Market winds down before holiday; recent deals see demand; McClatchy firms on asset sale

By Paul Deckelman and Paul A. Harris

New York, May 27 - The high yield market was sleep-walking through an abbreviated pre-holiday session on Friday, with no new deals coming to market, owning to the light staffing and early departures seen at many junk shops.

That finished off an only moderately busy week in which about $6 billion dollar-denominated paper was seen by syndicate sources as having priced, including issues from familiar junk bond issuers such as General Motors Co. - selling via General Motors Financial Co., Inc. - and Level 3 Communications, Inc. as well as one mega-deal sized transaction, from British global mining concern Vedanta Resources plc, which brought an upsized $1.65 billion two-part offering to market late in the session on Thursday.

The only piece of news to emerge from the primary-side was the announcement by International Wire Group, Inc. that the Camden, N.Y.-based electrical wire manufacturer will be doing a secured PIK toggle notes deal soon.

Among the new issues that priced on Thursday, traders said the longer half of the big Vedanta deal - its 10-year bonds - was seen straddling its par issue price when the new bonds began trading on Friday. However, they did not see the company's new five-year tranche of bonds in the aftermarket.

They meantime said that other deals that had priced earlier Thursday, like GM, Oil States International Inc., WCA Waste Corp. and International Auto Components Group continued to be well-bid for at, or sometimes above, the deals' respective issue prices. The latter deal was seen adding to its gains.

Away from the new-issue market, traders saw McClatchy Co.'s bonds up, particularly its 2017 senior secured issue, on the news that the newspaper publisher had inked a deal to sell the building where its Miami paper is located, and will use a portion of the $236 million proceeds from that asset sale to repay debt.

Statistical indicators meanwhile showed the junk market down on the session and on the week as well.

Sunstate for coming week

The primary market put up a goose egg on Friday ahead of the Memorial Day holiday weekend.

Sunstate Equipment Co. LLC had been expected to price its $170 million offering of six-year senior secured second-lien notes (Caa2/CCC+) via Bank of America Merrill Lynch on Friday.

However that transaction has been moved into the week ahead, according to market source.

The debt refinancing deal is talked with an 11% to 11¼% yield.

A big year...in five months

With no activity on Friday the pre-Memorial Day week came to a close having seen $10.7 billion of issuance.

That extends year-to-date issuance to $175.8 billion, to Friday's close.

With one May market session left to play out, the first five months of 2011 have seen the primary market put up issuance that tops every yearly total in the history of the market, except last year's $292.6 billion.

Prior to 2010, the biggest yearly total was 2009's $161.8 billion, which of course has been eclipsed by the issuance seen in the first five months of 2011.

And the $45.9 billion of month-to-date issuance renders May 2011 the biggest May in the history of the market, nearly doubling the next biggest: May 2009's $24.2 billion.

Slightly pensive

Heading into the Memorial Day holiday weekend, players saw signs that a certain amount of pensiveness may be taking hold in the high-yield market, according to sources at two high-yield mutual funds who spoke on Friday.

The most tangible indicators remain positive, they admit.

Fund flows remain in the black, although the most recent week saw flows that were generally flat: a $94 million inflow to high-yield mutual funds for the week to Wednesday, according to Lipper-AMG.

And many of the recent deals continue to perform well in the secondary, the buy-siders concede.

For example, the General Motors Financial Co., Inc. 6¾% senior notes due 2018 (B1/B/BB-), which priced at par on Thursday in a $500 million issue, were up ¼ to ½ point on Friday, a fund manager said.

However, the source added, initial discussions on the GM deal had that paper coming with a low 6%-handle yield.

The new Level 3 Escrow Inc. 8 1/8% senior notes due 2019 (Caa1/CCC/), which priced at 99.264 to yield 8¼% on Wednesday, in a $600 million transaction, were up 3 points over that issue price on Friday afternoon.

"You're seeing a little bit of selling into the calendar, which you weren't seeing so much a couple of weeks ago," the investor said.

"Also you've seen the market widen," the source added.

The J.P. Morgan high yield index yielded 6.92% on Friday, up from 6.73% on May 13, the buy-sider said.

The index spread was 540 basis points on Friday, up from 518 bps on May 13.

"Triple Cs were the underperformers," the investor added.

Meanwhile, a trader from a high-yield mutual fund mentioned receiving tips on drive-by deals during the past week that failed to materialize, with the explanation being that the potential quick-to-market issuers would await more favorable market conditions to proceed.

A little less manic

Nevertheless, a post-Memorial Day calendar already began to take shape during the pre-holiday week.

It includes two sizable deals, Endo Pharmaceuticals Holdings Inc.'s $700 million offering of senior notes (/expected BB-/) via Bank of America Merrill Lynch, Morgan Stanley and Citigroup, and W&T Offshore, Inc.'s $600 million offering of eight-year senior notes, via Morgan Stanley.

"I think the calendar is going to be strong at least up until the end of QE2," a mutual fund manager said on Friday, referring to the Federal Reserve Bank's quantitative easing program which made it a bidder for as much as $600 billion of Treasuries - a program that is set to expire in June.

"After that you don't know," said the fund manager.

"Meanwhile I'll continue to play the calendar," the buy-sider added, "but I'm not as manic about it as I was two weeks ago, when I would break a sweat at the thought of missing deals.

"Now I'm being a little more selective."

New deals hold gains

A trader said that Friday was "a non-event day," with no pricings seen in the domestic market. He meantime said that "everything was pretty firm and well-received" among the newly priced deals from Thursday.

In almost all cases, the new deals did no worse than stay around their respective issue prices, and some added to their gains.

An issue in the former category was the week's biggest offering, from Vedanta Resources, a British metals mining company with global operations, which priced a $1.65 billion two-part offering at par late Thursday, enlarged from an originally planned $1.5 billion.

On Friday, a trader saw its $900 million of 8¼% notes due 2021 at 99 7/8 bid, 100 1/8 offered in very light pre-holiday dealings.

However, he did not see the other part of that deal - the $750 million of 6¾% notes due 2016.

A second trader also saw the 10-year bonds straddling their issue price, but had not seen the shorter piece of the deal.

A trader said that GM's $500 million of 6¾% notes due 2018 were trading around the level of aftermarket gains which the Detroit giant's new issue had notched after its pricing at par on Thursday afternoon.

The carmaker's new issue was heard by traders to have pushed up to 101 bid, 101½ offered when it was freed for secondary trading.

A trader said that the new bonds stayed above the 101 bid level in light dealings on Friday.

Level 3 hangs in there

Traders said that the new bonds of Broomfield, Colo.-based telecommunications and internet network operator Level 3 were trading at or above the aftermarket levels they had reached after the company's quickly shopped $600 million of 8 1/8% notes due 2019 priced during Wednesday's session.

That issue - upsized from the originally announced $500 million - priced at 99.264 to yield 8¼%.

Initial gains were gradual - when the new bonds moved into the secondary market later Wednesday, they were originally seen up just slightly from issue, going home at 99 5/8 bid, 100 1/8 offered.

However during Thursday's session, which saw good appreciation in some of the new deals, the Level 3 bonds pushed up to 100 5/8 bid, 101 offered.

A trader on Friday said that Level 3 was still "hanging in there," at 100 5/8 bid.

And at another desk, a trader saw Friday's levels get as good as 100¾ bid, 101¼ offered.

When the new deal was announced on Wednesday, it sent some of the company's existing issues down as much as a point or two over the next two sessions.

On Friday, a trader said that the existing Level 3 bonds, such as its 9¼% notes due 2014, "recovered a little" from the lows they had experienced on Wednesday and Thursday. However, he said that even so, the bonds were still down ½ to ¾ point on Friday from the levels held before the new deal was announced.

Oil States, Automotive move up

Among the less-celebrated deals, Oil States International's $600 million of 6½% notes due 2019 were trading around 100 5/8 bid, 100 7/8 offered, a trader said, while another pegged the bonds as high as 100¾ bid, 101¼ offered.

The Houston-based oilfield services company's issue priced at par on Thursday and then traded around 100½ bid, 100¾ offered in the immediate aftermarket before firming slightly to the levels seen on Friday.

Another Thursday deal , Houston-based WCA Waste's $175 million of 7½% notes due 2019, were seen on Friday as having moved up to 101½ bid, 102 offered.

That was up from their par issue price and up as well from initial aftermarket levels at 100½ bid, 101 offered.

Traders also sighted better levels in International Automotive Components Group. The German auto parts concern's $300 million offering of 9 1/8% senior secured notes due 2018 priced at par on Thursday and then moved up to 102 bid, 102½ offered.

By Friday, however, the new bonds had firmed to 102½ bid, 103 offered.

Market signs off on day, week

Away from the new issues, statistical measures of market performance - which had edged up on Thursday for the first time this week, gave up those gains on Friday.

A trader saw the CDX North American Series 16 HY index down by 1/16 point on Friday, to end at 101 15/16 bid, 102 1/16 offered after having edged up by 1/8 point for a second straight day on Thursday.

The index ended the week down 5/16 point from the level at which it had closed out the previous week, ended May 20.

The KDP High Yield Daily Index was down by 2 basis points on Friday to close at 75.93, after having been unchanged on Thursday from Wednesday's level. Its yield rose by 2 bps, to 6.50%, after having come in by 1 bp on Thursday

And the Merrill Lynch High Yield Master II Index was down for the fourth time in five sessions, losing 0.017% on Friday, in contrast with its 0.006% advance on Thursday, its first such upturn after three straight days on the slide.

The loss on Friday dropped the index's cumulative return to 5.872% from 5.89% on Thursday, and down further from the 6.071% level at which the market measure had finished the previous Friday, now its high point for 2011 so far. It showed a loss for the week of 0.187%, the first such week-over-week loss after nine straight weeks of gains.

McClatchy moves up

Among specific issues, traders saw little really happening.

However, one trader said that Sacramento, Calif.-based newspaper publisher McClatchy "had real news" which sent its bonds up - namely the sale of the building where its Miami Herald is published and the adjoining parking lot, a parcel totaling 14 acres, to developer Genting Malaysia Bhd.

"They got a really good price too," he said - $236 million, which is actually more than McClachy's market capitalization, given the fall in the publishing company's shares, in line with those of other newspaper companies, in the last two or three years.

He saw its 5¾% notes due 2017 up 1 point at 84 bid,

He also saw its 6 7/8% notes firm to a 63-64 context from a pre-news level at 621/2.

A market source at another desk, though, said that the real action was in the company's 11½% senior secured notes due 2017, which rose by 1¼ points to end at 109¾ bid, on very solid round-lot volume of over $34 million - a very busy level even on a regular day, let alone on a dull pre-holiday session.

The bonds jumped after the company announced that $65 million of the $236 million proceeds would be offered to the holders of those bonds at par.

The company has $875 million of the bonds out there, and will likely do this via a partial tender offer.

Earlier this year, its chief financial officer, Patrick J. Talmantes, said on a conference call that McClatchy will be "opportunistic as to the timing and as to paydowns and the bond issues we're going after and then to take into account a range of factors, including the maturity date, the yield that we'd be getting, the discount to face value and the role each bond plays in our overall capital structure," in deciding what bonds to pay down or take out."

It will also spend $163 million of the asset sale proceeds to meet pension liabilities.

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