Upsized HCA deal prices; Duane Reade downsizes, revamps deal; new Arch Coal issue red hot

By Paul Deckelman and Paul A. Harris

New York, July 29 - HCA Inc. wowed 'em on Wednesday in Junkbondland, bringing a sharply upsized, quickly shopped offering of senior secured first lien notes to market just hours after that new offering was announced. The bonds priced too late in the day for any aftermarket activity, although HCA's existing paper was seen by traders to have been actively traded at slightly higher levels.

High yield syndicate sources meantime heard that another healthcare-related prospective issuer - drugstore operator Duane Reade Inc. - had downsized and restructured its offering, which had originally been planned as a $325 million two-tranche deal combining senior secured and senior unsecured notes. Some market participants had been expecting Duane Reade to price Wednesday, or at the latest Thursday, but with those changes having been made, it won't come before Friday at the earliest.

Duane Reade put out quarterly earnings, and trader saw the favorable numbers giving an assist to sector peer and sometimes rival Rite Aid Corp.'s bonds, which were points higher despite a lack of fresh news about the Camp Hill, Pa.-based drugstore chain operator itself.

Another gainer, the traders said, was Arch Coal Inc., whose new seven-year bonds had priced too late in the day on Tuesday for any kind of aftermarket action - but then made up for it on Wednesday, firming solidly when they began trading.

The technical rally in credit continues to roar, market sources said on Wednesday.

One high-yield mutual fund saw its third biggest year-to-date cash inflow on Wednesday, the fund's manager told Prospect News.

"Everything is better today," the manager said. "Everything is up. It's unbelievable."

HCA returns

HCA returned to the high-yield market on Wednesday with a massively upsized $1.25 billion issue of 7 7/8% senior secured first-lien notes due Feb. 15, 2020 (Ba3/BB).

The notes priced at 98.254 to yield 8 1/8%, in the middle of the 8% to 8¼% yield talk, and rich to the discount talk of approximately 2 points. They were increased from $750 million.

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

Proceeds will be used to repay bank debt.

Wednesday's deal by the Nashville-based hospital company came 3½ months after it priced another massively upsized $1.5 billion issue of 8½% 10-year first-lien senior secured notes at a significantly deeper discount, 96.755, to yield 9%, on April 15

They look like geniuses

In addition to today's deal and the April deal, mentioned above, HCA did a $310 million issue of 9 7/8% eight-year senior secured second-priority notes in February which priced at 96.673 to yield 10½%, a junk bond investor recalled on Wednesday.

At that time everybody thought they should have done more, the investor recounted.

Now they look like geniuses for waiting, the buy-sider added.

The buzz in the market was that the original $750 million deal was playing to $8 billion of orders, the investor said, adding that word was that JP Morgan offered HCA $750 million at 8%, $1 billion at 8 1/8%, and $1.25 billion at 8¼%.

Of course, HCA ultimately got its $1.25 billion, on Wednesday, for 8 1/8%.

Waiting for the numbers

There was no advance warning that HCA was coming with Wednesday's deal, the investor said.

"They were just waiting for their numbers," the source added, referring to the company's stellar earnings call on Wednesday.

Among the highlights:

• Revenues in the second quarter increased 7.2% to $7.483 billion;

• Net income totaled $282 million, compared to $141 million in the prior year's second quarter;

• Adjusted EBITDA totaled $1.399 billion, compared to $1.104 billion in the second quarter of 2008; and

• Same facility equivalent admissions increased 4.4%, while same facility admissions increased 1.9% in the second quarter compared to the same period last year.

Earnings news heard throughout the healthcare sector has been nothing short of spectacular, the investor said.

"Healthcare spreads are now back to pre-Lehman levels," the source added, referring to the dramatic spread widening which occurred amid the general melee in the capital markets when the apparently not-too-big-to-fail Lehman Brothers filed for Chapter 11 bankruptcy protection on Sept. 15, 2008

A&P price talk

Apart from HCA, the primary market produced very little news.

However, sources on both the buy-side and sell-side confided that the new issue pipeline does not seen particularly extensive at present.

Perhaps as cash continues to flow into the high-yield asset class that could change, one syndicate banker reasoned.

Meanwhile on Wednesday, Great Atlantic & Pacific Tea Co., Inc. set price talk for its $225 million offering of six-year senior secured notes (B3/B-) at the 11% area with about 3 points of original issue discount.

The books close at noon ET on Thursday. The notes are expected to price after that.

The debt refinancing and general corporate purposes deal is being led by bookrunner Bank of America Merrill Lynch.

Duane Reade downsizes, restructures

Finally, news was heard Wednesday on the deal from Duane Reade.

The order books will close Friday for the downsized, restructured $300 million offering of six-year senior secured notes (Caa1/B-).

Previously the New York City-based drugstore chain company was marketing $325 million of notes in two tranches.

In the restructuring announced on Wednesday, Duane Reade upsized the secured notes tranche to $300 million from $215 million, and eliminated the proposed $110 million subordinated seven-year notes tranche.

Goldman Sachs & Co. is the left lead bookrunner. Bank of America Merrill Lynch is the joint bookrunner.

Proceeds will be used to fund a tender for Duane Reade's existing senior secured floating-rate notes due 2010 and the 9¾% senior subordinated notes due 2011, and to repay the company's asset-based loan.

New HCAs unseen, existing bonds busy

The new HCA 7 7/8% senior secured notes due 2020 came to market too late in the session for any kind of aftermarket dealings.

However, the Nashville, Tenn.-based hospital operator's existing bonds "were pretty active," ahead of the company's new-deal pricing, a trader said.

He saw its 9¼% notes due 2016 "trading all over the lot," somewhere between 104 and 105. He said that was pretty much the same as Tuesday's level, or "maybe a little bit better than [Tuesday]," when the high trade was 1043/4, versus Wednesday's 105.

"But the name in general is pretty active."

A market source saw over $10 million of the 91/2s having changed hands at mid-afternoon in a mid-104 context, while almost as many HCA 7 7/8% notes due 2011 had traded, at a shade over par.

HCA's 6¼% notes due 2013 were trading at 931/2, up from 92¾ on Monday.

Capital One captivates market

Also on the new-deal front, a trader mentioned Capital One Financial Corp.'s new issue of 10¼% cumulative trust preferred certificates due 2039 issued through Capital One Capital V. The McLean, Va.-based banking company priced $1 billion of that paper on Wednesday - double the $500 million originally talked around the market, and with a split rating of Baa2/BB/BBB, it attracted attention from both junk and high-grade investors.

A junk trader quoted the securities as having traded up to around the 101 level from its issue price of 98.846.

He also saw several such existing hybrid issues trading actively - Capital One Capital IV's 6.745% trust preferreds due 2082 had been trading around 66 on Friday, and had moved to as high as 70½ on Wednesday, "though by the end of the day, it came in a little and traded back down" to end at 681/2.

A market source saw over $40 million having traded by mid-afternoon, eclipsing any of the junk bonds that were trading.

The trader also saw the company's Capital One Capital III 7.686% trust preferreds due 2066 get as good as 78, before going out at around 77 - still well up from around 72 at the beginning of last week, the most recent prior trading activity.

"So Capital One has done well."

Arch Coal bonds on fire

A trader said that Arch Coal's issue of 8¾% notes due 2016 "did pretty well," rising to a closing level of 100½ bid, 100¾ offered - well up from the 97.464 level at which the St. Louis-based coal company had priced its $600 million of bonds on Tuesday, upsized from an original $500 million.

He saw the bonds actually lifted to a peak of 101 "early this morning, but then they calmed down a bit; even though they were ½ point off the peak level," he asserted, the bonds had posted a solid advance on the day.

"Everybody liked that one, coming into the deal, and they upsized it, obviously."

Peninsula bonds ease off

Among other recently priced deals, Tuesday's Peninsula Gaming LLC's two part deal traded at slightly lower levels; the Dubuque, Iowa-based riverboat gaming concern's 8 3/8% senior secured notes due 2015, which was upsized to $240 million from an originally planned $215 million, traded Wednesday at 98 bid, 98½ offered, a trader said - down from the peak levels at 99-99½ at which they had traded after pricing.

However, they were still well above their 97.701 pricing level, which translates to a yield of 8 7/8%.

Meanwhile, the other half of that bond issue also backpedaled. The $305 million of 10¾% senior unsecured notes due 2017 hit a peak of 97¾ bid, but "late in the day" moved down to 97 bid, 97¼ offered - less than the 97¾ bid, 98 offered level seen in Tuesday's initial aftermarket dealings. The bonds had priced earlier Tuesday at 97.395 to yield 11¼%.

Market remains firm

Back among the more established issues, the CDX Series 12 High Yield index - which had eased a half-point on Tuesday - was seen by a trader to be unchanged Wednesday to end at 88¼ bid, 88¾ offered.

Meantime, the KDP High Yield Daily Index, which gained 19 basis points on Tuesday, was up another 21 bps on Wednesday to end at 65.55, while its yield tightened by 12 bps to 9.46%.

In the broader market, advancing issues - which had led declining issues for an eighth straight session on Tuesday - decided that nine's fine on Wednesday, continuing to lead them by a seven-to-six margin.

Overall market activity, measured by dollar-volume totals, rose by nearly 16% from Tuesday's level.

Rite Aid on the rise

A trader noted that "a lot of Rite Aid traded," even asking rhetorically "why the heck would Rite Aid trade?" and especially higher, since there seemed to be no fresh news out about the company -- indeed the most recent development being touted on the company's website is the fact that the chain offers "Big Back-To-School Savings With Private Brand Value, Online Rebates."

Even so, the trader saw Rite Aid's 9½% notes due 2017, which had recorded turnover of nearly $30 million by mid-afternoon, making it one of the busiest of junk bonds, trading around 75½ to 76 - well up from Tuesday's range of 72-73, "so they're up today, and I don't know why." He also noted that "the stock was off, but the bonds were up the last two days, which is kind of strange."

A market source at another desk noted the same kind of phenomenon - Rite Aid's 9 3/8% notes due 2015 were up 3 points to the 76 level, also on no news seen.

Later on, someone pointed out that Rite Aid rival Duane Reade had reported good numbers for the just-passed fiscal second quarter ended June 27, releasing the results even as it marketed its upcoming bond issue to prospective buyers. "Their numbers were good," the first trader said, "so I guess by extension that's why Rite Aid was active and up."

The New York-based company - whose drugstores blanket midtown and lower Manhattan - reported that its total same-store sales for the quarter increased 1.7%, given a boost by a 3.6% rise in pharmacy same-store volume. While Duane Reade still lost money on a net basis, its loss narrowed to $11.6 million from $12.1 million a year earlier, while operating income improved to $1.2 million, versus a $200,000 operating loss a year ago.

CIT lower, but less busy

A trader said that CIT Group Inc.'s bonds were "pretty quiet," but down about 2 or 3 points across the board, on "not a whole lot of activity."

The name, he said, "is just quoted down more than trading down."

He saw its floating-rate notes due on Aug. 17 down 2 or 3 points to around 76½ bid, on "not much activity."

He saw the 7 5/8% notes due 2012 in a "551/2ish" area.

Another trader said that the New York-based commercial lender's bonds were trading down, opining that "people are just afraid that they're going to file [for bankruptcy] before this exchange" now underway, concludes. He also saw the floaters going home at 76½ bid.

Sprint Nextel firms despite loss

Elsewhere, a trader saw Sprint Nextel Corp.'s bonds trading slightly higher, with investors apparently shrugging off the Overland Park, Kan.-based wireless company's bad second-quarter performance.

He saw the company's 7 5/8% notes due 2011 closing around the 100 5/8-100¾ level, versus the bonds' close at par each of the previous two sessions. "There were a lot of trades, all in the 1001/2-100¾ area. All of them were."

He also saw the 8¾% bonds due 2032 trading in an 85-85½ range, up from 84 the prior two sessions.

At another desk, a market source saw Sprint's 5.95% notes due 2014 up by more than 3 points on the day at 86 bid, while its 6% notes due 2013 got as good as 87, up slightly from prior levels around 86. Activity was brisk, with nearly $15 million of the bonds seen to have changed hands by mid-afternoon.

The source pointed out that the bonds were being quoted actually below their Tuesday finish, as low as 84 - but chalked that up to a couple of small, unrepresentative odd-lot "outlier" trades late in the session.

The slightly upside movement in Sprint's paper came about even as the company was reporting a wider second-quarter net loss of $384 million, or 13 cents per share, versus red ink of $344 million, or 12 cents per share, a year earlier. Excluding unusual items, the loss came in at 4 cents per share - greater than the penny per share loss Wall Street had been expecting.

Revenues dropped 10% year-over year to $8.1 billion versus $9.05 billion a year ago, in line with analyst estimates.

The analysts said that Sprint's bottom line was hurt by the company's net loss of post-paid customers - i.e. those with regular monthly service contracts, considered the most valuable customers in the industry. Nextel showed a gain of prepaid customers - but those customers, who purchase airtime for their phones on a sporadic, pay-as-you-go basis, are considered a less steady and less valuable source of revenue.

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