Toys 'R' Us, Aurora drive by with upsized deals; Sprint runs up on Q2; funds jump by $2 billion

By Paul Deckelman and Paul A. Harris

New York, July 26 - Geoffrey Giraffe jumped into Junkbondland on Thursday - or more properly, the well-known cartoon mascot's company, retailer Toys 'R' Us, Inc., did, and it ended up wheeling out a shopping cart full of fresh cash after pricing an upsized, quick-to-market $450 million offering of five-year notes.

Also dropping by was Aurora USA Oil & Gas, Inc., which brought a quickly shopped $165 million add-on to the existing 2017 bonds that it sold earlier this year. That issue was also upsized before it priced, and both deals came to market too late in the day for any kind of secondary dealings.

Away from the $615 million of new paper that actually priced, the primary was quiet. There was word of just one other potential transaction percolating - broadband operator WaveDivision Holdings LLC was said to be laying the groundwork for a $250 million bond deal to help fund its own acquisition, although that's not expected to happen before the end of this month or maybe the beginning of August, high-yield syndicate sources said.

Among recently priced deals, Pantry, Inc.'s eight-year notes were seen to have moved up solidly when they began trading around.

QR Energy LP's new eight-year notes were quoted a little higher, but only in very limited dealings.

Away from the new deals, Sprint Nextel Corp.'s bonds and shares zoomed, despite the wireless provider's wider second-quarter loss, as it reported revenue gains and raised its full-year adjusted earnings estimates.

Statistical market performance measures were better across the board after having been mixed on Wednesday and lower the two sessions before that.

Meanwhile, another indicator of sorts - flows of cash into high-yield mutual funds and exchange-traded funds, a key barometer of junk market liquidity trends - were strongly higher for a seventh straight week, with no end yet in sight.

AMG gains $2 billion

As Thursday's session was drawing to a close, participants familiar with the weekly AMG high-yield mutual fund flow statistics said that in the week ended Wednesday, $2.01 billion more came into those funds than left them.

It was the largest weekly inflow seen so far this year, surpassing the previous high of $1.9 billion of fresh cash that came into the funds in the week ended Jan. 25. It was, in fact, the biggest inflow the funds have seen since the week ended Oct. 26, 2011, when a whopping $4.25 billion more came into the funds than left them, the biggest inflow AMG has ever recorded since it began tracking fund flows in 1992.

It was the seventh consecutive strong showing by the junk mutual funds and ETFs in as many weeks reported by Arcata, Calif.-based AMG, a unit of Thomson Reuters' Lipper/FMI division. It followed the $821 million cash addition seen in the previous week, which ended July 18.

Those seven inflows have totaled about $7.83 billion, according to a Prospect News analysis of the figures, representing a continuing solid turnaround from the pattern of weakness that had been prevalent in late May and early June, when the funds lost about $6.43 billion over the space of four weeks, including two huge cash hemorrhages each in excess of $2 billion, according to the analysis.

On a year-to-date basis, Lipper said that latest inflow pulled the cumulative net inflow figure up to $26.45 billion, including the ETFs. The year-to-date figure counts monthly reporting funds as well as the weekly reporters, the company said. Excluding those ETFs and just tallying the mutual funds, the year-to-date net inflow stood at $19.5 billion.

Inflows have now been seen in 25 out of the 30 weeks since the start of the year against just five outflows.

EPFR: Funds up $2.21 billion

A rival fund-tracking service, Cambridge, Mass.-based EPFR Global, reported that in the week ended Wednesday, about $2.21 billion more came into the funds it follows than left them, confirming the recent turnaround in the fund-flow trajectories. That followed the previous week's $1.32 billion cash injection.

As was the case with the AMG Lipper numbers, EPFR - which uses a different methodology, but whose figures usually point in the same direction as AMG - reported that this was the seventh consecutive large inflow number. Inflows have totaled an estimated $11.65 billion during that stretch.

As was the case with AMG, those inflows followed four straight weeks of sizable outflows in late May and early June.

The latest week's inflow lifted EPFR's year-to-date total return to $41.6 billion, the company said. It has reported 25 inflows this year versus five weeks in which there were outflows.

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

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new-deal borrowing binges seen in both 2009 and then in 2010, as well as the robust secondary market seen both years, and continued to be the driver behind 2011's near-record issuance.

Those fund flows are also seen as the key element behind the high-yield secondary market's strong performance so far this year versus other fixed-income asset classes and its relatively active new-deal pace, with issuance volume running about 15% below last year's year-to-date totals.

Toys 'R' Us grinds rate lower

The drive-by market remained active on Thursday. Two quick-to-market issuers, each bringing a single tranche, raised a combined total of $613 million.

Toys 'R' Us priced an upsized $450 million issue of 10 3/8% five-year senior notes (B3/CCC+) at 99.033 to yield 10 5/8%.

The buzz in the market was that the book was two times oversubscribed, according to a high-yield mutual fund manager.

However, a debt capital markets banker asserted that demand for the new notes was probably greater than two times the issue size given that it priced at the tight end of the 10 5/8% to 10¾% revised yield talk, which had tightened from the initial 10¾% to 11% talk.

And initial conversations took place at 11% to 11¼%, the banker recounted.

J.P. Morgan Securities Inc. and Goldman Sachs & Co. had the physical books for the deal, which was upsized from $350 million. Bank of America Merrill Lynch and Deutsche Bank Securities Inc. were the bookrunners. JPMorgan will bill and deliver.

The notes, which come with 2.5 years of call protection, will be redeemable on and after Feb. 15, 2015 at 105.188.

Some market watchers expected a five-year bullet, according to a sellside source.

However, the source continued, the equity sponsors have had Toys 'R' Us in their portfolio for seven years and are unlikely to want to be locked in for another five.

In July 2005, the Wayne, N.J.-based toy retailer was taken private by Bain Capital, KKR and Vornado.

Toys 'R' Us plans to use the proceeds from Thursday's upsized deal to redeem $400 million of its outstanding 7 7/8% senior notes due in 2013 and for general corporate purposes.

Aurora taps 9 7/8% notes

Elsewhere Thursday, Australia's Aurora USA Oil & Gas priced an upsized $165 million add-on to its 9 7/8% senior notes due Feb. 15, 2017 (Caa1/CCC+) at 101.5.

The reoffer price, which came on top of price talk, rendered a 9.364% yield to worst.

The deal was upsized from $100 million.

Credit Suisse Securities (USA) LLC and UBS Securities LLC were the joint bookrunners.

Proceeds will be used to fund capital expenditures for development of the company's holdings in the Eagle Ford shale trend (together with other sources of liquidity) and for other general corporate purposes, including financing potential future acquisitions of oil and natural gas interests in its core areas.

'Drive-by kind of market'

Thursday's business aside, the active forward calendar is thin indeed, with just one dollar-denominated offering onboard. Crescent Resources, LLC started a roadshow on Wednesday for its $325 million offering of seven-year senior secured notes (confirmed Caa2/expected B+) via Jefferies & Co., Credit Suisse and JPMorgan.

However, the drive-by market will likely stay active, a senior syndicate banker said on Thursday. In the 16 sessions since the Fourth of July, 26 quick-to-market issues have priced for an average of nearly two deals per day.

Nor is there any reason to expect a major let-up in that business during the Dog Days of August, the banker said.

Meanwhile, a buyside source said that the capital markets have begun to gear up for a significant uptick in sponsor-related activity post-Labor Day.

"There is just a lot of cash out there," the buysider said late Thursday.

Late deals are no-shows

In the secondary market, traders said that they had not seen any signs of either the Aurora USA Oil & Gas offering nor of the Toys 'R' Us deal owing to the relatively late hour at which both of those transactions priced and the fact that, in the words of one market participant, "people were running out early," typical for a summer trading session with no compelling reason to stay the full day.

The proceeds of the Wayne, N.J.-based toy, game and children's products retailer's quick-to-market new deal will be used to take out its $400 million of 7 7/8% notes due 2013. Those were seen having gained 2 5/8 points on the day, with a market source seeing them go home at 104 7/8 bid, although volume was relatively light, with just $3 million of the existing bonds changing hands.

A second market source pegged the bonds as high as 105 bid, calling that up 2 points.

Pantry pops in secondary

Among the deals that priced on Wednesday, a trader said that Panty's new 8 3/8% notes due 2020 "were hugging 102."

He saw the bonds trading in a bid range of 101¾ to 1021/4.

That was up solidly from the par level at which the Cary, N.C.-based convenience-store chain operator's $250 million offering priced on Wednesday. They priced too late that day for any kind of an aftermarket at that time.

He also saw QR Energy/QRE Finance Corp.'s 9¼% notes due 2020 bid at 99 but said that he saw it "first thing this morning" and saw nothing in the new credit subsequently.

"I never saw an offering," he added, "so I couldn't tell you where that thing's going to be."

The Houston-based upstream master limited energy partnership priced its $300 million deal late Wednesday at 98.62 to yield 9½%.

Both deals were scheduled forward-calendar offerings rather than opportunistically timed drive-bys.

Traders meantime did not see Wednesday's quickly shopped 6½% notes due 2020 that Warsaw, Ind.-based orthopedic medical device maker Biomet, Inc. had priced at par. That $1 billion issue - almost doubled in size from an originally announced $550 million - had been quoted in Wednesday's aftermarket having gotten as good as 101 bid, 101¼ offered.

Sprint is a star

Away from the new deals, traders said that the big name of the day, far and away, was Sprint Nextel. The company's bonds and those of its Sprint Capital Corp. subsidiary firmed smartly after the Overland Park, Kan.-based No. 3 U.S. wireless operator reported relatively favorable second-quarter results.

One trader said that Sprint Capital's 6 7/8% notes due 2028 "were the big volume leaders," seeing more than $33 million of those bonds having changed hands by the close, tops among the purely junk-rated issues.

He saw the bonds up 3¼ points, going home at 86¼ bid; there were even some smallish odd-lot trades in the issue as high as the 89 area, well up from Wednesday's close at 83 bid.

The trader saw the Sprint Capital 8¾% notes due 2032 gaining 3¾ points to close out at 96¼ bid after hitting highs around the 99 mark, versus Wednesday's finish at 921/2. He saw more than $22 million of those bonds having traded.

He said that Sprint Capital's 6.9% notes due 2019 were "the last of the heavy-volume ones," with more than $20 million of that paper moving around. He saw the bonds gaining 3 points on the day to go out at 99 1/8 bid, a little down from their intraday peak levels near 101½ bid but well up from the 96-area at which those bonds had closed on Wednesday.

Parent Sprint Nextel's own paper was less popular. For instance, its 6% notes due 2016 only traded around $10 million in rising to 99 bid, off from the intraday peak levels around 102 but up solidly from Wednesday's close around 97¾ bid.

Sprint "had great numbers," a second trader said in explaining the strong activity in the 6 7/8% notes, which he saw going home trading between 86 and 87 bid and with more than $35 million trading.

The numbers weren't actually all that great except on a relative basis. Sprint's second-quarter loss actually widened to $1.37 billion, or 46 cents per share, from its year-ago red ink of $847 million, or 28 cents per share. The loss was wider than the roughly 40 cents per share that Wall Street was expecting.

However, the notion of Sprint losing lots of money has been practically built in to its bond and share prices. The second quarter was the 19th consecutive quarter in which Sprint, struggling to stay competitive against larger wireless rivals AT&T Mobility and Verizon Wireless, has ended in the red.

But with the bar set low on the financial community's expectations for the company, the latest results did give investors a few things to smile about.

For one thing, revenues of $8.84 billion were actually up 6% from a year ago and beat the Street's average estimates of around $8.72 billion.

Sprint also said that it was making progress in getting customers of the old Nextel Communications - which Sprint bought in 2005 but which it is now shutting down as obsolete - to switch over to Sprint service instead of jumping to Verizon or AT&T; some 60% of those leaving Nextel during the quarter migrated over the Sprint.

It also reported better progress than its rivals in signing up new Apple iPhone customers.

All told, Sprint raised its forecast for adjusted operating earnings for the full year by 18%.

Sprint's New York Stock Exchange-traded shares were up in tandem with the bonds, gaining as much as 22% in intra-day dealings before going home at $4.05, up 68 cents on the day, or 20.18%. Volume of nearly 305 million shares was almost six times the norm.

A slow session

Apart from what little interest there was in the recently priced issues, plus the news-driven activity in Sprint Nextel, a trader said that there simply wasn't much going on.

"Over here, we're dealing with a few customers out on vacation - they're not just out for a day, they're out multiple days - so I think we're running into the summer 'family road trip' time, with desks being half-filled," the trader said.

Junk was seen taking its cues from equities, which were strongly up after the head of the European Central Bank said his organization is ready to do "whatever it takes to preserve the euro."

The bellwether Dow Jones industrial average notched its second straight gain to end up 211.88 points, or 1.67%, at 12,887.93, while the S&P 500 and Nasdaq Composite each recorded their first gains after three straight retreats. They rose 1.65% and 1.37%, respectively.

Back in Junkbondland, statistical measures of market performance also rose across the board after having been mixed on Wednesday and universally lower on both Monday and Tuesday.

A trader saw the Markit Group CDX North American Series 18 High Yield index rise by 11/16 point on Thursday to end at 96 1/16 bid, 96 5/16 offered. It had edged up by about 1/16 point on Wednesday, breaking out of a three-session slump.

The KDP High Yield Daily index posted its first gain after four defeats on Thursday, adding on 5 basis points to close at 73.36, in contrast to Wednesday's 3-bps downturn.

Its yield came in by 3 bps to end at 6.40%. On Wednesday, it had declined by 1 bp, its first narrowing after three straight sessions on the rise.

The widely followed Merrill Lynch U.S. High Yield Master II index also improved, breaking out of a three-session slump on Thursday. It rose by 0.144%, versus Wednesday's retreat of 0.037%.

The latest gain lifted its year-to-date return to 8.396% from Wednesday's 8.24%, though it remains below Friday's 8.457%, the peak level for 2012 so far. But the index's recent levels remain the strongest they've been since the end of 2010, when the market measure returned 15.19%.

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