Upsized D.R. Horton drive-by, Modular Space price in quiet market; firmer tone seen

By Paul Deckelman and Paul A. Harris

New York, Feb. 19 - Junk bond primary sphere activity was seen by syndicate sources to have picked up somewhat on Wednesday from Tuesday's dishwater-dull session, which saw no new deals priced and only one announced.

That latter deal - an upsized $375 million of five-year senior secured notes from Berwyn, Pa.-based Modular Space Corp., a producer of modular space structures and storage containers - was one of two issues pricing on Wednesday, for total issuance of $875 million.

The day's other pricing came from Fort Worth-based homebuilder D.R. Horton, Inc., which came to market with an upsized and quickly shopped $500 million of five-year notes. Traders saw those bonds pretty much anchored around their issue price in busy dealings. The Modular Space transaction, meanwhile, priced too late in the session for any kind of immediate aftermarket activity.

There was also some activity in the euro-denominated market, with German steelmaker Thyssen Krupp AG and Britain-based international electronics retailer Darty plc each pricing deals during the day.

Back in the domestic dollar market, traders saw some upside activity in several of the recently priced issues, such as Diamond Foods, Inc., though just on limited volume.

Away from the new or recent issues, Momentive Performance Materials Inc.'s bonds were getting clobbered in heavy trading for yet another day after a Standard & Poor's warning last week that the specialty chemical maker will likely need to restructure its debt load or else face default.

Statistical market performance measures were mixed for a second consecutive session.

DR Horton upsized and tight

Two single-tranche dollar-denominated deals priced during the Wednesday primary market session, as two issuers raised a combined total of $875 million.

Executions were notable.

Both deals were upsized.

Both priced at the tight end of price talk.

One of the two came as a drive-by.

D.R. Horton priced an upsized $500 million issue of five-year senior notes (Ba1/BB) at par to yield 3¾%.

The deal was upsized from $400 million.

The yield printed at the tight end of the 3¾% to 3 7/8% yield talk.

Wells Fargo was the left bookrunner for the general corporate purposes deal. Citigroup, Deutsche Bank, J.P. Morgan and RBS were the joint bookrunners.

Modular Space at the tight end

Modular Space priced an upsized $375 million issue of five-year senior secured second-lien notes (B3/B-) at par to yield 10¼%.

The deal was upsized from $365 million.

The yield printed at the tight end of the 10¼% to 10½% yield talk.

Initial guidance was in the 10½% area, according to a market source.

BofA Merrill Lynch, JPMorgan, Wells Fargo and Baird were the joint bookrunners for the debt refinancing.

$12 billion shadow pipeline

Wednesday's action emptied the active forward calendar.

However there will be action ahead, syndicate sources assure.

A considerable amount of it will come to market in the form of drive-by deals, one official said.

The shadow pipeline for high yield stands at about $12 billion at present, a syndicate banker said on Wednesday.

ThyssenKrupp's €1.25 billion

In drive-by action from the euro-denominated market, German steelmaker ThyssenKrupp AG (Ba1/BB/BB+) launched and priced a €1.25 billion issue of 3 1/8% senior notes due Oct. 25, 2019 at a 215 basis points spread to mid-swaps.

The deal came into the market earlier Wednesday at benchmark size, with guidance of 220 bps.

The deal, which had a spirited following among crossover accounts, played to a book that contained in excess of €4.5 billion of orders, according to a market source.

The reoffer price was 99.201, rendering a yield of 3.284%.

BNP Paribas, Credit Agricole, Deutsche Bank and SEB led the general corporate purposes deal.

Deutsche Bank will bill and deliver.

Darty tight to revised talk

In a deal that was marketed by means of a roadshow, London-based retailer Darty Financements SAS priced a €250 million issue of seven-year senior notes (/BB-/) at par to yield 5 7/8%.

The yield printed at the tight end of the 5 7/8% to 6% yield talk, which had been revised tighter from earlier talk of 6% to 6¼%.

Global coordinator and joint bookrunner BNP Paribas will bill and deliver. Credit Agricole and HSBC were also global coordinators and joint bookrunners.

Barclays, Natixis Securities and SG CIB were bookrunners.

Proceeds, along with borrowings under a new credit facility, will be used to repay Darty's existing €455 million revolver.

Horton busy but little changed

In the secondary market, the new D.R. Horton 3¾% notes due 2019 were among the day's most active issues, a market source said, seeing over $21 million of the notes having changed hands by the close.

But he saw the bonds ending unchanged from their par issue level.

Other traders also saw little or no price change in the homebuilder's bonds, with one pegging them in a par-to-100 1/8 context, while another saw them straddling their issue price at 99 7/8 bid, 100 1/8 offered.

"Nothing really traded," said one trader who had the bonds at par to 1001/4. "They stayed right at new-issue."

"It traded into a par bid a couple of times. It doesn't seem like that bond is going anywhere up," yet another one of the traders said. "I guess homebuilders with 3% [handle] coupons are not as attractive as they used to be," at least not to traditional junk accounts, although high-grade investors reaching down the credit curve for yield as a crossover play might tell a different story.

D.R. Horton's existing 3 5/8% notes due 2018 meantime were seen about unchanged at 102 1/8 bid on volume of over $9 million.

One of the traders also noted that "homebuilders' housing start numbers have been a little bit on the disappointing side."

The Commerce Department announced on Wednesday that U.S. housing starts fell 16% last month to a seasonally adjusted annual rate of 880,000, the lowest level since September, blaming unusually cold weather conditions in many parts of the nation. The plunge from December's annualized rate of 1.05 million units was the biggest month-over-month slide seen since February 2011. And January's rate came in well under the roughly 950,000-unit pace that economists on average were looking for, which would have translated to a dip of under 5%.

Modular Space aftermarket absentee

The day's other deal - Modular Space's 10¼% senior secured notes due 2019 - meanwhile priced too late in the session for any kind of real aftermarket activity.

"A lot of people were asking about that one" before it priced, a trader said, apparently intrigued by the hefty coupon north of 10% that was being talked around.

Recent deals firmer

Traders saw some firmer levels being quoted - but little real volume - in some of the new issues that came to market last week.

For instance, one saw Diamond Foods' 7% notes due 2019 up ¼ point on the session at 102½ bid, 103 offered.

The San Francisco-based producer of packaged snack foods such as nuts, popcorn and potato chips priced $230 million of those notes at par last Thursday. They immediately jumped to the 102 bid area in initial aftermarket dealings and have continued to hold up there ever since.

He also saw Ineos Group Holdings SA's 5 7/8% notes due 2019 ¼ point better at 101¼ bid, 101¾ offered.

The Switzerland-based chemical producer priced $590 million of those notes at par last Tuesday as part of a €1.037 billion equivalent two-part offering that also included a euro-denominated five-year tranche. The bonds firmed a little when they hit the aftermarket, eventually creeping up to around the 101 bid level.

Fresenius US Finance II Inc.'s 4¼% notes due 2022 gained 3/8 point to end at 100 5/8 bid, 101 1/8 offered.

The issuer - a financing unit of German health-care company Fresenius SE &Co. KgaA - priced $300 million of those notes, also at par and also last Tuesday. The notes hung around their issue price, or maybe a quarter point or so better.

Forest holds gains

Apart from the new issues, traders saw little additional movement in Forest Laboratories Inc.'s 4 3/8% notes due 2019, which had jumped by two or three points on Tuesday on the news that the New York-based specialty pharmaceuticals company had agreed to be acquired by sector peer Actavis plc in a $25 billion cash-and stock transaction.

One trader said that he saw just one $1 million trade in the notes, at the same 106 level at which they had closed on Tuesday.

"Forest was up yesterday," another trader said of Tuesday's action, "and it seemed like they held their gains in moderate trading today - but there was nothing crazy."

Momentive's downside momentum

A market source noted that the Junkbondland Most Actives List was dominated on Wednesday by Momentive Performance Materials' several issues of bonds, all showing losses in heavy trading.

He saw the heaviest volume in its 8 7/8% notes due 2020, pegging those bonds down 1 point on the day at 104½ bid on volume of over $22 million.

Its 9% notes due 2021 also lost 1 point to finish at 86½ bid, with over $15 million changing hands.

But by far the biggest loser of the session was Momentive's 11½% notes due 2016, which nosedived some 12½ points to crash-land at 52½ bid on turnover of over $17 million.

The bonds have been falling for over a week, since last Tuesday, when S&P dropped Momentive's credit rating to CCC- and gave it a negative outlook. The agency noted that free cash flow has been negative for nine quarters. In the third quarter alone, the company burned through over $80 million of its cash cushion.

With some $3.3 billion of outstanding debt on Momentive's balance sheet, S&P analysts Cynthia Werneth and Paul Kurias cautioned that "prospects for sufficient improvement to stave off a payment default or debt restructuring within the first three quarters of 2014 are dim."

They added that "we expect the company to continue to generate negative free operating cash flow, causing liquidity to dwindle."

Before that negative news came out, the 11½% notes had been trading around 76 bid, and the 9s were around 93.

Market indicators stay mixed

Apart from such bonds with notable news attached to them as Momentive or the new D.R. Horton issue, traders said that Wednesday's market was extremely quiet.

"What a yawn," one trader exclaimed. Another said that "Yesterday [Tuesday] there was decent activity - but we were dead in the water today."

Yet another theorized that with the market having been closed on Monday, "this week just has that kind of holiday feel to it. You scratch your head, wondering why you're not partaking of that holiday" instead of being at work. "You ask 'how did I get stuck coming in?'"

Statistical junk-market performance indicators were mixed for a second straight session on Wednesday after eight consecutive sessions before that of having been higher.

The Markit Series 21 CDX North American High Yield index lost 15/32 point to end at 107 5/16 bid, 107 7/16 offered, its second loss in a row; the index had eased by 1/32 point on Tuesday.

But the KDP High Yield Daily index posted its ninth consecutive gain, rising by 11 basis points to close at 74.93, after pushing up by 6 bps on Tuesday.

Its yield meanwhile came in for a ninth consecutive session on Wednesday, falling by 4 bps to 5.38% at the close, after declining by 2 bps on Tuesday.

And the widely followed Merrill Lynch High Yield Master II index recorded its 11th straight advance on Wednesday, rising by 0.137%, which followed Tuesday's 0.154% improvement.

The latest advance raised its year-to-date return to 1.895%, its seventh consecutive new high level for 2014. That was up from 1.756% on Tuesday.

The index's yield to worst declined to 5.372% - a new low for the year - from Tuesday's finish at 5.409%. The yield thus surpassed the previous 2014 low of 5.386%, set on Jan.22. The levels were well down from 5.735% on Feb. 4, its peak yield level for the year so far.

Its spread to worst tightened to 409 bps over comparable Treasuries from 414 bps on Tuesday. Those spreads remained in from Feb. 4th's 444 bps, the wide point for the year so far, although they also were up from the tight spread for the year, 398 bps, recorded on Jan. 22.

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