Upsized Kinetic, FMG, MarkWest, Chesapeake deals pace busiest junk primary session in months

By Paul Deckelman and Paul A. Harris

New York, Oct. 25 - The high-yield primary arena had its biggest session since the high-flying days of mid-summer. Four deals collectively totaling over $4.5 billion came to market on Tuesday, all of them after having been upsized to meet long-pent-up investor demand.

Topping the bill was the restructured seven-year deal from health-care company Kinetic Concepts, Inc. After first being downsized, the issue was eventually upsized to $1.75 billion - Junkbondland's first mega-deal since AES Corp.'s $1.25 billion Dolphin Sub II two-part offering a month ago and the biggest transaction since another health-care borrower, HCA Inc., priced its mammoth $5 billion issue three months ago.

Another giant-sized offering came from Australian iron mining concern FMG Resources Pty. Ltd., which priced an upsized, quickly marketed $1.5 billion tranche of eight-year paper.

Also bringing a drive-by deal Tuesday was natural gas operator MarkWest Energy Partners LP, which increased its 10.5-year issue to $700 million.

Sector peer Chesapeake Oilfield Operating LLC likewise pumped up the size of its eight-year bond offering to $650 million.

All of the new bonds traded in the secondary market, with Chesapeake doing the best and the others posting more modest aftermarket gains.

The new deals - comprising the busiest primary session since July 26, when the HCA behemoth and several other big deals priced - overshadowed the non-new-deal secondary market, which had a mostly positive tone to it but no standout features.

Recently strong statistical performance indicators turned mixed.

Kinetic Concepts upsizes

The high-yield primary market saw its biggest day in four months on Tuesday as four issuers, each bringing a single upsized tranche of bonds, raised $4.57 billion.

The last day to top that amount was July 26, which saw $7.9 billion in five tranches, including $5 billion in two tranches from HCA.

On Tuesday, Kinetic Concepts priced an upsized, restructured $1.75 billion issue of 10½% seven-year second-lien senior secured notes (B3/B/) at 98.198 to yield 10 7/8%.

The issue was upsized from $1.65 billion.

The yield printed in the middle of the 10¾% to 11% yield talk.

The maturity of the notes was decreased to seven years from 7.5 years.

Call protection was increased to four years from three years.

A planned euro-denominated tranche was withdrawn.

Morgan Stanley & Co. LLC, Bank of America Merrill Lynch, Credit Suisse Securities (USA) LLC and RBC Capital Markets were the joint bookrunners.

The note offering was previously upsized to $1.65 billion from $1.25 billion with the shifting of $400 million from a bank loan.

Proceeds will be used to help fund the buyout of the company by Apax Partners, Canada Pension Plan Investment Board and the Public Sector Pension Investment Board for $68.50 per share in cash in a transaction valued at $6.3 billion, including outstanding debt.

In addition to the bonds and a $2.3 billion term loan, acquisition financing includes a $200 million revolver and about $1.75 billion of equity.

The financing also included a $900 million unsecured bridge loan. The dealers planned to take out that bridge with the issuance of $900 million of senior unsecured notes. However, they declined to launch the unsecured tranche into the market due to market conditions at the time they launched the second-lien notes.

The additional amount of proceeds from Tuesday's upsizing of the second-lien notes will be used to reduce the size of the unsecured bridge, which was previously reduced by $50 million with an upsizing of the bank loan last week.

The dealers are holding the remainder of the bridge, about $750 million, and plan to take it out with a bond deal that they will launch into the market as circumstances permit, an informed source said on Tuesday.

The Kinetic Concepts deal is the largest leveraged buyout bond deal since the credit crisis. First Data Corp. did $7.1 billion in three tranches in September 2008, according to a syndicate source.

It's also the largest secured LBO bond deal since November 2006, when HCA priced $4.2 billion in two tranches.

FMG drives by

Two of Tuesday's four deals were drive-bys.

Australia's FMG Resources (Fortescue Metals Group) priced a massively upsized $1.5 billion issue of eight-year senior notes (expected ratings B1/B+) at par to yield 8¼%.

The yield printed on top of the price talk.

J.P. Morgan Securities LLC, Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank Securities Inc. and RBS Securities Inc. were the joint bookrunners for the quick-to-market issue, which was increased from $1 billion.

The Perth-based iron ore company plans to use the proceeds for capital expenditures and general corporate purposes.

The deal went well but was not a huge blowout, according to a syndicate source who pointed out that Fortescue, prior to Tuesday's whopper, already had $3.6 billion of bond debt outstanding.

No matter how flush the buyside is with cash, it can only absorb so much of a particular name, the syndicate source said.

MarkWest, at the tight end

MarkWest Energy Partners and MarkWest Energy Finance Corp. priced an upsized $700 million issue of 10.5-year senior notes (Ba3/BB/) at par to yield 6¼%.

The yield printed at the tight end of the 6¼% to 6 3/8% price talk.

Barclays Capital Inc., BNP Paribas Securities Corp., JPMorgan, SunTrust Robinson Humphrey, Inc. and U.S. Bancorp Investments, Inc. were the joint bookrunners for the quick-to-market issue, which was upsized from $500 million.

The Denver-based oil and gas company plans to use the proceeds to fund the tender offer for its 8¾% senior notes as well as for working capital and general corporate purposes.

Chesapeake four-B deal

Chesapeake Oilfield Operating and Chesapeake Oilfield Finance, Inc. priced an upsized $650 million issue of eight-year senior notes (Ba3/BB+) at par to yield 6 5/8%, at the tight end of price talk that was set in the 6¾% area.

Bank of America Merrill Lynch, Credit Agricole Securities (USA) Inc., Credit Suisse, Citigroup Global Markets Inc. and Goldman Sachs & Co. were the joint bookrunners for the issue, which was upsized from $500 million.

Proceeds will be used to redeem intercompany debt due to Chesapeake Energy Corp.

The deal went extremely well, a syndicate source said.

It saw big-time play from investors who already had exposure to the "Chesapeake Energy complex" of bonds, the source said.

With its Ba3/BB+ ratings, the Chesapeake Oilfield deal is just what the market is looking for right now, the source added.

More drive-bys possible

There could be more drive-by deals ahead, including one for Wednesday, pending market conditions, syndicate bankers said late Tuesday.

However, the visible supply is not vast, one syndicate official said.

The forward calendar is thin.

Atlantic Power Corp. is expected to put out price talk and possibly even price its $460 million offering of seven-year senior notes on Tuesday, an informed source said.

Morgan Stanley & Co. LLC and TD Securities (USA) LLC are leading the deal.

Looking a little farther down the road, Peabody Energy Corp. is expected to bring in excess of $1 billion of new issuance into the high-yield market during the next two weeks.

Bank of America Merrill Lynch will lead the deal. The syndicate of banks will also include UBS Securities LLC and Morgan Stanley.

The exact size of the deal is to be determined, according to the source.

ArcelorMittal SA, which had been part of a joint venture with Peabody to acquire Macarthur Coal Ltd., pulled out of the expected $4.9 billion deal on Tuesday.

Other funding for the acquisition comes in the form of a $1 billion senior unsecured term loan.

New bonds seen better

When Kinetic Concepts' new seven-year secured notes were freed for secondary market dealings, a trader saw them trade into a 99½ bid, leaving them offered.

A little later on, he saw the bonds at 99¼ bid, 99½ offered, still up from their 98.198 issue price.

A trader saw Chesapeake Oilfield Operating's eight-year paper get as good as 101 bid, 101¾ offered, versus its par issue price, although he said he "would assume that offering will come in a little bit."

When MarkWest Energy Partners' 10.5-year issue broke, a trader pegged those bonds at par bid, 100¼ offered, little changed from their par issue price.

A second trader said that "a lot" of the new bonds had traded at bid levels between 100 1/8 and even 100¾ earlier but added that the rapidly shopped deal "looks a tad weaker now" at 100¼ bid.

And a buyside source meantime saw the bonds retreat even further, quoting them at 99 7/8 bid, 100 1/8 offered.

That source also saw the same kind of levels on Australian iron ore producer FMG Resources' $1.5 billion drive-by issue.

However, at another shop, the new bonds were seen at 100 1/8 bid, 100¼ offered, a modest improvement from their par issue price.

Sallie Mae gets socked

Away from the new issues, a trader said that Tuesday's session actually was "a fairly active day." He said the junk most-actives lists were dominated by the split-rated crossover issues that normally attract attention from high-grade accounts reaching for yield as well as junk players.

One such credit was SLM Corp., whose 6¼% notes due 2016 (Ba1/BBB-BBB-) saw nearly $48 million changing hands. The bonds fell 2 points on the day to end at 99½ bid.

The company's 8% notes due 2020 lost 2¼ points to end at 1031/2, with nearly $30 million traded.

That slide mirrored the fall in the Newark-based student loan company's New York Stock Exchange-traded shares, which slid by $1.82, or 12.84%, to end at $12.36, on volume of over 18 million shares, about three times the norm.

The stock and the bonds fell against a backdrop of the White House announcement of a federal plan to aid student loan borrowers, many of whom struggle with tens of thousands of dollars of debt when they graduate and try to enter a depressed job market.

The proposal will reportedly slash monthly payments for some college students to 10% of their discretionary income starting next year, will let the borrowers combine their student loans with government loans into a single payment, at reduced interest rates, and will forgive the balance of their debt after 20 years of payments.

Analysts said Sallie Mae slid amid investor uncertainty over what the new rules will mean for the company.

Ally is active

A trader said that "a lot of the big names" were actively trading, such as Ally Financial Inc.'s 8% bonds due 2031. He saw the Detroit-based automotive and residential lender and online banking company - the former GMAC LLC - trading in a 98-99 context before ending at 99 bid, which he called up 2 points.

He said an older issue of the 8s, which normally trades several points behind the larger, newer issue, was at 95-96.

But the new ones "had the most volume, in the tens of millions [of dollars] traded. It's a big issue, almost $2 billion. So that's where all of the activity is - very heavy volume today."

A market source at another desk said that the 8s, which he pegged at just over 99, racked up at least $30 million in trading, making it one of the busiest high-yield bonds of the session.

Another source said that "a bunch of GMACs were trading around."

CIT steady after numbers

A market participant said that CIT Group Inc.'s 7% notes due 2017 "were big traders today," following the New York-based commercial lender's third-quarter earnings report and conference call.

However, he said that the bonds looked little changed, seeing them at 100¼ bid.

At another desk, a source also called the 2017s unchanged at 100¼ on volume of over $10 million.

CIT's 7% notes due 2015 were also little moved at 100 3/8 bid, with about $5 million traded, although its 7% notes due 2016 gained 1½ points to end at 100½ bid, with around $4 million changing hands.

On its conference call, CIT touted its debt-cutting efforts during the quarter and said one of its top priorities is to redeem or refinance all of the remaining $6.5 billion of those 7% series A bonds in order to get out from under restrictive financial covenants requiring assets be encumbered by their use as collateral (see related story elsewhere in this issue).

Indicators turn mixed

Statistical performance indicators, which had firmed solidly on Friday and again on Monday, turned mixed on Tuesday.

A market source said that the CDX North American series 17 High Yield index lost ¾ of a point Tuesday to end at 91¾ bid, 92 offered after having pushed upward by 1¼ points on Monday.

But the KDP High Yield Daily index rose by 30 basis points for a second consecutive session on Tuesday, ending at 72.82. Its yield came in by 13bps, to 7.61%, on top of the 4-bps tightening recorded Monday.

And the Merrill Lynch U.S. High Yield Master II index was on the upside for an eighth consecutive session on Tuesday, rising by 0.465%, which followed Monday's 0.528% advance.

That lifted the index's year-to-date gain to 2.901% from Monday's 2.425%.

It was the index's highest reading since Aug. 5, when it showed a 4.279% return for the year.

The index continued to show considerable progress in bouncing back from its recent low point, the 3.998% deficit recorded Oct. 4, the year's worst showing, but it still is well down from the peak gain for the year of 6.362%, which was set on July 26.

Mortgage insurers bounce back

Out of the distressed-debt precincts came word that after getting absolutely decimated on Monday on the news that Arizona authorities had seized PMI Group Inc.'s main business subsidiary, PMI and other mortgage insurer sector peers like Radian Group Inc. and MGIC Investment Corp. regained some lost territory.

A trader said that Philadelphia-based Radian's 5 5/8% notes due 2013 moved back up to a 74-76 range, which he called up 3 or 4 points, although he added "some of those are [just] quoted, they don't always trade actively."

He said the company's 5 5/8% notes due 2015 were quoted at 60-61, which he said was down 1 point.

He saw Milwaukee-based MGIC's 5 3/8% notes due 2015 trading between 62 and 65 bid for much of the day, though he saw them having risen to 66 by the day's end. He said that it was up a point from Monday's issues but on "not a lot of activity - these are thin issues. But still, they are back up from the lows of [Monday]. The big drop was [Monday], as you know."

He said that Walnut Creek Calif.-based PMI Group's 6% notes due 2016 last traded at 26-27, but he said there were only two trades all day, one at 26 and one at 27, calling the bonds up 1 point to 2 points on "not much volume."

He also said MBIA Inc.'s 14% surplus notes due 2031 "might have moved up a little bit," though he saw little activity, locating the bonds going home at 46-49. That was up a point or two, but the trader added that he didn't know how much activity there really was, noting that the Armonk, N.Y.-based mortgage insurer's 144A bonds don't Trace, "so you don't see the volume."

Yellow Media higher

In the Canadian debt market, Yellow Media Inc.'s bonds were edging back up in trading after having recently gotten clobbered, a source said.

The company's 6.5% notes due 2013 traded higher at 64.25 on Tuesday, up from the wide 61 bid, 66 offered levels at which they had been quoted back on Sept. 29.

Yellow Media's debt had plunged after the Montreal-based telephone directory publisher's Sept. 28 announcement that it would take a C$2.9 billion third-quarter charge and eliminate its stock dividend after the scheduled Oct. 17 payment.

Cristal Cody contributed to this report

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.