New Watson bonds continue strong in trading; Sinclair up despite subordination in debt deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 - Watson Pharmaceuticals Inc.'s new two-part bond issue was seen actively trading around for a second consecutive session on Friday, with high yield accounts seen interested in the split-rated deal even though its coupons are relatively low by traditional junk market standards.

The high yield primary market meantime remains in its mid-summer night's dream, with little or nothing seen doing on the forward calendar.

Among the established issues, Sinclair Broadcast Group Inc.'s bonds were seen having risen several points on the news that the troubled television station group owner had reached an agreement with its convertible debt holders that will likely head off the possibility that those convert holders might push the company into bankruptcy by demanding repayment of their paper when their put options take effect next year and in 2010. Traders noted the anomaly that the straight bonds were up, even though the debt deal will further subordinate them in the company's capital structure.

Elsewhere, American International Group Inc.'s bonds were seen better for a second straight session, helped by positive investor reaction to optimistic comments on the company's future by its new chief executive officer.

The ranks of high-yield players remained thin on Friday, with many spending the final session of the Aug. 17 week out of the office, sources said.

Junk moved perhaps ½ point higher, according to a trader from a high-yield mutual fund.

"It's really hard to tell, though, because it's so quiet" the trader added.

Watson wows 'em in secondary

On a day when not much was doing in Junkbondland - a trader summed things up by noting that it was "another summer Friday in August," with the implication that not much was expected to happen - a standout name, for a second straight session, was that of Watson Pharmaceuticals, which had priced a two-part $850 million bond offering on Tuesday.

The Corona, Calif.-based drugmaker's split-rated (Ba1/BBB-/BBB-) deal actually came off the high-grade desks of participating investment banks, but it has generated some interest among junk accounts, even though its coupons - 5% for the five-year tranche and 6 1/8% for the 10-year piece - are quite low by usual junk bond standards.

A syndicate official attributed this to "a total absence of activity" in the purely high yield primary.

Still, a junk trader noted that the bonds accounted for two of the three most heavily traded issues in the junk market, although he acknowledged that some of that volume no doubt came from regular high-grade accounts playing in the deal despite its Ba1 rating from Moody's Investors Service.

He saw the $450 million of five-year notes trading at 100¼ bid, off slightly from 100½ on Thursday, on $31 million of turnover, the most of any junk or quasi-junk issue. Those bonds had priced Tuesday at 99.589, and had moved up to nearly 101 before coming slightly off that peak level.

He also saw the $400 million 10-year tranche at 101 3/8, again off slightly from Thursday's close at 101 5/8, seeing $24 million of the bonds changing hands.

The bonds had also been among the volume leaders on Thursday, with $23 million and $22 million, respectively, traded, among that session's busier names.

Another trader said that the Watson paper was "starting to catch a little interest" in the junk precincts, quoting the five-years at 100¼ bid, 100¾ offered on "huge volume" for an otherwise relatively quiet day.

"Wow," he exclaimed, when looking up where the bonds were trading and seeing the strong volume. "Our guys are playing it. A lot of bonds are trading, too."

He also saw the 10-years bid as high as 1013/4-101 7/8, on "tremendous volume."

While acknowledging that there were junk investors going into the Watson deal, he added that "I can't see that may high yield accounts buying that coupon," agreeing that it must be because of a lack of any other new supply. Observers think it unlikely that the junk market will see any purely high yield pricings - unlike the split-rated Watson - before the Sept. 7 Labor Day holiday in the United States.

"After [the next two weeks'] lull, maybe, they'll be lining up on the runways again for more deals to come," he said.

"It feels right now that everybody wants to get in before the door closes - anybody who has any financing to do, is trying to get in the door. That's what it feels like."

Sprint Nextel comes off bottom

Among other recently priced deals, the trader saw Sprint Nextel Corp.'s 8 3/8% notes due 2017 having finally climbed a little bit off their recent bottom. The Overland Park, Kan.-based wireless service provider priced a whopping $1.3 billion of the bonds on Aug. 10 - upsized sharply from the $500 million originally shopped around. However, after that pricing at 98.575 to yield 8 5/8%, the new bonds "got thrashed," he said, "absolutely hammered."

They were driven down to lows about 95 offered - a loss of around 4 points - but after bottoming out Thursday, "they're finally showing signs of life," the trader said, quoting the bonds bid at 95¾ - still "well underwater" versus the issue price, but up from Thursday's lows.

Jabil jumps a little

The trader also saw better levels among another recent deal, that for Jabil Circuit, Inc. The St. Petersburg, Fla.-based electronics manufacturer priced a $312 million offering of 7¾% notes due 2016, upsized from an originally planned $200 million, back on July 31. The bonds priced at 96.143, to yield 8½%.

"It's not staggering," he said, but noted that the bonds had been trading to the downside the last couple of days, finishing at around 97 earlier in the week. He saw the bonds trading Friday at "at least" 98 bid, 98¾ offered, helped by Citigroup analysts putting a "buy" recommendation on the company's shares.

He also saw Jabil's 8¼% notes due 2018 trading at 99¾ bid, up from 98¼ bid, 99 offered.

Market indicators stay strong

Back among the established issues, a trader saw the CDX Series 12 High Yield index - which had gained 3/8 point on Thursday - up another 3/8 on Thursday, finishing at 88¾ bid, 89¼ offered. That topped the 88 bid, 88½ offered close seen the previous Friday, Aug. 14.

The KDP High Yield Daily Index, which had risen 9 basis points on Thursday, gained another 14 bps on Thursday to end at 65.81, while its yield tightened by 3 bps to 9.46%.

In the broader market, advancing issues - which led decliners for a third straight session on Thursday, by about a 12-to-11 margin, expanded their lead on Friday to about six to five.

Overall market activity, reflected in dollar-volume totals, was down some 20% from Thursday's pace.

Sinclair bonds rise - but why?

A trader said that one of an otherwise dull summer Friday's major features was Sinclair Broadcast Group, after the Hunt Valley, Md.-based television station group owner announced its debt agreement with its convertible debt holders, in all probability heading off the likelihood that those holders will demand payment on their notes next spring and in early 2011, which Sinclair had previously warned could force it into Chapter 11.

The traders meanwhile noted that Sinclair's $273 million of outstanding senior subordinated notes due 2012 were higher on the day - and that left them scratching their collective heads in puzzlement, since the debt deal terms call for the company to take out the convertibles with the proceeds of a new secured debt issue, effectively subordinating the existing junk bonds.

"We thought that the 8s were going to go down on this news, that they were going to be squashed," one said, noting that issuing the more than $417 million principal amount of second-lien notes required under the deal would push the holders of the unsecured straight bonds further to the back of the line in the event of a bankruptcy or other restructuring situation.

Even so, he said, those 8% bonds traded up 1½ to 2 points, closing at 82.

Another trader, who saw those bonds go home at 82½ bid, 82¾ offered, admitted that he "was surprised. I don't see how this could be good for the 8s" - other than on the theory that the debt agreement might avert a catastrophic restructuring event, even if it means putting another layer of debt above the straight bonds. Even so, he said, "it seems strange that they're up."

Yet another trader quoted the 8s going out at 81½ bid, 82½ offered, which he called up 2½ points on "not a lot of trading."

Sinclair announced late Thursday, after the domestic financial markets had closed for the day, that it had reached agreement a committee representing the holders of its $294.3 million of outstanding 3% convertibles due 2027 and its $143.5 million of 4 7/8% converts due 2018, who have the contractual right under those securities' indentures to put them back to the company and demand immediate payment in full in May of next year and January of 2011, respectively.

Sinclair had warned in an 8-K filing with the Securities and Exchange Commission back on July 10 that it does not have the money to pay those bonds off should the holders put them back to the company - an event which it said was "highly probable," considering its current stock prices and said it was experiencing difficulty in raising new funds. Sinclair said at that time that it had begun planning for a potential restructuring, including contingency plans for a possible bankruptcy filing.

Under the new agreement, the company's Sinclair Television Group subsidiary would complete a private placement of new 12% second-lien debt securities due 2014, guaranteed by the parent company and certain of its subsidiaries, and secured by a second lien on the assets currently securing the loans under Sinclair Television's senior secured bank credit facility. The coupon on the new notes would increase by one-quarter of a point each six months, of which at least 8% would be paid in cash and the remainder could be paid in additional second-lien notes, subject to a fixed-charge coverage test. Sinclair would use the proceeds from the secured note issue to tender for the 3% converts at a price of 93.5, and the 4 7/8% converts at a price of 90, plus accrued and unpaid interest for each. The tender offers would be conditioned upon, among other things, the company raising sufficient funds from the secured-note placement, and getting at least 95% of the holders of each class of convertible notes to go along with the buyback.

A trader meantime said that those converts were "on fire" on the news, seeing the 3% converts having moved up to a 90-92 context from previous levels around 83-84, on good volume. "Holy s**t!" he exclaimed, as he checked the price quotes and saw the magnitude of the move. He also noted that it was not so very long ago - back in the spring, to be more precise - that those bonds had been trading around in the 50s.

He also saw the company's 4 7/8s - which had dipped below 40 for a while earlier this year - trading in an 86-89 range, well up from its most recent sizable trades, seen the week before, around 75 bid, 75¾ offered.

At another desk, a trader said the 3% convertibles were "up a lot," seeing them trading in a 90-93 range before going out at 90, which he said was still up around 6 points from prior levels.

"These were not very active prior to today," he said. "They're off their tops, but still improved." He said he saw "seven or eight" large-sized trades.

Not out of the woods yet

One of the traders said there seemed to be "some skepticism [in the market] that the deal will get done," perhaps due to the high threshold of participation needed from converts holders, or perhaps on the fact that, as Sinclair said in its filing last month, any restructuring of the convertible notes would need to address a potential refinancing and/or extension of the company's revolving loan facility due June 2011. Sinclair also cautioned at that time that restructuring the convertibles at higher redemption prices would leave very little EBITDA cushion, with Sinclair projecting about $159 million of 2009 EBITDA in a soft market which it said is showing "no signs of recovery" from depressed advertising revenues, at least not before the second half of next year.

Also compounding Sinclair's troubles, even if the debt deal does go though, is the problem that Sinclair is having with its local management agreement partner in six of the markets where its TV stations operate, Cunningham Broadcasting Corp. That company is itself facing a potential bankruptcy, which would cause a default under Sinclair's bank credit agreement.

Sinclair warned in the July filing that the potential bankruptcy of Cunningham may result in the rejection of Sinclair's local management agreements with the company - and said that any rejection by Cunningham of these agreements would result in a material loss of revenue, business cash flow and enterprise value for Sinclair.

Despite those looming potential problems, Sinclair's Nasdaq-traded shares jumped as much $1.30, or 60% above Thursday's close, at one point in the Friday session, before closing up 70 cents on the day, or 32.56%, at $2.85. Volume of 4.535 million shares was more than eight times the norm.

AIG improvement continues

Elsewhere, a trader said that American International Group's paper "was a bit better today," up for a second straight session on investor response to hopeful-sounding comments from the company's newly installed CEO, Robert Benmosche.

"We had a continuation from [Thursday] after the comments by the new CEO," with the New York-based insurance giant's 8¼% notes due 2018 moving up to the mid-70s, ending around 75. He noted that earlier in the week, the bonds had traded in the high 60s, "so in the past couple of days, they're probably up around 5 or 6 points.

"There were a lot of comments [Thursday] by Benmosche" - a respected former CEO of Metropolitan Life Insurance Co. who took the helm of troubled AIG on Aug. 10 - "about the plans that he wants to do - he's going to repay the [government] loans, and he's not going to sell businesses on the cheap [to raise cash for loan repayment] - he's going to sell them for the right price. These were positive comments" that helped the bonds, both Thursday and again on Friday, the trader said.

At another shop, a trader saw AIG's 6¼% bonds due 2037 trading at 40 bid, versus 38 on Thursday, "a nice 2 point pop," on volume of $9 million. One of the day's most actively traded issues, he said, was AIG's 5.60% notes due 2016, which moved up to 64½ bid, up from 63 on Thursday, on volume of $20 million. AIG's 4 7/8% notes due 2010, on the other hand, were up "just a measly 1/8 point" to 933/4, on $12 million traded.

RBS hybrids get rocked

Also among the financials, the trader saw Royal Bank of Scotland Group plc's 7.64% hybrid preferred securities due 2099 as one of the day's active issues, with the Edinburgh, U.K.-based banking company's issue falling to 43 bid versus 48½ on Thursday.

"They got whacked," the trader said, whole noting that the company's ADR shares were actually up 33 cents in NYSE trading, so "I don't know why they would be down so significantly, and on $15 million of [bond trading] volume - certainly nothing to sneeze at."

A no-deal week

The primary market passed the week to Friday with no new issues pricing.

That's the way things are apt to remain during the two-week run-up to the three-day Labor Day holiday in the U.S., sources counsel.

"We could see a deal next week, but I doubt it," a syndicate banker said.

"The primary market is likely through for the summer.

"We've seen a nice four-day rally in equities, while high-yield has flagged a little," the banker remarked.

"Trading volumes were light; we saw some of the lightest trading days of the year.

"Today, however, the market is quite firm."

A pulled deal and an outflow

The only news bearing upon the primary market to surface during the past week was negative.

On Monday Dole Food Co., Inc. postponed a $325 million offering of seven-year senior secured notes due to market conditions.

Then on Thursday AMG Data Services reported that the high-yield mutual funds saw their first outflow in eight weeks: negative $90 million for the week to Aug. 19.

However market sources declined to make heavy weather out of either event.

As for the Dole postponement, an informed source reflected Friday that Dole is a very rate-sensitive, opportunistic issuer.

Dole launched its deal on a Friday (Aug. 14), and intended to price it the following Monday, which was a questionable tactic, the source commented.

"Then on Monday stock futures were down 150 points and the high-yield market felt like crap," the source added.

"The rate backed up on them at least 50 basis points, and they decided that they did not want to go forward."

As to the $90 million outflow reported Thursday, market sources were characterizing it Friday as "flat."

"Of the accounts we talked to during the week, some had seen some outflows and some had seen some inflows," a banker said.

Earlier in the week one high-yield mutual fund saw its biggest daily outflow for the year so far, according to an asset manager from the fund in question.

The banker who spoke Friday said that may not have been a totally isolated incident: a few other accounts may have seen their biggest year-to-date outflows during the May 17 week, the source allowed.

The fund manager who spoke to Prospect News specified that the year's biggest daily outflow occurred on Tuesday.

That was the day after a significant global sell-off in stocks, which saw the major U.S. indexes drop by amounts greater than 2%.

A trader from the high-yield mutual fund, commenting Friday that there have clearly been outflows, suggested that there has been a little market timing going on.

"September and October traditionally are not very good months in the high yield," the trader said.

"And based on the fact that we are up for the year, to the tune of 40%, there is bound to be some market timing." (The trader referred to the year-to-date return posted by the Merrill Lynch High Yield Master II Index).

Looking to September

With no deals pricing during the Aug. 17 week, at Friday's close issuance remained at slightly more than $83.6 billion in 195 junk-rated dollar-denominated tranches, according to Prospect News data.

Although the remainder of August is expected to produce little, if anything, to add to that total, September will likely be another story, sources say.

"I think September is going to be gangbusters," a banker said on Friday, adding that all the dealers seem to have new junk offers teed up for September.

"It's apt to be much like what we saw earlier in the summer, when there was just a ton of deal-flow," the banker said.

This source expects to see around $15 billion in each of the three coming months - September, October and November.

"Of course, it's contingent upon whether the market holds up," the banker said.

"But given the rebound we saw after Monday's precipitous drop, things still look pretty good."

The waiting game

Although the dealers profess little hope that any deals will surface before Labor Day, conversations during the Aug. 17 week were rife with "should have been," "could have been" and "might have been" deals.

Companies that had been contemplating a mid-August pass at the primary decided to step away from the on-deck circle and watch instead from the sidelines, sources say.

"The brief sell-off we saw starting a week ago scared a few issuers," said a sell-side source.

"But as things improve I think they'll be more willing to hit the bid."

Were those issuers correct to wait? Prospect News asked this official.

"It's questionable," replied the sell-sider.

The official conceded that rates did indeed back up - perhaps 50 basis points or more - early in the past week.

Rates might come back down in September, or they might not, the source pointed out.

And had any of those potential issuers elected to come during the past week they would have enjoyed the full attention of the market, whereas the September calendar is expected to be a lot busier, the official added.

"Then you will be competing with a lot of other issuers, and the accounts will have a lot of other choices," the sell-sider said.

"We've seen a nice little rebound over the past four days. So maybe issuers were correct to wait. "But if the AMG flows remain flat over the next couple of weeks, as they were this week, there may not be as much hot money chasing these deals in September."

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