North Atlantic prices, firms; new SunCoke surges; Genworth falls; funds up $287 million

By Paul Deckelman and Paul A. Harris

New York, July 21 - North Atlantic Trading Co. Inc.'s $285 million two-part offering came to market on Thursday, high-yield syndicate sources said, with both halves of the Darien, Conn.-based tobacco company's deal pricing in line with market expectations. The bonds were seen having firmed in the aftermarket.

Wednesday's $400 million eight-year deal from metallurgical coke producer SunCoke Energy, Inc. was reported by traders having firmed smartly from their par issue price when the bonds - too late on Wednesday for any trading - were freed for secondary activity.

Another gainer was Capsugel Financeco SCA, a unit of New Jersey pharmaceutical capsule producer Capsugel Inc. It priced €325 million of eight-year notes, heard split between U.S. and European accounts - relatively unusual for a euro-denominated deal - on Wednesday, and they moved up solidly from their par issue price.

However, the traders saw little aftermarket movement in Wednesday's other offering, a $290 million tranche of secured paper from Canadian print and online media publisher Trader Corp.

In the secondary arena, Genworth Financial, Inc.'s nominally investment-grade bonds were seen by junk traders gyrating around at very un-high-grade like levels in the upper 50s and lower 60s on heavy volume, after the insurer issued poor preliminary second-quarter numbers.

Apart from that debacle, prices generally were seen continuing their recently firm trajectory, with statistical indicators all pointing northward.

And high-yield mutual funds, considered a good proxy for overall junk market liquidity trends, notched their third consecutive weekly inflow, gaining a net of $287 million in the week ended Wednesday.

Funds gain once again

Market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI announced an inflow that followed - and was dwarfed by - the stupendous $1.3 billion cash injection seen the previous week ended July 13, which, according to data compiled by Prospect News, was the biggest inflow seen so far this year.

The latest high mark edged out the $1.299 billion inflow for the week ended Feb. 9. That was also the absolute largest cash gain since the massive $1.391 billion addition notched more than a year ago, in the week ended June 23, 2010.

Those two injections, plus the $884 million recorded in the week ended July 6, total $2.471 billion, according to the Prospect News figures, as the junk market tries to battle back from five positively deadly weeks before that dating to June 1, during which a net total of some $6.259 billion left the funds.

For the year as a whole, inflows have now been seen in 20 weeks versus nine weeks of outflows, for a net cumulative inflow estimated total of just over $4 billion, according to the data. That's still down from the estimated peak year-to-date level of $7.82 billion recorded in the week ended May 25, according to the data.

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: two weeks of declines in March totaling $1.146 billion followed by three weeks of inflows totaling $1.78 billion and then two more weeks of outflows in late April adding up to $190 million.

That was then followed by inflows seen over the next four weeks, totaling $1.14 billion. Those gains were then far overshadowed by the most recent string of cash losses, which was snapped by the inflows seen the past three Thursdays.

Cumulative fund-flow estimates 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 last month, from which it is just now recovering.

A trader expressed some surprise at the latest week's $287 million AMG figure, exclaiming, "Wow - it was much less than I had thought."

Before the number appeared, he had suggested that flows - while certainly not beating, or even matching, the prior week's giant cash infusion - might be strong enough for an inflow number north of $500 million. He explained that "a lot of guys I spoke to got cash again [Wednesday] night."

North Atlantic's $285 million

The high-yield market is rallying again, according to a mutual fund manager who pointed to Thursday's only deal - North Atlantic Trading's $285 million two-part senior secured notes transaction - as evidence.

The Darien, Conn.-based tobacco company priced a $205 million tranche of 11½% five-year second lien notes (B2/B-) at 98.00 to yield 12.044%. The second lien notes priced in line with price talk that called for an 11½% coupon at an issue price of 98 to yield in the 12% area.

The company also priced an $80 million tranche of 19% 5.5-year third-lien notes (Caa2/CCC) at 97 to yield 19.916%. The coupon will pay 11% cash and 8% in kind. The third-lien notes also priced in line with price talk that called for an 11% cash coupon and an 8% PIK coupon at 97 to yield in the 20% area.

Jefferies was the bookrunner for the debt refinancing.

Both tranches, which were priced at significant discounts, traded to around par, said the mutual fund manager who had looked at the deal but passed.

M&G starts Monday

There was only one new deal announcement during the Thursday session.

M&G Finance Corp. plans to begin an international roadshow on Monday in New Jersey for its $500 million offering of eight-year senior notes (expected ratings B3//BB).

J.P. Morgan is the bookrunner.

Proceeds will be used to fund capital expenditures, as well as to repay debt and to provide liquidity and working capital.

The only deal in the market that is a possible Friday transaction is Cleveland, Tenn.-based payday loan and title loan firm Main St. Personal Finance, Inc.'s $95 million offering of eight-year senior secured notes (B3/B-), via Cortview Capital.

There could be news on the deal Friday, an informed source said.

It was talked last week with a 13% to 13½% yield.

Thin calendar

The high-yield mutual funds saw $287 million of inflows for the week to Wednesday, according to Lipper-AMG, a money manager from a mutual fund said late Thursday.

Once again paper has become scarce, the source asserted.

The calendar is thin, but the primary market should remain reasonably active until the final weeks of August.

"We're not going to have the $10 billion per week clip we saw in April," the manager said and added that the market, in any case, is challenged to absorb that amount of issuance.

"We could see about $5 billion per week," the buysider added.

Reynolds oversubscribed

Turning to business at hand, all players are now focused on Reynolds Group, which is in the market with a whopping $2 billion two-part offering of eight-year notes.

The deal, via Credit Suisse and HSBC, is on a trajectory to price during the week ahead.

"Everybody is in that deal," the investor lamented, estimating that the $2 billion combined amount of bonds should have no trouble generating $6 billion of demand.

The deal features $1.5 billion of senior secured notes and $500 million of senior unsecured notes.

Initial discussions on the secured piece took place in the 8¼% context, sources say. Discussions on the unsecured piece took place in the low 10% range.

That was yesterday, the fund manager asserted.

Because the buyside anticipates dismal allocations of the new paper, investors are upping their positions in the existing Reynolds Group 9% senior notes due 2019 , the source said.

Those bonds have been on a roller coaster ride that saw them trading all the way up to 106 bid during the spring 2011 rally and subsequently dropping all the way to 96 bid, when Reynolds announced in mid-June that it would acquire Graham Packaging Co., Inc., an event perceived to have a likely impact on Reynolds' credit.

Now, the 9% notes have retraced some of that lost ground, although they are still trading below par.

However, as of Thursday, the Reynolds 9% notes due 2019 were trading with an implied yield of 9.18%, the investor said.

"That tells you that the new unsecureds are not going to come with that 10% yield everybody has been dreaming about," the source remarked, adding that the low-to-mid 9% range is probably more likely for a yield on the unsecured paper now in the market, which will mature in the same year as the existing unsecured paper.

As for the new secured Reynolds paper, which initially generated discussions around 8¼%, it will probably come in the low 7% context, the buysider lamented.

North Atlantic moves up

When North Atlantic Trading Co.'s new two-part deal moved into the aftermarket, a trader said that he had heard a 98 bid - identical to the issue price - on the company's $205 million of second-lien senior secured notes due 2016. He said he had not seen an offered level.

A second trader said he did not see either that tranche or the $80 million of third-lien senior secured notes due 2017, although he noted that in many years of trading, he didn't think he had seen a coupon on any bond as high as the latter piece's 19% handle.

Another market source later in the day, though, did quote the second-lien notes at 99.5 bid, up from the 98 pricing level, while the third-lien piece was at 981/2, up from 97 at pricing.

SunCoke surges in secondary

Clearly the star of the day among new or recent deals was SunCoke Energy's $400 million of 7 5/8% notes due 2019. The Lisle, Ill.-based metallurgical coke producer's deal priced at par on Wednesday, but came to market too late in that session for any kind of secondary dealings.

On Thursday, however, a trader proclaimed that "that one did well," as he saw the new bonds having pushed up to 102½ bid, 102¾ offered.

A second trader saw them not too far off that level at 102¼ bid, 102½ offered, while a third said they were 102 bid, 102½ offered.

Trader trudges around

Wednesday's other dollar-denominated deal, from Trader Corp., an Etobicoke, Ont.-based print and online media publisher, did not do nearly so well - or maybe it did, depending upon whom you spoke to.

One trader pegged its $290 million of 9 7/8% senior secured notes due 2018 at 99 bid, 99½ offered, more or less straddling the company's 99.367 issue price, which yielded 10%.

He said that he saw "not much trading at all" in the deal, which was upsized from the originally planned $275 million.

However, another trader heard quotes as high as 100¾ bid and said that the bonds were anchored at 99¾ bid, par offered, "so they traded up quite a bit today."

Capsugel does well

A trader who normally does not track euro-denominated paper said that the Capsugel 9 7/8% notes due 2019 were trading at 101 76/8 bid, 102 3/8 offered, "with people looking for bonds."

The Peapack, N.J.-based pharmaceutical name's €325 offering, which the trader said was distributed between both European and American accounts, priced at par on Wednesday.

Although they hit the market pretty late in the day, a trader on Thursday said that the new bonds traded a little on Wednesday at 101 3/8 bid, 101 7/8 offered. He saw them on Thursday having firmed to 101 7/8 bid.

Market indicators up again

Away from the new deal arena, traders saw market statistical indicators, which had firmed on Tuesday and Wednesday, continuing that momentum on Thursday.

A trader saw the CDX North American Series 16 HY Index up by13/16 of a point on Thursday to end at 101 9/16 bid, 101 11/16 offered, after having risen 7/16 of a point on Wednesday.

The KDP High Yield Daily Index gained 9 basis points on Thursday to close at 75.52, after surging by 13 bps on Wednesday. Its yield came in by 3 bps to finish at 6.67%, after coming down by 6 bps on Wednesday.

The Merrill Lynch High Yield Master II Index was a winner for a third straight session on Thursday, posting a hefty 0.14% gain - just slightly larger than Wednesday's 0.133% advance.

That gain lifted its year-date return to 5.996% on Thursday from 5.848% on Wednesday. However, that cumulative return figure still remains below its year-to-date peak level of 6.071%, which was reached back on May 20.

A trader said that there was "not much" new and exciting going on, though the market did have "a decent tone."

But he said: "This week and last, a lot of people whom I normally talk to are just [not in]." He cited one particular individual at a shop he talks to daily who was out last Wednesday, Thursday and Friday and "was out again this week."

He said some people "may have decided to go to the beach," as New York temperatures rose well above the 90-degree mark.

A second trader said that volumes "were some of the worse that I've seen in quite some time."

He said that volume was light, even by summer standards.

As for the tone, he said that the secondary market "opened up pretty much bid without; if you did offer something and you were at all off the market that other people were quoting, you got lifted immediately."

Genworth gyrates lower

Trader said that the big mover of the day volume-wise was Genworth Financial's 6.15% notes due 2066, which saw more than $45 million trading at lower levels after the Richmond, Va.-based insurer reported poor preliminary second-quarter results ahead of next week's announcement of the full numbers.

"They got clobbered," a trader said, quoting the bonds as having fallen as low as 58 bid, before going home around 62, well down from prior levels in the middle 60s.

He declared that he was "surprised that they were even trading this high," despite their nominally investment-grade ratings.

Another trader, while noting the Standard & Poor's downgrade of two of the company's units to BB- from BB+ previously, opined: "It's hard to believe that we have a potential fallen angel out there."

S&P lowered the ratings on Genworth Mortgage Insurance Corp. and Genworth Residential Mortgage Insurance Corp. of North Carolina, although it kept the parent company's counterparty credit rating at BBB, albeit with a continued negative outlook.

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