Precision Drilling, gigantic HCA, upsized Reynolds pace busy day; Reynolds, Precision trade up

By Paul Deckelman

New York, July 25 - The high-yield market saw one of its busiest days of the year on Tuesday. It was led by a pair of upsized mega-deals.

First, consumer packaging products company Reynolds Group Holdings Ltd. priced its upsized $2.5 billion offering of eight-year senior secured and senior unsecured notes.

That had been expected to be the big deal of the day - and the week - but around mid-day Eastern time, hospital operator HCA, Inc. announced plans for a $1 billion two-part offering, which also features senior secured and unsecured paper.

But before the day was out, the quickly shopped HCA deal had ballooned into the biggest junk bond deal of the year to date and one of the biggest of all time, even, ultimately weighing in at $5 billion.

Caught in between the two behemoths, Canadian oilfield services operator Precision Drilling Corp. came in with its own upsized drive-by offering. It priced a single tranche of $400 million of 10-year notes.

Traders said that both the new Reynolds deal and the Precision Drilling transaction firmed smartly when they moved into the aftermarket, each gaining about 2 points.

That put them right up there with Academy Ltd.'s new deal, which priced on Monday and also tacked on 2 points in the aftermarket.

HCA's giant-sized offering came way too late in the day for any kind of trading.

Also on the primaryside, price talk was heard on Fiesta Restaurant Group, Inc.'s $200 million deal, which underwent a little indenture tinkering on Tuesday. And gaming operator Rock Ohio Caesars LLC was heard getting ready to throw the dice on a $380 million secured bond deal, although that transaction is not expected immediately.

Traders said that the new-deal arena pretty much monopolized everyone's attention, leaving precious little to do in the secondary market. Statistical indicators were seen flat to higher. One issue that did see heavy dealings was Hovnanian Enterprises, Inc., down for a second session on investor worries over the state of the housing market.

Reynolds wraps things up

As was widely expected, Reynolds Group kicked off the day's festivities at mid-morning as its Reynolds Group Issuer LLC, Reynolds Group Issuer Inc. and Reynolds Group Issuer (Luxembourg) SA subsidiaries priced their upsized $2.5 billion offering of eight-year senior secured and unsecured notes.

They brought in $1.5 billion of 7 7/8% senior secured notes (Ba3/BB-), which priced at 99.268 to yield 8%, and $1 billion of 9 7/8% senior unsecured notes (Caa1/B-) at 99.318 to yield 10%.

Reynolds had announced on Monday that the senior unsecured tranche would be doubled in size to $1 billion from the originally planned $500 million, while the senior secured tranche was left unchanged at $1.5 billion.

Both tranches, which are due on Aug. 15, 2019, priced in line with their respective pre-deal market price talk of a yield in the 8% area for the secured piece and in the 10% area for the unsecured tranche.

The eagerly awaited deal was said to be multiple-times oversubscribed and played to a range of investors beyond just the domestic high-yield market.

A primaryside source said that "the deal went very, very well," adding that besides demand "from all of the usual high-yield guys," here was also brisk interest in the new paper from European accounts, high-grade accounts - even with the relatively low rating on the unsecured tranches - and he "even saw some EM [emerging markets] accounts in there as well."

He said that Reynolds now "is one of the larger bond complexes in high yield, so if you have any index-related funds, you'll almost have to be in it at this point based on how big it is as a part of the index, or anyone's index at this point."

The proceeds from the new offering will be used to help fund Reynolds' pending acquisition of Graham Packaging Co. Inc.

Auckland, New Zealand-based consumer food and beverage packaging products producer Reynolds - whose products include the well-known Reynolds Wrap aluminum foil - announced on June 17 that it would acquire Graham, a York, Pa.-based maker of customized blow-molded plastic bottles and jars, for $25.50 per share in cash, or $1.68 billion total, with the transaction having a total enterprise value of $4.5 billion, including the assumption by Reynolds of Graham's net debt.

Reynolds further announced in early July that it would line up $2 billion of senior secured term loan financing from its lenders and sell $2 billion of bonds, split into the senior secured and unsecured tranches.

Reynolds, in announcing the upsizing of the senior tranche on Monday, said that the net proceeds from the increase in the size of the bond deal will be used to repurchase any of Graham's $500 million of existing 8¼% senior notes due 2017 and 2018 that are tendered in connection with change-of-control offers at 101% of par that will be made following the closing of the Graham acquisition. Any remaining net proceeds from the upsizing of the bond deal will be applied to repay borrowings coming due in the near term or to repay, repurchase or otherwise retire other debt.

The big deal came to market via joint book-running managers Credit Suisse Securities (USA) LLC and HSBC Securities (USA) Inc.

The rise of Reynolds

Almost as soon as the new Reynolds bonds priced, they were seen having firmed solidly. A trader quoted the 7 7/8% bonds around mid-day as having pushed up to 102 bid, 102½ offered, while the 9 7/8% notes were at 101 7/8 bid, 102 3/8 offered.

A second trader saw pretty much similar levels, noting "that's pretty much where the bonds have been all day, give or take one-eighth or one-quarter of a point."

"Yeah, there was lots of trading in Reynolds," said a trader who saw both tranches at 102 bid, adding "the market has been waiting for that one for a couple of weeks," perhaps to break the log jam and get the recently mediocre junk market back on the same kind of track it was on earlier in the year.

A re-heated market?

A trader opined that the strong showing of the Reynolds deal "tells me that there is a lot of appetite still out there for junk bonds."

Turning to Precision Drilling's upsized $400 million offering of 10.5-year senior notes (Ba1/BB+), which also priced during the session and then traded up, he said "the sector is hot, and the rating is attracting investment-grade investors that feel safe with a BB credit in a too-low-interest-rate environment."

Precision prices precisely

Precision Drilling increased its deal size from the $300 million that it originally announced just a few hours before the quick-to-market deal priced.

The notes, which will mature in mid-December of 2021, priced at par to yield 6½%, right at the middle of pre-deal market price talk.

Like the Reynolds mega-deal, "that one went pretty well," a syndicate source said of the Calgary, Alta.-based oilfield services company's transaction.

"That was really interesting because you really haven't seen much in that sort of space" - i.e., unsecured four-B-rated paper - "done in the last month and a half." The only other such deal he could think of off-hand that fit that category was the $750 million offering of 7% notes due 2021 priced at par by Redwood City, Calif.-based data centers operator Equinix, Inc. on July 6.

"For an unsecured issue of four-B paper that's not LBO and not bridge [loan] take-out paper, it went very well," he said.

Precision, which provides a range of onshore services, including contract well-drilling, to oil and gas companies in North America and internationally, plans to use the new-deal proceeds to fund its capital expenditures, including its 2011 new rig-build program, and for general corporate purposes.

The source further said that the deal priced "very tight, tight in fact of the range" that the underwriters had first set on the deal, "so that was good."

The issue came to market via joint book-running managers Credit Suisse, RBC Capital Markets, LLC and Morgan Stanley & Co. LLC. The co-managers on the deal were TD Securities (USA) LLC, Bank of America Merrill Lynch, Wells Fargo Securities, LLC, HSBC, Scotia Capital (USA) Inc. and Simmons & Co. International.

Precision pops up

Soon after Precision's bonds priced, they too were trading busily upward.

A trader saw the bonds at 102 1/8 bid, 102 3/8 offered, well up from their par issue price. Several others saw similar levels.

"It looks like everything is enjoying a 102 bump - call it being in the '2-point club.' A 2-point profit for the day isn't bad," the trader said.

Academy is hot ...

Elaborating on that theme, he noted that Academy's new 9¼% notes due 2019 had traded up by around 2 points on Monday after pricing at par and were still up there on Tuesday.

Katy, Texas-based sporting goods and outdoor gear retailer Academy's special-purpose Allstar Sub LLC unit priced $450 million of those bonds Monday as part of the financing for the pending buyout of the company by Kohlberg Kravis Roberts & Co., LP.

... but MTR is not

However, not every new deal that has lately clattered down the chute is enjoying the "2-point bump."

Case in point: MTR Gaming Group, Inc.'s 11½% senior secured second-lien notes due 2019, which priced at 97 on Friday to yield 12.096% and which haven't been able to get out of their own way since then.

A trader on Tuesday saw the Chester, W.Va.-based racetrack and slot machine racino parlor operator's $560 million deal at 94 bid, 94½ offered, down a point or more from the levels seen on Monday.

"How much gaming can Ohio take?" he mused, referring to MTR's planed construction of a video terminal lottery parlor at its track in Columbus, Ohio, at a time when a number of other casino projects are going on in the Buckeye State.

Rock Ohio plans deal

Two of those projects - the construction of casinos in Cincinnati and Cleveland - involve a joint-venture company known as Rock Ohio Caesars, and market sources said the company plans to sell $380 million of senior secured second-lien notes as part of the financing that it is lining up.

They said Tuesday that there were no other firm details on the bond portion of the financing out, suggesting that the company would first work on the bank financing component of the project.

Rock Ohio - an entity formed by Livonia, Mich.-based Rock Gaming LLC, controlled by Dan Gilbert, the owner of the Cleveland Cavaliers NBA team, and the giant Las Vegas-based casino operator Caesars Entertainment Corp. - is expected to hold a bank meeting on Wednesday to launch a proposed $125 million term loan via lead banks Credit Suisse and Deutsche Bank Securities Inc.

When they announced their joint venture back in December, Rock Gaming and Caesars said that the new company expects to invest $400 million in the Cincinnati project and $600 million in Cleveland.

Fiesta serves up price talk

Primaryside players also heard Tuesday that Fiesta Restaurant Group's $200 million offering of five-year senior secured second-lien notes is expected to yield between 8¾% and 9%.

They said that order books for the deal would close at 1 p.m. ET on Wednesday, except for those accounts meeting with company executives on the U.S. West Coast.

The sources also said that the deal's structure had been changed somewhat to remove a company option to redeem up to 10% of the notes at 103 during the first 2½ years after issue, when the bonds are otherwise non-callable.

The debt-repayment deal is being done through Wells Fargo and Jefferies & Co.

Huge HCA weighs in

But all of that activity was only a preliminary for the big deal of the day, which didn't get announced until around mid-day and which didn't price until well after trading had wound down.

HCA massively upsized its already large two-part drive-by bond deal, coming in with one of the biggest junk deals ever, a $5 billion behemoth, junk market sources said.

The deal - which started out normally enough as a $1 billion two-part issue hurriedly shopped around to potential buyers via an afternoon investor call - priced way too late in the day for any kind of aftermarket action, market participants said.

In between the announcement and the pricing, its size was greatly pumped up, with sources seeing a $3.15 billion tranche of 8.5-year senior secured first-lien notes (Ba2/BB) and $2 billion of 10.5-year senior unsecured notes (B3/B-). When the final pricing took place, the secured tranche had been trimmed slightly from those estimates to an even $3 billion, with the unsecured piece coming in at $2 billion.

Both tranches of the new bonds priced at par late Tuesday, with the secured bonds priced to yield 6½% and the unsecured bonds 7½%. Both came at the wide end of price talk for the respective tranches - 6 3/8% to 6½% for the secured bonds and 7 3/8% to 7½% for the unsecured issue.

The total size makes it both the biggest junk deal of the year so far, surpassing the $3.2 billion of bonds that Chrysler Group LLC sold in a two-part offering of senior secured eight- and 10-year paper in mid-May, and one of the biggest junk deals ever.

A trader heard during the afternoon that the deal was being upsized by a lot and predicted that "this will go on to overshadow everything, even Reynolds."

HCA, a Nashville-based operator of hospitals and other medical facilities, plans to use the proceeds from the deal to redeem and repurchase its 9⅝%/10⅜% second-lien toggle notes due 2016 and its 9¼% second-lien cash-pay notes, which are also due 2016.

The bonds were brought to market via joint book-running managers J.P. Morgan Securities LLC, Barclays Capital Inc., Bank of America Merrill Lynch, Citigroup Global Markets Inc., Deutsche Bank and Wells Fargo.

Existing HCA gets hit

One of the traders noted that HCA's existing bonds "got banged down" on the news that the company was doing a big new bond deal and the further news that it was being massively upsized even beyond that already large beginning level.

He quoted the 7¾% notes due 2021 down 1 or 1½ points at 102½ bid, 103 offered, noting that the bonds had been up as high as the 105 bid, 105½ offered level on Friday.

In morning trading before the HCA new-deal announcement, he saw them at 103¾ bid, 104½ "before this new deal began to take on a life of its own."

Market indicators edge up

Away from the new-deal precincts, traders said that not much was going on, with the new deals sucking up most of the oxygen in Junkbondland.

They noted that market statistical indicators, which had turned mixed on Monday, firmed perhaps a little on the whole but did not do that much on Tuesday - with one notable exception - perhaps reflecting the negative tone in equities amid the continued debt-ceiling political standoff.

A trader saw the Markit CDX North American Series 16 High Yield index up by 1/16 of a point on Tuesday to end at 101 3/8 bid, 101½ offered after having been down ¼ point on Monday.

The KDP High Yield Daily index edged up by 1 basis point on Tuesday to finish at 75.64 after it had lost 4 bps on Monday. Its yield was unchanged on Tuesday for a second straight session at 6.62%.

But the Merrill Lynch High Yield Master II index showed its sixth consecutive gain on Tuesday. It was up by 0.093% on top of Monday's 0.052% gain and Friday's solid 0.20% rise. The latest gain lifted its year-date return to 6.362%, a new peak level for 2011, from Monday's 6.263%, the previous zenith.

Housing data hurts Hovnanian

Among specific names, Hovnanian Enterprises' debt was "the most actively traded issue in the market," according to a trader, and was down for a second straight session.

The bonds were weaker after the U.S. Department of Commerce reported housing figures that were not pleasant.

The trader said the 11 7/8% notes due 2015 fell a couple points to 681/2. The 10 5/8% notes due 2016 were meantime the day's most active securities, falling to a 941/2-96½ context from 97¾ previously.

"They were off a couple of points in some pretty heavy trading," he said.

Another trader said the paper "started out strong" and that the 10 5/8% notes experienced "huge volume. The CDS was very active too."

He said the notes lost early-gained ground, falling to "941/2-ish" from around 96 at the open.

Another market source who saw the bonds get hammered said that about $65 million of the 10 5/8s traded during the session and at mostly lower levels.

Tuesday's levels were the lowest seen in the credit in over a year.

New housing data showed that home purchases declined 1% to 312,000 in June, hitting a three-month low. Market expectations were closer to 320,000.

Another trader said that the Red Bank, N.J.-based homebuilder might be feeling the fallout from investor angst over the possibility that Congress may decide to limit or even do away with the traditional mortgage interest deduction as part of a tax overhaul program that could emerge from the current debt-ceiling showdown.

"And not just Hovnanian would go down" among the homebuilders if that were to happen, he predicted.

"If you take away that deduction, you're one step away from burning down just about every house."

Stephanie N. Rotondo contributed to this report

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