European bonds dominate session; Paragon megadeal on tap; prices ease; funds gain $107 million

By Paul Deckelman and Paul A. Harris

New York, July 10 – The high-yield primary sphere shifted most of its focus to Europe on Thursday as British and continental borrowers tapped the junk market with several new euro- and sterling-denominated offerings.

Issuers included Fiat SpA, Dufry Group SCA, CMC di Ravenna, Iceland Foods and TSL Education Group Ltd.

The dollar-denominated segment, meanwhile, fell silent, with syndicate sources reporting that no deals had priced by the market close, in contrast to Wednesday, when there were two offerings of new dollar-denominated and fully junk-rated paper totaling $850 million.

However, market participants were getting ready for a $1.19 billion two-part offering from Paragon Offshore Ltd., a Houston-based provider of offshore drilling services to the energy industry, which is expected to price during Friday’s session.

Among the deals that have already priced, traders saw considerable activity in Wednesday’s offerings from energy operator Summit Midstream Partners, LP and from television station group owner Sinclair Broadcast Group, Inc.

There was also active trading going on in Tuesday’s gigantic new two-part transaction from power generating company Calpine Corp.

Overall, traders saw a softer junk secondary market, and statistical market-performance indicators turned lower across the board after having been mixed on Wednesday.

However, another indicator – the flow of cash into or out of high-yield mutual funds and exchange-traded funds, considered a good barometer of overall junk market liquidity trends – was higher for a third consecutive week, continuing to bounce back from a relatively rare recent negative reading.

Junk funds gain $107 million

Market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said late Thursday that $107 million more came into those funds than left them in the week ended Wednesday.

It was the third straight inflow seen by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., which last week reported a $90 million cash injection for the seven-day period ended July 2, which in turn had come on the heels of a $619.2 million inflow in the week ended June 25.

Those gains, adding up to $816.2 million, follow a relatively rare outflow of $239 million that took place the week before that, ended June 18. That cash loss had been the first net outflow from the funds seen since the week ended April 30, when they had collectively lost $631 million, and it broke a subsequent string of six consecutive weeks of net inflows totaling $2.32 billion, according to a Prospect News analysis of the figures.

With the latest week’s upturn, inflows to the weekly-only reporting funds have now been seen in 21 of the 27 weeks since the start of the year, according to the analysis, against just six outflows.

The inflow in the latest week raised the year-to-date cumulative net inflow number to $6.68 billion, according to a market source – a new peak inflow level for the year. That total is up from the previous week’s estimated $6.58 billion total, the previous peak level.

Cumulative fund-flow estimates may be revised upward or downward or may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

In 2013 – which had 53 reporting weeks due to a statistical quirk – inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, according to the analysis.

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime also saw an inflow in the latest week, a market source said, although he said that cash addition only amounted to under $1 million.

EPFR’s methodology differs from AMG/Lipper’s, as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper’s strictly domestic orientation. Accordingly, the two services’ weekly numbers are also generally quite different. While their respective weekly results usually point pretty much in the same direction, that has not always been the case. In some weeks in which AMG/Lipper showed outflows, EPFR saw overall inflows. It thus has recorded inflows in 24 out of the 27 weeks since the start of the year, against only three weekly outflows during that time.

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming into or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable, more so than those of other, larger cash sources, and thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years and which has mostly continued on into this year as well.

Fiat drives by

Most of Thursday's high-yield new issue action unfolded in the euro- and sterling-denominated markets.

Those markets backed up somewhat on Thursday, a London-based investment banker said, adding that most names were ¼ point to ½ point lower on the day.

However, bonds merely appeared to be marked lower, the source said, noting that trading volumes seemed very thin, with investors remaining focused on the new issue calendar.

In the euro-denominated market, Fiat Finance and Trade Ltd., a subsidiary of Fiat, launched and priced an €850 million offering of eight-year senior notes (B2/BB-/BB-) at par to yield 4¾%.

The quick-to-market deal played to €1.6 billion of orders, a sellside source in Europe said.

Joint bookrunner JPMorgan will bill and deliver. BofA Merrill Lynch, Commerzbank, Goldman Sachs International, Natixis, Santander and UniCredit were also joint bookrunners.

Dufry comes atop talk

Dufry Group priced a €500 million issue of eight-year senior notes (Ba3/BB+/BB) at par to yield 4½%.

The yield printed on top of yield talk.

Global coordinator Royal Bank of Scotland will bill and deliver. Goldman Sachs was also a global coordinator.

Royal Bank of Scotland, Goldman Sachs, BBVA, Credit Agricole CIB, HSBC, ING, RBI and UBS were bookrunners.

The Basel, Switzerland-based provider of travel services and products plans to use the proceeds to help finance the purchase of the Nuance Group.

Meanwhile, at least one euro-denominated deal is expected to price Friday.

Italian construction firm CMC di Ravenna talked its €300 million offering of seven-year senior secured notes (B2/B) to yield 7½% to 7¾%.

Global coordinator BNP Paribas will bill and deliver. UniCredit is also a global coordinator. Banca IMI is the joint bookrunner.

Iceland Foods prices

In the sterling-denominated market, Stretford 79 Foods plc, a wholly owned subsidiary of Iceland Foods, priced £950 million of senior secured notes (B1/B+) in three re-sized tranches on Thursday.

The debt-refinancing deal included a downsized £400 million tranche of seven-year fixed-rate notes that priced at par to yield 6¼%. The tranche was decreased from £430 million.

A downsized £200 million tranche of 10-year fixed-rate notes priced at par to yield 6¾%. The tranche was decreased from £250 million.

An upsized £350 million tranche of floating-rate notes priced at par to yield Libor plus 425 basis points. The tranche was increased from £275 million.

All three tranches came on top of price talk.

In addition to shifting £80 million of proceeds to the floating-rate tranche from the fixed-rate tranches, the overall size of the three-part deal was decreased by £5 million, taking the total to £950 million from £955 million.

Global coordinator Credit Suisse will bill and deliver. JPMorgan was also a global coordinator. HSBC was a joint bookrunner.

TSL Education two-part deal

TES Finance plc, the parent of TSL Education Group, completed a £300 million two-part offering of six-year senior secured notes (B2/B/).

The deal included £200 million of fixed-rate notes that priced at par to yield 6¾% and £100 million of Libor plus 500 bps floating-rate notes that priced at 99.75.

Both tranches came on top of price talk.

Joint bookrunner Goldman Sachs will bill and deliver. Jefferies was also a joint bookrunner.

The London-based education services provider plans to use the proceeds to refinance debt, to fund repayment of shareholder loans and to finance the acquisition of Vision for Education Ltd.

Paragon talks $1.19 billion

Action in the dollar-denominated primary market is expected to resume on Friday, when a pair of issuers are scheduled to complete their transactions.

Paragon Offshore set price talk for its $1,185,000,000 two-part offering of senior notes (Ba3/B+) on Thursday.

The deal includes eight-year notes that come with four years of call protection, talked to yield in the 6¼% area, as well as 10-year notes that come with five years of call protection, talked to yield in the 6¾% area.

Also on Thursday, the company upsized its term loan to $650 million from $545 million. However, whether the resizing of the term loan will have an impact on the size of the bond deal was not announced on Thursday, market sources said.

Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Barclays, Citigroup Global Markets Inc., Credit Agricole CIB, Credit Suisse Securities (USA) LLC, HSBC, SunTrust Robinson Humphrey Inc. and Wells Fargo Securities LLC are managing the bond deal.

Surgical Partners upsizes, sets talk

Co-issuers Covenant Surgical Partners, Inc. and Consolidated Pathology, Inc. upsized their offering of senior secured notes due 2019 to $130 million from $120 million.

At the same time, yield talk of 8¾% to 9% was released and timing was moved ahead. Books close Friday morning, and the Rule 144A and Regulation S for life deal is set to price and allocate on Friday afternoon. Previously, the deal was expected to be in the market into next week.

Moody's Investors Service has assigned its B3 rating to the notes. Standard & Poor's rates the notes at B-. Those ratings were a factor in the upsize, according to a source.

Imperial Capital LLC is the bookrunner.

Proceeds will be used to refinance debt, to fund future acquisitions and for general corporate purposes. Proceeds resulting from the $10 million upsize go to the balance sheet for acquisitions.

QTS starts roadshow

QTS Realty Trust, Inc. started a roadshow for a $250 million offering of eight-year senior notes (/B+/).

The debt refinancing deal is set to price Wednesday or Thursday next week.

Deutsche Bank is the left bookrunner. BofA Merrill Lynch, KeyBank, Goldman Sachs, Jefferies, JPMorgan and Morgan Stanley are the joint bookrunners.

PNC Capital Markets, RBS Securities Inc., Regions, Stifel Financial Corp. and TD Securities are the co-managers.

The issuing entities will be subsidiaries QualityTech LP and QTS Finance Corp.

Recent deals actively traded

In the secondary market, traders said that there was busy trading in several of the deals that had priced over the past several sessions.

The busiest was Summit Midstream Partners’ 5½% notes due 2022. A market source saw the Dallas-based midstream energy limited partnership’s issue having racked up over $56 million of trading volume just before the close.

He pegged those bonds at 100¾ bid, which he said was down by ¼ point from where the bonds had gone out the previous day.

But a second trader said they remained “wrapped around 101,” quoting them at 100 7/8 bid, 101 1/8 offered.

The company had priced $300 million of the notes at par in a quick-to-market transaction on Wednesday.

Another busy bond was Sinclair’s 5 5/8% notes due 2024, with over $46 million of the paper changing hands.

A trader called those bonds up ¼ point, moving in a 100 1/8 to 100 3/8 range all day before going home at 100¼ bid.

However, at another desk, a trader called that same 100¼ level down ¼ point on the day.

Hunt Valley, Md.-based Sinclair had priced its quickly shopped $550 million of those notes at par on Wednesday via its Sinclair Television Group, Inc. subsidiary after having upsized the issue from an originally announced $450 million.

Calpine’s two tranches of new bonds were something of a mixed bag, a trader said.

He saw the Houston-based power generating company’s 5¾% notes due January 2025 up by 1 point at 101¼ bid, on turnover of more than $31 million.

He also saw its new 5 3/8% notes due January 2023 down 1/8 point at 100¼ bid, with over $17 million traded.

But another trader had not seen any upside in the 10.5-year bonds, saying both tranches traded in a 100 to 100¼ context, which he said was actually down ¼ point.

Calpine had driven by the junk market on Tuesday with $2.8 billion of new paper split into tranches of $1.25 billion of the 5 3/8% notes and $1.55 billion of the 5¾% paper. Both tranches had priced at par.

A trader saw Walter Energy Inc.’s 9½% notes due 2019 trading at 100¼ bid, calling that up marginally. Over $12 million of the Birmingham, Ala.-based metallurgical coal producer’s bonds were traded.

Walter priced $320 million of the bonds on Tuesday at 99 to yield 9.741%. The deal was a quickly-shopped add-on to its already existing $650 million of the notes, $450 million of which had priced last September and $200 million of which had priced as an add-on in March.

Investors and analysts meantime pondered about whether the underperforming coal company – hard-hit by the downturn since last year in met coal prices – and its sector peers, some also facing challenges from softer prices, would be able to maintain their liquidity until coal market conditions improved. (See related story elsewhere in this issue.)

Market seen easier

A trader declared that “everything was off by about ¼ point today.”

A second trader said that apart from the action in the newly priced issues, not much was happening.

He said that “if you go down the Trace list,” once you got past the three big new junk deals “it was all IG or crossover names” likely to be of little interest to the average junk marketer.

The day’s dealings, he said, “were situational. Everyone was focused on loans or on the new deals, watching to see what was going on.”

Market indicators turn lower

Statistical indicators of junk market performance were lower across the board on Thursday, and for the second time in the past three days, after having been mixed on Wednesday.

The KDP High Yield Daily index slid by 11 bps Thursday to end at 74.70 – its sixth straight loss – after having been down by 2 bps on Wednesday to end at 74.81.

Its yield rose by 5 bps to 5.05%, its fifth straight wider session. It had been up by 1 bp on Wednesday, as well as Tuesday and Monday.

The Markit CDX Series 22 index lost 5/32 point on Thursday to end at 108 9/16 bid, 108 5/8 offered. On Wednesday, it had gained 1/16 point.

The widely followed and usually robust Merrill Lynch High Yield Master II index ended the day on the downside for a third consecutive session, dropping by 0.206%, which followed retreats of 0.032% on Wednesday and 0.026% on Tuesday, which had broken a string of six consecutive sessions before that in positive territory.

Thursday’s loss left its year-to-date return at 5.472%, down from Wednesday’s 5.69% and well down from the 5.751% return recorded on Monday, the peak level for 2014 so far.

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