No deals price, but recent issues gain in line with firmer market; funds lose $909 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 30 - After several days of respectable activity, the high-yield primary arena quieted down on Thursday. The session saw no pricing of any dollar-denominated, purely junk-rated issues from domestic or industrialized-country borrowers.

However, syndicate sources heard price talk out on a pair of deals that could come to market on Friday. The talk was from oil and gas exploration and production company Parsley Energy, LLC, which is doing an upsized $400 million eight-year note offering, and live-event impresario SFX Entertainment, Inc., which is doing a $200 million offering of five-year secured paper.

Among recently priced deals, traders saw such names as Ardagh Group, Radio One, Inc., Westmoreland Coal Co. and North Atlantic Drilling Ltd. all pushing higher.

So were such recently lagging underachievers as Walter Energy, Inc. and Momentive Performance Chemicals, Inc.

Traders saw the junk market generally better by ¼ to ½ point, helped along by a rebound in stocks, which had taken a drubbing over the previous few sessions on investor fears of renewed Federal Reserve tapering of its monetary stimulus program.

Statistical indicators of market performance rose across the board on Thursday after having been lower all around on Wednesday.

But another indicator - the flow of cash into and out of high-yield mutual funds and exchange-traded funds, considered a key barometer of junk market liquidity trends - tumbled into negative territory for the first time this year.

Funds lose $909 million

As Thursday's Junkbondland activity was winding down, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $909 million more left high-yield mutual funds and exchange-traded funds than had come into them in the week ended Wednesday.

A source said that virtually all of the outflow - $902 million, or about 99% of it - had been caused by investors pulling funds out of the ETFs, which have emerged over the past several years as a favored investment vehicle for volatile, fickle "hot money" investors. The more traditional high-yield mutual funds accounted for just $7 million of the outflow.

The downturn was the first outflow seen so far this year and the first after three consecutive inflows that included the $423 million cash injection seen by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., the previous week, which ended Jan. 22.

Those three weeks of inflows to the funds since the start of the year totaled about $1.13 billion, while the latest week's outflow, in turn, dropped that cumulative net 2014 figure to around $221 million, according to a Prospect News analysis of those numbers.

Inflows have been seen now in four out of the last six weeks, for a cumulative net outflow during that time of about $319 million, according to the analysis. Besides the latest outflow, that otherwise positive period was marred by the lone recent outflow of $643 million in the week ended Jan. 1.

On a longer-term basis, even with the downturn this week, inflows have still been seen in 16 of the last 21 weeks, going back to the week ended Sept. 11; net gains have accumulated during that time to about $8.48 billion, according to the analysis.

In 2013, inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, according to the analysis.

Cumulative fund-flow estimates may be revised upward or downward or may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts said that the sustained flows of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the more than $1 trillion junk market - has been a key catalyst behind relatively strong performance seen by both the junk primary and secondary markets over the past two years and which has continued so far this year.

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, said Thursday that in the latest week, it saw "the same general number for us, driven by U.S. HY funds." EPFR's methodology differs from AMG/Lipper's in that the latter is strictly domestic-oriented, while EPFR's fund universe includes a number of funds that are domiciled outside of the United States.

Talking the deals

No new issues priced on Thursday, and the high-yield new issue market news flow was light.

Price talk surfaced on two deals that have been on roadshows and are expected to clear before the Friday close.

Parsley Energy upsized its offering of eight-year senior notes (Caa2/CCC+) to $400 million from $325 million and talked the notes to yield 7½% to 7¾%.

Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. LLC are the joint bookrunners.

And SFX Entertainment talked its $200 million offering of five-year senior secured second-lien notes (Caa1/B-) to price with a yield in the 9¾% area.

That's the tight end of earlier yield guidance of 9¾% to 10%, according to a market source.

Barclays is the lead left bookrunner. Deutsche Bank Securities Inc., Jefferies LLC and UBS Investment Bank are the joint bookrunners.

With the high-yield market finding firmer footing on Thursday following sell-offs and negative cash flows earlier in the week, activity in the new issue market ought to pick up soon, according to a trader.

A debt capital markets banker professed visibility on deals that could be announced as early as Friday, provided the market remains supportive.

B Communications roadshow

Only one new deal announcement surfaced on Thursday.

Israel-based B Communications Ltd. began a roadshow on Thursday in London for a $775 million equivalent offering of seven-year senior secured notes (/BB-/expected BB-).

A roadshow in the United States is scheduled to get underway on Monday.

On offer are dollar-denominated notes formatted as Rule 144A for life and euro-denominated notes formatted as Regulation S for life.

JPMorgan, Citigroup, HSBC and Discount Underwriting and Issuing Ltd. are the joint bookrunners.

The Ramat Gan, Israel-based telecommunications-oriented holding company plans to use the proceeds to repay all amounts outstanding under the loans it incurred to acquire its controlling interest in Bezeq - The Israel Telecommunications Corp. Ltd., and to deposit funds into a debt service account.

Recent deals do well

In the secondary market, traders saw generally better levels on the new paper that had priced earlier in the week.

One saw Ardagh Group's 6¼% notes due 2019 at 100 5/8 bid, 101 1/8 offered, "and that was after trading around 100¼ to 100½ this morning."

He also saw its new 6¾% notes due 2021 around 100 3/8 bid, after having traded earlier in a 100 1/8 to 100 3/8 context.

At another shop, a trader saw the 6¼% notes up ½ point on the session at 100¾ bid, 101¼ offered, although he said the 6¾% notes were unchanged at 100 1/8 bid, 100 3/8 offered.

Through its Ardagh Packaging Finance plc and Ardagh Holdings USA Inc. funding subsidiaries, the Dublin-based glass and metal beverage, food and consumer products packaging company priced $830 million of bonds in a two-part offering on Wednesday - $415 million each of the 6¼% notes and 6¾% notes, both of which came at par.

A trader saw Radio One's 9¼% senior subordinated notes due 2020 trading between 101 and 102 bid, later on seeing the bonds at 101 bid without, "so that's definitely done better."

A second trader saw the notes up 7/8 point on the day at 102 1/8 bid, 102 5/8 offered.

The Silver Spring, Md.-based broadcaster and diversified media company priced $335 million of the notes at par on Wednesday, and they were seen having firmed smartly in initial aftermarket dealings.

A trader saw Westmorland Coal's 10¾% senior secured notes due 2018 up 3/8 point, at 108 5/8 bid, 109 1/8 offered. The Englewood, Colo.-based thermal coal producer and power generation company priced $425 million of the notes as an add-on to its existing paper on Wednesday; the notes priced at 106.875 to yield 6.975% after the deal was upsized from an originally announced $400 million.

North Atlantic Drilling's 6¼% notes due 2019 were seen by a trader on Thursday up 3/8 point on the day at par bid, 100 3/8 offered. The Hamilton, Bermuda-registered offshore drilling operator priced $600 million of those notes at par on Tuesday, although they slipped slightly from that level in initial aftermarket dealings.

Walter does wonderfully

Away from the new deals, one of the stars of the day clearly was Walter Energy's 9 7/8% notes due 2020. A market source saw those bonds having jumped by 1½ points to end at 76½ bid, with volume of over $9 million putting it high up on the Most Actives List.

A second trader also saw the notes at that higher level, calling them up by more than 1 point.

That stood in sharp contrast to losses seen in those notes on Wednesday.

There was no fresh news seen out on the company, whose bonds and shares have been in a rut over the past several days on negative analysts' commentary.

The Birmingham, Ala.-based metallurgical coal producer's bonds have slid into the mid-70s from recent highs about a week ago in the 83-to-84 bid context, in line with weaker prices of metallurgical coal, which is used in the production of steel and other metals. Those prices, which had already been considered low at $132 per ton, have now slid to $125 per ton, and some analysts think they could come down even further.

Walter's paper has been battered by negative commentary such as that offered by Wells Fargo Securities, which downgraded its shares to "market perform" last Friday from "outperform" previously. Analyst Sam Dubinksy warned in a research note that while pricing for metallurgical coal had been expected to recover as Chinese steel production improved, "this did not occur," as China grew its output by over 8%, but pricing still fell due to supply additions at low-cost miners and on foreign exchange fluctuations. Dubinsky further cautioned that "with China potentially slowing again due to tightening credit, we believe pricing will remain a challenge in 2014. Given Walter's high debt loads and earnings likely to remain very weak, we are more cautious on shares."

On Monday, Citigroup analyst Brian Yu cautioned that Walter and sector peer Alpha Natural Resources, Inc. stood to be hurt more than most other coal companies by the fall in prices for metallurgical coal.

Besides putting Walter under pressure, that pushed Bristol, Va.-based Alpha Natural Resources' bonds down, but on Thursday, its 6% notes due 2019 were up 5/16 point to finish just above 83.

Sector peer Arch Coal Inc.'s 7¼% notes due 2021 were up nearly 1¾ points on the day, to 76¼ bid.

Momentive moves up

Away from the coal names, Momentive Performance Materials' 9% notes due 2021 were seen by a trader having gained 1½ points on the session to go home at 91½ bid, on volume of over $8 million. That more than made up for the 1-point loss the credit had suffered on Wednesday.

The Columbus, Ohio-based specialty chemical manufacturer meanwhile announced earlier in the week that it is increasing prices for base epoxy resin products in its Europe, Middle East and Africa region by €90 per metric ton. The new pricing becomes effective on Feb. 1, or as contracts allow.

Bonds mostly better

Overall, traders saw a rising tide in the junk market, which was seen generically better by between ¼ and ½ point after having weakened on Wednesday.

One trader characterized the market as "pretty quiet," adding that "it had a much better tone to it than it's had, probably, in the last week or so - between the way we were finishing last week and the first few days of this week.

"Things seemed to firm up a little bit. We saw a lot more offer lists than the prior days."

He pegged the rise generically at ¼ point, observing "at least there were bids around today. Yesterday [Wednesday], they were few and far between."

Market indicators rebound

Statistical junk-market performance indicators turned higher across the board on Thursday after having lost ground all around on Wednesday.

The Markit Series 21 CDX North American High Yield index rose by 7/32 point to end at 106 7/16 bid, 106½ offered after having lost 13/16 point on Wednesday.

The KDP High Yield Daily index gained 5 basis points on Thursday to finish at 74.50, versus its 15-bps slide on Wednesday.

Its yield declined by 3 bps to 5.57% after having risen by 6 bps on Wednesday.

And the widely followed Merrill Lynch High Yield Master II index firmed by 0.077% on Thursday after having lost 0.035% on Wednesday.

The gain raised its year-to-date return to 0.785% from 0.707% on Wednesday, although it remained well down from last Wednesday's 1.185%, its high point of the year so far.

The index's yield to worst fell to 5.581% from Wednesday's 5.601%. But it remained well above its low level for the year, last Wednesday's 5.386%.

Its spread to worst tightened to 427 bps over comparable Treasuries from Wednesday's 430 bps, which was a new wide point for the year so far, surpassing the previous mark of 425 bps set this past Monday.

Junk, in turn, was seen having taken its cue from a stock market that was squarely in a rebound mode after having taken its lumps over several sessions on investor worries about what impact the increased Federal Reserve tapering off of its quantitative easing bond-buying program might have on the economy, as well as jitters about the state of some of the emerging markets such as China and Turkey.

However, those fears took a back seat Thursday amid a tech-led rally that sent the bellwether Dow Jones industrial average up by 109.82 points, or 0.70%, to end at 15,848.61. The broader S&P 500 index rose by 19.99 points, 1.13%, to close at 1,794.19 - the market gauge's biggest one-day percentage gain since Dec. 18. The even broader Nasdaq Composite index saw its biggest daily percentage rise since Oct. 10 as it firmed by 71.69 points, or 1.77%, to go home at 4,123.13.

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