PSS, Pacific Drilling price; Chesapeake Energy still churning; funds see still more inflows

By Paul Deckelman and Paul A. Harris

New York, Feb. 16 - The high-yield primary market saw activity pick up a little on Thursday. Two dollar-denominated deals collectively worth more than $500 million priced, versus the miniscule activity of the previous session.

Medical products and services distributor PSS World Medical Inc. came to market with a $250 million 10-year issue, and deepwater oilfield services contractor Pacific Drilling SA priced $300 million of three-year notes later in the session. Unlike most of this week's new issues and some of last week's, neither of those offerings was an opportunistically timed, quickly shopped drive-by transaction. Both came off the forward calendar.

The new PSS World Medical bonds firmed solidly when they reached the aftermarket, while Pacific Drilling's paper came too late in the session to trade around.

For a third straight session, there was astoundingly heavy trading in the new Chesapeake Energy Corp. seven-year mega-deal that priced late Monday. The activity was still anchored within a half-point, or even less, of the bonds' discounted issue price. With so little real price movement going on, traders were still puzzling out why volume in the natural gas company's new deal has rolled into the hundreds of millions of dollars over each of the past three days.

Away from trading in the new deals, particularly Chesapeake Energy, traders saw little real junk market activity. They said the market softened initially coming off Wednesday's retreat but recovered later on as stocks jumped on better economic data.

Statistical measures of junk performance turned mixed.

And high-yield mutual fund flows - a good proxy for overall Junkbondland liquidity trends - showed weekly gains for the 11th straight time.

AMG posts $1.77 billion inflow

As Thursday's session was winding down, market participants familiar with the weekly AMG high-yield mutual fund flow statistics said that in the week ended Wednesday, $1.77 billion more came into those weekly reporting funds than left them.

It was the seventh consecutive gain so far in the new year and came on the heels of the almost identically sized $1.78 billion cash injection seen by Arcata, Calif.-based AMG, a unit of Thomson Reuters' Lipper/FMI division, in the week ended Feb. 8.

There have been no outflows so far in 2012, and net inflows have totaled about $10.96 billion, according to a Prospect News analysis of the numbers, up from $9.19 billion the week before.

It was also the 11th consecutive inflow, a streak that dates back to early December. Over that almost three-month stretch, net inflows have totaled $14 billion, according to the Prospect News analysis.

EPFR sees $2.25 billion inflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, also reported an 11th straight week of inflows.

About $2.25 billion more came into those funds than left them during the week ended Wednesday.

That followed a $3.55 billion cash addition the previous week - the second-largest weekly inflow since EPFR began tracking the junk fund flows, exceeded only by the $4.76 billion cash infusion seen in the week ended Oct. 26.

On a year-to-date basis, with no outflows seen so far in 2012, inflows have totaled $15.78 billion, up from the prior week's estimated $13.53 billion cumulative total.

Over the 11-week period dating back to early December, inflows have added up to an estimated $18.68 billion.

EPFR's figures and those of AMG generally point in the same direction, although their actual numbers usually differ since they calculate their respective fund-flow totals very differently. EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds and counts exchange-traded funds excluded from the more narrowly focused AMG tally.

Cumulative fund-flow estimates, whether of the AMG numbers from Lipper/FMI or those from EPFR, 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 observable and 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, and continued to be the driver behind 2011's near-record issuance.

Those fund flows are also seen as the key element behind the high-yield secondary market's fairly strong performance so far this year and the pickup in new-deal activity.

PSS Medical World prices

PSS World Medical priced a $250 million issue of 10-year senior notes (Ba3/BB-) at par to yield 6 3/8% on Thursday.

The yield printed at the tight end of the 6½% area yield.

Credit Suisse Securities (USA) LLC and Bank of America Merrill Lynch were the joint bookrunners.

Proceeds will be used to pay down revolver debt, to partially prefund repayment of the company's convertible notes due 2014 and for general corporate purposes.

Pacific Drilling too

Pacific Drilling priced a $300 million issue of three-year notes at par to yield 8¼%.

Pareto Securities, DnB NOR Markets and RS Platou Markets were the bookrunners.

Proceeds will be used to fund working capital and company growth and for general corporate purposes.

Fiat drives by

Away from the dollar-denominated market, Fiat Finance & Trade Ltd., SA priced an upsized CHF 425 million issue of 5% notes (Ba3/BB/BB) at a 480 basis points spread to mid-swaps.

The deal launched at mid-swaps plus 481 bps.

The notes priced at par and yield 5.01%.

UBS was the bookrunner for the quick-to-market deal, which was upsized from CHF 250 million.

MMI sets price talk

Singapore's MMI International Ltd. talked its $300 million offering of five-year senior secured notes (expected Ba3/expected BB-/confirmed BB-) to yield 8% to 8¼%.

The books closed at the end of the Thursday market session, and the deal is set to price Friday morning.

J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC and UBS Securities LLC are the joint bookrunners.

The Singapore-based precision engineering company plans to use the proceeds to repay debt.

Tembec to tap 11¼% notes

Tembec Industries Inc. plans to price a $50 million add-on to its 11¼% senior secured notes due Dec. 15, 2018 (expected ratings B3/B-) on Friday via bookrunner Bank of America Merrill Lynch.

The Quebec-based forest products company plans to use the proceeds for general corporate purposes including additional liquidity to support its previously announced capital expenditure initiatives.

The original $255 million issue priced at 98.717 to yield 11½% in August 2010.

PSS paper pops

When the new PSS World Medical 10-year notes were freed for secondary dealings, a trader said that he had "not seen a single thing in that."

But a second trader declared that the Jacksonville, Fla.-based medical products and services provider's deal "traded very well." He saw the bonds jump to 103¼ bid, 103 5/8 offered from their par issue price.

While there was not too much activity seen in the new bonds, another trader said that there didn't have to be.

"With a $250 million deal, all you need is somebody to say 'I want to buy $20 million more,' and it's at 103."

He said that a rise in the bonds' price to 103 would translate into a yield of around 6%, "so that one's done. Nobody's going to trade that anymore."

More Chesapeake trading

For a third straight session, Chesapeake Energy's new 6.775% notes due 2019 were the toast of the town, at least in terms of activity levels if not necessarily price movements.

"A lot of size again has traded," one market participant said, estimating volume at almost $150 million.

While that was only about one-third of the $450 million of the new bonds that changed hands on Tuesday after Chesapeake priced the upsized $1.3 billion issue at 98¾ to yield 7%, it was about in line with Wednesday's volume.

He saw the bonds up slightly, with almost all of the day's trading taking place inside a 991/4-to-99½ context.

After pricing, the new Chesapeake issue had initially traded around 98 7/8-99; then on Wednesday, they had edged up to and a little above the 99 mark.

The trader said that the huge attraction of Chesapeake was puzzling given the relatively small price moves the bonds have generated.

"Usually [new bonds just trade for] a day or so, and whoever needs to add, adds, and whoever wants to flip, flips. But the high volume in this name is just astounding.

"It's not like we're talking $30 million or $40 million," he continued, "but hundreds of millions."

He pointed out that the second-most actively traded bond, according to the Trace system, "is $110 million away," Gap Inc.'s 5.95% notes due 2021. Trading in the San Francisco-based clothing store chain operator's bonds totaled around $33 million.

"So single-handedly, there's nothing even close to [Chesapeake] today."

Chesapeake appeal a puzzle

At another desk, a trader said that "people still can't decide whether they want to own it or they want to sell it, and I'm not even sure who's trading it, what type of accounts, or whether it's just the Street trading it with one another, making one-eighth point markets."

He pointed out that Trace tends to undercount trading volume, particularly when it comes to high-yield issues. He speculated that over the three sessions, perhaps the entire $1.3 billion of the new Chesapeake notes that were issued may have actually changed hands at one point or another.

But despite that great volume, he opined that "this just seems to be a trading vehicle. It doesn't seem to be anything that people really care about."

The trader suggested that "there are several ways that people are looking at it."

Some investors might feel that since they bought the bonds at a discount of 1¼ points from par, "if they get taken out a year from now, at par, they will have gotten a coupon of almost 7% and they'll make 1¼ points."

However, in his opinion, such a scenario is predicated on Chesapeake being able to successfully continue its previously announced strategy of selling non-core assets to monetize them, helped by a stabilizing of natural gas prices.

But he said there are several ways the wheels might come off such a strategy, including natural gas prices remaining at currently depressed levels or softening even further so that nobody wants to buy those gas assets, or Chesapeake deciding it could not get the price for the assets being sold that it wants and taking them off the market. A third reason might be that the widely used natural gas drilling method known as fracking "has become a political football and nobody wants to get in the middle of that."

If the asset sales don't materialize, "you don't get called, and it becomes a non-call piece of paper again. People are saying that then it's cheap to the rest of the Chesapeake curve and it should tighten in, so you'll get performance there."

He disagrees. If the asset sales don't happen, "you're stuck in there for the duration, and the credit will deteriorate."

While some people may be "betting that it will get upgraded to investment grade, I don't know if that will happen either. So if you bought it because you thought they were going to get the asset sales off, you were going to make 1¼ points and you were going to get taken out in a year and none of that happens, you're not going to get upgraded. So are you going to realize any tightening relative to the rest of the Chesapeake curve? It's hard to say."

He called investing in the bonds "a nice bet on a piece of paper that conceivably you could get par for 11 months from now - if everything falls into place. Other than that, it's just pure speculation."

Riding the roller coaster

Away from Chesapeake and the other new deals, a trader said that "stuff was a little weaker to begin the day, but then we got it all back this afternoon. So you were probably basically unchanged after some volatility in the morning and then the afternoon."

Part of the rebound mirrored the stock market, which started off slowly but gradually gained strength on good news about U.S. economic data that overshadowed, at least for a day, the continuing angst about the Greek debt situation. The bellwether Dow Jones industrial average jumped by 123.13 points, or 0.96%, to end at 12,904.08, its highest close since May 2008, months before the financial meltdown that year began in earnest.

The trader also noted that high yield initially was feeling some of the downward pressure on the high-grade financials, some of which were threatened with possible ratings downgrades, but "as that sector stabilized, you saw high yield stabilize and some of the money come back in."

Another trader called Thursday's session "a strange day. It softened early, Europe was open, then it came back. It was just a weird day."

He also said that "there was very little flow. Everyone was working on the same thing. If you got involved in a name, all of a sudden, three or four brokers would try to get involved in it.

"It was kind of crazy."

He saw "some ETF selling today, then some ETF buying."

Market data turns mixed

Statistical measures of junk market performance turned mixed on Thursday, the same way it was earlier in the week, after having been lower Wednesday.

A trader said that the CDX North American Series 17 High Yield index gained ¾ point to end at 97 bid, 97½ offered after having seen two consecutive losses, including Wednesday's 5/8 point retreat.

But the KDP High Yield Daily index notched its fifth straight loss on Thursday, off by 9 bps to close at 74.05, on top of the 6-bps decline seen Wednesday. Its yield moved up by 3 bps on Thursday to 6.72% after having gained 1 bp on Wednesday.

And the widely followed Merrill Lynch High Yield Master II index eased by 0.127% on Thursday, its second straight loss. It had edged down by 0.007% on Wednesday.

That loss dropped the index's year-to-date return to 3.745%, down from Wednesday's 3.877% and down as well from Tuesday's 3.885%, its peak for 2012 so far.

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