Primary shuts down, probably for year; secondary not much busier; Navistar active after numbers

By Paul Deckelman and Paul A. Harris

New York, Dec. 20 - The high-yield primary market fell completely quiet on Friday, and most participants believe that things over there are done for the year after a busy 2013 that resulted in a new issuance record.

The week closed with the pricing of some $5.063 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country borrowers, according to data compiled by Prospect News.

That was down from the $8.982 billion, which came to market in 19 tranches the previous week ended Dec. 13.

But it was sufficient to boost Junkbondland issuance for the year to $327.956 billion in 702 tranches - a new all-time record. The old record of $327.055 billion in 691 tranches was set in 2012.

And primaryside sources expressed the belief that once the traditional year-end lull ends when the calendar flips over to 2014, activity will pick up pretty much where it left off.

In the secondary realm, traders did not see much in the way of dealings in recent new issues - or much else for that matter - with some players choosing an early exit.

Once exception on the new-deal front was MGM Resorts International's new 6.25-year notes, which have been one of the most actively traded issues this week.

Away from the new deals, Navistar International Corp.'s bonds were active at slightly lower levels, after the embattled truck, bus and engine manufacturer released quarterly results showing a considerably lower net loss from a year ago and touting strong cash accumulation. The numbers also highlighted continued warranty problems that are acting as a drag on its results.

But amid the light volume, traders said the market seemed to have a firmer tone, encouraged by the strength in equities as well as continued positive reaction to the relatively moderate tapering off from quantitative easing that the Federal Reserve announced on Wednesday.

The highyield primary market did not generate any news on Friday. No deals priced nor were there any new deal announcements, as sources professed the belief that new issue activity has concluded for the year, but will resume with vigor in January.

Secondary turns quiet

In the secondary market, traders saw not much more activity overall than people on the primaryside were seeing.

A trader described things as "very quiet."

A second said that many people chose to leave early, a typical market behavior on a holiday-time Friday afternoon.

He said that all they were doing at his shop was "year-end account cleanup."

The first trader said that while things were quiet, the overall market tone seemed better, with investors mirroring the buoyant tone seen in the equity markets, where surprisingly strong gross domestic product numbers pushed both the bellwether Dow Jones industrial average and the Standard & Poor's 500 index to new record high closes.

He said that with a feeling of more confidence in the market, "a lot of clients are getting more constructive and selling the shorter stuff to go into longer paper." Shorter-duration bonds are usually seen as the ultimate defensive position and hedge against market volatility and uncertainty.

He suggested that the shift followed Wednesday's announcement by the Federal Reserve of a relatively modest and apparently benign $10 billion reduction in its monthly $85 billion bond buying campaign, allaying the fears of many in the financial markets that the tapering off would be more radical and traumatic.

The Fed also said that it would carefully consider any further tapering based on how the economy is doing and would continue to keep its short-term interest rates way down for the foreseeable future.

"If the Fed is going to stay that way, it looks like the longer rates aren't going to fly up there. That's what it looks like," he noted.

The trader said he saw "a lot of well-rounded accounts, selling paper that's due in [the remainder of] 2013, 2014 or can be called, and they're going out longer, and selling their paper to the short-duration funds."

With the Fed having alleviated much of the interest-rate risk that investors were fearing, he said that "there's a certain calmness in the market right now."

And looking ahead, he noted that "a lot of these corporations have a lot of money - they're flush with cash," raising the possibility that some of those companies will be in the market to buy back their own bonds.

"And a lot of these funds - they've got money that they've got to invest.

"There's a lot of money that's going to come in after the first [of January], it looks like," he added/

New deals mostly quiet

Among specific issues, traders said there didn't seem to be much activity going on among recently priced deals.

For instance, nobody saw any trace of Sierra Hamilton LLC's 12¼% senior secured notes due 2018.

The Houston-based oil and gas exploration and production company had priced $110 million of the notes at par in a scheduled forward-calendar deal on Thursday, although market sources said that its small size made it an unlikely candidate for much aftermarket trading.

Wednesday's considerably larger deal from Darling International Inc. also was not seen around very much. A trader said that the bonds were unchanged on the day at 100½ bid, 101 offered.

The Irving, Texas-based company, which, despite its romantic-sounding name, operates in the very gritty and unglamorous food-products rendering and recycling industry, brought $500 million of those 5 3/8% notes due in January of 2022 to market at par. The notes were trading as high as a 100 7/8 to 101 bid context initially after pricing, but had given up about half of those gains in Thursday's dealings.

One recent new deal, which has been fairly busy in the aftermarket, has been MGM Resorts International's 5¼% notes due in March of 2020, some $500 million of which had priced at par in a drive-by deal on Monday.

When the bonds were freed for trading on Tuesday, over $90 million changed hands, and although activity dropped off considerably after that first surge, it remained among the most active junk issues throughout the week, including Friday.

A market source saw over $8 million having traded in round lots on Friday, with numerous additional odd-lot trades.

As was the case on Tuesday and subsequent days, round-lots were trading at levels below the par issue price, while many of the odd-lot trades went off at considerably higher levels, with traders suggesting that buyers were acquiring the round-lots and then turning around and selling smaller pieces to retail accounts ate considerably elevated prices.

On Friday, the high tick for an odd-lot trade was 102¼ bid and most of the trades were above at least the par level. But on a round-lot basis, the bonds lost ½ of a point to close at 99¼ bid.

Navistar busy after numbers

Away from the new deals, traders saw relatively busy activity in Navistar International's 8¼% notes due 2021. Over $10 million of the notes traded, finishing down ¼ of a point at 103½ bid.

The activity followed the release of the Lisle, Ill.-based truck, bus and engine manufacturer's fiscal fourth-quarter results.

On the company's conference call, its executives touted their "Drive to Deliver" turnaround initiative for the troubled company, as well as Navistar's having accumulated its largest cash position in 30 years.

However, analysts like Vicki Bryan of the Gimme Credit independent research service noted the company's long list of problems, including continued heavy cash spending to meet warranty obligations arising from an ill-fated type of truck engine Navistar tried to introduce some years ago and its underperforming sales.

Bryan, who rates the bonds a "sell," said in a research note: "Navistar is under the gun to get its wheels out of the ditch after finally abandoning its colossally failed proprietary emissions system produced in all its legacy engines and trucks. As it struggles to reinvent its entire product line in a matter of months, its biggest challenge will be to maintain sufficient cash to fund the transition that will secure its future."

Market signs strengthen

Overall, statistical junk-market performance indicators were higher across the board for a second consecutive session on Friday, after having been mixed on Wednesday.

They were mixed versus their week-earlier results for a third week in a row.

The Markit Series 21 CDX North American High Yield index posted its third straight gain on Friday, rising by 5/16 of a point to end at 107 15/16 bid, 108 1/16 offered, on top of Thursday's 5/32 of a point advance.

The index was also up versus the 106 7/8 bid, 107 offered reading at which it had closed out the previous week on Dec. 13.

The KDP High Yield Daily index also posted its third consecutive advance Friday, improving by 3 basis points Thursday to close at 74.28, after moving up by 2 bps on Thursday. Its yield was came in by 1 bp to 5.66%, after having been unchanged on Thursday.

The index reading was down from last Friday's 74.32, although the yield, which usually moves inversely to the actual index reading, also came down from last Friday's 5.69% level.

The widely followed Merrill Lynch High Yield Master II index gained 0.059% on Friday, its second straight advance following Thursday's gain of 0.069%, which had snapped a two-session losing streak.

Friday's improvement lifted its year-to-date return to 7.151% from Thursday's 7.088%. It also established a new peak level for the year, passing the previous high-water mark of 7.091% reading, set on Dec.11.

The index's spread to worst measure also declined to a new low for the year at 422 basis points over comparable Treasuries, beating the previous tight point for the year of 425 bps, which had been set on Monday of this week and matched on Thursday.

For the week, the index was up by 0.165%, its sixth consecutive weekly gain. It had risen by 0.106% last week, leaving the year-to-date return at 6.975%.

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