Zayo prices upsized add-on; new Western Digitals gain; funds lose $545 million after six gains

By Paul Deckelman and Paul A. Harris

New York, March 31 – Telecommunications company Zayo Group LLC drove by the junk bond market on Thursday, closing out the month of March and the year’s first quarter with an upsized $550 million add-on to its existing 2025 notes.

Given the lateness of the hour at which the deal priced, traders did not immediately report having seen any initial aftermarket dealings in the credit.

But they saw huge volume trading in the two giant-sized tranches of Western Digital Corp. notes which had priced during Wednesday’s session. While the computer hard-drive manufacturer’s purely junk-rated eight-year notes were by far the busiest issue of the day, its split-rated seven-year secured paper was seen racking up the best aftermarket gains.

The traders also saw continued firm and active trading in two other megadeal-sized offerings that priced earlier this week, for wireless operator T-Mobile USA, Inc. and for building maintenance supplies and tools provider HD Supply, Inc.

Away from the new deals, traders saw brisk activity in Algeco/Scotsman Holding Sàrl’s bonds after the maker of modular building structures reported quarterly numbers, its chief executive officer tendered his resignation and the company hired advisers to help it look into its liquidity and financing.

Statistical market performance measures were higher across the board for a second consecutive session on Thursday; they had broken out of their recent slump on Wednesday after having been lower all around five straight sessions before that.

But another market measure – flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, which are considered a reliable barometer of overall junk market liquidity trends – turned negative this week to the tune of a $545 million net outflow in the reporting week. It was the funds’ first such net outflow after six consecutive weeks before that during which inflows had been seen, five of those of considerable size.

Zayo upsizes

Zayo Group Holdings, Inc. brought Thursday’s sole deal, an upsized $550 million add-on to its 6 3/8% senior notes due May 15, 2025 (Caa1/B-), pricing it at 97.76 to yield 6.707%.

The issue was increased from $350 million.

The reoffer price came on top of price talk and in line with the earlier guidance that had been set at of 97.75.

There was a significant amount of reverse inquiry in the deal, a trader said.

Morgan Stanley was the bookrunner.

Zayo, a Boulder, Colo.-based provider of bandwidth infrastructure services, plans to use the proceeds to fund the redemption of its 10 1/8% senior notes due 2020. The additional proceeds resulting from the upsizing of the deal will be used to repay term loan debt.

Calendar remains slim

The Friday session could be a quiet one in the new issue market, according to a trader who looks for primary market business to resume in the week ahead.

In the wake of Zayo’s Thursday drive-by the active forward calendar remains thin, with one deal in the market.

Diebold Inc. started a roadshow on Wednesday for a $500 million offering of eight-year senior notes.

Initial guidance has the deal coming with a yield in the high 7% to low 8% context.

The offer is expected to price on Tuesday.

J.P. Morgan and Credit Suisse are the joint bookrunners for the acquisition-related financing.

Beyond Diebold the active forward calendar is empty.

However there is a pipeline, sources say.

Provided the market holds up, weekly issuance of $3 billion to $6 billion might be expected over the course of the coming two weeks, a debt capital markets banker forecast.

Look for Credit Suisse to bring a trio of deals in the coming two weeks, one each from the health care, financial and foods sectors, a buyside source said.

Wednesday inflows

Dedicated high-yield funds saw daily inflows on Wednesday, a trader said.

High-yield ETFs saw $292 million of inflows on the day.

Zayo unseen, new Western Digital rises

In the secondary arena, traders did not immediately report any aftermarket activity in Zayo Group’s add-on to its existing $350 million of 6 3/8% notes due 2025.

They cited the lateness of the hour at which the upsized and quickly shopped add-on had priced.

However, there was no shortage of trading activity in the new Western Digital megadeal which had priced on Wednesday.

A trader said that the company’s new 7 3/8% secured notes due 2023 “were up nicely” on the session, seeing those split-rated (Ba1/BBB-/BBB-) bonds moving around during the day in a 101 3/8 to 102¼ bid context, with the last trades of the day going off between 102 and 102¼ bid.

All told, he said, more than $208 million of those notes had changed hands.

A second trader also pegged the bonds between 102 and 102¼, while a third had them at 102 1/8 bid – although he said that was down 3/8 point from earlier peak levels around 102½.

But as for the other half of that big deal – Western Digital’s 10½% senior unsecured notes due 2024 – the first trader said “it didn’t do that well.”

He said that “at the beginning of the day, people wanted to get out of the name at par” – and then began hitting bids to bring the bonds down to a 99¾ to par context.

A second trader also saw the bonds dip to 99¾ bid during morning trading, down from closing levels above par on Wednesday.

But he said that after that, the notes moved back up, to 100¼ bid, 100½ offered.

Another trader saw the bonds get as good as 100 5/8 bid, although he said that was down almost ¼ point from earlier peak levels.

More than $329 million of those notes ended up changing hands, with “a lot of trades” between 100 3/8 and 100½ bid, one of the traders added.

Western Digital, an Irvine, Calif.-based maker of computer hard drives, priced a total of $5,255,000,000 of new paper on Wednesday in a regularly scheduled forward calendar offering that was downsized from an originally planned $5.6 billion, with that difference being shifted over to the company’s bank loan deal.

The secured tranche was upsized to $1,875,000,000 from an originally announced $1.5 billion, while the unsecured tranche was cut to $3.35 billion from $4.1 billion originally.

Both halves of the deal priced at par.

The $5,255,000,000 deal was the biggest seen in Junkbondland this year, according to data compiled by Prospect News, topping the $2.4 billion two-part offering that St. Louis-based managed care provider Centene Corp. did on Jan. 28.

The unsecured fully junk-rated tranche of eight-year notes was the biggest junk deal seen since the $4.8 billion three-part offering that European cable operator Altice SA brought to market last Sept. 25 as part of the funding for its acquisition of U.S. sector peer Cablevision Systems Corp.

T-Mobile, HD Supply move up

Traders saw continued active dealings, at higher levels, in the two other billion-dollar offerings that priced in the junk market this week.

A trader saw the new T-Mobile 6% notes due 2024 moving up to a 101¼ to 101 3/8 bid context, with over $26 million traded.

A second trader saw them doing even better, going out at 101 5/8 bid, calling that a gain of 3/8 point on the day.

During the morning, the bonds had traded between 101 1/8 and 101 3/8 bid.

The Bellevue, Wash.-based wireless carrier priced $1 billion of the notes at par in a quick-to-market offering on Tuesday. When it hit the aftermarket on Wednesday, T-Mobile was easily the junk market’s volume leader, with more than $75 million of those bonds changing hands and finishing at 101¼ bid.

Meanwhile, Monday’s offering of 5¾% notes due 2024 from HD Supply remained active on Thursday, generating more than $14 million of volume.

A trader said that the bonds were up by as much as ¾ point on the session, finishing at 102¾ bid.

A second trader saw the bonds trading between 102¾ and 103 bid.

HD Supply, an Atlanta-based distributor of building and maintenance tools and supplies, had priced $1 billion of notes at par in a quick-to-market deal on Monday, gaining around a point in initial aftermarket dealings.

On Tuesday, more than $59 million of the notes changed hands, ending at 101 3/8 bid, a gain of 3/8 point on the day. On Wednesday, they had continued to move up, ending around 102 bid with over $14 million traded, setting the stage for Thursday’s continued improvement.

Algeco up as CEO exits

Away from the new deals, Algeco/Scotsman’s 10¾% notes due 2019 were seen heading higher Thursday.

One trader said the bonds were a point better at 30, though he added that the paper hadn’t traded in a week.

Another trader said the notes were “pretty active,” trading “+/-30.” That compared to a 29 to 29½ context previously.

“They had numbers out,” a trader noted. “It prompted a lot of activity, but I wouldn’t say there was much price movement.”

Yet another trader saw the bonds “a touch better” around 30½ bid during the session, but said that at the end of the day, they had come back down to around a 29½ bid handle.

He saw more than $26 million of the bonds having traded, putting the credit among the day’s Most Actives.

On Wednesday, the Baltimore-based provider of prefabricated modular space and storage solutions reported its latest quarterly results. For the year, revenue slid to $1.55 billion from $1.73 billion the year before.

Gross profit came to $545.24 million, down from $634.33 million. The net loss widened to $363.09 million from $339.57 million.

Come Thursday, the company had more news to announce: Jean-Marc Germain, chief executive officer, was stepping down from his post, effective April 30.

According to a company news release, Germain is considering another leadership role at “a large global company.” He is expected to remain in an advisory role until July.

The company hopes to have a successor by the end of April.

In addition to announcing the CEO’s departure, Algeco said that it had hired PJT Partners Ltd. as financial adviser and Kirkland & Ellis LLP as legal adviser to help the company improve its bottom line.

The company said that its advisors will look into ways to improve liquidity and “to conduct a review of its current financing.”

Indicators stay better

Statistical market performance measures were higher across the board for a second consecutive session on Thursday; they had broken out of their recent slump on Wednesday after having been lower all around five straight sessions before that.

Thursday thus marked their third stronger session in the last eight trading days.

The KDP High Yield Daily Index gained 18 basis points on Thursday to close at 65.63 its second straight advance; on Wednesday, it had jumped by 22 bps, breaking out of a five-session slump before that. Coupled with four straight gains before those losses, Thursday was the index’s sixth upturn in the last 11 trading days.

The index’s yield came in by 4 bps on Thursday to 6.65%, after having tightened by 7 bps on Wednesday – its first such narrowing after four straight sessions before that in which the yield had risen. The yield has now narrowed in seven out of the last 11sessions.

The Markit Series 26 CDX North American High Yield Index was up by 5/32 point on Thursday, finishing the day at 102 11/16 bid, 102 23/32 offered.

It was the index’s second straight gain, having also risen by slightly over ½ point on Wednesday.

The Merrill Lynch North American High Yield Master II Index posted its second gain in a row on Thursday, improving by 0.253%, on top of Monday’s 0.489% advance.

Those upside sessions had followed five consecutive losses before that; they marked the marked the index’s fifth gain in the last 10 sessions.

It rose by 0.489% on Wednesday, versus Tuesday’s 0.305% loss.

Thursday’s upturn pushed the index’s year-to-date return up to 3.247% from 2.986% on Wednesday.

Funds lose $545 million

However, another numerical indicator – the flow of investor cash into or out of high-yield mutual funds and exchange-traded funds, which are considered a reliable barometer of overall junk market liquidity trends – turned negative this week.

The funds saw a net outflow of $545 million in the reporting week ended Wednesday – the funds’ first such net outflow after six consecutive weeks before that during which inflows had been seen, five of those of considerable size, generating more than $13.4 billion of inflows during that time (see related story elsewhere in this issue).

-Stephanie N. Rotondo contributed to this review

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