Datatel hitting the road; market reopens strongly with Chesapeake busy on deals; Sears slides

By Paul Deckelman and Paul A. Harris

New York, Jan. 3 - It was back to work on Tuesday in Junkbondland as market participants opened a brand new month, quarter and year by mostly taking prices higher, continuing the bullish trend evident in the latter part of December. Statistical measures of market performance were pointing upward.

One of the more active names in the secondary market was Chesapeake Energy Corp., whose bonds traded around on the natural gas operator's announcement of its second big deal in a week for some of its shale assets.

Another busy bond was Residential Capital LLC, which was given a boost by news reports indicating its corporate parent will not force the mortgage lender into bankruptcy.

But the most active name on the day - Sears Holdings Corp. - continued to trade on the downside on Tuesday after the venerable retailer had been whacked down last week on several pieces of bad news.

The new year did not spark a sudden revival of the primary sphere, as there were no pricings.

However, syndicate sources heard that Sophia LP, the vehicle through which education technology provider Datatel Inc. is financing its pending acquisition of SunGard Higher Education, was beginning a roadshow for its $530 million bond deal.

And consumer products company Prestige Brands Holdings Inc. was heard likely to bring its planned $290 million bond issue to market sometime this month.

The first primary market session of 2012 passed quietly, with no issues pricing and no new deal announcements.

Behind the scenes, however, there were indications that a bigger-than-expected January could be taking shape, market sources said.

The opening month of 2012 could see $10 billion to $20 billion, an investor said on Tuesday. That's up from estimates of $5 billion to $10 billion heard late in 2011.

The strongest indication that January could get busy in the primary was a rallying market, with junk up one point on Tuesday, said the investor.

Sprint Nextel Corp.'s 11½% notes due Nov. 15, 2021 were 101½ bid, 102½ offered on Tuesday versus 98½ bid last week, the buysider said. Those bonds came at par in a $1 billion tranche in early November.

A junk rally, which the manager characterized as "sneaky," has put a bid in the market and appears to be positioning triple-C paper as the present outperformer, according to the fund manager.

Inflows are another indication that January could be bigger than forecasts, which came less than a fortnight ago, the investor said.

The high-yield mutual funds saw $455 million of inflows for week to the Dec. 28 close, according to AMG Data Services.

"It's an impressive amount of cash to come in during the week between Christmas and New Year's Day," the buysider remarked.

"Typically, investors like to wait to see how the new year gets started before putting a lot of cash to work."

Also factoring into a possible bigger-than-expected January is a slower-than-expected December, the buysider said.

"We were expecting that there could be one or two deals during the final week before Christmas, but those deals never materialized," said the manager, who noted that the last straight-out junk deal to price was 99 Cents Only Stores Inc.'s $250 million issue of 11% senior notes due 2019 (Caa1/CCC+/), which came on Dec. 14.

Three weeks have passed since the last deal - an interval during which the buyside has taken in cash in the form of inflows, coupon payments and loan payments, the investor said, adding that people are keen to put that cash to work.

Datatel expected this week

The primary market is expected to spring to life before the opening week of 2012 is over, sources said on Tuesday.

A roadshow for $530 million of senior notes (Caa1/CCC+) backing the merger of Datatel with SunGard Higher Education is expected to begin during the present week.

The maturity of the notes remains to be determined, but is expected to be seven or eight years.

J.P. Morgan, Bank of America Merrill Lynch, Barclays, Citigroup and Credit Suisse will lead.

In addition to Datatel, one syndicate official professed visibility on a quick-to-market deal from the natural resources space, which is expected to come before the end of the week.

Also potential opportunistic issuers, some of whom were said to be eying the primary market late last year, may now be closer to pulling the trigger, a debt capital markets banker said after Tuesday's close.

One of those opportunistic deals, a debt refinancing sized at $1 billion, appears to be teed up for the week ahead, the banker added.

A new year dawns

In the secondary arena, a trader said that "the market was very firm today," estimating a gain in the overall market of about 1 point.

"Everyone came back [after the holiday weekend], cash is building, equities are up and life is great - buy bonds."

A second trader agreed: "Stuff started up right out of the box today."

He said that "first thing this morning," most bonds were up anywhere from a half-point to 1 full point.

Among the reasons he suggested were that "it's the beginning of the year and people are back. The market seems like it's going up, so dealers and everyone are just buying stuff to have inventory."

He also mentioned the continuing cascade of cash coming into the junk world, as exemplified by mutual fund flows, which are considered a reliable indicator of overall junk market liquidity trends. Last week, AMG Data Services saw some $455 million more come into domestic, weekly reporting high-yield mutual funds than leave them - a fourth straight weekly cash infusion.

That capped off a year in which weeks in which inflows were seen outnumbered by weeks during which the funds bled money by around a two-to-one ratio, according to a Prospect News analysis of the AMG numbers. Total net inflows reached around $11 billion, the analysis said.

The other major mutual fund tracking service, EPFR Global, meantime said on Tuesday that for the year, high-yield mutual funds took in a net inflow of $7.84 billion. EPFR calculates its numbers differently than AMG, using a wider funds universe that includes some non-U.S. domiciled funds, but the two agencies' numbers generally point in the same direction.

"Money has been coming in for new year, year-end-type deposits," he said.

He continued that "no matter what you think about the market, if you're [overflowing with] cash, you've got to do something with it; you're not earning anything in Treasuries or wherever you park your cash while you're waiting to buy something.

"If you're a high-yield portfolio manager, you're getting paid to invest in high yield. If you've got to buy something, you buy what you can, not necessarily what you want," he said.

Indicators keep improving

Statistical measures of junk market performance, which had been firming repeatedly pretty much for the last two weeks of the old year, kicked off the new year on Tuesday by continuing to rise.

A trader saw the CDX North American series 17 High Yield index up 5/8 point on Tuesday to end at 93 9/16 bid, 93 11/16 offered, after having edged marginally higher on Friday but having risen 3/8 point on Thursday. It closed out the year on Friday at 92¾ bid, 93¼ offered.

The KDP High Yield Daily index on Tuesday closed at 72.65. Its yield tightened by 11 bps on Tuesday, to 7.36%, after having declined by 1 bp on Friday to end the year at 7.47%.]

Traders said that junk bonds partially took their cue from equities, which put a disappointing 2011 behind them and opened the new year on a strong note, helped by positive U.S. manufacturing data for December, U.S. November construction statistics and better-than-expected data from Germany and China. On top of that, market-watchers were seeing the traditional "January effect."

The bellwether Dow Jones Industrial Average, after losing 69.48 points on Friday to end 2011 at 12,217.56 - still a 5.5% gain on the year - shot up by 179.82 points , or 1.47%, on Tuesday to close off the first session of 2012 at 12,397.38, its highest close in more than five months.

The Standard & Poor's 500 index, which ended 2011 down 0.43% on the year, firmed by 1.55%on this year's first session. And the Nasdaq composite index, down 0.33% for 2011, started '12 off with a bang, zooming 1.67%.

Chesapeake is a champ

Among specific junk names, a trader said that "there was news out on Chesapeake [Energy], so those bonds were up a couple of points on the news," although he allowed that "everything had a better tone."

He saw the Oklahoma City-based natural gas exploration and production company's 6 5/8% notes due 2020 at 108 bid, 108½ offered, calling them up 2 points, while its 6½% notes due 2017 traded in a 107-to-107½ context. He said the company's bonds generally were all up 1½ to 2 points, helped by the news that Chesapeake had completed another big deal to monetize some of its shale assets.

A market source at another desk saw the 6 5/8s rise to 108 bid, with over $9 million of the bonds traded, but said that was only a quarter-point better than the last previous round-lot levels, last week.

He saw the 9½% notes due 2015 also gain just a quarter-point, to 114¾ bid, wither over $8 million changing hands.

But the company's 6 7/8% notes due 2020 were seen up more than 3 points on the day on just a round-lot basis, closing at 108½ bid, Volume was about $3 million.

Chesapeake's higher activity was fueled by the announcement that the company had entered into a joint venture with the U.S. arm of French energy concern Total SA. Chesapeake is contributing 512,000 acres in the Utica Shale gas formation in eastern Ohio, with Total paying Chesapeake $2.03 billion, including $610 million in cash at the closing and the remaining $1.42 billion by the end of 2014.

That followed last week's announcement that Chesapeake had sold some of its Marcellus Shale midstream assets to its 42% owned affiliate Chesapeake Midstream Partners LP for $865 million, $600 million of it in cash at the closing and the rest in the form of more stock in the partnership, raising Chesapeake's share to about 46%.

Analyst Philip C. Adams of the Gimme Credit independent investment advisory service notes that Chesapeake - now benefitting handsomely from its aggressive land-buying sprees of the past several years - received from the two transactions "just over $1.2 billion for year-end debt reduction."

Sears gets socked

Elsewhere, a trader said that Sears Holdings' bonds "have been fairly active," quoting the Hoffman Estates, Ill.-based department store retailer's 6 5/8% notes due 2018 last trading around the 75 bid level on over $23 million of turnover, although he said that on a round-lot basis, the bonds were at the 76 ¾ bid level. He saw activity anywhere between 75 and 77 and pronounced the bonds down around 2 to 2¼ points, bucking the market's generally positive trend.

A second trader said the 6 5/8s began the day around 76, but he figured that "they're going to be under pressure," and they were going home around 76 bid, which he called down 3 points from year-end levels around 79. But he said the latter level was on a small trade on Friday and thus not representative. Looking only at round lots, he said that the bonds were unchanged from recent levels in the mid-70s.

He guessed that volume may have been above $30 million, given all of the $1 million-plus trades in the name recorded on the Trace tracking system.

"Whatever, it's a lot of volume."

The first trader noted the negative news, which the operator of the iconic Sears and Kmart store chains released last week and how that took the bonds down from pre-news levels. Back on Dec. 23, the 6 5/8s were trading in an 81-83 context, but after the news, "they took the big hit" as the Sears paper nosedived to as low as 72 7/8 and then traded around between that level and 76.

Last Tuesday, Sears said that consolidated same-store sales at the two chains - that is, sales at outlets open for at least a year, the retailing industry's key performance metric - fell by 5.2% from a year earlier during the crucial eight weeks ended Dec. 25, the make-or-break selling season for most store operators.

Sears also announced plans to close 100 to 120 of its weakest-performing store locations. Standard & Poor's took the news badly, announcing that it was putting some of Seas' debt ratings on CreditWatch negative. The ratings agency called it probable that the venerable retailer's credit protection metrics will deteriorate further in the near term, with Sears' revenues hurt by softening sales of its bread-and-butter items such as consumer electronics, home appliances and clothing.

"That was the news that prompted the sell-off [last week], and the bonds went down by 7 or 8 points," the trader said.

After that, there were numerous negative news stories out speculating on how Sears would have to struggle in the new year. He said one was titled "Sears' chickens are coming home to roost," while another said Sears had been "mismanaged" and was losing sales to rival Macy's.

"Right around [Dec.] 27, there was not one flattering story about Sears," he said.

MBIA moves on court ruling

A trader said that "at the end of the day," MBIA Inc.'s 14% surplus notes due 2033 had jumped to a 59-61 context, which he said was up 4 or 5 points from its year-end level on Friday, following a favorable ruling in the Armonk, N.Y.-based bond insurer's protracted legal battle with lending giant Bank of America.

"That's a big move on those surplus notes," he said.

MBIA's New York Stock Exchange-traded shares were meantime up by 94 cents, or 8.11%, at $12.63, on volume of 5.3 million, more than twice the norm.

A New York state judge issued a ruling which may make it easier to prevail in its securities fraud lawsuit against Bank of America, growing out the 2008 financial industry meltdown.

MBIA said that Countrywide Financial Corp., then an independent mortgage originator but now a part of B of A, misled it about the credit quality of some 368,000 loans that were the collateral on mortgage-backed securities MBIA insured. When those loans were revealed to be of not good quality and the MBS securities tumbled, MBIA was forced to make good on its guarantees.

In Tuesday's ruling, New York State Supreme Court Justice Eileen Bransten did not rule on the merits of MBIA's case against Countrywide and its new parent, but said that the insurer would only have to show that Countrywide misled it about the $20 billion of securities it insured - not that the misrepresentations actually caused its losses.

BofA said it was studying the judge's ruling.

ResCap rises on decision

A trader said that Residential Capital LLC's 9 5/8% junior secured guaranteed notes due 2015 were up about 4 points on Tuesday on volume of about $10 million. He said the Minneapolis-based mortgage lending company's bonds had closed out the year on Friday trading at 70½ bid, and were trading on Tuesday at 741/2.

A second trader said that the bonds of the Ally Financial Inc. subsidiary got as good as 76¼ on "decent volume," before ending at 74 12/2 bid, 75½ offered, which he still called up about 3 points.

The bonds were seen up in the wake of unconfirmed news reports that Detroit-based Ally - the one-time GMAC - has decided not to put its sometimes troubled mortgage Oriental Culture Group into bankruptcy to restructure its finances.

That pushed the bonds to their highest level since the highest level since Nov. 8 -- before Ally hired advisers to weigh options for the Oriental Culture Group.

Sprint seen mixed

A trader called Sprint Nextel's 8 3/8% notes due 2017 "another big mover," quoting the Overland Park, Kan.-based wireless carrier's bonds down around 3½ points on the day at 91½ bid on "a couple of million" traded.

But a second trader said that 91-92 "is about where they already were," calling them unchanged on "not much volume - maybe $4 million or $5 million."

He said that Sprint's 6.90% notes due 2019 were actually up 1 point, at 83½ bid, 84 offered.

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