Primary quiet to end $11 billion week; Yum! slates megadeal; Valeant up on M&A buzz

By Paul Deckelman and Paul A. Harris

New York, May 27 – The high-yield primary sphere took a break on Friday – finally – after a busy four days which saw more new dollar-denominated and fully junk-rated paper from domestic or industrialized-country borrowers come clattering down the chute than any other week so far this year.

The lack of any new deals pricing during the session for the first time this week left the weekly tally of new junk bonds right where it had been at the close on Thursday – some $11.2 billion had priced in 20 tranches, according to data compiled by Prospect News – well up from the $5.87 billion which came to market in nine tranches last week, ended May 20, and up as well from the $10.94 billion of new paper that priced in nine tranches during the week ended April 8, this year’s previous heaviest primary week.

This week’s issuance was the most seen in Junkbondland since the $13.64 billion that priced in 14 tranches during the week ended last Nov.6, last year’s single heaviest primaryside week.

The week’s issuance raised this year’s new-deal total so far to $92.63 billion in 129 tranches, although that still lagged last-year’s intense pace by 40.38%; some $155.37 billion of new junk paper had priced in 245 tranches by this point on the calendar last year.

While no new deals actually priced on Friday, syndicate sources said that fast-food restaurant operator Yum! Brands, Inc. – known world-wide for its Taco Bell, KFC and Pizza Hut eateries – plans to dish out more than $2 billion of new notes in a two-part deal expected to come to market next week.

In the secondary arena, traders reported reduced volumes owing to the abbreviated pre-Memorial Day session. Fixed-income markets in the United States will be shuttered on Monday in observance of the holiday.

As had been the case all along this week, much of what activity that did go on was centered around the names that came during this week’s flood of new deals, such as Teck Resources Ltd., Cengage Learning Inc., TransDigm Inc. and Hertz Equipment Rental Corp. They said the new deals mostly hung around at the levels seen at the end of Thursday’s session.

Away from the new deals, embattled Canadian drugmaker Valeant Pharmaceuticals International Inc.’s bonds were up by anywhere from 1 to 3 points across the company’s capital structure, strengthened by the news that the company’s management had rejected a takeover bid – which investors seemed to take as a positive sign that some in the financial world still see value in Valeant despite its well-publicized troubles.

Statistical market performance measures were mixed for a second consecutive session on Friday; the indicators had turned mixed on Thursday, after having been higher across the board on both Tuesday and Wednesday. Friday was as the third mixed session in the last five trading days.

But the indicators were up all around versus where they had finished last Friday, when those market measures had been mixed. It was the second stronger week in the last three trading weeks.

Yum! announces $2.3 billion

The high-yield primary market took a breather ahead of Friday’s early close, sources said, after a week that saw a massive $11.2 billion of issuance in the four days through Thursday’s close.

Yum! Brands announced a $2.3 billion offering of senior notes in tranches with maturities in 2024 and 2026 in a Friday morning press release.

The announcement – coming as it did ahead of an extended holiday weekend – mystified several market sources who spoke to Prospect News.

The deal (B1/BB) will be led by Goldman Sachs & Co. and is expected to price on Thursday, June 2, a trader said.

Yum! plans to use the proceeds, along with new bank debt, to fund a return of capital to shareholders, as well as to repay revolver debt and for general corporate purposes.

The week ahead

Primary market activity won’t be nearly as robust in the holiday shortened May-June crossover week, a debt capital markets banker forecasted on Friday.

A number of issuers who priced deals during the past week were initially expected to hold off until the post-Memorial Day period, the banker added.

The issuers in question elected to accelerate timing ahead of two events which could possibly impact investors’ appetites for risk.

One of those events is the June 14-15 Fed meeting. The Fed might decide to raise its benchmark Fed Funds rate at that time, the source noted.

The other potential market-impacting event is the so-called “Brexit” referendum, set for June 23, when voters in the United Kingdom will decide whether or not the country is to stay in the European Union.

Meanwhile the market is really focused on two deals, the banker said.

One is the above-mentioned $2.3 billion offering from Yum! Brands.

The other is the unsecured portion of Dell Inc.’s financing for the acquisition of EMC Corp.

That deal, expected to come sized at $3.25 billion, was truncated when demand soared for Dell’s investment grade-rated secured bonds.

On May 18 Dell sold $20 billion of senior secured notes (Baa3/BBB-/BBB-) in six tranches to investors from the high-grade, crossover and high-yield sectors who combined to put in $80 billion of orders. Of that total, 20% came from junk investors.

The much diminished $3.25 billion, down from $9 billion, of speculative-grade senior unsecured notes is expected to come sooner rather than later, the banker said on Friday.

Away from Dell and Yum!, there are some opportunistic issuers that might appear, the source added, but specified that issuance in the May-June crossover week is unlikely to be anything nearly as robust as that seen in the run-up to Memorial Day.

Mixed flows on Thursday

Cash flows for dedicated high-yield bond funds were mixed on Thursday, the most recent session for which data was available at press time.

High-yield ETFs sustained $110 million of outflows on the day.

However actively managed funds saw $40 million of inflows on Thursday.

Those numbers trail Thursday’s report from Lipper-AMG that the dedicated high-yield funds sustained $562.3 million of outflows for the week to last Wednesday’s close.

Teck trades actively

In the secondary market, a trader said that all told “not much was going one, outside of trading in the new deals, and Valeant.”

He said that there was “not very heavy volume” in most of the recently priced deals, with a couple of exceptions, “and levels were about where they were yesterday.”

He quoted the new Teck Resources 8% notes due 2021 at 102 bid, and the 8½% notes due 2024 at 102¼, which he said was not much changed on the day.

On a day when not much was going on, Teck was actually one of the busier names on the block, a second trader said, noting that more than $20 million of each of those new bonds had changed hands, putting both high up on the Most Actives list.

He saw the five-year notes finishing at 102 1/8 bid, calling that down 3/8 point on the session, while the eight-year piece of paper was at 102½ bid, which he said was up by around 1/8 point

Yet another trader saw the five-years in a 102¼ to 102¾ context, while the eight-years traded between 102½ and 103. But he noted that was down from levels around and above 103 bid at which the new Teck paper had traded after pricing.

Teck, a Vancouver, B.C.-based mining concern, had priced $1.25 billion of those notes in a regularly scheduled forward calendar on Thursday after the transaction was upsized from an original $1 billion.

The deal consisted of $650 million of the 2021 notes and $600 million of the 2024 notes. Both tranches priced at par and then sprinted up above the 102 bid level on active volume when they were freed for secondary dealings.

Thursday deals hold steady

Among Thursday’s other deals, a trader quoted the new Cengage 9½% notes due 2024 at a 100¾ to 101 bid level. More than $8 million of those notes changed hands during the session – not much by ordinary standards but a sizable amount for Friday.

A second market source located the notes at 100¾ bid, calling them little changed.

Cengage, a Boston-based educational materials and services provider, priced $640 million of the notes at par on Thursday after downsizing the scheduled forward calendar offering twice, from $740 million originally and then $640 million. The paper firmed modestly when it moved into the aftermarket later on Thursday.

A trader said that Realogy Holdings Corp.’s 4 7/8% notes due 2023 were trading around 99¼ bid, “right where the issue was priced” on Thursday.

The Madison, N.J.-based real estate services company had priced $500 million of the 4 7/8% at 99.269 in a quick-to-market offering to yield 5%.

TransDigm, Hertz seen busy

Going back a little further, the new TransDigm 6 3/8% notes due 2026 were seen hanging in a little bit above their par issue price at 100 1/8 bid, a trader said, calling that down about 1/8 point on the session.

More than $12 million of the notes were moving around.

A second trader also saw the notes marginally lower, at 100 1/8 bid, 100 3/8 offered.

The Cleveland-based aircraft components maker’s $950 million of the notes priced at par in a quick-to-market offering on Wednesday but only firmed slightly from that point, though on heavy volume.

A trader saw the Hertz Equipment’s7½% notes due 2022 up 1/8 point at 100½ bid on around $9 million of volume.

HERC, a division of the giant Estero, Fla.-based vehicle and heavy equipment rental company, priced $1.235 billion of new paper in two tranches on Wednesday after upsizing the scheduled forward calendar offering from $1.1 billion. It consisted of $610 million of the 7½% notes and $625 million of 7¾% notes due 2024, both of which priced at par and then hugged a par to 100¼ bid context.

Valeant gains on takeover talk

Away from the new deals a trader said that Valeant Pharmaceuticals “had news out and the bonds were up,” seeing its 6 1/8% notes due 2025 up a deuce on the day at 84 bid.

He saw the company’s paper up 2 points across its capital structure.

More than $38 million of those 6 1/8% notes traded, a market source at another desk said, making it easily the day’s most active junk bond issue.

Its next-busiest issue, the 6 3/8% notes due 2020, gained 1 3/8 points, ending up at 89 3/8 bid, on volume of $8 million.

A trader said that the bonds rose on the news that Valeant, a troubled Laval, Quebec-based drug had rejected a joint acquisition bid from Japan’s Takeda Pharmaceutical Co. Ltd. and private-equity firm TPG, “meaning that some people have an interest in the company.”

© 2015 Prospect News.
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