Primary returns as Fresenius prices, firms; Calumet also comes; funds mark first gain in weeks

By Paul Deckelman and Paul A. Harris

New York, Sept. 8 - The high-yield primary market made its long-awaited and much-anticipated return on Thursday with not one, but two deals having priced, just a day after those prospective borrowings were announced.

German health care provider Fresenius Medical Care AG got the ball rolling with a restructured and upsized two-part offering of seven-year dollar- and euro- denominated notes. Junk market syndicate sources heard that a proposed third tranche of floating-rate notes had been scrubbed, and the other two fixed-rate tranches upsized accordingly.

When the new dollar-denominated bonds were freed for aftermarket activity, they were seen having firmed more than a point to around the par bid level, after having priced at a discount.

The euro-denominated tranche also moved up when it freed, though not quite that much.

Later in the session, domestic chemical manufacturer Calumet Specialty Products Partners, LP came to market with a $200 million tranche of eight-year notes whose terms mirrored a $400 million issue from earlier in the year. However, those bonds appeared too late in the day for any kind of dealings.

Apart from the optimism engendered by the revival of the new deal market, traders said that nothing much jumped out at them in the secondary realm, where statistical performance indicators turned mixed after Wednesday's solid advance.

But high-yield mutual funds, seen as a reliable gauge of overall market liquidity trends, posted their first upturn for the week after five straight weeks before that on the downside.

AMG sees $576 million gain

As Thursday's session was wrapping up, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week ended Wednesday, $576.48 million more came into those weekly reporting funds than left them.

It was the first time in six weeks that those fund-flows were seen on the positive side. Over the preceding five weeks dating back to the week ended Aug. 3, the funds had tallied a net loss of some $4.854 billion, according to a Prospect News analysis of the numbers, including the $96.44 million outflow seen in the week ended Aug. 31.

That five-week losing streak, which included the staggering $3.42 billion hemorrhage in the week ended Aug. 10 - the second-biggest such outflow on record - more than offset the roughly $2.775 billion that came into the funds in the four weeks before that, dating to the week ended July 6, according to the analysis.

For the year as a whole, although inflows have still been seen in 22 weeks versus 14 outflows, the momentum of late had clearly shifted in the other direction when it comes to year-to-date net totals. While at one point year-to-date net inflows had totaled as much as $7.82 billion, which was recorded in the week ended May 25, according to the analysis, the recent string of sizable outflows eventually erased that bulge and drove that year-to-date total into the red, with the cumulative outflow having grown to an estimated $574.91 million by last week.

This week's similarly sized inflow essentially erased last week's year-to-date deficit for a nominal 2011 cumulative inflow total of about $1.5 million, according to the analysis.

Fund-flow patterns began the new year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year. Then fund-flow patterns turned choppy with two or three weeks of declines, followed by several weeks of inflows, going back and forth since then. But after July's apparent break to the upside, August was a complete wipeout, while September has so far started on the positive side.

EPFR sees $515 million inflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, reported a $515 million inflow to the funds in the latest week, more than offsetting the $328 million outflow recorded last week.

As was the case with the AMG figures, it was the first inflow seen after five straight weeks in the red. After the strong start to the year, outflows - even with the latest gain - have still now been seen in 10 weeks out of the last 14, including the mammoth $6.71 billion outflow recorded in the Aug. 10th week. That marked the single largest loss of cash from those funds since EPFR began tracking fund flows some years ago. EPFR's calculations now show 24 weeks of inflows so far this year against 12 outflows.

The latest week's cash inflow cut the estimated year-to-date net outflow to $943 million from the previous week's estimated $1.458 billion deficit.

EPFR's figures and those of AMG generally point in the same direction, although their actual numbers usually differ markedly since they calculate their respective fund-flow totals very differently. EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds and counts exchange-traded funds excluded from the more narrowly focused AMG tally.

For the week ended Wednesday, EPFR's count of strictly domestic funds showed an inflow of $883 million. The $515 million figure includes some European funds, which EPFR said "did not fare as well" as their stateside counterparts this week.

Cumulative fund-flow estimates, whether of the AMG funds from Lipper/FMI or those from 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. Those trends had pretty much continued into 2011 as well, although the market hit something of a dry patch in June, then seemed to recover in July - only to run into a brick wall for all of August, from which the junk market is only now just starting to recover.

Fresenius upsizes deal

Two issuers priced a combined three tranches of notes on Thursday, raising a total of $578 million and €392.5 million.

These deals represented the first new issues to clear the primary market in more than three weeks.

Fresenius placed two tranches of 6½% fixed-rate seven-year senior notes (Ba2/BB/) sized at €400 million and $400 million.

The notes in both tranches priced at 98.623 to yield 6¾%, at the tight end of the 6¾% to 7% price talk.

The deal was upsized and restructured.

A proposed €100 million of floating-rate senior notes due 2014 was withdrawn.

The euro-denominated fixed-rate notes tranche was upsized to €400 million from €300 million.

The dollar-denominated tranche, meanwhile, was upsized to $400 million from $300 million.

Credit Suisse was the lead left bookrunner for the euro-denominated tranche in a syndicate that also included joint bookrunners JPMorgan, Morgan Stanley and SG CIB.

J.P. Morgan Securities LLC was the lead left bookrunner for the dollar-denominated notes. Credit Suisse Securities (USA) LLC, Barclays Capital Inc. and Morgan Stanley & Co. Inc. were the joint bookrunners.

Proceeds will be used to refinance debt and for general corporate purposes.

Massive demand

The order books for both Fresenius fixed-rate tranches were vastly oversubscribed, market sources said.

The German-based dialysis company made a concession to the presently rugged market conditions of between 50 basis points and 75 bps, according to the reckoning of a London-based debt capital markets banker.

Fresenius is a name well known to European high-yield investors and well liked by them, the banker said.

Few were able to pass up an opportunity to increase exposure to the name when Fresenius was offering such a generous concession, the banker said, adding that allocations were apt to be microscopic fractions of the orders placed by European accounts.

The proposed €100 million floating-rate senior notes due 2014 failed to get traction, perhaps owing to concerns about the liquidity of the floaters, a market source said.

There was $3 billion of orders for the upsized dollar-denominated tranche, according to a buyside source.

Although the official 6¾% to 7% price talk came out early on Thursday, discussions about the deal on Wednesday were taking place at 7% for the euro-denominated notes and 7¼% for the dollar notes, according to a trader from a high-yield mutual fund.

However, as the day progressed, the whisper was reined in, sources said.

Calumet Specialty prices

Elsewhere on Thursday, Calumet Specialty Products and Calumet Finance Corp. priced a $200 million issue of 9 3/8% non-fungible senior mirror notes due May 1, 2019 (B3/B) at 93, resulting in a yield of 10.739%.

The reoffer price came on top of the price talk.

Bank of America Merrill Lynch, Barclays Capital Inc. and J.P. Morgan Securities LLC were the joint bookrunners.

Traders said that Calumet Specialty Products Partners' offering of mirror notes to its existing 2019 issue came to market too late in the session for any kind of a real aftermarket.

Proceeds may be escrowed for up to three months. There is an escrow redemption feature, allowing the notes to be redeemed at the initial offering price plus accrued interest for the first 60 days and at 101 plus accrued interest thereafter.

Upon release from escrow, the proceeds will be used to fund the acquisition of the Superior Refinery assets from Murphy Oil.

The issuer is an Indianapolis-based producer and seller of specialty hydrocarbon products.

The original $400 million issue priced at par on April 15, 2011, hence the concession to market conditions of 136 bps.

A calendar? 'Yes, but...'

Thursday's deals represented the first new issues to clear the market since Immucor, Inc. priced a $400 million issue of 11 1/8% notes due 2019 on Aug. 16, more than three weeks ago.

When asked if the calendar would build in the wake of Thursday's issues, the dealers gave responses that were affirmative but cautious.

We have deals that could come, said one syndicate banker.

However, this source mentioned the ongoing pronounced gyrations of the stock indexes and suggested that the present volatility in equities renders an inhospitable environment into which to launch a junk bond deal.

A syndicate banker in Europe professed expectations that there would be announcements about deals from the European dealers early next week, or perhaps even on Friday.

New Fresenius firms up

When the new Fresenius seven-year dollar-denominated notes were freed for secondary dealings, a trader quoted the bonds as having firmed to 99 7/8 bid, 100 1/8 offered from the 98.623 level at which the tranche had priced.

"It's always [nice] to see the word 'new' show up," he said, noting that the Fresenius deal was the first junker to price since Immucor - another health care name - brought its $400 million offering of eight-year notes to market last month.

"The dollar tranche traded well," a second trader enthused, "back up to the par level. It was a nice job there," although he added that the issuer and its underwriters "priced it right. They priced it the way you needed to price the first deal to come in a while, which was nice of them."

At another desk, a market source saw the dollar bonds going out at 99 7/8 bid, 100 3/8 offered, while the euro-denominated tranche "was cheaper than that."

He saw the latter bonds, which, like the dollar bonds, also priced at 98.623 to yield 6¾%, heading home at a 99 3/8 bid, 99 5/98 offered level.

Market indicators turn mixed

Away from the new deal arena, secondary statistical measures of market performance, which had definitely plunged on Tuesday but rebounded nicely on Wednesday, were seen having turned mixed in Thursday's dealings.

A trader saw the CDX North American Series 16 HY Index down by 5/8 of a point on Thursday, to close at 93 bid, 93¼ offered, after having jumped by 1¼ points on Wednesday.

But the KDP High Yield Daily Index, after a little early morning weakness, came back later on to finish up by 7 basis points, at 72.5. That followed the index having zoomed by 29 bps on Wednesday.

Its yield came in by 3 bps, to 7.70%, after having tightened by 10 bps on Wednesday.

And the Merrill Lynch U.S. High Yield Master II Index rose by 0.175% on Thursday, its second consecutive day on the upside. That followed Wednesday's 0.322% advance. The index has now showed gains in eight sessions out of the last nine.

Thursday's gain lifted the year-to-date return to 2.08% from Wednesday's 1.902%, although the year-to-date return remained well below the peak level for the year of 6.362%, set on July 26.

The junk market managed to hold its own despite a retreat in the stock market, which on Wednesday had moved upward in tandem with Junkbondland.

The bellwether Dow Jones Industrial Average lost 119.05 points, or 1.04%, on Thursday to close at 11,295.81 as Wall Street expressed its dismay that Federal Reserve Chairman Ben Bernanke, who delivered an eagerly awaited speech giving his outlook on the U.S. economy, said that policy makers will discuss the tools they could use to boost the recovery at their next meeting this month and stand ready to use them if necessary. He, however, offered the market no concrete hints as to what those measures might be.

Broader indexes like the Standard & Poor's 500 and the Nasdaq Composite, which like the Dow had also rebounded on Wednesday from Tuesday's loss, finished Thursday down by 1.06% and 0.78%, respectively.

Activity picks up

Whether because of the renewed market confidence stemming from its successful pricing of deals from first Fresenius and, later, Calumet - the first such transactions in many weeks - or just because people who had been absent in the aftermath of the long Labor Day holiday weekend were back in the office, a trader opined, "It just felt like people were starting to do stuff - it had that feeling to it."

Activity, as measured by dollar-volume levels, was up about 6% from what it had been on Wednesday.

A second trader characterized Thursday's session as "kind of a mixed day. There's not a ton [of obvious stories] that jumps out at me."

He thought the junk market "really ended the day basically unchanged. There were some good two-way flows, but nothing that really jumps out at you."

NewPage a no-show

Among specific names, a trader saw NewPage Corp.'s 11 3/8% notes due 2014 unchanged to "maybe a little softer," quoting the notes flat at 85-86 versus around 87 on Wednesday.

He said there was "not a ton" of dealings going on, in stark contrast to Wednesday's session, when over $76 million of those notes had changed hands, by far the largest turnover that day of any junk bond.

Those bonds went on a wild ride on Wednesday, first plunging badly but then later coming back to end slightly higher, though trading flat, or without their accrued interest, on the news that the troubled Miamisburg, Ohio-based coated-paper manufacturing company had sought Chapter 11 protection from its bondholders and other creditors while it attempts to restructure its heavy debt load.

Familiar names are steady

Among other familiar, well-traded names, a trader said, benchmark issuer Community Health Systems Inc.'s 8 7/8% notes due 2015 were trading at 101 bid, 101½ offered, up slightly from the Franklin, Tenn.-based hospital operator's Wednesday level at 100¾ bid, 101½ offered.

Ford Motor Co.'s 7.45% bonds due 2031 were unchanged at 109¾ bid, 110¾ offered.

Caesars Entertainment Operating Co.'s 10% notes due 2018 were down by three-quarters of a point, at 74 bid.

Smithfield strengthens

A trader said that Smithfield Foods Co.'s 10% notes due 2014 were up by 1 point, at 114½ bid, although he said it was "not on huge volume - just about $1 million or so."

He saw the company's 7¾% notes due 2017 up one-quarter point, at 1043/4, though on volume of only about 800 bonds ($800,000).

That followed the Smithfield, Va.-based hog producer and meat packer's report of strong results for the 2012 fiscal first quarter ended July 31.

Besides a fifth consecutive quarter of record year-over-year earnings, company executives touted Smithfield's debt-cutting efforts during the quarter, as well as measures aimed at lowering its annual interest costs and increasing its liquidity.

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