Forest Oil paper nosedives as merger changes kill change-of-control put; iHeart gains

By Paul Deckelman and Paul A. Harris

New York, Dec. 16 – Cascading oil prices continued to take their toll on high-yield oil and gas sector names as Chesapeake Energy Corp., Sand Ridge Energy, Inc. and Samson Investment Co. in Tuesday’s trading.

But the day’s biggest loser in the energy group – Forest Oil Corp. – plunged for reasons not directly related to the oil price slide; rather, the exploration and production company, which was bought by sector peer Sabine Oil & Gas LLC in a transaction that closed on Tuesday, announced revised merger terms that will not trigger the change-of-control put provision in its bonds indentures.

Sabine’s bonds meantime gyrated around at better levels.

Also on the upside, iHeart Media Inc.’s bonds were higher in active dealings.

The high yield primary sphere stayed quiet on Tuesday.

Market sources meantime saw continued daily outflows of cash from high yield mutual and exchange-traded funds.

Statistical indicators of junk market performance were off across the board for a fifth consecutive session on Tuesday and were down all around for the seventh session in the last eight, a bearish pattern only interrupted by a mixed session exactly a week ago.

Outflows continue

The primary market passed a quiet Tuesday, with market sources continuing to express the opinion that volatility in the capital markets – set in train by the spectacular crash in the price of crude oil – has shuttered the high-yield new issue market for the remainder of the year.

Cash flows for dedicated high-yield funds continued to be negative on Monday, the most recent session for which fund flow information was available at press time, according to a buyside source.

High-yield ETFs saw $350 million of outflows on Monday. Actively managed funds saw $265 million of outflows. And dedicated bank loan funds saw $315 million of outflows.

PetSmart outlines financing

PetSmart Inc. revealed in an 8-K filed with the Securities and Exchange Commission on Tuesday that is has received a commitment for $6.2 billion in debt and a $750 million senior secured ABL facility for its acquisition by a consortium led by BC Partners Inc.

Citigroup Global Markets, Nomura Securities International Inc., Jefferies Finance LLC, Barclays and Deutsche Bank are the leads on the debt.

Other funds for the transaction will come from up to about $1.83 billion in equity.

Under the agreement, PetSmart is being bought for $83.00 per share in cash, or about $8.7 billion.

The buying consortium includes funds advised by BC Partners, alongside several of its limited partners, such as La Caisse de depot et placement du Quebec and StepStone.

Closing is expected in the first half of 2015, subject to shareholder and regulatory approval and other customary conditions.

PetSmart is a Phoenix-based specialty pet retailer.

Forest Oil falls

In the secondary arena, a trader said that the biggest action came in Forest Oil, whose bonds plunged as low as the mid-to-lower 40s from prior levels in the middle 80s, before bouncing back a little to end around 50 bid.

A market source said that the Denver-based oil and gas E&P operator’s 7¼% notes due 2019 ended down 35¼ points on the session, on volume of over $32 million.

Its 7½% notes due 2020 closed at 47 bid, down around 40 points, on volume of over $17 million.

Those bonds took their tumble when Forest and Houston-based Sabine Oil & Gas announced the closing of their previously announced planned combination of the two energy companies.

However, in an unusual twist, they announced that the terms of the merger had changed.

Originally, the owners of the closely-held Sabine were to have received 73.5% control of the merged entity, with the publicly-traded Forest’s shareholders getting the remaining 26.5%.

However, under the revised terms, the Sabine owners will now have 40% voting control of the combined company, leaving Forest’s shareholders with the other 60%.

Because the Sabine interests do not have a majority of the voting power, the companies claim that technically speaking, there has been no change of control of Forest, and thus, no triggering of the provisions in the latter’s bond indentures that would have allowed the holders of the $578 million of the 7¼% notes and the $222 million of the 7½% notes to put the bonds back to the company at 101% of their par value at a cost to Forest of some $808 million.

Forest’s bonds will remain outstanding after the transaction, as will Sabine’s existing bonds and its outstanding second-lien loan

As a result of the revised transaction terms, the $850 million of bridge commitments the companies previously lined up to finance the repurchase of the Forest bonds under the original transaction terms are no longer necessary; the combined company will save at least $100 million in transaction costs and interest expenses over the next three years by leaving the Forest bonds outstanding, their announcement said.

Sabine’s NFR Energy 9¾% notes due 2017, which had last been seen trading at 45 bid on Thursday, shot up to 63½ bid on Tuesday, before coming off that peak level to finish at 58¼ bid, on volume of over $23 million.

Some late trades?

A trader who had been watching the Forest Oil gyrations said that a few million of each issue traded in the morning, before the merger close and the revised terms were announced and after those terms came out, the bonds plunged into the 40s from the 80s.

He said, however that “what’s really interesting” about the action in the company’s bonds was that on a number of those initial round-lot trades after the news came out – a total of nine such trades in the 7¼s and another nine in the 7½s – “those trades were reported to Trace anywhere from 25 to 60 minutes later,” when the rules of the Financial Industry Regulatory Authority, which operates Trace, require trades to be reported within 15 minutes.

“It was not like this was just one trade, where they simply forgot to issue it in,” he declared, “but trade, after trade after trade.

“They may have been trading bonds between 41 and 46, but they were not letting the rest of the market know for an hour.”

“Some of these trades were trading for a three-, four-, or five-point spread,” he claimed, suggesting that “they wanted to keep the cash register running as long as possible. An account is going to sell you the bonds at 42, and you can sell them to someone else at 48, that’s essentially what was happening here.”

On the Trace website listing the individual trades in that issue, those trades carry a “Z” modifier, indicating “Sold late, out of sequence.”

He predicted that “somebody [at the dealer involved] is going to be hearing from FINRA and the SEC.”

A second trader who was aware of the day’s heavy downside dealings in Forest Oil said he was not aware of the apparent problem with some of those trades.

FINRA did not return a late-afternoon phone call from Prospect News seeking information or a clarification of the situation.

Energy bonds off

Apart from Forest Oil, energy issues continued to slide against a backdrop of weak crude oil prices. The benchmark U.S. crude’s January contract settled up 2 cents at $55.93 a barrel, after having touched a session low of $53.60 – its lowest since May of 2009.

Chesapeake Energy’s 4 7/8% notes due 2022 lost 3/8 point to end at 92¼ bid on over $42 million traded, making it the most active junk issue.

Samson Investment’s 9¾% notes due 2020 lost 4 points to end at 37 bid, while SandRidge Energy’s 7½% notes due 2021 ended at 54 bid, down 5 points on the session.

Improved iHeart levels

On the upside, San Antonio, Texas-based media company iHeart’s 14% notes due 2021 ended at 77½ bid, up ¼, on volume of over $21 million.

Its 11¼% notes due 2021 gained ¾ point to end at par, with over $18 million having changed hands.

Traders had seen no fresh news about the company – which last week announced a sizable sale of its tower assets – that might explain the rise.

Indicators’ losses deepen

Statistical indicators of junk market performance were off across the board for a fifth consecutive session on Tuesday and were down all around for the seventh session in the last eight, a bearish pattern only interrupted by last Tuesday’s mixed session.

The KDP High Yield Daily Index suffered its eighth consecutive loss on Tuesday, falling by 39 basis points to end at 69.01, its lowest close since Oct. 5, 2011, when it had fallen to 68.53. Tuesday’s nosedive follows a 50 bps plunge on Monday.

Its yield ballooned upward by 13 bps to 6.43%, its eighth straight widening, after having risen by 10 bps each on Friday and again Monday.

The Markit CDX North American High Yield Series 23 index saw its fifth straight loss on Tuesday and its eighth such downturn in the last nine sessions retreating by 5/32 point to 103 31/32 bid, 104 offered. On Monday it had lost 11/32 point.

And the Merrill Lynch U.S. High Yield Master II Index was a loser for an eighth successive session on Tuesday, and its year-to-date return fell into the red for the first time since the fall of 2011.

The index declined by 0.619%, on top of Monday’s 0.479% retreat.

The latest downturn left its year-to-date return with a 0.258% loss, versus Monday’s 0.364% positive return.

It was not only the index’s first time in the red this year, but in fact was its first time in negative territory at all since Oct. 13, 2011, when it had closed down 0.429%.

The year-to-date return also remained well below its peak level for the year of 5.847%, recorded on Sept. 1.

Several other index components notched new marks for the year. Its yield to worst rose to a seventh consecutive new high for the year at 7.259% from the previous high of 7.105% on Monday.

Its spread to worst shot up to 576 bps over comparable Treasuries, its seventh consecutive new wide point of the year. On Monday it had risen to 558 bps.

And its average price per covered issue fell to 96.48666, its eighth straight new low for the year, from 97.10219 on Monday.

According to the Finra/Bloomberg high-yield bond index, junk bond volume rose to $5.044 billion on Tuesday from $4.477 billion on Monday.

Sara Rosenberg contributed to this report

© 2015 Prospect News.
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