Sappi prices $700 million two-part deal; Newfield stays strong; ATP improves on funding news

By Paul Deckelman

New York, June 20 - Things were heating up in Junkbondland on the first day of summer on Wednesday.

Primary action picked up, with high-yield syndicate sources hearing of an upsized and restructured $700 million two-part pricing of senior secured bonds from a unit of global coated paper giant Sappi Ltd. Those new bonds, however, came to market too late in the day for any kind of secondary dealings.

Standard & Poor's, as expected, cut its ratings on Choice Hotels International Inc., kicking the lodging company's ratings down to the junk side of the fence, even as it shops around what is now a split-rated $400 million issue of notes.

Moody's Investors Service put its rating on the company - for the moment still at investment-grade - under scrutiny for a possible downgrade, with both ratings agencies spooked by the company's plans to take its bond deal proceeds to pay out a big dividend to its shareholders. That deal is expected to price on Friday off the junk bond desks of the various involved banks.

A split-rated deal that priced on Tuesday for Newfield Exploration Co. continued to trade at a big premium to the par level at which the energy company's bonds came to market. Activity in the new credit, which attracted junk interest as well as crossover high-grade players, was brisk for a second straight session.

Zayo Group LLC's big two-part bond deal, which wowed the market when it priced a week ago, was reported to still be hanging onto the very handsome gains the telecommunications firms' new paper racked up after pricing.

In the secondary market, ATP Oil & Gas Corp. was the busiest purely junk name, posting gains on the news that the offshore energy exploration and production company had successfully done a $35 million convertible debt sale, giving it a fresh shot of working capital.

Junk generally was higher on the day, on par with gains in the major high-yield market indexes.

Sappi upsizes two- part deal

There was one pricing on Wednesday.

Sappi Papier Holding GmbH priced a quick-to-market $700 million two-part offering of senior secured notes (Ba2/BB), high-yield syndicate sources said. That deal was upsized and restructured from an original one-tranche $300 million transaction.

The issuer priced $400 million of 7¾% senior secured notes due 2017 and $300 million of 8 3/8% senior secured notes due 2019, both at par, in line with pre-deal market price talk.

Market participants had heard price talk on the five-year notes between 7¾% and 8%, and talk for the seven-year paper was talked between 8¼% and 8½%. The five-years priced at the tight end of talk, while the seven-years came to market right in the middle of their anticipated range.

The company - a Gratkorn, Austria-based subsidiary of giant international coated paper and chemical cellulose manufacturer Sappi Ltd., of Johannesburg, South Africa - originally announced plans on Wednesday morning to sell $300 million of the 2017 notes.

However, that deal was first restructured into a two-part affair, with the addition of the seven-year tranche, and then the original five-year piece was upsized.

The company said that it would use the proceeds of that deal, plus cash on hand, to refinance in a separately announced tender offer up to $300 million of its outstanding bonds due 2014, $300 million of 12% senior secured notes and €375 million of 11¾% senior secured notes. It said the dollar-denominated notes would have a higher acceptance priority than the euro notes.

As the day wore on, market sources heard that the company had twice expanded the size of the tender offer, making the restructuring and upsizing of its bond deal a must.

The deal was brought to market via joint global coordinating book-running managers J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and RBS Securities Inc.

Credit Agricole Securities (USA) Inc., Standard Chartered Bank and UniCredit Bank were joint lead managers and bookrunners.

The Sappi deal hit the tape too late in the session for any kind of aftermarket action,

It was the first dollar-denominated, purely junk-rated deal seen so far this week, following the upsized, euro-denominated issue of five-year senior notes seen on Monday from German cable and broadband operator Kabel Deutschland GmbH and the pair of split-rated dollar deals that priced on Tuesday, from energy concern Newfield Exploration Co. and from real estate investment trust DDR Corp.

Choice ratings chopped

Among the deals in the new-issue pipeline, Choice Hotels' planned $400 million offering of 10-year senior notes took a big step down to full-fledged junk-bond status on Wednesday, as Standard & Poor's assigned a BB rating to its upcoming deal and cut the Silver Spring Md.-based lodging franchisor company's existing ratings by several notches as well. The corporate credit rating and the rating on the company's existing $250 million of senior unsecured notes due 2020 were sliced to BB+ from BBB.

The ratings agency additionally said that once the upcoming note deal closes, it expects to further cut the rating on the existing bonds again, to BB, putting it in line with the new paper.

S&P cited Choice's announced plan to pay a significant $600 million debt-financed special dividend to shareholders. That dividend would be paid using the proceeds from the upcoming bond deal and from new bank debt financing that the company expects to line up, which is to include $150 million of term loan debt and a $200 million revolving credit line.

The agency said those intentions "signal management's willingness to drive balance sheet leverage above the company's stated financial policy goal."

Moody's Investors Service, which rates the company's current bonds at Baa3, cited similar concerns in its decision to put Choice's ratings under scrutiny for a possible downgrade.

Those qualms about the big dividend deal and the likely downgrading of the firm's levels to junk from their nominally investment-grade status at the time the bond deal was announced were cited by junk market sources who said that the new bond deal - with Deutsche Bank Securities Inc. and Wells Fargo Securities LLC as the active bookrunners and Bank of America Merrill Lynch, Goldman Sachs & Co. and J.P. Morgan as passive bookrunners - will likely price off the junk desks of the respective banks when it comes to market on Friday.

An investment-grade source at one of those companies also said on Wednesday that it was "probably junk."

Talking the deals

Away from Choice Hotels, which is expected to price on Friday, two other prospective bond deals were being actively shopped around, also for likely pricing at the end of the week.

P.F. Chang's China Bistro, Inc., a Scottsdale, Ariz.-based operator of Asian-themed restaurants in a number of states, hit the road on Monday to market its $300 million offering of eight-year notes, the proceeds of which will go to partially finance the acquisition of the company by Centerbridge Capital Partners.

That Rule 144A for life deal is being brought to market via Deutsche Bank, Wells Fargo and Barclays Capital Inc.

Engility Corp. - currently a unit of New York-based defense contractor L-3 Communications Holdings Inc. - began marketing its $250 million offering of seven-year senior notes to potential buyers with presentations last week in Boston and New York.

Proceeds from that bond issue, together with the proceeds of a new senior secured credit facility, will all be used to pay a special cash distribution to L-3 as part of Chantilly, Va.-based Engility's coming spin-off from L-3.

The 144A deal, sold with registration rights, will come to market via Bank of America Merrill Lynch, Barclays, Credit Agricole and Sun Trust Robinson Humphrey Inc.

There were also some unconfirmed rumblings that WOW! Internet Cable & Phone was going to imminently launch its planned $1.02 billion of eight-year senior notes, part of the financing package for the Denver-based internet, cable and phone service provider's pending $2.2 billion purchase of Knology.

That deal will be brought to market via Credit Suisse Securities (USA) LLC, Morgan Stanley Senior Funding Inc., RBC Capital Markets Corp., Sun Trust Robinson Humphrey and Bank of Tokyo -Mitsubishi- UFJ Ltd.

Newfield holds gains

Among deals recently priced, a trader said that the new 5 5/8% notes due 2024 brought to market on Tuesday by Newfield Exploration were "holding in nicely" in a bid range of 102 to 1021/4.

That's around the levels where the Woodlands, Texas-based oil and natural gas exploration and production company's bonds traded on Tuesday, after the upsized $1 billion split-rated (Ba1/BBB-/BB+) issue priced at par.

Unlike some relatively lower-yielding split-rated issues that have recently come to market, but did not attract much interest from purely junk investors - i.e., the new deals from Newark, Del.-based education finance company SLM Corp. or Ford Motor Credit Co. LLC, the auto-loan financing arm of Dearborn, Mich.-based automotive giant Ford Motor Co. - Newfield's deal managed to attract attention from junk players as well as the high-grade crossover types.

A junk market trader said that some $57 million of the new bonds changed hands - below the more than $80 million that the new deal knocked down on Tuesday right after pricing, "but still fairly active."

Another trader said, "The last couple of deals have done very well," meaning Newfield and last week's two-part megadeal from Zayo Group.

Newfield, he said, "did really well," at 102 1/8 bid, 102¼ offered, "pretty good for a 5 5/8% coupon."

The quickly shopped deal was a classic case of an issuer being in the right place at the right time - and having the right deal to offer investors.

The company's vice president of investor relations, Steve Campbell, told Prospect News on Wednesday that market conditions were ideal on Tuesday. "It was good timing - good in equities, commodities, all of the markets were up."

He added that the company "is always looking at the market."

The sale was increased in size by $250 million and priced at the tight end of both whispered and revised guidance.

"We initially went out with the $750 million, but the (investor) appetite was there, so we decided to do $1 billion," Campbell said.

Commenting on the somewhat usual 12-year maturity, the Newfield executive said that having the bonds mature in 2024 rather than opting for the move conventional 10-year tenor "was decided upon because if you look at [Newfield's] overall debt structure, it's every two years. It just made sense."

All told, he said, "We thought it went great."

At the Gimme Credit independent research service, senior analyst Evan Mann opined, "We continue to view NFX as a stable credit with a foothold on an investment grade rating."

However, he cautioned that the company's willingness to use debt to finance strategic acquisitions would likely delay any possible ratings upgrade and added that without such an upgrade, or an acquisition of the company by a larger competitor, "upside is limited over the near term."

Zayo continues to zoom

A trader said that last week's 10 1/8% unsecured senior notes due July 2020 from Zayo Group just continued to add to their gains.

"Holy moly!" he exclaimed in quoting the Louisville, Colo.-based internet infrastructure's bonds as having now pushed above the 105 mark, at 105 bid, 105½ offered.

He saw the new 8 1/8% senior secured notes due January 2020quoted at bid levels between 104¼ and 1041/2, but said he saw no offerings on Wednesday.

He said the two Zayo tranches, which included $750 million of 8 1/8% notes and another $500 million of the 10 1/8s, continued moving "up, up and up."

The success of Zayo's three-times oversubscribed, but crisply executed deal, paired with the good showing by Newfield, could mean "a change in psychology," which up till now has been sagging.

Market measurers stay strong

A trader saw the Markit Group CDX North American Series 18 High Yield Index up by 7/16 of a point on Wednesday, at 95 7/16 bid, 95 5/8 offered, on top of Tuesday's three-quarters of a point rise.

The KDP High Yield Daily Index posted its fifth straight gain, jumping by 30 basis points on Wednesday to end at 72.97. This was on top of Tuesday's 28 bps advance. Its yield fell by 9 bps, to 6.82%, on top of Monday's 9 bps drop.

And the widely followed Merrill Lynch U.S. High Yield Master II Index was up for a sixth straight session on Wednesday, gaining 0.289% on top of Tuesday's 0.442% rise.

The latest gain lifted its year-to-date return to 6.331% from Tuesday's 6.025% reading - its highest level and its first time over the psychologically significant 6% mark since the 6.19% level seen on May 15. However, the year-to-date return remains below its peak level for 2012, the 6.8% set on May 7.

ATP up on financing news

The most active purely junk issue of the day was ATP Oil & Gas' 11 7/8% second-lien notes due 2017, with over $48 million changing hands.

Those bonds, which traded on Tuesday in a 45-to-47 context, opened Wednesday around 49 bid, pushed as high as the 50 mark and then were seen going home around 49, an estimated 1.5 to 2-point gain on the day, a market source said.

A trader at another desk saw the bonds going out at 49.

The Houston-based offshore oil and natural gas exploration and production company's bonds pushed up after ATP announced that it had sold a $35 million of 8% unsecured convertible note due in December 2013 and a warrant to purchase company common shares in a private placement transaction involving a single, unidentified institutional investor.

ATP plans to use the proceeds from the deal for working capital.

According to ATP's most recent 10-Q quarterly filing with the Securities and Exchange Commission covering the period ended March 31, the issuer, unlike many other high-yield players does not have a revolving credit facility in place that it can draw on to meet such needs. Its $2.115 billion of total debt at the end of the quarter consisted of the nearly $1.5 billion of bonds, $353 million of term loan debt and $303 million of debt under a separate term loan facility secured by its ATP Titan undersea drilling rig vessel and certain other infrastructure assets.

The company said in the 10-Q that as of March 31, it had a working capital deficit of $267.9 million.

In order to "preserve [its] development momentum in such a negative working capital environment," it had increased its term loans - most recently in March with a $155 million expansion - issued convertible perpetual preferred stock, granted net profits interests in some of its wells to certain of its vendors, sold NPIs and dollar-denominated overriding royalty interests in its properties to its investors and entered into prepaid swaps against future production that provided cash proceeds to ATP at closing. It engaged in such short-term cash-management tactics in 2011 and has continued such measures so far this year.

A high-yield market source said that he heard no rumblings at all that ATP might be in the market for a larger or more permanent financing transaction, such as another junk bond deal or term loan tranche or revolver, reasoning that the $35 million it generated from the convertible deal should be enough to tide the company over and meet its needs in the near-term.

A trader said: "Let's face it. If they can stick it out" with such short-term measures until the company starts generating sufficient revenues from one or more of its Gulf of Mexico undersea wells to meet its working capital needs, "oil [prices] are going to come back, right? Sooner or later."

Under the terms of the private placement deal, principal and interest on the convertible note are payable in four quarterly installments, with ATP having the option to pay the installments in cash, in stock shares or a combination of the two. The note is convertible in whole or in part at any time at the holder's option into common stock at an initial conversion price of $4.46 per share, Tuesday's closing price.

The warrant, meantime, permits the purchase of up to 3.923 million shares of ATP within the next 5.5 years at an initial exercise price of $6.69 per share, or a 50% premium over Tuesday's price. It may be exercised by the holder in whole or in part at any time after the six-month anniversary of the date of issuance.

The strike price could be adjusted if, on the eighteen-month anniversary of the closing date of the transaction, the exercise price of the warrant is greater than the then-current market price of the common stock, subject to certain conditions.

The prospect of equity dilution through the possible conversion of the 8% note or the issuance of up to nearly 4 million shares through exercise of the warrant was not welcomed on Wall Street, where ATP's Nasdaq-traded shares traded down as much as 4.4% on an intraday basis while investors digested the company's announcement. Those shares came off their lows, though, to go home quoted down 4 cents on the day, or 0.9%, at $4.42 apiece, on about normal volume of 1.7 million shares.

Andrea Heisinger contributed to this report

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