Tesoro Logistics notes price; recent deals come off highs; B/E Aerospace climbs post-earnings

By Paul Deckelman and Paul A. Harris

New York, Oct. 22 – The high-yield market cooled off a little bit on Wednesday from its previously torrid pace.

Syndicate sources said that $1.3 billion of new bonds came to market in one deal, Tesoro Logistics LP’s two-part offering consisting of five-year and eight-year notes.

Traders saw no immediate aftermarket activity in the bonds of the San Antonio, Texas-based company, which owns and operates energy transportation and storage facilities and equipment.

The $1.3 billion was down from Tuesday’s total of $1.95 billion of new dollar-denominated, junk-rated paper, which priced in four tranches.

Traders saw brisk activity in Tuesday’s new-issue names such as German ball-bearing manufacturer Schaeffler AG and business information and analytics provider IHS Inc., with the latter credit seen as the busiest in Junkbondland. Those bonds were seen having come off from the highs they had hit in their initial aftermarket dealings, although they remained well above their respective issue prices.

That was also the case with other recent deals, including those from alcoholic beverage distributor Constellation Brands, Inc. and from Nova Chemicals Corp.

Away from the new deals, traders said the secondary market seemed mostly firm, although some names did come in from their recent peak levels.

Among specific issuers, aircraft interior components manufacturer B/E Aerospace Inc.’s eight-year bonds gained altitude in active trading after the company reported improved third-quarter earnings versus a year ago that topped analysts’ expectations and announced its intention to refinance its current debt as part of the upcoming spin-off of some of its operations.

Statistical indicators of junk market performance turned mixed on Wednesday after having been higher across the board over the previous four sessions.

Tesoro comes inside talk

News volume in the primary market was light on Wednesday.

The day's sole issuer was Tesoro Logistics, which priced $1.3 billion of senior notes (Ba3/BB) in two tranches.

The deal featured a $500 million tranche of five-year notes that priced at par to yield 5½%. The yield printed 12.5 basis points inside of yield talk in the 5¾% area.

In addition, Tesoro Logistics priced an $800 million tranche of five-year notes at par to yield 6¼%. As with the five-year notes, the yield printed 12.5 bps inside of yield talk, which was in the 6½% area.

BofA Merrill Lynch was the left bookrunner. RBS Securities Inc., Barclays, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, MUFG, RBC Capital Markets, UBS Investment Bank and Wells Fargo Securities LLC were the joint bookrunners.

Proceeds, along with a new amended and restated revolver and a concurrent public equity offering, will be used to repay existing revolver debt and to fund the acquisition of QEP Field Services, LLC’s midstream business for $2.5 billion, which includes $230 million to refinance QEP debt. Proceeds will also be used for general partnership purposes.

Fresenius conference call

The session also brought one new deal announcement.

Fresenius Medical Care US Finance II, Inc. scheduled a conference call with investors at 12:30 p.m. ET Thursday to present a $900 million two-part offering of non-callable senior notes (expected ratings Ba2/BB+).

The deal, which is set to price Friday morning, features notes due Oct. 15, 2020 and notes due Oct. 15, 2024.

Tranche sizes remain to be determined.

Wells Fargo is the left bookrunner. Citigroup, Deutsche Bank, Scotia and SunTrust are joint bookrunners.

The Bad Homburg, Germany-based kidney dialysis company plans to use the proceeds to repay the term loan A-2 under its 2012 credit agreement, as well as other short-term debt, and to fund acquisitions and for general corporate purposes.

Tesoro Logistics little traded

In the secondary realm, traders said they had not yet seen any activity in the new Tesoro Logistics five-year or eight-year notes, which came to market late in the session.

Intense trading in IHS

Among other recently priced deals, a trader said that IHS Inc.’s 5% notes due 2022 “traded a lot of bonds today,” calling them “the volume leaders.”

He saw $80 million of the Englewood, Colo.-based business information and analytics provider’s new bonds changing hands, saying that the new paper “started off wrapped around 102 and then pulled back a little,” in line with the general junk retreat from Tuesday’s highs.

He saw the notes going home in “a 101¼-to-101¾ type context,” calling that down ¾ points on the day.

A second market source pegged the bonds ¼ point lower at 101½ bid, estimated round-lot volume alone at more than $73 million by the close.

That quickly shopped $750 million issue had priced at par late in the day on Tuesday after having been upsized from an originally announced $500 million. A market participant said the bonds had moved up to around 101 7/8 bid on Tuesday in initial aftermarket activity late in the day, with over $24 million traded.

Schaeffler off its highs

Tuesday’s big deal, the two tranches of dollar-denominated notes totaling $1.15 billion from German automotive and industrial ball-bearing manufacturer Schaeffler, was seen on Wednesday having come in a little bit from the robust gains racked up on Tuesday in very active initial aftermarket dealings after pricing.

A trader said that the company’s 6¼% senior secured PIK toggle notes due 2019 were trading around the 102½ bid level, while its 6¾% senior secured PIK toggle notes due 2022 were around 103 bid.

At another desk, a market source saw the 2019 notes off ¼ point at 102 3/8 bid, on volume of more than $18 million, while the 2022s were about unchanged at 103 1/8 bid, with over $32 million having traded.

Yet another trader quoted two-sided markets in the name, seeing the 2019 notes off ¼ point on the day at 102 1/8 bid, 102 5/8 offered and the 2022 notes down 3/8 point at 102¼ bid, 102¾ offered.

Schaeffler priced $475 million of the 2019 notes and $675 million of the 2022 notes, both at par, via its Schaeffler Holding Finance BV funding unit as part of a larger €1.2 billion equivalent three-part offering that also included €350 million of 5¾% senior secured PIK toggle notes due 2021, which priced at 98.756 to yield 6% after being upsized from €300 million originally.

The new dollar bonds had firmed smartly in Tuesday’s aftermarket dealings, the 2019s moving up to around 102½ bid on volume of more than $32 million and the 2022s rising to around the 103 bid level on $49 million of turnover.

TPC trades lower

Tuesday’s other offering, a tranche of 8¾% senior secured notes due 2020 from Houston-based chemical components manufacturer TPC Group Inc., was seen by a trader having come down to 103½ bid, 104½ offered, which he called a loss of ½ point.

The company had priced a $50 million add-on to its existing 2020 notes on Tuesday at 103½ yield 7.741%. The new bonds had moved up to 104 bid, 104½ in their initial post-pricing trading.

Constellation comes off

A trader saw both halves of Monday’s two-part offering from Constellation Brands trading a little lower on Wednesday versus where they had gone home on Tuesday, when they first hit the aftermarket and firmed from their par issue prices.

He quoted its 3 7/8% notes due 2019 “wrapped around 101” and its 4¾% notes due 2024 “wrapped around a 102ish level.”

The Victor, N.Y.-based manufacturer and importer of such well-known alcoholic beverages as Robert Mondavi wines, Svedka vodka and Mexico’s Corona beer had priced a quickly shopped $400 million of each issue at par on Monday, with the 3 7/8% notes having pushed up to around 101½ bid and the 4¾% paper having jumped to a little above 102 bid when they began trading on Tuesday.

Nova eases from highs

The trader also saw Nova Chemicals’ quick-to-market 10.5-year offering, which had priced Friday, having come down from its peak post-pricing trading levels.

He said that those 5% notes due May 1, 2025 were trading around 102¼ bid on Wednesday, “off a little from the 102½ to 103 where they had topped out yesterday [Tuesday].”

The Calgary, Alta.-based plastics and chemicals producer had priced its $500 million issue at par on Friday; the paper gained 1 point in initial late-session aftermarket trading and then continued to move up by about another ¼ to ½ point on Monday, when over $34 million had changed hands.

And they had surged on Tuesday, up another 1½ point to around 102½ bid, on busy volume of more than $23 million traded.

Albertson’s 7¾% bonds slide

Among other recently priced names, Albertson’s Holdings LLC’s 7¾% senior secured second-lien notes due 2022 remained one of the most active junk credits for a second straight session on Wednesday.

A market source quoted the Boise, Idaho-based supermarket operator’s notes at 98 1/8 bid, down 5/8 point, with over $20 million traded.

That was a far cry from Tuesday, when the notes had risen 1 1/8 point to go home at 98¾ bid, on volume of over $17 million.

The company had priced its $1.15 billion of those notes on Oct. 8 at 98.55% to yield 8%. But the new bonds began retreating “almost right out of the chute,” a trader said, eventually bottoming below 94 bid around the middle of last week.

Since then, they had come off that nadir to back above the 98 bid level earlier this week.

B/E Aerospace better

Away from the new deals, bonds of B/E Aerospace were seen better after the Wellington, Fla.-based aircraft interiors manufacturer reported improved third-quarter numbers.

A market source saw the company’s 5¼% notes due 2022 up 2 5/8 points on the day, going out at 111 5/8 bid, with over $27 million having changed hands, making it one of the day’s busiest junk credits.

Its 6 7/8% notes due 2020 gained 7 /8 point to end at 108½, though volume was only about $4 million.

But unlike the bondholders, equity investors were disappointed; the company’s Nasdaq-traded shares fell by $5.52, or 6.90%, to end at $74.47. Volume of nearly 2.8 million shares was double the norm.

The company reported net earnings during the third quarter ended Sept. 30 of $102.2 million, or 98 cents per diluted share, up from $92.7 million, or 90 cents per share, in the year-earlier quarter.

Adjusted for non-recurring costs, earnings came in at $121.3 million, or $1.16 per share, up from $93.9 million, or 90 cents, a year ago and slightly above Wall Street’s expectations of $1.15.

Revenues of $1.1 billion for the period were up 24% from $888 million a year ago but slightly missed expectations of $1.11 billion.

The company also gave further details about its previously announced plans to spin off its consumables management segment, consisting of B/E’s aerospace distribution and energy services businesses, into a new entity, KLX, Inc., which will be capitalized through the issuance of $1.2 billion of new senior unsecured notes.

As part of this upcoming separation, B/E expects to redeem all of its currently outstanding debt, using the proceeds from an anticipated issuance of new secured prepayable term debt plus a $750 million dividend that KLX will pay to its soon-to-be-former parent from the proceeds of its bond sale, with the new entity retaining $430 million of those proceeds for general corporate purposes. The company also expects to establish a secured revolving line of credit for its own general corporate purposes.

Sears, Penney come off lows

Elsewhere, a trader said that “one name that has stood out the past couple of sessions” at his shop has been Sears Holdings Corp., helped by Monday’s announcement that the Hoffman Estates, Ill.-based operator of the eponymous Sears and Kmart department store chains is doing a rights offering that will allow its stockholders to purchase up to $625 million principal amount of 8% senior notes due 2019 and equity warrants.

“They’re bringing a new deal, and its [6 5/8% 2018] bonds have been trading in a 93¼-to-93½ context,” he said.

He said that was actually off a little from the 94-to-94½ range they previously held, “so bonds are off a little bit, but Sears is definitely up on the new news of the new deal that’s potentially coming.”

Those notes had traded as low as an 87-to-88 context just a week ago.

He also said that J.C Penney Co. Inc.’s recently issued 8 1/8% notes due 2019 “were trading off their lows, moving up to 95½ to 96.”

The Plano, Texas-based department store operator sold $400 million of the notes, pricing them at par on Sept. 10 after increasing the deal size from $350 million.

After initially trading at or a little bit above their issue price, the bonds began to lose ground and gradually moved lower, bottoming at around 93½ bid on Monday before starting to come back up.

Market recently improved

Overall, a trader said that “all of the short stuff that’s been getting beaten up over the past few weeks has definitely come back.

“Bids that were getting hit are now the offers that are getting lifted, so we’ve definitely come back a bit.”

Funds inflows expected

The better market tone that started at the end of last week and that has continued on so far this week – even with the slight easing off the highs seen on Wednesday – has market participants believing that investors are putting money back into junk bond mutual funds and exchange-traded funds – a small percentage of the total amount of money sloshing about the $1.5 trillion high-yield market, but an observable and quantifiable piece of that total picture that serves as a gauge of overall market liquidity trends.

For instance, the sources have seen robust daily inflows to the ETFs, with one reporting a $384 million net inflow to the ETFs on Friday.

Accordingly, another participant opined that “I would not be surprised by a decent inflow number tomorrow,” referring to the usual Thursday afternoon release of fund-flow data for the week ended Wednesday by the several fund-tracking agencies.

He said that his prediction was “based on the pricing action we’ve seen this week.”

And he said that the expected inflow would be “a nice bounce from last week,” when AMG Data Services, a subsidiary of Thomson Reuters Corp.’s Lipper analytics unit, reported that $548.7 million more had left those funds than came into them in the week ended last Wednesday, a sharp deterioration from the $1.28 billion inflow that had been seen the week before, ended Oct. 8.

So far this year, net outflows from those domestic weekly-reporting only funds have totaled $5.51 billion, Lipper said.

Indicators turn mixed

Statistical indicators of junk market performance turned mixed on Wednesday, breaking a string of four consecutive stronger sessions.

The KDP High Yield Daily index extended its gains, rising by 13 bps to end at 72.45, its fifth straight advance. That came on top of Tuesday’s 44-bps jump.

Its yield, though, was unchanged at 5.38%, after having come in by 17 bps on Tuesday, its fourth straight narrowing.

The Markit CDX North American High Yield Series 23 index saw its first loss on Wednesday after five successive upside sessions, dropping by ½ point to end at 106 1/8 bid, 106¼ offered. It had gained 5/8 point on Tuesday.

However, the Merrill Lynch High Yield Master II index notched its fifth improvement in a row on Wednesday, as it moved up by 0.127%, on top of Tuesday’s 0.614%, which was one of its strongest one-day performances so far this year, second only to Friday’s 1.066% jump.

The latest gain lifted its year-to-date return to 4.625% from Tuesday’s 4.492%. But the year-to-date return remains well down from its peak level of the year so far, 5.847%, set on Sept. 1, when the index was published even though the junk market was essentially closed that day due to the Labor Day holiday break.

According to the Finra-Bloomberg Active US High Yield Bond index, Wednesday’s junk market volume was $3.9 billion, down from Tuesday’s $5.22 billion.

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