driving away many high rollers. Steve Wynn, the chairman of the eponymous company, expressed his frustration with the situation during the company’s conference call with analysts following the release of the numbers.

Fortescue firms up

But numbers turned out to be the catalyst behind a rise in Fortescue Metals Group’s bonds.

A trader said “Fortescue was very busy. They had their call this morning and the bonds popped,” although he added that they had softened a little from their peak levels later on, while still finishing considerably higher on the day.

Its 9¾% notes due 2022 still managed to post a handsome 3 point gain to 101 bid, with over $56 million of the notes having changed hands, one of the busiest bonds of the day.

FMG’s 6 7/8% notes due 2022 firmed several points to 72¾ with over $15 million traded.

The Australian iron ore producer said that it had managed to cut its operating costs in the face of weak prices for its output, bringing its cost down to $16.90 per ton – about half of what it was a year ago – and it expects to wring out further cost savings, driving its costs down to the $15 per ton level by year’s end.

Besides a leaner cost structure, Fortescue touted its debt-buyback program, which saw it take out $384 million of bonds in open-market transactions since June at an average cost of 80 cents on the dollar.

“If the market is going to price our debt at those levels, then we are going to buy it,” the company’s chief executive officer Nev Power declared.

Visant rise continues

Traders saw Visant’s 10% notes due 2017 up another 1/8 to ¼ point on Thursday, ending at 102¼ on volume of more than $24 million.

Those bonds had shot up by more than 18 points on Wednesday, and on volume of more than $110 million, on the news that the Minneapolis-based maker of school year books and class rings will be acquired by Jarden Corp. in a $1.5 billion deal.

Indicators turn mixed

Statistical measures of junk market performance turned mixed on Thursday, after having been lower across the board on Wednesday for the first time in more than two weeks.

Thursday was the third such mixed session in the previous four – the indicators had also ended mixed on Friday and again on Tuesday – its fourth mixed finish in the last seven sessions and its sixth in the last 10 trading days.

The KDP High Yield Daily Index suffered its second straight loss Thursday after having pushed higher over the previous six straight sessions and in seven out of the previous nine sessions. It finished off by 8 basis points to end at 67.11, on top of Wednesday’s 11 bps fall.

Its yield rose by 3 bps to 6.60%; on Wednesday, it had come in by 1 bp, even though the index had also declined on the day. Wednesday had been the second straight session that the yield – which normally moves inversely to the index, rising when it the index falls and vice versa – did not conform to the usual pattern.

Thursday marked the second time in the last three sessions that the yield had risen.

The Markit Series 25 CDX North American High Yield Index saw its first gain after two straight losses, jumping by 15/32 point on Thursday to end at 102 1/8 bid, 102 5/32, in contrast to Wednesday’s 5/32 point loss.

The Merrill Lynch North American Master II High Yield Index, though, posted its third straight setback, easing by 0.016% on Thursday, on the heels of Wednesday’s 0.074% retreat.

Thursday’s loss increased the index’s year-to-date deficit to 0.658% from 0.642% on Wednesday – although that’s still a considerably smaller cumulative loss than the 3.069% year-to-date loss seen on Oct. 2 – the most red ink for the year so far and the index’s lowest level since Oct. 5, 2011, when the market measure had shown a 3.834% year-to-date deficit.

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