Avis prices, struggles in trading; new Iron Mountain, Barrett busy; junk falls as Fed fizzles

By Paul Deckelman and Paul A. Harris

New York, Sept. 21 - Avis Budget Car Rental LLC drove up to the Junkbondland borrowing window on Wednesday and left with $250 million from its long-awaited sale of 8.5-year notes. However traders said the new bonds were stuttering along in aftermarket trading, holding below their issue price.

They also saw very active dealings in the new bonds from Iron Mountain Inc. and Bill Barrett Corp. which had priced on Tuesday. While those two deals managed to stay above the par level at which both had priced, they were off their peak levels as the session was winding down.

Indeed, traders said that junk in general had given up its early gains and was moving to the downside late in the day, taking its cue from stocks, which were hammered down viciously late in the day by negative investor reaction to the Federal Reserve's much-anticipated but essentially anticlimactic announcement that it would seek to bring down long-term interest rates by buying longer-duration Treasury paper.

Statistical indicators of market performance, up on the day on Tuesday, all moved to the downside.

While most issues were lower, including benchmarks like Community Health Systems Inc., a few managed to buck the trend, including Rite Aid Corp., ahead of Thursday's release of quarterly results.

Avis Budget prices atop talk

In a tough market, with the major stock indexes in the United States dropping by 2% to 3%, Avis Budget Group priced a $250 million issue of senior notes due March 15, 2020 (B2/B) at par to yield 9¾%.

The yield printed on top of the price talk.

Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., Credit Agricole Securities (USA) Inc., RBS Securities Inc. and Scotia Capital (USA) Inc. were the joint bookrunners.

Proceeds will primarily be used to help fund the acquisition of Avis Europe and to repay debt of Avis Europe.

The issuing entity is AL Escrow Corp., which will be assumed by Avis Budget Car Rental LLC and Avis Budget Finance, Inc., subsidiaries of Avis Budget Group.

Avis plays to 80 accounts

The Avis deal was multiple-times oversubscribed, with over 80 accounts in the order book, an informed source said.

The bond allocations were tough, especially given the relatively small size of the issue, the source added.

Although there was some interest in the deal among European investors, U.S. high yield accounts represented most of the book.

The new notes, which priced at par, broke at 101¼ bid, in the secondary market, but eased to 101 1/8 bid at the close, the source added.

Deal flow remains thin

In the wake of Wednesday's Avis Budget deal, the active forward calendar is extremely thin.

Stillwater Mining Co. is expected to price its $300 million offering of five-year senior notes via Deutsche Bank Securities before the end of the week.

There was no official price talk on the Billings, Mont.-based palladium and platinum producer's bond deal at Wednesday's close.

However yield conversations in the high-10% range have taken place, according to an asset manager who works for a high yield mutual fund.

Elsewhere dealers profess visibility on deals for the near term. However ongoing capital markets turbulence renders specific timing on the launches extremely difficult, sell-side sources say.

"The high-yield market has held in pretty well, given all the turbulence in the stock market," a debt capital markets banker said just after the Wednesday close.

"Most of the deals that have priced recently are holding in quite well, and fund flows have remained generally positive," added the banker, who anticipates a new high-yield deal announcement during the Sept. 26 week.

Another dealer also mentioned a possible deal launch, probably for the Sept. 26 week.

"If things look very favorable it might launch on Friday," the sell-sider added.

New Avis issue trades off

For the first time since late July or early August, it seemed, there were as many as three new deals, priced on back-to-back days, trading around - but a trader quipped that "maybe that was not such a good thing," given that at least one of those transactions was seen having trouble just staying above water.

The new Avis 8.5-year bonds may have tried harder - the Parsippany, N.J.-based vehicle-rental company's iconic advertising slogan - but without much success.

A trader declared that they were "struggling to get above par," where the $250 million issue had priced, and saw them, going home at 99¾ bid.

A second trader saw the bonds trading "a decent amount below issue in Avis at this time," trading in a 991/4-99½ context, while a third put them at 991/2-par.

A market source elsewhere said that the new bonds had "traded up slightly, and then they traded off a little."

Bill Barrett bonds busy

The new 7 5/8% notes due 2019 from Bill Barrett Corp. were easily the volume leaders on the day, with a trader seeing nearly $100 million of the Denver-based oil and gas exploration and production company's paper trading.

He quoted the $400 million issue - upsized from the originally announced $300 million - at 100 5/8 bid, up from the par level at which they had priced late in the day on Tuesday, too late, in fact for any kind of aftermarket at that time.

A second trader said that the Bill Barrett bonds "came off their highs" seen earlier in the session and were going out at 100½ bid.

However, at another desk, a trader pegged the bonds at 100 5/8 bid, 101 1/8 offered.

Iron Mountain active

A trader saw Iron Mountain's new 7¾% senior subordinated notes due 2019 holding around the 100½ bid level, with "a ton of volume on that," estimating activity of more than $75 million.

Another trader, also seeing the Boston-based information storage and document processing company's deal at 1001/2, said that "both of those [Iron Mountain and Bill Barrett] are off their highs."

Iron Mountain's $400 million offering - upsized from the originally announced $300 million - priced on Tuesday at par, and then had gotten as good as 101 bid before closing out on Tuesday at 100 5/8 bid, 101 1/8 offered.

The trader said that the new deals lost ground as "the market really kind of sold off late this afternoon on the Fed announcement."

Junk is sunk as Fed 'twists'

"Everything sort of started coming in after the Fed's little twist-and-shout dance," a trader said. "Before that, everybody seemed to be on hold, waiting to see what the Fed did."

After the Fed announced what has been termed "Operation Twist" - presumably because it aims to twist the yield curve a little by bringing down the longer yields - another trader said, "stocks fell, and high yield went with it."

Faced with the prospect of continued economic weakness and a lack of lending, the central bank unveiled its latest gambit after a two-day meeting. Essentially, the Fed will sell $400 billion of short-term Treasury paper - five years and under - that it holds and use those proceeds to instead buy longer-term government bonds, of six years duration and up, in hopes of bringing down long-term rates and convincing lenders and the public that there is ample liquidity around. In addition, starting next month, proceeds from maturing agency and mortgage-backed securities holdings, totaling around $15 billion to $20 billion per month, will be reinvested in MBS paper rather than Treasuries, in an effort to encourage more mortgage lending.

Observers noted that a fairly high concentration of 20- to 30-year bonds - 29% - in the planned Fed purchases, and interpreted that to mean that the central bank believes that the current economic malaise is not going to go away any time soon.

And while long Treasury paper firmed smartly - the 30-year yield dropped by 21 basis points to 2.99%, while the 10-year declined by 8 bps to 1.85% - equities tumbled in the last hour of dealings, spooked by the Fed's apparent pessimism about the economy's prospects in the near- and even the medium-term.

The bellwether Dow Jones Industrial Average -which had showed solid gains for most of Tuesday before falling late in the day and just barely managing to eke out a 7-point gain on the session - nosedived late in the day Wednesday to end with a loss of 283.82 points, or 2.49%, closing at 11,124.84. Broader indexes such as the Standard & Poor's 500 and the Nasdaq Composite likewise did a late plunge, with the S&P ending down 2.94% and the Nasdaq closing off 2.01%.

Junk indicators retreat

Against that somber backdrop, junk market statistical performance indicators, which had been solidly up on Tuesday, were in retreat on Wednesday.

A trader said the CDX North American Series 16 HY Index fell by 1 5/16 points on Wednesday to close at 92 1/16 bid, 92 7/16 offered, after having gained 3/8 of a point on Tuesday.

The KDP High Yield Daily Index dropped by 10 bps on Tuesday to 72.04, versus its 8 bps rise on Tuesday. However, its yield actually came in by 2 bps to 7.87%, after having risen by 3 bps on Tuesday.

The Merrill Lynch U.S. High Yield Master II Index gave up 0.06%% on Wednesday, after having advanced by 0.056% on Tuesday.

That left the index's year-to-date return at 1.538% on Wednesday, down from Tuesday's 1.599%. The cumulative return also remains well below the peak level for the year of 6.362%, set on July 26.

Market activity levels, measured by dollar volume, dropped by around 13% Wednesday after having zoomed by 62% on Tuesday versus the session before.

A trader said that for much of the day it was "just the same crap. It wasn't until they did their thing that you started to see stuff come in."

Another junk participant, noting the financial market carnage following the Fed pronouncement, opined: "I don't know why this government, and the Fed don't just leave things alone. These people are insane. They just can't seem to let it be."

He continued that at least part of the problem is "we've got way too many of these Princeton economic gurus" - a not-so-veiled slap at Fed chairman Ben Bernanke, who formerly chaired the economics department at that Ivy League university.

"The academics have been turned loose. These things take time to heal - and I think it exacerbates the situation when you keep doing these things."

Some issues fall

Market participants said that most familiar names were lower on the day. For instance, Franklin, Tenn.-based hospital company Community Health Systems' benchmark 8 7/8% senior secured notes due 2015 were down ¾ point at par bid, 100¾ offered, while sector peer HCA Inc.'s 6½% notes due 2020 were off by ¼ point at par bid. Volume of over $15 million made the Nashville-based hospital operator's bonds one of the busiest junk issues of the day.

Also on the healthcare front, Birmingham, Ala.-based rehabilitation center operator HealthSouth Corp.'s 8 1/8% notes due 2020 - which were down by several points on Tuesday on investor fears that new Medicare reimbursement rules that will be issued as part of government efforts to cut entitlement spending will harm the company - were down again Wednesday, falling another 1¼ points to end at 98.

But a trader - who saw the bonds in a 97-98 context said that the credit was "nowhere nearly as active" as it had been on Tuesday, when he saw it dip to the 98-99 level from 102 previously.

Some on the rise

The trader said that "the higher-quality stuff is really holding in well, the super-high-quality paper."

For instance, he said that Wellington, Fla.-based aircraft interior components manufacturer B/E Aerospace Inc.'s 8½% notes due 2018 were trading up at 109¼ bid, or a 5.30% yield, "and that's probably up 4 points in the last month."

However, he acknowledged that "a lot of the illiquid stuff, the stuff with hair on it, continues to get leaned on.

"So there's been a real bifurcation in high yield -the super-high-quality stuff is clearly in demand, but stuff that has any kind of hair on it, or the stuff that needs the economy a little more in order to turn out to be a success story, is clearly under pressure."

Rite Aid steady before numbers

Rite Aid will release its second-quarter results on Thursday and ahead of the numbers the bonds were moderately active but steady.

One trader said the 8 5/8% notes due 2015 were "kind of unchanged" at 901/2. Another market source called the paper up slightly at 90¼ bid.

The summer has been good for the Camp Hill, Pa.-based drugstore chain. Same store sales increased throughout the season. However, analysts are expecting a loss of at least 18 cents per share.

A year ago, Rite Aid reported a net loss of $199.3 million, or 23 cents per share. In its first fiscal quarter, the company forecast a loss of $370 million to $560 million for the year on revenues of $25.7 billion to $26.1 billion.

Stephanie N. Rotondo contributed to this report

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