Junk rally continues, names up multiple points, Sprint runs on T-Mobile news; Rite Aid higher

By Paul Deckelman and Paul A. Harris

New York, Aug. 31 - The nascent high-yield market rebound intensified on Wednesday, on fairly brisk volume for a late-August session.

Traders saw a number of junk names up by multiple points, with almost nobody seen on the downside. Among the gainers were such familiar names as HCA Corp., MGM Resorts International and Chrysler Corp.

Most of the gainers were up just because the overall market was up, but a few rose on actual news developments. Rite Aid Corp.'s paper popped after Barron's reported that a pair of analysts felt that the drugstore operator's August sales figures would show a hefty gain as a result of a surge of "front-end" buying by customers stocking up ahead of Hurricane (later Tropical Storm) Irene.

And Sprint Nextel Corp.'s bonds got a boost from the news that the federal government is trying to block the pending merger of its wireless industry rivals AT&T and T-Mobile.

Statistical indicators of market performance were on the upside across the board for a third consecutive day.

And while no new deals were announced during the session, primaryside players saw expected issuers like Kinetic Concepts Inc. and Emdeon Inc., already situated on the high yield forward calendar, moving forward on the financing front for their respective leveraged buyout deals that will result, eventually, in new junk bond transactions.

Primary closed, tone improves

The primary market remained shuttered on Wednesday, sources said.

The overall tone of the market was better, according to a syndicate banker, who said that cash bonds were 1 to 2 points higher on the day.

However volumes were muted, the banker said.

One other ray of late August sunshine came in the form of news on cash flows for high yield funds.

The funds saw $118 million of inflows on Monday, according to data reported by EPFR Global, the banker said. Of that amount, $101 million flowed into mutual funds while $17 million flowed into exchange-traded funds.

Based on daily flows since last Thursday, the banker expects the weekly funds flow number covering the period from last Thursday's open to Wednesday's close to be flat or slightly positive.

Both EPFR and Lipper-AMG report weekly fund flow numbers relating to high-yield funds on Thursdays.

Lowest August issuance since 2002

The month of August saw $1.26 billion of issuance in seven junk-rated, dollar-denominated tranches.

That renders August 2011 the slowest August in nine years, just ahead of August 2002 which saw only $1.18 billion in six tranches.

August 2008 saw a similarly small number of deals, six tranches, as August 2011. However August 2008's $1.69 billion dollar amount of issuance tops that of August 2011.

The biggest August was that of the record-setting year of 2010 which saw $23.5 billion in 52 tranches.

Nevertheless the $211.0 billion of 2011 year-to-date issuance, in 471 tranches, still far exceeds the $161.9 billion, in 375 tranches, which had priced by the end of August in 2010.

Healthy levels for hospitals

A trader said there was "a little bit of something" going on, producing a fair amount of activity for the normally-quiet final trading session in August, "and the market seemed a lot better."

He saw the newest Junkbondland benchmark issue - HCA's 6½% first-lien senior secured notes due 2020 moving above the 101 bid mark several times during the session, up solidly from Tuesday's late levels around 99½ bid, 100¼ offered.

He saw the Nashville-based hospital operator's $3 billion deal get as high as 101¼ bid at a couple of points during the day, before dropping back a little to 101, which he called up 1¼ points on the day.

"That was around mid-day; it's gotten quiet since then in that name," he said.

HCA had priced the tranche at par in a two-part, $5 billion drive-by transaction back on July 26. The bonds had initially moved well above that pricing level but then got hammered down into the mid-90s by this month's pronounced market weakness.

A market source at another desk saw the HCA first-lien paper among the busiest issues in junk on Wednesday, with over $10 million having changed hands. He quoted the bonds as having gotten as good at one point at 103 7/8 bid, before coming off that peak to end at 100¾ bid, up by perhaps 7/8 on the day.

He also saw the other half of that HCA mega-deal - its $2 billion of 7½% notes due 2022 - having firmed by 1 3/8 points to 99¼ bid, also on busy volume of around $10 million.

Gaming bonds catch a hot hand

A trader said that the bonds of Caesars Entertainment Corp. bonds - the Las Vegas gaming giant formerly and still unofficially known to junk players as Harrah's - "have been on a tear for the last several days," and added to those gains on Wednesday, although they backed off a little from their earlier highs.

He saw its widely traded 10% notes due 2018 get as good as 79¼ bid during the day, although they did step back a bit to finish around 78½ bid.

He said that compared with Tuesday's bid levels as low as 75½ and as high as 771/2, "so they're better."

A second market source pegged the bonds going home up 2½ points at 79 bid, with volume of over $19 million, putting it among the Top Five busiest junk bonds.

Caesars' 11¼% senior secured notes due 2017 gained 2¼ points to end at 108¼ bid.

At another desk, a trader meantime saw Caesars' biggest rival on the Las Vegas Strip, MGM Resorts International, as "maybe the biggest mover, up 3 to 4 points, when many others were up 1 or 2 points across the board."

Its 9% senior secured notes due 2020 pushed up to 108½ bid.

Rite Aid rallies on report

One of the traders detected "some movement in Rite Aid," quoting the Camp Hill, Pa.-based Number-3 U.S. drugstore chain operator's 8 5/8% notes due 2015 as having moved up to 91 bid. He said that the bonds had not traded on Tuesday, but had been languishing at 87¼ bid, as recently as Friday, "so they moved up."

Another market source, also seeing the bonds at 91, called them up by 2¼ points, with over $14 million of the bonds having changed hands.

Its 9½% notes due 2017 also firmed, to the 87½ mark, though on about $6 million of turnover.

The first trader attributed the gains to a story in Barron's which quoted Credit Suisse analysts Edward J. Kelly and Rajat Suri as declaring that Rite Aid, and its sector rivals like Walgreen Co. and CVS Caremark Corp. likely benefitted from the rush to buy food items and emergency supplies in the eastern part of the United States ahead of Hurricane Irene this past week.

They said those pre-storm preparations, including massive consumer purchases of such non-pharmacy items as bottled water, flashlights and batteries, were a probable driver behind strong front-end sales on a same-store, or comparable-store basis - i.e. stores open at least a full year, the key performance metric in the retailing industry.

They pointed out that of the three major national drugstore operators, Rite Aid likely benefitted the most from this buying surge, since 35% of its stores were located in the storm-threatened area ranging from North Carolina up the Eastern seaboard into New England, versus 25% for CVS Caremark and 15% for Walgreens.

With Rite Aid - the smallest of the Big Three chains - reporting its latest sales data on Thursday, the analysts projected that Rite Aid's front-end same-store sales will be up 3.5%, "as the company seems to be gradually building sales momentum with its loyalty program and Hurricane Irene should help."

They also saw pharmacy comps up 1.5%, including a minus 150 basis point impact from the introduction of new generic medications for prescriptions, which produce a lower margin than brand-name medications, and a 2% to 2.5% overall same-stores sales gain.

Last month, Rite Aid reported that during the four weeks ended July 23 same-store sales increased 1.9% over the prior-year period. July front-end same-store sales increased 3.1%, while pharmacy same-store sales, which included an approximate 151 bps negative impact from new generic introductions, increased 1.4%.

Sprint runs up

Maybe the biggest mover of the day on actual news, rather than just being lifted along with the overall higher market, was Sprint Nextel's bonds and those of the Overland Park, Kan.-based wireless operator's Sprint Capital Corp. unit.

They got a boost from the news that federal regulators are suing to stop the planned merger of two of Sprint's competitors - the far-larger AT&T and the somewhat smaller T-Mobile - on antitrust grounds. Sprint is the third-biggest U.S. wireless operator, but lags well behind AT&T and Verizon Wireless in terms of customers and revenues. Prior to the announcement of the AT&T deal with T-Mobile, there had been some talk in the market that Sprint itself might merge with T-Mobile to create a more viable Number-3 competitor to the AT&T-Verizon duopoly, but that speculation went for nought.

"Sprint is up on the AT&T news," a trader confirmed. "Everything is up today, 1 to 2 points across the board - but that is clearly up more."

Another trader said that Sprint's 6 7/8% notes due 2028 "were up a good 3 points," trading up to a 90-90½ context, versus Tuesday's round-lot levels around 86¾ bid, while its 6 7/8% notes due 2013 gained 1 1/8 points to end at 100 3/8 bid.

The Sprint Capital 8¾% bonds due 2032 were the busiest in the company's capital structure, with almost $10 million traded. A trader saw them as high as 102¾ bid, before they went out at 102¼ bid, versus Tuesday's levels at 99.

Hard-hit bonds gain the most

A trader observed that some of the biggest gains came among bonds which had been hammered down viciously. "The most shorted were the most up."

For instance, he saw carmaker Chrysler Group LLC's 8¼% senior secured notes due 2021 "up 6 points from [Tuesday] morning - no fundamental reason, but all of a sudden, they're up 6 points."

Another market source located the Auburn Hills, Mich.-based automaker's bonds at 88½ bid on Wednesday, calling them up 5 points from Tuesday's lows.

Indicators extend gains

Statistical indicators of market performance, which have been up the past two sessions since Friday's downturn, notched a hat trick Wednesday with their third straight upturn.

A trader saw the CDX North American Series 16 HY Index gain 7/8 of a point on Wednesday, to end at 94 7/8 bid, 95 1/8 offered, on top of the 5/8 of a point advance seen on Tuesday.

The KDP High Yield Daily Index jumped by 62 basis points on Wednesday to finish at 72.57, after having moved up by 21 bps on Tuesday. Its yield tightened by a whopping 20 bps, to 7.71%, after having declined on Tuesday by 7 bps.

And for a third straight session, stocks and junk bonds - which last week seemed to have broken out of the usual pattern of the two risk-asset classes mostly moving in the same direction - remained joined at the hip for a third straight day. Equities - aided by a report that factory orders surged in July, indicating the manufacturing sector still has strength, were up for a fourth consecutive day, with the bellwether Dow Jones Industrial Average ending up by 53.58 points, or 0.46%, to end at 11,613.53, getting back in the black for the full year; broader indexes were also modestly higher, with the Standard & Poor's 500 up 0.49% on the day and the Nasdaq Composite 0.13% better.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.