Upsized Vanguard leads $1 billion-plus primary; new Florida Rail rises; funds up $739 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 20 - Borrowers continued to quickly and opportunistically tap the high-yield market for funding on Thursday as sudden "drive-by" offerings continued to dominate new issuance, as opposed to scheduled forward calendar deals.

Three of the former priced during the session versus just one of the latter, and those three included the biggest single transaction of the day, an upsized $800 million two-part offering from hospital operator Vanguard Health Systems, Inc. The deal included a tranche of senior discount notes - something rarely seen in Junkbondland anymore.

There was also a $150 million a.m.-to-p.m. offering from auto racing track operator Speedway Motorsports, Inc. and an unannounced $25 million add-on by Phibro Animal Health Corp. to its existing bonds. Metal products manufacturer Constellation Enterprises LLC's $130 million of secured notes was the only deal to price from the calendar. Europe also saw a quick-to-market pricing of a €750 million deal from broadband and cable operator UPC.

Apart from offerings that actually priced, domestic issuers Maxum Petroleum Inc. and National Mentor Holdings, Inc. were heard by syndicate sources to be shopping deals around, as were European borrowers VimpelCom and ONO Finance II plc. Spanish cabler ONO's deal, which could price as soon as Friday, contains a dollar-denominated tranche as well as a euro piece, while Russian communications operator VimpelCom's big deal is all in U.S. greenbacks.

Vanguard's deal came to market too late for secondary action and Phibro's was just too small, traders said, while the other issues did trade with Constellation firming solidly after it was freed. But the star of the secondary on Thursday was one of Wednesday's offerings: Florida East Coast Railway Corp. It had come too late to trade on Wednesday, but made up for lost time Thursday, shooting up more than 3 points from its par issue price.

Traders did not see much secondary activity apart from trading in the new issues, and market statistical measures eased a little.

But the heavy flow of new investor cash that has been fueling both the active 2011 high-yield primary and the so far robust secondary continued to roll on, seemingly unstoppable, as junk bond mutual funds - considered a key gauge of overall liquidity trends - recorded yet another net inflow for the week, almost $739 million.

Junk funds gain

As activity was closing down for the session, participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that the inflow was widely expected by market participants, given the surge seen in junk's performance since the start of the new year.

It was the seventh consecutive cash infusion, following on the heels of the $967 million injection seen the week ended Jan. 12.

In those seven weeks, dating back to Dec. 8, $4.53 billion of net inflows have come into the junk market, according to a Prospect News analysis of the figures.

On a year-to-date basis, 2011 net inflows have totaled some $2.449 billion, according to the analysis, with cash infusions seen in each of the three weeks against no outflows yet.

That continues the strong inflow trend seen in 2010, when some $10.67 billion more came into the funds then left them, and inflows were seen in 37 weeks, against just 15 weeks that experienced outflows.

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

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though quantifiable, percentage of the total amount of money coming in - fueled the record new-deal borrowing binges seen in both 2009 and then in 2010, as well as the robust secondary market seen both years. Both trends are continuing on in 2011 as well so far.

Vanguard Health upsizes

The Thursday primary market saw $1.259 billion of dollar-denominated issuance in half a dozen tranches and €750 million in a single euro-denominated tranche.

Vanguard Health priced an upsized $800 million two-part deal late Thursday.

Issuing at the operating company, Vanguard Health Systems priced a downsized tranche of eight-year senior notes (/B-/) at par to yield 7¾%.

The tranche was downsized from $375 million. The yield printed on top of price talk.

Proceeds from the operating company notes will be used for general corporate purposes.

Meanwhile at the holding company, Vanguard Health Holding Co. II, LLC and Vanguard Holding Company II, Inc. priced an upsized $450 million tranche of five-year senior discount notes (/CCC+/) at 59.845 to yield 10 5/8%.

The holding company tranche was upsized from $375 million. The yield printed in the middle of the 10½% to 10¾% price talk.

The initial $375 million of proceeds from the holding company notes were designated to fund a dividend.

Bank of America Merrill Lynch was the left bookrunner for the quick-to-market deal, the overall size of which was upsized to $800 million from $750 million.

Barclays Capital, Citigroup, Deutsche Bank, Goldman Sachs & Co. and Morgan Stanley were the joint bookrunners.

American Airlines certificate

American Airlines priced $153.826 million of 7% seven-year class B certificates (B1/BB+) sold at par to yield 7%.

The $657.032 million deal, via Goldman Sachs & Co., Deutsche Bank Securities Inc. and Morgan Stanley & Co. Inc., also featured $503.206 million of 5¼% 10-year class A certificates (Baa3/A-), which priced at par.

Speedway at the tight end

Back on the ground, Speedway Motorsports drove through the Thursday primary market, pricing a $150 million issue of eight-year senior notes (Ba2/BB) at par to yield 6¾%, at the tight end of the 6 7/8% area price talk.

Bank of America Merrill Lynch, JP Morgan, SunTrust Robinson Humphrey and Wells Fargo Securities were the joint bookrunners for the quick-to-market debt refinancing deal.

Constellation Enterprises

Constellation Enterprises priced a $130 million issue of 10 5/8% five-year first-priority senior secured notes (B2/B) at 98.583 to yield 11%.

The yield printed on top of yield talk, and the reoffer price came in line with discount talk of 1 to 2 points.

Credit Suisse Securities ran the books for the debt refinancing deal.

Phibro taps 9¼% notes

Phibro Animal Health priced a $25 million add-on to its 9¼% senior notes due July 1, 2018 (B3/B-) at 101.50 to yield 8.892%.

There was no official price talk.

Bank of America Merrill Lynch ran the books for the quick-to-market general corporate purposes deal.

UPC €750 million

Turning to the European high-yield market, Netherlands-based UPC priced a €750 million issue of 9.5-year senior secured notes (Ba3/B+) at par to yield 6 3/8%.

The yield printed on top of the price talk.

Credit Suisse, BNP Paribas, Barclays Capital, Citigroup, Credit Agricole CIB,

Deutsche Bank, HSBC, ING, Morgan Stanley and the Royal Bank of Scotland were the joint bookrunners for the quick-to-market debt refinancing deal.

The notes were issued via UPCB Finance II Ltd., a financing unit of the cable and telecommunications company.

The execution of the UPC deal was "excellent," according to a syndicate banker in Europe, who noted that the market cooperated and that UPC is a frequent high-yield issuer. This time out, UPC was issuing at the top of its capital structure.

ONO oversubscribed

From Elsewhere in Europe, Spain's ONO set price talk for its €460 million-equivalent offering of 81/2-year senior notes on Thursday.

A tranche of dollar-denominated notes is talked with an 11% to 11¼% yield.

Meanwhile, a tranche of euro-denominated notes is talked with an 11¼% to 11½% yield.

The notes are expected to price on Friday or Monday.

Deutsche Bank and Bank of America Merrill Lynch are the global coordinators.

BNP Paribas, Credit Agricole, Credit Suisse and J.P. Morgan Securities LLC are the joint bookrunners.

The notes are being issued by special purpose vehicle ONO Finance II plc.

Madrid, Spain-based broadband communication and entertainment company will use the proceeds to refinance existing notes.

The order book for the ONO deal is heard to be four times oversubscribed, according to a high-yield mutual fund manager based in the United States.

VimpelCom benchmark

Also on Thursday, the new issue calendar built.

Russia's VimpelCom (Ba2/BB+) will conduct a roadshow on Monday and Tuesday in New York and London for a benchmark-sized dollar-denominated offering of notes, according to market sources.

Barclays Capital, BNP Paribas, Citigroup and the Royal Bank of Scotland are managing the Rule 144A and Regulation S deal.

Proceeds will be used to help fund the $6.5 billion merger of VimpelCom with Wind Telecom (formerly Weather Investments SpA).

National Mentor $275 million

National Mentor Holdings, Inc. will begin a roadshow during the week ahead for its $275 million offering of seven-year senior notes (Caa2//).

UBS Investment Bank is the left lead bookrunner. Barclays Capital and Jefferies & Co. are the joint bookrunners.

Proceeds, together with borrowings under the new credit facility, will be used to repay all amounts owing under the existing credit facility and to pay a consideration of the tender offers and consent solicitations.

Maxum $250 million

Maxum Petroleum Operating began a roadshow on Thursday for its $250 million offering of eight-year senior notes.

Credit Suisse, Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Goldman Sachs & Co. and Citigroup are the joint bookrunners.

The Greenwich, Conn.-based marketer and logistics company for petroleum products will use the proceeds to repay its revolver and for general corporate purposes.

'We've been buying munis'

Cash continues to pour into high yield, sources noted on Thursday.

The high-yield mutual funds specifically saw $738.7 million of inflows for the week to Wednesday, according to a weekly report from Lipper-AMG, sources said.

A high-yield mutual fund manager acknowledged conspicuous amounts of cash coming in during a Thursday telephone conversation with Prospect News.

However, the cash comes with a bit of a problem, the buysider said.

"It's hard to put cash to work when no one is selling bonds in the secondary, and allocations on the new deals are horrible," the investor said.

One solution: municipal bonds.

"There are some munis, which are badly beaten up and actually yielding more than some high-yield bonds are right now," the buysider said.

The reason those munis are beaten up is "purely technical," the source added.

"Mom and pop have been listening to CNN, hearing all about what bad shape the muni issuers are in and putting in redemptions," the investor said.

Hence, while you can venture into the high-yield store and find nothing on the shelves, the muni market has a few bargains for the discriminating high-yield shopper, the manager contended.

Constellation is a star

When Constellation Enterprises' new five-year secured notes were freed for secondary dealings, a trader saw the Youngstown, Ohio-based metal products manufacturer's deal push up to 100½ bid, 101½ offered - well up from the 98.853 level at which the bonds had priced earlier in the session.

He saw "better sellers" in the issue

Another trader quoted the new Connies at 100½ bid, 101 offered.

Speedway in the fast lane

A trader saw Speedway Motorsports' new eight-year bonds at 101 bid, 102 offered, commenting that he was "kind of surprised," although he noted the fact that the deal was essentially a rollover, with investors in the Concord, N.H.-based auto-racing track operator's existing 6¾% senior subordinated notes due 2013 being taken out via a tender using the new-deal proceeds, just shifting into the new bonds.

"I think there was reverse inquiry from a lot of guys on that," he suggested.

A second trader saw those bonds at 101½ bid.

Vanguard, Phibro no-shows

While it was the big deal of the day, Vanguard Health Systems' $800 million two-part deal appeared too late in the day for any kind of aftermarket action.

Another afternoon issue, Phibro Animal Health's $25 add-on to its existing bonds, was just too small to merit much interest.

A trader who was asked about it succinctly replied, "Who cares?"

Florida Rail ticket to ride

Among the bonds priced earlier in the week, the clear winner was Florida East Coast Railway's new 8 1/8% senior secured notes due 2017; a trader saw those bonds trading sharply above the par level at which the $475 million deal, upsized from $450 million originally, had priced late in the day on Wednesday.

"That was a very good bond," a trader enthused. "We like that bond - it was way oversubscribed."

He said that the Jacksonville, Fla.-based railroad operator, which runs a freight line running pretty much the length of the Sunshine State, "has an interesting business."

He explained that "a lot of shippers and truckers [from outside Florida] don't want to go there because they don't have any product to take back. So these guys have got a pretty good lock on that market, bringing everything down the coast that way."

He saw the yield on the bond tightening to 7¼% from 8 1/8% at issue, "tighter than I initially thought it would go to, so that worked out pretty well."

He said that investor demand for the bonds was so brisk that "they could have tripled the size of that deal."

One factor helping boost the bonds, he said, was that "it's a new name, so everybody's got room for it. When they bump up to their limits of what they can own in a particular name or industry, this is a new name that hasn't been to the market, and they have a pretty good grasp of their business."

He went on to say that the new issue was "a win-win - a lot of people said they would take them, but the allocations were pretty thin," leading investors to turn to the secondary market in order to build their positions in the name."

Inergy, Charter do alright

Among Wednesday's other deals, Inergy, LP's $750 million issue of 6 7/8% notes due 2021 was trading around 100½ bid, 100 5/8 offered during the morning, a trader said. This was up slightly from the par level where the Kansas City, Mo.-based propane and natural gas distributor's upsized quick-to-market issue had priced on Wednesday, though down from its initial aftermarket peak level of 100¾ bid, 101¼ offered.

While the trader did not see much in the way of dealings after those early transactions, he asserted, "I still think there are buyers out there," estimating the bonds at 100½ bid, 101 offered.

Charter Communications, Inc.'s add-on 7% notes due 2019 was trading at 100¼ bid, 100½ offered on Thursday, up nearly a point from the 99.5 level at which the St. Louis-based cable and broadband operator's quickly shopped $300 million deal - upsized from $250 million originally - had priced on Wednesday to yield 7.082%

However, a trader said that Houston-based natural gas concern Targa Resources Partners LP's new 6 7/8% notes due 2021 "were straddling par" at 9 7/8 bid, 100 1/8 offered - right where the $325 million drive-by offering, upsized from the originally announced $250 million, had priced.

Those bonds had initially firmed slightly when they began to trade late Wednesday, getting as good as 100 3/8 bid, 100½ offered, before coming back in on Thursday. "We had a seller there," he said.

But a little later on, though, another trader quoted them at back up at 100 3/8 bid, 100 5/8 offered.

Secondary indicators ease off

Away from the new deal arena, a trader saw the CDX North American Series 15 HY index unchanged on Thursday, after having lost 3/8 point Wednesday to end at 103¼ bid, 103½ offered.

The KDP High Yield Daily index meantime fell by 4 basis points Thursday to end at 74.97, after having eased by 1 bp Wednesday. Its yield rose by 2 bps to 7.1% after having remained unchanged for a second consecutive session on Wednesday.

The Merrill Lynch High Yield Master II index lost ground for the first time in seven sessions, retreating by 0.054% on Thursday, essentially erasing Wednesday's 0.052% advance. That left its year-to-date return at 1.452% on Thursday, down from Wednesday's 1.507%, the peak level for 2011 so far.

Declining issues finally overtook advancers on Wednesday, after a 16-session stretch dating back to mid-December during which the gainers had led the losers. The decliners held about a six-to-five advantage versus the advancing issues' seven-to-six winning margin on Wednesday.

Overall activity, represented by dollar-volume levels, rose by 5% on Thursday, after having jumped 30% on Wednesday from the previous session's level.

But a trader said that, once again, the junk secondary was largely focused on trading in the new deals, with the established names mostly taking a back seat

Apart from the new deals, one said, "It was zero," except for trading in some scattered issues.

Harry & David come off lows

Among specific issues, a trader said that the Harry & David Operations Corp.'s 9% notes due 2013 "seemed like they ticked back up a little," after getting clobbered on Wednesday on the news that the Medford, Ore.-based marketer of fruit baskets and other gourmet food gift items is in danger of falling out of compliance with its credit facility covenants and will have to restructure its debt and secure new capital if it is to continue beyond the short-term.

He saw the notes pushing back to a 41-43 range from lows around 38 bid on Wednesday, "so they're up a few points." He saw "a decent amount of volume," with the last trades of the day going off around 42½ bid.

OPTI Canada still challenged

A trader saw "a lot of volume" in OPTI Canada Inc.'s 7 7/8% senior secured notes due 2014 and in its 8¼% notes also due in 2014. He said that at the end of the day, both issues were trading in a 66-67 range, though with most of those trades down around the 66-661/4-66½ area on the bid side.

'So they're holding in the mid 60s," he said, which is in line with where they've been this week but down from recent peak levels around and above the 70 bid mark. He saw "decent" trading in both, but noted that the Calgary, Alta.-based oil-sands energy company's 81/4s "are the bigger issue. The other ones just follow along."

A second trader called OPTI's bonds "weaker again today," including the 9% first-lien senior secured notes due 2012 and 9¾% first-lien 2013 senior secureds, "which are supposed to be covered, but it looks like they went out 991/2-par on the 2012s and the 2013s went out at 981/2-991/2, and they were quoted above par recently."

He also saw the other bonds continuing to trade down around 66 and with a yield of 20.5%. "I think these things are pretty heavy."

He characterized OPTI as "a particular name that seems to bounce around a lot. It's got a high-beta on it, and I think the hedge-fund community likes pushing this one around, so it has a typical 5-point swing."

He further said that investors in OPTI have got to have "a strong stomach for it. It's tough to be involved in that name."

Paper names stand pat

A trader said that NewPage Corp.'s 11 3/8% senior secured notes due 2014 have been holding around the 98 level, calling the Miamisburg, Ohio-based coated-paper manufacturer's bonds "active" in a 971/2-98 bid range, perhaps a half-pointy down from where they were trading on Wednesday.

He meantime saw Richmond, B.C.-based NewPage sector peer Catalyst Paper Corp.'s 11% senior secured notes due 2016 at bid levels around 100½ to 101, which he said seemed unchanged.

He saw the company's 7 3/8% notes due 2014 at 81 bid, 83 offered, calling them unchanged on the day. Those bonds have come down sharply from peak levels around 86 bid reached last week on Catalyst's announcement of the redemption of another series of bonds.

"So there was activity in the names. But there was more activity in the 11s. The 7 3/8s had no activity; they were just quoted there."

Autos little changed

A trader saw Motors Liquidation Co.'s benchmark 8 3/8% bonds due 2033 - issued when the company was still called General Motors Corp. before its 2009 bankruptcy reorganization - "a little lower," quoting the bonds around 35 bid, which he said was down ½ of a point on "decent volume."

Another trader also saw the "old GM" bonds down ½ of a point at 35 bid, 35½ offered, while seeing GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 up ¼ point on the session at 107½ bid, 108½ offered.

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