Downsized Fidelity two-part issue prices; deals firm in secondary, though Tronox, Skilled off

By Paul Deckelman and Paul A. Harris

New York, July 8 - Fidelity National Information Services, Inc. priced a downsized $1.1 billion two-part offering of seven-year and 10-year notes on Thursday. However, the company's mega-deal came to market too late in the session for any kind of secondary dealings.

The domestic primary market was otherwise quiet, while on the international side, price talk emerged on deals being marketed by German borrowers Continental AG, a tire manufacturer, and Oxea GmbH, a chemical company. The latter deal, consisting of dollar- and euro-denominated notes, is expected to price during Friday's session.

In the secondary market, prices were generally seen on the firmer side, except for specific names that had bad news out such as Tronox Worldwide LLC, which plunged after its parent company filed a bankruptcy reorganization plan, and Skilled Healthcare Group Inc., which traded down in response to Wednesday's huge damage award against the Foothill Ranch, Calif.-based nursing home operator, a verdict that has opened up the possibility that the company could be forced into bankruptcy.

As usual, there was brisk activity in Gulf of Mexico oil spill disaster names BP Capital Markets plc, Anadarko Petroleum Corp. and Transocean Inc., all on the upside, and this time, even innocent victim ATP Oil & Gas Corp.'s recently embattled bonds were seen moving up.

Junk funds lose $166 million

And as trading was winding down for the session, participants familiar with the Lipper FMI weekly high-yield mutual fund-flow numbers compiled by AMG Data Services of Arcata, Calif. - considered a reliable barometer of overall junk market liquidity trends - said that in the week ended Wednesday, some $166 million more left those funds than came into them.

That amount trimmed flows to just $93 million for the year to Wednesday's close for funds that report to Lipper-AMG on a weekly basis, according to a market source.

Meanwhile, bank loan mutual funds saw $93 million of inflows, and high-grade corporate bond mutual funds saw $896 million of inflows.

In keeping with color from the buyside that money is flowing into taxable bonds and out of stocks, equity funds sustained nearly $11.6 billion of outflows during the most recent week, trimming year-to-date flows to that asset class to slightly more than $21.2 billion.

The most recent week was the second consecutive outflow on top of the $332.44 million cash exodus from high-yield mutual funds seen in the previous week ended June 30.

These back-to-back negative flows do not appear to be having a dramatic impact upon the primary market, according to a sellside source who was close to Thursday's Fidelity National deal.

The buyside appears to have a substantial amount of cash to put to work, the sellsider remarked

The outflows had broken a two-week winning streak during which time about $1.66 billion of net inflows were recorded, including the $1.39 billion cash infusion seen in the week ended June 23 - believed to be the biggest inflow seen in the junk market since August 2003 and one of the largest inflows ever recorded, according to a Prospect News analysis of the figures provided by market sources.

Those two inflows, in turn, had stopped a six-week long slide, dating back to early May, which saw a combined net outflow of approximately $4.61 billion mount up, according to the analysis. And before that, there had been 10 straight weeks of inflows dating back to February and totaling over $4.44 billion, the analysis indicated.

That recent back-and-forth pattern, with several weeks of inflows alternating with several weeks of outflows, would seem to stand as a symbol for junk players' continued uncertainty about the chances of a strong market showing given current financial and macroeconomic conditions, at least since the strong bull run seen in the first four months of the year, which had yielded a robust primary and a sizzling secondary, seemed to fade.

With 2010 just a little past the halfway mark, inflows have now been seen in 16 weeks out of the 27 since the beginning of the year, while there have been 11 outflows - the most recent ones, as noted, and three other cash drains recorded in January and in February.

The outflow in the latest week cut the year-to-date cumulative total for the weekly reporting funds down to around $688 million, according to the analysis of the data, versus the roughly $854 million 2010 net outflow recorded the previous week. The funds hit their biggest year-to-date negative number for the year so far in the week ended June 9, with a cumulative deficit of $475 million, while their peak cumulative inflow total for the year was the approximately $4.09 billion recorded in the week ended April 28.

EPFR sees $113 million outflow

Another fund-tracking service - Cambridge, Mass.-based EPFR Global, whose methodology differs somewhat from AMG - meantime reported a $113 million outflow in the latest week.

That broke a three-week string of inflows reported by EPFR, including the previous week's tiny $4 million cash addition and before that, the enormous $1.1 billion cash infusion seen in the June 23 week.

Reflecting the difference between the ways AMG and EPFR calculate their respective fund-flow totals - EPFR includes results from certain non-U.S. domiciled funds as well as the domestic funds - the service's year-to-date net inflow total now stands at some $3.51 billion. That's down from last week's $3.62 billion and well below the peak inflow level of about $8.59 billion seen from the beginning of May onward after 10 straight weeks of inflows starting in late February.

Any and all cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

Fidelity National - a blowout

Fidelity National Information Services had the stage to itself during Thursday's session in the primary market.

The Jacksonville, Fla.-based financial services company priced a downsized $1.1 billion two-part senior notes transaction (Ba2/BB-). The overall size was lowered by $100 million, an amount that the company shifted to its bank deal.

Fidelity National priced a $600 million tranche of seven-year notes at par to yield 7 5/8%.

The yield printed at the tight end of the 7¾% area price talk.

The company also priced a $500 million tranche of 10-year notes at par to yield 7 7/8%.

The 10-year notes priced on top of price talk that had them coming 25 basis points behind the seven-year notes.

Bank of America Merrill Lynch, J.P. Morgan Securities Inc., Goldman, Sachs & Co. and Wells Fargo Securities LLC were joint bookrunners.

Proceeds, along with proceeds from the company's amended credit facility, will be used to repurchase shares of common stock and to pay down Metavante Technologies, Inc.'s credit facility. The company acquired Metavante in October 2009.

The Fidelity National transaction was a blowout, according to a source close to the deal.

Although the market buzz had the deal up to 10-times oversubscribed, the syndicate source said that that amount exaggerated the demand.

Nevertheless, the source added, the "big liquid deal" played to high-yield, high-grade, crossover and value accounts.

"It was a nice fit for everyone," the source added, noting that some of the demand was perhaps driven by accounts needing to own the deal for benchmarking purposes.

With respect to Fidelity National's upsized bank deal, the six-year term loan B (Ba1/BBB-/BB+) was increased to $1.5 billion from $1.4 billion and the pricing was lowered to Libor plus 375 bps from Libor plus 400 bps.

Also, the original issue discount firmed at 99, the rich end of the initial 98½ to 99 guidance.

German Friday

Only three deals remain on the active forward calendar heading into Friday.

All three prospective issuers hail from Germany, and all three are expected to complete their transactions before the Friday lights go down in Europe.

Conti-Gummi Finance BV, a financing unit of Continental, talked its €500 million minimum offering of five-year senior secured notes (B1/B) to yield 8¾% to 9%.

A €750 million deal size is expected, but it is possible that the company could upsize to as much as €1 billion, according to market sources.

Citigroup and Royal Bank of Scotland are the global bookrunners for the debt refinancing deal from the Hanover, Germany-based manufacturer and supplier of automotive parts.

Oxea talks two-parter

Meanwhile, Germany's Oxea set price talk for its €500 million equivalent offering of seven-year senior secured notes (B2/B+) on Thursday.

The dollar-denominated notes are talked to price with a 9½% yield. The euro-denominated notes are expected to price yielding 9¾%.

Deutsche Bank Securities, Morgan Stanley and JPMorgan are leading the offering.

Proceeds will be used to repay bank debt as well as to repay shareholder loans, to fund a distribution to shareholders and for general corporate purposes.

Finally, Phoenix PIB Finance BV, a financing unit of Germany's Phoenix Pharmahandel GmbH & Co. KG, is expected to price its €500 million offering of four-year non-callable senior notes (expected ratings B1/B-) on Friday.

However, no price talk surfaced during the Thursday session, sources say.

Deutsche Bank Securities heads the syndicate of banks leading the debt refinancing deal from the pan-European pharmaceutical wholesale, pre-wholesale and retail company.

Fidelity National issue not traded

Market participants noted that Fidelity National's big two-part deal came to market too late for any kind of secondary dealings.

One trader, while lamenting that the issuer and its underwriters had "kept tightening the price talk - they've taken [the issue] down to levels now where they've taken a lot of the upside out of it," still characterized the deal as going pretty well and predicted that it would be well-received.

It's "double-B, mid 7s [yield], that can probably tighten in to the low 7% area."

CKE seen stronger

The trader saw CKE Restaurants, Inc.'s new 11 3/8% senior secured second-lien notes due 2018 having firmed a little to the 99½ bid level, up from prior levels in a 98¼ to 98¾ context.

"We saw nothing but buyers," he said. "We couldn't find any retail sellers."

The Carpinteria, Calif.-based operator of such fast-food chains as Hardee's and Carl's Jr. priced $600 million of the bonds on Tuesday at 98.085 to yield 11¾%.

Other deals hanging in

The trader saw "some buyers" at around 101 bid for DynCorp International Inc.'s 10 3/8% notes due 2017, up ¾ point. The Falls Church, Va.-based defense contractor priced $455 million of the notes at par on June 29.

The new Case New Holland, Inc. 7 7/8% notes due 2017 were trading around 102¾ bid, 103¼ offered, up a point on the day. The Lake Forest, Ill.-based heavy equipment company priced an upsized $1.5 billion of those bonds at 99.32 on June 22 to yield 8%.

Market indicators stay on upside

Among established issues having no new-deal connections, a trader saw the CDX North American HY Series 14 Index rise by ¾ point on Thursday to 96 3/8 bid, 96 5/8 offered, this on top of its 11/2-point jump on Wednesday.

The KDP High Yield Daily index meantime improved by 22 basis points on Thursday to end at 70.72 after having gained 26 bps over the two previous sessions, including 12 bps on Wednesday. Its yield narrowed by 7 bps to 8.62% after having come in by 2 bps on Wednesday.

Advancing issues led decliners for a fourth consecutive session on Thursday, holding a better than seven-to-five advantage for a second straight day.

Overall activity, represented by dollar-volume levels, rose by 7% on Thursday, after having shot up by 52% on Wednesday, as the market gradually regained its stride after the Independence Day holiday hiatus at the start of the week.

A trader said that looking at things on a technical basis, "demand is well out-stripping supply, and it looks to be that way for a while. The [forward] calendar is virtually non-existent right now, and as long as equities keep going up, it's going to force people to continue to look around for alternatives" - and to find them in Junkbondland.

He said that if you were to look at the corporate market, "there isn't a lot of liquidity in the corporate market, and there's no yield in the corporate market, so anybody looking for yield is going to come here, and if that doesn't do it for them, they'll roll into equities and chase returns there."

But he said that high yield would doubtless remain very attractive for such investors. "If you can buy a double-B or a strong single-B high-yield name with an 8% or 9% or higher coupon at or close to par and just sit on it for the next six to 12 months, you're going to get anywhere from 4% to 8% just if it holds its price. If it goes up in price, your return is going to go up commensurate with that.

"I think people are looking at a pretty strong second half for high yield."

Acknowledging that "we'll have to see how it plays out," he further noted that right now, "with people talking the expected default rate down ... we're going to be faced with a scarcity of paper for the amount of cash that's sloshing around. Unless something truly bad happens in the economy, we could see spreads grind tighter over the course of the next six months."

Energy stays up there

Traders saw continued gains in the bonds of companies impacted by the BP oil rig disaster in the Gulf of Mexico on investor perceptions that progress is being slowly but surely made in international efforts to stop all leaking oil from the BP well about 40 miles off the Louisiana coast.

A trader said that BP's bonds, like its 7¼% notes due 2013 and its 4¾% notes due 2019, were each "holding steady to slightly higher," pegging each of those issues up ½ point on the day at 95½ bid and 89-90 bid, respectively.

He also saw the bonds of BP's 25% junior partner in the well, Anadarko Petroleum, up by perhaps ½ point on the day, with its 5.95% notes due 2016 finishing at 92.

The Woodlands, Texas-based Anadarko's paper, another trader said, looked up another 1 point to 1½ points. He quoted its 8.7% notes due 2019 at 100½ to 101½ after starting Wednesday's session at 97 to 98, "so they've had a pretty good run," up 3 points on Wednesday and an additional 1½ points on Thursday.

And the first trader saw ATP Oil & Gas' 11 7/8% second-lien senior secured notes - which have recently lagged the others on investor worries about the effects the government's deepwater drilling moratorium will have on the company's operations - having pushed "up a couple of points" to around the 72 level after having traded Wednesday in a 68 to 71 range.

The second trader suggested that "the energy sector could present some opportunities, especially the closer BP gets to putting the relief well in place" that will let the company siphon oil off from the leaking well. "That will at least let people begin to try and quantify what the risks are, not only for BP, Anadarko and RIG [Transocean], but to re-look at your drillers and anybody active in the gulf. So you could see energy paper catch a bid."

American Axle rolls along

Another gainer on the day was American Axle & Manufacturing Holdings Inc.'s bonds, which "moved up today," a trader said. He saw the Detroit-based automotive axle assembly manufacturer's 5¼% notes due 2014 gain several points in intraday dealings before coming down off its highs to close up a point at 85 bid, 86 offered.

"That one you normally don't see much movement in," the trader said.

Skilled Healthcare looking sickly

A trader saw Skilled Healthcare's 11% senior subordinated notes due 2014 actually trading around on Thursday at lower levels than they had held a week ago, when they last traded, but above the even lower levels at which the bonds had been quoted at on Wednesday in response to unfavorable legal news.

"Skilled Healthcare bounced a little" from Wednesday's low quote levels and from its opening on Thursday, coming back in line with a rebound in the company's shares.

He saw the notes trading in the 70 bid area; earlier, they had gyrated between a day's low of 66 and a high of 72 - with over $21 million showing on the Trace system, which he said was "maybe a quarter of the issue," all of it in round-lot transactions.

The bonds, he said were "all over the lot."

Those levels were well down from the 104 neighborhood in which those bonds had last previously been seen trading a week ago, back on July 1, but well up from quoted bid levels in the 35 to 50 range that were being bandied about the market on Wednesday, although no bonds were seen having traded.

A trader at another shop meantime said that there was "a lot of trade going on in the bonds." Given the deal's relatively small size, around $130 million total, "it's really going to whip around."

On the equity side of the fence, the company's New York Stock Exchange-traded shares were seen up 82 cents, or 53.95%, to close at $2.34, on volume of 9.22 million, over 40 times the usual turnover, rebounding solidly from the 75.6% plunge that they took on Wednesday; however, the stock price remains well below the $6.22 level it held before news of the verdict.

Those shares had nosedived Wednesday, and the company's bonds and bank debt had been quoted at sharply lower levels, after a California court ordered the company to pay $671 million - more than seven times its current market value - for failing to provide adequate staffing at its assisted-living facilities.

A jury, after hearing a seven-month long class-action suit against the nursing home operator, awarded the plaintiffs $613 million for statutory damages and another $58 million in restitution, and it could further sock the company for punitive damages, with that second phase of the proceedings set to begin next week.

The lawsuit, brought on behalf of some 32,000 patients at 22 Skilled Healthcare facilities in its home base of California, alleged that during the complaint period from 2003 to 2009, the company had violated a state statute mandating 3.2 nursing hours per patient per day.

Skilled Healthcare, in its response to the news, asserted that its facilities had been appropriately staffed and vowed to "vigorously pursue various post-trial motions," possibly including an appeal.

However, observers believe that the latter course may be difficult if not impossible for the company given that it has to post a bond for 150% of the final judgment in order to satisfy the typical bonding requirement to defer enforcement of a judgment while an appeal is pending. Liquidity is constrained, with just $94 million of a $100 million revolving credit facility available and, according to its most recent quarterly filing, only about $2.1 million of cash and cash equivalents on hand. "They don't have the liquidity to even post that bond," a trader declared.

Standard & Poor's noted the clash between the potential bonding requirement and the company's strained liquidity on Thursday in dropping Skilled Healthcare's corporate credit rating to CCC from B+ and its subordinated notes from B- to CC.

Also weighing in were analysts such as James L. Bellessa, Jr., a senior vice president and senior research analyst with D.A. Davidson & Co. in Lake Oswego, Ore., who warned that "considering the company's highly leveraged state and negative tangible book value" - its total debt-to-capitalization ratio stands at 62.5%, with nearly $450 million of debt on the books and a tangible book value of negative 54 cents per share - "we are hard pressed to see where management could secure sufficient capital to meet this [bonding] requirement."

In a research note on Thursday in which he downgraded Skilled Healthcare's shares to "underperform" from their previous status as a "buy," Bellessa noted that according to the company press release announcing the verdict, Skilled Healthcare's liability insurance coverage has already been exhausted for the policy years applicable to the case. With that in mind, Bellessa opined that "at this point, it is difficult for us to see how Skilled Healthcare will be able to pay the statutory damages awarded to the plaintiffs in the case or put up a bond to appeal, let alone pay any punitive damages yet to be handed down. Therefore," he cautioned, "the company may have to seek protection from its creditors through a bankruptcy filing."

Accordingly, he said that in addition to lowering its rating on the stock, Davidson is cutting its 12-to-18 month price target to $1.00 from the previous $9.00, "which reflects our assumption of an approximate 90% subjective probability the company will be forced into bankruptcy over this legal matter."

Skilled Healthcare did not respond to a call from Prospect News on Thursday seeking further comment.

New struggles for Sorenson

A trader said that Sorenson Communications Inc.'s 10½% senior secured notes due 2015 were languishing in the low 60s, around a 61-62 context, after having traded as low as the upper 50s - well down from the upper 60s context in which the bonds had recently traded.

The bonds of the Salt Lake City-based provider of communications products and services for the hearing-impaired have been under pressure lately after the Federal Communications Commission adopted what investors felt was a too-low reimbursement schedule for companies like Sorenson that provide video relay service to deaf people, allowing them to communicate via videophone with the help of a sign language interpreter.

"Not only do they have problems with the viability of their own business based upon the allowable rate they can charge," the trader said, "but now they've got competition from the new iPhone, in terms of its video ability that can let deaf people sign one another over the phone. It's another dent in their armor."

With worries about competition from such devices as iPhone added to concerns about the too-low video relay service reimbursement rates - Sorenson itself had warned the FCC in a May regulatory filing that a too-low rate could conceivably force the company into bankruptcy - "more and more people are starting to question the viability of the credit. There are fewer and fewer people that want to own it at these levels."

He said that the bonds had "worked their way down" to the 61-62 area from previous higher levels in the 60s last month, even dipping into the upper 50s for a while, "so we're getting back towards the lows."

Tronox takes a tumble

Chemical maker Tronox Worldwide saw its bonds drop 10 points or more after the company's parent filed its reorganization plan.

The Oklahoma City-based chemical pigments manufacturer was "the name of the day," proclaimed a trader who saw its 9½% notes due 2012 ending around 79½ bid, 80 offered, versus 90 at the opening and 92 at the close Wednesday.

Another source pegged the paper at 79 bid, 80 offered, down from 92 bid, 92½ offered.

Under the terms of the plan, unsecured creditors holding over $470 million in claims will receive 80% to 100% recovery. Secured creditors holding just $1 million in claims will be repaid in full.

Also, the company will set up trusts to deal with certain environmental claims, estimated to be as high as $5.2 billion. The trusts will be funded with up to $145 million in cash and other assets. And the trusts will have the right to receive 88% of recoveries related to litigation involving former owner Anadarko.

Anadarko purchased Kerr-McGee - Tronox's former parent - for $18 billion just a few months after Tronox was spun off in 2006. After Tronox filed for bankruptcy protection in January 2009, the company filed suit against both Kerr-McGee and its new owners in May 2009, claiming its parent had overloaded the spinoff with so much environmental liabilities that it had no choice but to file for Chapter 11.

Stephanie N. Rotondo contributed to this report

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