Junk jumps as trading resumes; Levi sizzles; Sprint fizzles; Kinetic Concepts downsizes deal

By Paul Deckelman and Paul A. Harris

New York, Oct. 11 - High yield got back to work on Tuesday following the long Columbus Day break - one of those odd holiday weekends in which the bond markets were closed in honor of the Italian explorer's debt-funded voyage of exploration but everything else was open.

Junk picked up where it ended last week, on a rising note, as statistical measures of market performance were pointing higher, as well as individual issues.

Levi Strauss & Co.'s bonds moved up late in the session after the apparel maker reported strong third-quarter results.

Hertz Corp.'s bonds were better in the wake of smaller car-rental rival Dollar Thrifty Automotive Group Inc.'s decision to end its efforts to sell itself due to a lack of adequate bids; would-be buyer Hertz had planned on funding the acquisition via increased borrowings.

ATP Oil & Gas Corp.'s bonds continued their recent strengthening trend.

On the downside, Sprint Nextel Corp.'s bonds got whacked around in the wake of last week's indications by the wireless operator that it plans to back away from its troubled network partner, Clearwire Corp.

In the primary arena, Kinetic Concepts Inc. was heard to have downsized and restructured its upcoming bond deal, eliminating a $900 million tranche of unsecured bonds.

New-deal players meantime looked forward to the pricing of MannKind Corp.'s six-year offering of senior discount notes, which could come to market as soon as Wednesday.

Kinetic Concepts downsizes

The Tuesday session, which trailed the three-day Columbus Day holiday weekend in the United States, saw no issuance in the high-yield primary market.

U.S. market participants did return to some deal news, however.

Kinetic Concepts has downsized its leveraged buyout financing bond deal to $1.65 billion from $2.55 billion by withdrawing a planned $900 million offering of senior unsecured notes.

What remains in the so-called "public market" is a $1.65 billion equivalent amount of 7.5-year second-lien senior secured notes (B3/B/), which are being offered in dollar and euro denominations.

Morgan Stanley, Bank of America Merrill Lynch, Credit Suisse and RBC are the joint bookrunners.

At least a portion of the withdrawn $900 million unsecured tranche will be marketed club-style, in the manner of a true private placement, according to an informed source.

Such an execution would bear some resemblance to Emdeon Inc.'s $375 million tranche of 11¼% senior notes due 2020, which was marketed private placement-style prior to last Friday's launch of $375 million of eight-year senior notes to qualified institutional investors. In the case of Emdeon, Goldman Sachs Asset Management agreed to purchase the $375 million of 11¼% notes, as previously reported.

Busy Monday in Europe

When they returned to their desks on Tuesday, market participants in the United States heard news of two European transactions that took place on Monday.

Both, however, were small deals and appear to have been somewhat special cases.

Germany's HeidelbergCement Finance BV priced a CHF 150 million issue of six-year notes at par to yield 7¼% on Monday.

The deal was marketed with price talk specifying a CHF 150 million maximum amount at a yield of 7¼% to 7½%. Hence the yield printed at the tight end of talk.

Deutsche Bank ran the books for the debt-refinancing deal.

HeidelbergCement capitalized on a healthy appetite for Swiss franc-denominated paper among retail investors, according to a London-based debt capital markets banker.

This allowed HeidelbergCement to actually price its 7¼% notes slightly tighter than the levels at which the building materials company's existing bonds were trading on Monday, the banker said.

Alternatively, had the company attempted to place euro-denominated notes with European institutional accounts, it would have certainly had to pay a healthy new issue premium, the banker said.

Also on Monday, Fresenius Medical Care AG & Co. KGaA priced a €100 million issue of five-year senior floating-rate notes (Ba2/BB) at par to yield three-month Euribor plus 350 basis points via Credit Suisse.

The floating-rate deal was launched and priced on Monday without official price talk, according to the London-based banker, who added that it was likely drive by reverse inquiry.

It represented the revival of a €100 million tranche of floating-rate notes due in 2014 that Fresenius postponed in early September due to lack of demand. That proposed tranche was withdrawn at the same time that Fresenius successfully placed €400 million and $400 million of 6½% senior notes due 2018.

Uncertainty ahead in Europe

With respect to the European high-yield primary market, the way ahead is uncertain, the London-based banker said.

Presently, people are keenly tuned into the euro-denominated tranche of the above-mentioned Kinetic Concepts second-lien notes offer.

The Kinetic Concepts European roadshow kicked off on Monday, but preliminary guidance has yet to firm up, the banker said.

European investors tend to be attracted to the new issue market for many of the same reasons investors in the United States are attracted to it, the sellsider said.

In that regard, a big selling point of the Kinetic Concepts deal is its size and the liquidity that a big issue affords.

For that reason, the euro-denominated tranche needs to come in a meaningful size, the banker said, who added that because European investors, like their counterparts in the United States, desire a "big liquid issue," the euro portion ought to come at least as big as €250 million.

Beyond the Kinetic Concepts euro tranche, the European primary market is something of a question mark, the banker said.

With respect to European macroeconomics and the present difficulties with distressed sovereign debt and its impact on the banks, discussions among central bankers and politicians have become more constructive lately, the sellsider said.

The iTraxx Euro Crossover index ended the Tuesday European session at 769 bps bid, 34 bps tighter since Friday.

Last Tuesday, it was 874 bps bid, so it has seen a dramatic move, the banker said.

Meanwhile, euro-denominated junk bonds have been up about one point per session over the past three sessions.

Market seen better

A trader in the secondary market opined that "the market felt a little better," although he said that it seemed "unchanged by the end of the day."

He said that earlier, Junkbondland - which saw but a handful of trades on Monday due to the Columbus Day market close - had moved up "on the back of [Monday's] equity market move," which saw the bellwether Dow Jones industrial average shoot up by more than 330 points.

That stock market strength proved unsustainable. On Tuesday, the Dow traded in a narrow range all day before going home down 16.88 points, or 0.15%, at 11,416.30. Broader indexes like the Standard & Poor's 500 and the Nasdaq Composite posted smallish gains (0.05% and 0.66%, respectively) on Tuesday.

The trader called Tuesday "a fairly active day," with "better-quality names holding in there."

Indicators show improvement

A trader said that the CDX North American series 17 High Yield index jumped by 1 7/16 points on Tuesday to end at 89 7/16 bid, 89 11/16 offered after having eased slightly on Friday.

The KDP High Yield Daily index rose by 40 bps on Tuesday to close at 69.84, on top of its 16 bps gain on Friday.

Its yield on Tuesday tightened by 13 bps, to 8.59%, after having come in by 4 bps on Friday.

And the Merrill Lynch U.S. High Yield Master II index posted its fifth straight gain on Tuesday, rising by 0.682%. That followed advances of 0.072% on Monday, amid extremely light holiday dealings, and 0.463% on Friday.

Tuesday's gain cut the index's year-to-date loss to 1.745%, versus 2.41% on Monday, 2.481% on Friday and against its deepest loss for this year, the 3.998% deficit notched last Tuesday. Those losses stood in stark contrast to the peak gain for the year of 6.362%, which was set on July 26.

Levi looks good

Among specific names, a trader saw Levi Strauss' bonds move up in late trading after the iconic San Francisco-based maker of blue jeans and other apparel released favorable third-quarter numbers.

"I guess [investors] liked their earnings," he said, in seeing the company's 7 5/8% notes due 2020 move up to 94¼ bid, 94½ offered. Those bonds had last traded on a round-lot level before that at 92 bid, last week.

Post-numbers trading was mostly in odd lots, but there were more than $4 million changing hands in round-lot trades, a market source said.

The bonds got a boost after Levi reported that during the fiscal third quarter ended Aug. 28, it earned $32 million, a 14% gain from year-earlier net income of $28 million.

Levi's quarterly revenue rose almost 9% year-over year, to $1.2 billion from $1.11 billion, though excluding currency fluctuations, revenue rose 4%.

Gap goes lower

Bonds of another well-known San Francisco-based issuer - apparel retailer Gap Inc. - were busier than Levi, but on the downside.

A trader saw its 5.95% notes due 2011trading between 90½ and 91½ most of the day, down from about the 91-92 level at which they traded last week.

He suggested that "they're highly rated, they've got a lot of cash - but their results" keep disappointing.

Gap last week released its September sales data, with net sales about flat from a year ago at $1.35 billion, while same-store sales - that is, sales at its stores open longer than one year, a key retailing industry performance metric - were down 4%, on top of a 1% decline from the prior year that was recorded in September 2010.

Gap's bonds were active, with over $35 million changing hands on a round-lot basis, although much of the activity was attributable to high-grade players reaching down for yield from the split-rated (Baa3/BB+/BBB-) issue, with only limited junk interest.

Hertz heads higher

Park Ridge, N.J.-based car-rental giant Hertz's 7 3/8% notes due 2021 pushed as high as 93 bid before ending the day at 91½ - still well up from prior levels around 89½ bid. However, trading was limited.

The gain, albeit on light volume, followed the news that Dollar Thrifty, a smaller car-rental operator that Hertz and rival Avis Budget Group Inc. had both been interested in buying, had decided that none of the bids it received were adequate. Avis dropped out of the sweepstakes recently, leaving Hertz as sole bidder.

Had its bid been accepted, Hertz was expected to fund the acquisition via credit facility borrowings and/or the issuance of debt securities, as well as cash on hand.

ATP continues improvement

ATP Oil & Gas - whose previously badly battered 11 7/8% notes due 2015 were pushed solidly higher at the end of last week - were quoted in a 73-75 region, which a trader called "actually a little higher."

He said that the Houston-based offshore energy exploration and production company's bonds were "really just quoted, on not much volume."

A second trader said that ATP "has been the most volatile name, probably, of late."

He saw some markets Tuesday in the lower 70s, with $1 million of bonds trading as high as 74, versus Friday's levels between 72½ and 73 - although he noted that the bonds were trading in a 60s-to-lower-70s context last week, "so these things have been pretty volatile."

Earlier last week, the bonds had gotten down to the high 50s to lower 60s, so since then, "they've had a nice move."

He noted that crude oil prices, which were trading around $75 per a barrel a week ago, moved up to about $85 per barrel currently, "a pretty big move," although crude still remains well below its levels as high as $114 reached earlier this year.

With oil prices recovering from their recent trough, the trader suggested that ATP "is trading as a proxy for oil prices."

Clearwire climbs, Sprint slides

A trader said that Clearwire's 12% notes due 2015 started the day trading between 70 and 72 and pushed up to around 73-75 by the day's end, while its 12% notes due 2017 moved up to a 39-40 context from a wider 35-40 spread earlier on, "so that was up a couple of points."

"There were plenty of Clearwire quotes all day long, so I'd say they were active" based on that, he said, although he did not know how much was traded.

Clearwire's bonds fell on Friday after its network partner - for now - Sprint Nextel announced moves seen as backing away from its relationship with troubled Clearwire.

A trader meantime saw Sprint's bonds "definitely active," with the Overland Park, Kan.-based No. 3 U.S. wireless carrier's 6 7/8% notes due 2028 going home at 69½ bid, 70 offered, "down three points on a lot of volume."

He said "a bunch" of Sprint's various issues traded "all day long."

He saw Sprint's 6% notes due 2016 at 81 bid after having been down as much as "another 3 or 4 points" earlier in the day in a 78-80 context.

"So they had heavy volume and bounced off the bottom, it seems like."

A second trader declared that "Sprints were down a lot today," with the 6s - which had traded as high as 87¾ bid last Friday - were offered in the low 80s without a bid earlier Tuesday.

At one point, he said those bonds traded as low as 79 bid before coming back to 81¼ bid.

"I guess someone hit the panic button with that 79 trade this morning," he said.

He meantime saw Clearwire's 2015 notes, which had been offered as low as 68 on Friday, trading "first thing this morning" around 71 bid.

A market source said Sprint was among the more active names in the junk world. He saw the 6s trading at mid-afternoon around 83½ bid, on volume of over $13 million.

Its 8 3/8% notes due 2017 were trading just under the 88 level, also on about $13 million.

Sprint Capital Corp.'s 6 7/8% notes due 2028 hung in under the 69 level on $14 million of volume at mid-afternoon.

Canada a relative bargain

Canada's corporate high-yield bond market weakened last week, with spreads wider by nearly 30 bps, though Canadian dollar yields remain attractive compared to U.S. high-yield bond yields, a trader said.

Some names such as Connacher Oil & Gas Ltd., Precision Drilling Corp. and Ford Credit Canada Ltd. have Canadian dollar bonds trading cheaper than the U.S. counterparts.

Calgary, Alta.-based Connacher Oil & Gas' Canadian dollar 8¾% notes due 2019 are trading at 691/2, compared with the company's U.S. dollar 8½% notes due 2019, which were seen at 72, the trader said.

Ford Credit's Canadian dollar 4 7/8% notes due 2014 were quoted at 99 while its U.S. dollar 8% notes due 2014 were seen at 106.25. The issuer is the Canadian finance arm of Ford Motor Co.

Cristal Cody contributed to this report

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