Primary quiets ahead of holiday, recent deals stay firm; Penney softer in downgrade's wake

By Paul Deckelman and Paul A. Harris

New York, Nov. 21 - The high-yield primary sphere essentially took an early breather Wednesday ahead of the upcoming Thanksgiving holiday break in the U.S. debt markets.

No dollar-denominated, purely junk-rated issues from domestic or developed-country borrowers were either announced, talked around or priced; the sole activity anybody saw was the pricing of a euro-denominated secured-bond deal for Polish chemicals concern Ciech SA.

Traders saw some limited secondary market activity in some of the recently priced bonds, with Monday's Legacy Reserves LP notes trading around their issue price.

Last week's deals from Sealed Air Corp., AK Steel Corp., Melco Crown Entertainment and GrafTech International Ltd. were all seen holding on to the solid gains they had notched in the aftermarket.

But a trader said Walter Energy Inc.'s recent new deal came off its recent highs, while Thompson Creek Metals Co. Inc.'s existing bonds were more active than its new issue.

Away from the new deals, there was continued activity in J.C. Penney Co., Inc.'s bonds, which were seen lower in the wake of Tuesday's not-unexpected credit rating downgrade for the department store operator.

Ciech brings euro deal

Poland's Ciech priced a Wednesday's sole deal, a €245 million issue of seven-year senior secured notes (B2/B/) which came at par to yield 9½%.

The yield printed at the tight end of the 9½% to 9¾% yield talk.

The deal was marketed at a minimum size of €225 million.

Joint bookrunner Credit Suisse will bill and deliver. Barclays was also a joint bookrunner.

In addition to the euro-denominated bonds, the financing included PLN 382 million of notes sold into the domestic market, according to a debt capital markets banker in London, who added that terms for the zloty deal were not widely circulated.

The Ciech deal played mostly to European high-yield accounts and was well received, a London-based debt capital markets source said.

Finished for the week

With the Thanksgiving holiday weekend at hand, the Ciech deal concluded primary market activity for the week in both Europe and the United States, sources said.

The London syndicate banker professed visibility on a pair of deals that are likely to be business for the post-Thanksgiving week.

Meanwhile the post-Thanksgiving U.S. high yield market is expected to be active, with volumes lower than those seen in the phenomenal Labor Day to Thanksgiving interval, which saw $106.4 billion of issuance in 216 junk-rated, dollar-denominated tranches.

The previous record amount of Labor Day to Thanksgiving issuance came in 2010, with a total of $92.03 billion in 195 tranches.

No matter what the final run-up to 2013 holds for the dollar-denominated primary market, the previous yearly issuance record, 2010's $252.8 billion, lies deeply buried in history's vault.

With 21 market sessions remaining in the year - a count which Dec. 24, when activity is doubtful - the year has already seen $296.4 billion in 614 junk-rated, dollar-denominated tranches.

Little activity seen

Even though Wednesday's session was officially a regular day in the bond markets ahead of Thursday's scheduled full market shutdown in observance of Thanksgiving and the abbreviated session Friday recommended by the Securities Industry and Financial Markets Association, the reality was that what little activity taking place had been pretty well wrapped up before noon ET - and even that wasn't much to talk about.

"It's pretty damn quiet," was how one trader put it - although a second trader allowed that "believe it or not, there was some activity going on. Some accounts were in."

However, he added that it was "nothing like crazy - it was pretty slow. A lot of junior guys were in here, just covering everybody's backs."

Legacy, American Piping quiet

The trader said that he had seen no activity in either Legacy Reserves Finance Corp.'s 8% notes due 2020 or American Piping Products Inc.'s 12 7/8% senior secured notes due 2017 - the only two junk deals that had priced this week.

At another shop, a trader said that he too had seen nothing doing in the $100 million deal from American Piping, a St. Louis-based based distributor of industrial-grade pipes, fittings and flanges. That small deal had priced on Tuesday at 98 to yield 13.436%, with no aftermarket seen.

He said that Midland, Texas-based oil and gas exploration and production operator Legacy Resources' bonds had traded in a 97 7/8 to 98 1/8 bid context on Tuesday but were unseen on Wednesday.

The company, with its Legacy Reserves Finance Corp. unit as co-issuer, had priced its $300 million offering on Monday at 97.848 to yield 10%.

Last week's deals hold

Going back a little further, while there wasn't much real activity, the second trader noted that some of the deals which had priced last week were hanging on to the strong gains which they had notched in their initial time in the aftermarket after pricing.

For instance, he said that Sealed Air's 6½% notes due 2020 were at 103¼ bid, 104¼ offered, adding that "they've been doing well since the break - a skyrocket in flight."

The Elmwood Park, N.J.-based provider of food safety and security, facility hygiene, and product protection solutions had priced its $425 million deal at par last Thursday, after having chopped its originally announced $850 million size in half to $425 million, dropping a planned 10-year notes tranche and just going with the eight-year bonds.

The bonds initially traded in a 101½ to 102 context, moving up to above 103 bid on Monday and staying there.

Another recent deal he saw doing quite well was AK Steel's new 8¾% senior secured notes due 2018, pegging those bonds at 103½ bid, 104½ offered.

The West Chester, Ohio-based manufacturer of specialty steel alloys had priced its $350 million issue at par last Wednesday, and it had edged up to a 100 1/8 to 100 3/8 bid context by Thursday - but jumped on Monday to 102¾ to 103¼ bid and remained firm after that.

The trader saw Melco Crown Entertainment's 8½% notes due 2020 on Wednesday at 102¼ bid, 103 offered.

The Hong Kong-based operator and developer of casino projects in China's Macau gambling enclave had priced its $825 million issue at par on Friday via its Studio City Co. Ltd. subsidiary, with the new bonds having moved up to 101¼ bid, 102 offered by Monday and continuing to gain ground after that.

GrafTech's 6 3/8% notes due 2020 were seen on Wednesday at 102½ bid, 103½ offered.

The Parma, Ohio-based manufacturer of graphite electrodes used to produce steel and other non-ferrous metals and needle coke, a crystalline form of carbon used primarily in the production of such graphite electrodes, priced its $300 million 6 3/8% notes due 2020 at par last Thursday. They initially traded around 101½ bid, 102½ offered, but had pushed up to the 102½ bid level by Monday and stayed up there after that.

Arch Coal Inc.'s 9 7/8% notes due 2019 were being quoted Wednesday at 98 bid, 99 offered.

The St. Louis-based coal producer had priced its $375 million offering last Wednesday at 95.934 to yield 10¾%, after having upsized the transaction from the originally planned $350 million. The bonds initially jumped almost 2 point in the aftermarket to above the 97 bid level, then fell back to around issue price, but were back above 96 bid Monday, and continued to gain after that.

Walter comes off highs

Not all of last week's issues were necessarily holding onto their gains, though.

A trader said that Walter Energy's 9 7/8% notes due 2020 were trading at 99 bid, par offered on Wednesday.

The Birmingham, Ala.-based producer of metallurgical coal had priced its $500 million offering last Friday at 99.302 to yield 10%. While the bonds had pushed up to 101½ bid, 102 offered on Wednesday - and at least one trader quoted them as high as 103 at that point - by Wednesday, the trader said that "they were better bid - but they are sinking a bit," back to around the issue price.

Among last week's other deals, he saw Pacific Drilling V Ltd.'s 7¼% senior secured notes due 2017 at 99 5/8 bid, 100¼ offered.

The Luxembourg-based ultra-deepwater drilling contractor priced its $500 million issue on Friday at 99.483 to yield 7 3/8%, and they have stayed in that vicinity since then.

Antero Resources Finance Corp.'s 6% notes due 2020 and Ainsworth Lumber Co. Ltd.'s 7½ senior secured notes due 2017 each stayed fairly close to the par level at which both of those issues of bonds had priced last Wednesday. Denver-based energy company Antero's $300 million of notes were seen at 99¾ bid, 100¾ offered, while Vancouver-based wood products producer Antero's $350 million of paper was at par bid, 101 offered

Existing Thompson Creeks trade

A trader saw no activity in the new Thompson Creek 9¾% senior secured first-priority notes due 2017. The Denver-based mining concern had priced $350 million of the bonds last Friday at 99.076 to yield 10%, and they had gotten as good as 101 bid, 102 offered in Monday's aftermarket.

However, he did see some activity Wednesday in the company's existing notes, quoting its 7 3/8% notes due 2018 73½ bid, 75½ offered calling that "pretty much unchanged."

He said that the company's 12½% notes due 2019 were at 88½ bid, 891/2, down from 90 bid, 91 offered on Tuesday.

Penney bonds trade down

Away from the new or recently priced issues, a trader saw some erosion in J.C. Penney's bonds, in the wake of Tuesday's announcement by Moody's Investors Service that it was cutting the Plano, Texas-based department store operator's credit ratings.

He said that Penney's 7.65% notes due 2016 and 7.95% notes due 2017 were trading around 95 bid, 96 offered, after having moved on Tuesday between low bids of 95 and high bids of 96, "so they're in a little bit."

He said the easing in the Penney's bonds was really the only action he was seeing in Wednesday's high-yield secondary market - and even that was not much to comment upon.

Moody's on Tuesday said that it was downgrading J.C. Penney's long-term ratings, including its corporate family and probability of default ratings, to B3, off several notches from Ba3 previously. The cut reflects Moody's expectation that the company's fourth-quarter gross margins "will severely decline as a result of the need to actively clear excess inventory." This, when combined with continued sizable sale declines in the fourth quarter, will lead to "earnings and credit metrics bottoming out at levels significantly weaker than expected, the agency said."

Moody's said it no longer believes that the company's "credit metrics will return to being supportive of a Ba3 rating over the next 12 months."

The agency also downgraded J.C. Penney's speculative grade liquidity rating to SGL-3, which represents adequate liquidity. The outlook is negative.

Crossover names in spotlight

With not too much happening in the Junkbondland secondary itself, there seemed to be considerable activity in split-rated crossover credits, with names such as ArcelorMittal SA, Ford Motor Credit Co. LLC, Gap Inc., Expedia Inc. and El Paso Pipeline Partners dominating the Trace most actives lists.

For instance, Luxembourg-based steelmaker ArcelorMittal's Ba1/BB+/BBB- 6 1/8% notes due 2018 saw relatively busy volume of $15 million, placing it high up on the actives list. The bonds were unchanged at 100 ½ bid. Several other ArcelorMittal issues, such as its 4½% notes due 2017, its 6¼% notes due 2022 and its 7% bonds due 2039, were in the Top 10 volume leaders for Trace's high yield listings.

Asked who was buying all of this split-rated paper - high-yield players looking to move up, quality-wise, or high-grade guys reaching down on the credit-quality curve to pick up some yield for their portfolios -- one of the junk traders said that "you usually see that up there in volume, and I never know who's buying these things, because at least in our circles, we never run across the [ArcelorMittal] name."

He also noted that ArcelorMittal, for instance, "has some maturities that are way out there, maturing in '49. So it's got some long funky stuff, which tends to be more of the investment-grade crowd."

A time for caution

Another trader, taking more of a big-picture view with the last month of 2012 approaching, opined that "the market right now is in a very cautious state of mind."

He noted the recent spate of withdrawals by investors from high-yield mutual funds and exchange-traded funds, which caused both of the agencies that track flows of money into and out of funds as a barometer of overall junk market liquidity trends, ThomsonReuters' Lipper analytics unit and EPFR Global, to report massive outflows this past week. Lipper put the cash loss at $1.3 billion and EPFR, using a different methodology, estimated it at $957 million.

He also noted that "some people [analysts] are writing that high yield is over-weighted right now.

"The caution flag is up. What happens now will all come down to earnings" and the market's reaction to those financial results.

Another factor is concern over the looming "fiscal cliff" that threatens the economy at the end of the year if big automatic military and healthcare spending cuts are allowed to take effect and current lower tax rates are allowed to expire, absent some kind of political deal between the president and Congress.

However, he suggested that such fears may be "overblown," opining that there probably will be some sort of resolution.

Another potential positive to balance out the negatives, he said is that "a lot of companies have a lot of cash - their balance sheets are getting pretty good - so they have the opportunity to buy back some debt, which some of them are doing," strengthening the companies and creating potential upside for the current holders of such paper.

Putting it all together, he said that "fundamentally, the market is not falling apart by any stretch of the imagination - but all of these new issues now are [being evaluated by the market] issue by issue. Accounts aren't just going in blind and buying the stuff. They're not.

"A lot of people are very nervous."

Indicators improve

Among statistical market performance indicators, the Markit Series 19 CDX North American High Yield index gained 9/32 point on Wednesday - its fourth consecutive gain - to end at 99 1/8 bid, 99 3/8 offered. It had been up by 7/16 point on Tuesday.

The KDP High Yield Daily Index rose by 4 basis points Wednesday to end at 73.61, its third consecutive gain, after having risen by 6 bps on Tuesday. Its yield came in by 1 bp to 6.32%, its third straight narrowing, after having declined by 2 bps on Tuesday.

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