Oversubscribed Fortescue mega-deal prices, gains; new MGM struggles; market awaits Momentive

By Paul Deckelman and Paul A. Harris

New York, Oct. 26 - Fortescue Metals Group Ltd. priced a mammoth $2.04 billion offering of five-year notes on Tuesday, high-yield syndicate sources said. They heard that the Australian metals mining concern's offering was well oversubscribed by interested would-be investors, despite its great size. When the bonds were freed for secondary activity, traders saw the new issue firm by multiple points from its par issue price.

While the new Fortescue deal was hot, Monday's offering from MGM Resorts International was not.

Traders quoted the Las Vegas-based gaming giant's new bonds as mostly trading at, or below, the issue price, just a smidge under 99, at which that $500 million offering came to market on Monday. The company's existing bonds, which had traded up on Monday in the wake of the new deal, were seen having mostly come off those peak levels.

Away from deals that have actually priced, syndicate sources heard price talk out on the two halves of Momentive Performance Materials Holdings' more than $1.2 billion offering of 10-year notes, which are expected to each come to market on Wednesday morning. The company's two main operating divisions - Momentive Performance Materials Inc. and Hexion Specialty Chemicals Inc. - are now under the same corporate umbrella following the completion of their merger earlier this month, and each is issuing bonds under its own name to take out its older, pre-merger bonds.

Quality Distribution Inc. meanwhile began shopping a $225 million issue of eight-year secured notes, the proceeds of which will be used to take out existing bond debt issued by the Tampa, Fla.-based bulk transportation company.

Outside of the new-deal realm, Ford Motor Co.'s bonds got all revved up, particularly its longer-dated issues that have room to run, after the No. 2 U.S. automaker reported strong third-quarter numbers and outlined the progress it has been making on cutting debt and expanding its liquidity.

Ford rival General Motors Corp.'s bonds were meantime heard to have come along for the upside ride.

Fortescue gets it done at 7%

The Tuesday primary market saw a single tranche of junk price, but it was a big one.

Australia's Fortescue Metals Group priced a $2.04 billion issue of five-year senior notes (B1/B/BB+) at par to yield 7%.

The yield printed at the tight end of the 7% to 7 1/8% price talk.

J.P. Morgan Securities LLC and Royal Bank of Scotland were the joint bookrunners.

During the marketing of the deal, the Perth, Australia-based producer and sea-borne trader of iron ore decreased call protection to two years from three years. After two years, the notes will be callable at par plus 75% of the coupon.

Proceeds, along with proceeds from a $2.04 billion senior credit facility, will be used to refinance debt.

Substantial interest savings

The Fortescue deal played to over $15 billion of orders, according to a high-yield mutual fund manager who added that the allocations were lousy - poor for those who played the bridge and awful for those who did not.

"We did not play the bridge, but we heard that we got better allocations than some people who did," the investor said.

Two-thirds of the participants were high-yield accounts, the fund manager said. Most of the remainder of the book was comprised of crossover accounts.

"Everybody seems to believe that this bond will be gone in two years," said the investor, adding that this belief led to the increase of the first call premium to par plus 75% of the coupon, or 105.25, when call protection was decreased to two years from three years.

The Fortescue deal was originally shopped around 8%, the buysider said, confirming color that Prospect News heard earlier in the week from other market sources.

Hence, a rallying high-yield market paved the way for a dramatic reduction in interest expense for Fortescue, which ended up printing at 7%.

Momentive/Hexion price talk

Elsewhere on Tuesday, Momentive Performance Materials Holdings put out price talk on a combined $1.28 billion of 10-year notes to be issued separately by Hexion Specialty Chemicals (Momentive Specialty Chemicals, Inc.) and Momentive Performance Materials.

The Hexion (Momentive Specialty Chemicals) $440 million offering of second-lien senior secured notes (Caa1/CCC+) are talked in the 9¼% area. The issuing entities are Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance ULC.

Meanwhile the Momentive Performance Materials $840 million equivalent proceeds of 10-year springing-lien notes (Caal/CCC) are coming in two tranches, with dollar-denominated notes that, like the Hexion notes, are talked in the 9¼% area, and euro-denominated notes that are talked in the 9 5/8% area.

The Momentive Performance Materials notes will be unsecured prior to the redemption of its 12½% notes due 2011, callable in December 2011 at 106.25. Following that redemption, the new 10-year notes will be backed with second-lien security.

JPMorgan, Citigroup Global Markets Inc., Credit Suisse Securities, Morgan Stanley & Co. Inc., UBS Investment Bank, Bank of America Merrill Lynch, Deutsche Bank Securities Inc. and Goldman Sachs & Co. are the joint bookrunners for the Rule 144A and Regulation S with registration rights offering.

Proceeds will be used to refinance bond debt that remains on the books in the wake of Apollo Management's acquisition of the two chemical companies earlier this month.

Quality Distribution plans $225 million

Quality Distribution plans to price a $225 million offering of eight-year second-priority senior secured notes during the Nov. 1 week following an investor roadshow.

Credit Suisse, Bank of America Merrill Lynch, RBC Capital Markets and Jefferies & Co. are the joint bookrunners for the debt-refinancing deal.

Although the final week of October has yet to see a dramatic build-up of the calendar, higher deal volume is ahead, primary market watchers say.

"It feels like there is some league table chest-pounding going on," a buyside source remarked, adding that JPMorgan claims to have 20 left-books deals between now and Thanksgiving and another 15 in which they are on the right.

R&R Ice Cream whispers

Meanwhile, the euro-denominated junk market remained quiet on Tuesday following Monday's drive-by deal from Germany's Hapag-Lloyd AG, a London-based debt capital markets banker said.

On Monday, Hapag-Lloyd priced a €150 million fungible add-on to its 9% senior notes due Oct. 15, 2015 (B3/B) at 103.375 via Deutsche Bank Securities, Citigroup, Credit Suisse, Goldman Sachs, JPMorgan and UniCredit.

Two euro-denominated deals remain in the market.

England-based R&R Ice Cream plc has run an extensive roadshow for its €280 million offering of seven-year senior secured notes (B2/BB-), according to the banker who is not in the deal.

Although price talk has not yet surfaced, the deal is being whispered in the context of 8¾%, the source added.

Barclays Capital and Credit Suisse are joint bookrunners for the debt-refinancing deal.

Siemens Enterprise Communications GmbH & Co. KG, a Munich-based issuer, is marketing a €200 million offering of five-year first-lien senior secured notes (B3/B-) via left bookrunner Jefferies and joint bookrunners UBS Investment Bank and Wells Fargo Securities.

Meanwhile, the market anticipates that a deal from Italy's Wind Telecomunicazioni SpA will soon materialize as the company looks toward its near-term debt maturities.

And when Wind comes to market, it's usually a whopper, market sources said.

Wind brought two deals in 2009.

In July 2009, Wind Acquisition Finance SA priced €2.7 billion equivalent of 11¾% eight-year senior notes (B2/BB-/) in two tranches: $2 billion at 97.492 to yield 12¼% and €1.25 billion at 96.271 to yield 12½%.

Then in December 2009, Wind Acquisition Holdings Finance SA priced €748 million equivalent of 12¼% senior notes due July 15, 2017 (B3/B-/) at 98.325 to yield 12½%.

New Fortescue jumps ...

A trader said that the new 7% notes due 2015 from FMG Resources Pty. Ltd. - Fortescue Metals Group - "traded very well. It was incredibly active."

He quoted the bonds at 102½ bid, 103 offered, well up from the par level at which the $2.04 billion bond behemoth had priced earlier in the session.

There was, he said, "a ton of trading. I'm not sure of the logic behind all of the investors, but clearly there was good demand, both as a new issue and then in the secondary market afterwards."

A second trader said that his shop was trading the Fortescue bonds "somewhere in the 1021/2-¾ context." While he had seen the bonds offered as high as 103, by the end of the day, he said "that offering came in" to somewhere between 102½ and 103. There was "a lot of them trading."

... but MGM takes its lumps

The strength seen in the new Fortescue bonds was not seen in Monday's $500 million offering of 10% notes due 2016 from MGM Resorts International. That deal priced too late in the session for any kind of aftermarket activity Monday, but when the bonds broke on Tuesday, "they couldn't seem to get out of their own way," said a trader, who quoted them at 98 3/8 bid, 98 5/8 offered - down from the 98.897 level at which the quick-to-market issue had priced on Monday to yield 10¼%.

A second trader also saw the bonds at that level, noting that "they were closer to 99 in the beginning" and moved between 98 3/8 and 99 all day in what he said "seemed like non-stop trading," but they traded "for the most part" with a 98-handle.

MGM "definitely traded below issue all day" and "still hasn't seen the light of day" in going out around 98½ bid. He said there was "fairly active trading" in the credit.

"The New MGMs aren't doing as well," yet another trader said, seeing the bonds trading down as much as ¾ point from their issue price before recovering a little late in the day to 98 3/8 bid, 98½ offered, "and then we just stopped trading."

Among the company's existing bonds, a trader saw its 6 5/8% notes due 2015 at 87¾ bid, 88¾ offered.

That was down from levels around 89 bid seen on Monday, when the bonds had risen solidly, and in fairly active trading, ahead of the pricing of the new deal. Investors were apparently heartened - at least initially - by the prospect of MGM doing some balance-sheet cleanup with the proceeds of the new deal by paying down credit facility debt.

At another desk, a market source quoted those bonds down 1 point on the day, at 88, versus Monday's 2-point gain.

MGM's 11 3/8% notes due 2018, which on Monday had jumped as much as 3½ points to around the 105 bid level, were seen having retreated back to about the 105 2/3 level on Tuesday.

"There were an awful lot of quotes" on the existing bonds, one of the traders said, "pages of activity, because it was such a huge deal. I would say that whole structure was pretty active."

Friday deals keep gains

Looking back to the deals that were priced on Friday but still trading around, a trader said that Omnova Solutions Corp.'s 7 7/8% notes due 2018 were trading Tuesday at 102 1/8 bid, 102¾ offered, about the level to which they had risen in Monday's dealings.

Those prices represented a solid gain for the Fairlawn, Ohio-based specialty chemical company's $250 million offering, which was seen going out on Friday no better than 101¼ bid, 101¾ offered, versus their par issue price earlier in the day.

Sabra Health Care LP/Sabra Capital Corp.'s 8 1/8% notes due 2018 were meantime trading on Tuesday at 102½ bid, 103 offered, up about ¼ point from Monday's close, which in turn was a little better than the 102 bid, 102½ offered peak price at which traders saw those bonds going home on Friday.

The health-care real estate investment trust - which after its pending spinoff will hold the various properties now owned by Irving, Texas-based Sun Healthcare Group Inc. - priced the $225 million deal earlier Friday at par.

Market indicators stay strong

Away from the new-deal world, a trader saw the CDX North American Series 15 HY index unchanged on Tuesday at 100½ bid, 100¾ offered after having been up ½ point on Monday.

The KDP High Yield Daily index meantime gained 5 basis points Tuesday to finish at 74.49 on top of its 13-bps rise on Monday. Its yield tightened by 1 bp to 7.17% Tuesday after having come in by 5 bps on Monday.

The Merrill Lynch High Yield Master II index rose by 0.127% on Tuesday after having zoomed by 0.216% on Monday. The latest advance pushed its year-to-date return up to 14.167%, its fourth consecutive new 2010 peak level, eclipsing the old mark of 14.022% recorded on Monday.

Advancing issues topped decliners for a fifth consecutive session on Tuesday, widening their advantage to better than seven-to-six from the six-to-five edge seen on Monday.

Overall activity, represented by dollar-volume levels, shot up by 43% on Tuesday after having edged upward by 2% on Monday versus the previous session.

A trader saw "a good tone to the market."

However, another trader said that from where he sat, "nothing was really jumping out."

Ford flies on Q3 results

Nothing, that is, other than Ford.

Traders saw its 7.45% bonds due 2031 move solidly higher after the Dearborn, Mich.-based No. 2 domestic carmaker reported solidly higher third-quarter earnings versus a year ago and reported on its conference call the progress it has made in cutting debt and improving its liquidity, including several moves in the current quarter that it believes will add to that progress (see related article elsewhere in this issue).

A trader said that the bonds were at 114½ bid, 115½ offered, which he called up 2 points on the session.

Another trader said that "although there were some earnings out here and there, Ford was the big name here, at our desk," which "traded a bunch of Ford."

He said that Ford "was up in the long end across the board," although he only saw minor gains - perhaps 1/8 point - at the short end of the curve. "Ford hasn't been able to run that much anyway [in the short maturities of three years and less] because the paper's so short."

A market source pegged the Ford long bonds up 1 5/8 at 114 5/8 bid.

Another trader meantime saw Ford Motor Credit Co.'s 8.70% notes due 2014 having risen to 115 3/8 bid, while its 7% notes due 2013 gained ½ point to end at 109½ bid. However, Ford Credit's 7% notes due 2015 were being quoted down more than 1 point at 109 bid.

For the third quarter, Ford reported net income of $1.7 billion, or 43 cents per share, a $690 million improvement from the third quarter of 2009. Pre-tax operating profit totaled $2.1 billion, or 48 cents per share, a $1.1 billion improvement from a year earlier.

Ford Credit reported net income of $497 million in the third quarter, an increase of $70 million from $427 million a year earlier. On a pre-tax basis, Ford Credit earned $766 million in the third quarter, up from $677 million a year ago. It distributed $1 billion to its parent in the third quarter and expects to distribute another $1 billion in the fourth quarter for a total of $2.5 billion of distributions in 2010.

On the debt front, Ford on Tuesday announced several steps it is taking to further reduce debt, including the prepayment of the remaining $3.6 billion of debt owed to its retiree health-care trust fund by the end of this month as well as the launching of conversion offers covering two series of convertible debt totaling nearly $3.5 billion principal amount.

Those initiatives follow the paydown of some $2 billion of revolving credit facility debt during the third quarter ended Sept. 30 and Ford's use of $300 million of the proceeds from its approximately $1.5 billion sale of its Volvo unit earlier this year to Chinese automaker Geely to partially prepay its secured term loan.

GM bonds towed higher

Also in the autosphere, the first trader meantime saw Ford domestic arch-rival General Motors' benchmark 8 3/8% bonds due 2033 up 3/8 point at 35 3/8 bid, 35 7/8 offered.

A second trader quoted the benchmarks up ½ point at 35½ bid, 36 offered, attributing the rise to Ford's strong earnings-fueled gains.

But a third called the GM paper unchanged at 35½ bid.

LPS on the rebound

Elsewhere, a trader said that Lenders Processing Services, Inc. "continues to come back" from its recent lows.

He saw the company's 8 1/8% notes due 2016 "back up" and trading around 103 bid - after having gotten whacked down to the par level over several sessions earlier this month amid concern about how the discovery of all kinds of alleged irregularities in the writing of home mortgage loans and in the foreclosure process for those loans that had defaulted might affect the Jacksonville, Fla.-based company, which handles documentation and other services for banks and other institutions processing home loans. "They continue to recover.

"They are involved in the whole processing side of the whole mortgage/foreclosure game, so there are definitely some people concerned about their involvement. But at this point in time, people are starting to get a little more comfortable [with the name] and are starting to grind it back up."

That having been said, however, he noted that the bonds were still down at least 5 points from where they had been before all of the news about the mortgage-loan problems knocked them down. The bonds had been trading around 108 bid, then fell to par and are just now coming back to 103, so he said they still have a ways to go to get back to where they were.

CIT strength continues

Also among the financials, CIT Group Inc.'s bonds were "active and a little better on the back of their numbers," a trader said. It reported third-quarter net income of $131.5 million, or 66 cents a share, handily beating the 45 to 47 cents per share that Wall Street had been expecting.

The New York-based commercial lender's 7% notes due 2016 were being quoted up 1½ points at just over par, while a market source saw its 7% 2017 notes up as much as 4 points during the session at almost the 103 mark.

A source at another desk dismissed that latter notion, however, pointing out that while a series of late trades did boost the '17s by several points above the levels around par where most of the company's other bonds were trading, they were all smallish odd-lot transactions not really representative of anything. He noted that the last round-lot trade in that 2017 paper was around the par level.

CIT's 7% notes due 2013, meantime, were seen finishing up more than a point at the 102 level. But another trader saw them up less than a point around the 101 5/8 level.

CIT's bonds have been quite active at mostly firmer levels over the past two sessions. A trader attributed their sudden popularity to a positive mention CIT got over the weekend in Barron's, which reported that the T. Rowe Price High Yield Fund likes the credit.

Owens little moved on Chavez move

The news that Venezuela's ever-unpredictable strongman, Hugo Chavez, apparently plans to expropriate two Owens-Illinois Inc. plants in that Latin American country did not seem to initially have much impact on the Toledo, Ohio-based glass packaging company's bonds.

"I don't know that there was much movement in those bonds," a trader said, adding that he had seen "nothing here on the desk, nothing in the Street." He last saw Owens-Brockway Glass Container Inc.'s 6¾% notes due 2014 at 102½ bid, 103½ offered.

Owens, said another trader, "was not off by much," pegging its 7.80% notes due 2018 at 109¼ bid.

But a market source at another desk saw the company's 7 3/8% notes due 2016 off by nearly 1 point at just over 109, while seeing the 63/4s a tad lower at 1021/2.

Owens says the two plants targeted for government confiscation represent less than 5% of the company's global segment operating profit.

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