Junk primary quiet, but new L Brands bonds jump; Bombardier flies on government aid report

By Paul Deckelman and Paul A. Harris

New York, Oct. 28 – The high-yield market had a relatively quiet day on Wednesday, at least on its face.

No new dollar-denominated, fully junk-rated deals from domestic or industrialized-country borrowers priced, nor were any even announced.

But behind the scenes, bankers continued trying to get American Energy – Permian Basin, LLC’s planed $560 million offering of five-year secured paper done, syndicate sources said. They said that there had been some changes made in the covenant package to try to coax investors aboard.

The investors needed no such prompting, meanwhile, to get involved with L Brands, Inc.’s new 20-year notes that priced on Tuesday in a drastically upsized quick-to-market transaction. Traders said that the retailer’s bonds had firmed smartly on heavy volume in secondary dealings Wednesday, building on the gains initially notched when the bonds began to trade right after pricing.

They also saw a fair amount of activity in Tuesday’ other new deal, Toll Brothers, Inc.’s 10-year offering, although there was little real price movement off Tuesday’s aftermarket gains. Traders reported some junk investor interest in the homebuilder’s split-rated bonds alongside buying by higher-grade accounts looking for some crossover yield.

Apart from the new deals, Canadian aircraft manufacturer Bombardier, Inc.’s bonds gained altitude in active dealings, presumably in response to news reports indicating that the Quebec provincial government could step in and offer the beleaguered company financial assistance.

Bonds of another troubled Canadian firm, drug maker Valeant Pharmaceuticals International, Inc., were seen having turned higher Wednesday after having taken their lumps over the previous several sessions amid charges of fraudulent sales practices and heated company denials. There were no new developments out Wednesday that might easily explain the upturn.

Statistical measures of junk market performance turned higher across the board on Wednesday after two straight sessions on the downside. They had turned lower all around and had stayed down there on Tuesday after having been higher on Friday and mixed for three straight sessions before that.

Wednesday was the second stronger session in the last four sessions, the fourth in the last nine sessions and the sixth such better session in the last 15 trading days.

American Energy update

No deals priced during the Wednesday session.

No new deals were announced.

However, dealers continue to work the American Energy – Permian Basin $560 million offering of five-year senior secured first-lien notes, a high-yield investor said on Tuesday.

Orders have come in specifying a yield as high as 10%, although talk continues to be 9% to 10%, the source added.

But it's not done yet, the investor said.

A new red went out, and there have been covenant changes.

The deal, which has lately been shrouded in “radio silence,” according to sources, kicked off on Oct. 16 via left bookrunner Goldman Sachs & Co. and joint bookrunners Jefferies LLC and BofA Merrill Lynch and came with initial guidance in the 9% area.

On Monday the company began a consent solicitation to amend its 8% senior secured second-lien notes due 2020.

That solicitation was set to expire at 5 p.m. ET on Wednesday.

Autodistribution talked at 9%

The European primary market generated news on the only euro-denominated deal presently on the active calendar.

France-based Autodistribution Group talked its €237 million offering of restructured five-year senior holdco pay-if-you-can notes (B3/CCC+) with a 9% coupon at 99 to 99.5.

Pending the final price, the notes could yield 9 1/8% to 9¼%.

In a restructuring triggered by investor pushback, the initial call premium was increased to 102 from 101. The notes will become callable after one year at 102 and after two years at par.

Books close at 6 a.m. ET on Thursday, and the buyout deal is set to price thereafter.

Global coordinator JPMorgan will bill and deliver. Credit Suisse is also a global coordinator. BNP Paribas is the lead manager.

Possible calendar in Europe

Beyond Autodistribution there is a pipeline, albeit a relatively modest one, sellside sources said on Wednesday.

Look for a double B-rated credit to come with a €600 million to €750 million equivalent deal in euros and sterling via Barclays and BofA Merrill Lynch next week, a London-based debt capital markets banker said.

There could also be a £500 million deal, the source added, but the source did not offer an issuer name or sector.

Another London-based banker had visibility on two or three deals, although none of them is expected to be particularly large.

Italy's ICBPI pre-marketed €1 billion of bridged debt financing during the middle part of October, according to a market source.

The debt, to come in the form of bonds and loans in a to-be-determined mix, could hit the market as early as the week ahead, the source added.

Goldman Sachs has the lead, although at least four other banks are believed to be involved, sources said.

Proceeds would be used to help fund the €2.15 billion buyout of the Milan-based financial services provider by a consortium comprised of Advent International, Bain Capital and Clessidra.

As to the moderately brightened prospects of the European junk market, sources cite improving market technicals that would appear to support a decent calendar.

Like their American counterparts, European high-yield accounts have been seeing cash inflows, they say.

Right now the challenge is to acclimatize prospective issuers to rate prospects that have undergone some upward revision on the heels of the late-summer, early-fall correction in the junk bond market, a syndicate banker said.

Inflows on Tuesday

As with Europe, the technical picture in the U.S. high-yield market continues to brighten, sources said on Wednesday.

The cash flows of the dedicated high-yield funds were positive on Tuesday, the most recent session for which data was available at press time.

High-yield exchange-traded funds saw $258 million of inflows on the day.

Asset managers took in $400 million on Tuesday.

L Brands boom

In the secondary arena, traders said the most notable credit of the day was L Brands’ new 6 7/8% notes due 2035, which traded sharply higher on heavy volume, building on the momentum established when they began trading around on Tuesday.

“They were the big trader today,” a market source said, “on very good volume.” He saw the bonds having moved up by more than 2 points on the session to around a 103½-to-104 bid context.

A second trader said that the new notes had initially firmed by about 1¾ points on Tuesday, with about $16 million traded, after that $1 billion issue – radically upsized from $400 million originally – had priced at par as a drive-by transaction.

One Wednesday, he indicated, the Columbus, Ohio-based retail chain operator’s new bonds extended those gains, pushing as high as 104 bid – up some 2¼ points on the day – with over $105 million changing hands, easily topping the junk market’s Most Actives list.

Toll trades busily

A trader meantime saw the new Toll Brothers 4 7/8% notes due 2025 trading actively on Wednesday, with over $34 million having moved around.

He pegged the bonds at 100¼ bid, actually down by 3/8 point from their closing levels on Tuesday.

A second trader quoted the bonds at 100¼ bid, 100¾ offered, although he called them unchanged on the day.

At another desk, a trader likewise put the bonds in a 100¼-to-100½ bid context.

The Horsham, Pa.-based homebuilder priced its quick-to-market $350 million deal at par on Tuesday via its Toll Brothers Finance Corp. unit.

Although the split-rated (Ba1/BB+/BBB-) offering was priced off the investment-grade desks, once it hit the aftermarket, the trader said, “I think it’s kind of a mixed bag which desks had it,” with some junk accounts getting into Toll as well as high-grade investors looking to pick up some yield by crossing over into split-rated territory.

He said he had seen some trades pop up on his runs, “so there was a mix” in terms of what kind of investors bought into the bonds.

“But there was some volume, though.”

Concordia climbs from hole

Going back a little further to the recently priced purely junk offerings, Concordia Healthcare Corp.’s 9½% notes due 2022 were seen by a trader having gained 1 point on the session to end at 97¾ bid, on volume of more than $15 million.

The Oakville, Ont.-based specialty pharmaceuticals producer had priced $790 million of those notes at par last Tuesday. When they were freed to trade, they were initially seen around a 97½ bid context, falling to 96 later that session, leading traders to believe that the underwriters had resold the bonds to accounts in that 96-to-97 context rather than at par just to move the paper out. They linked the unusual pricing activity to problems with a bridge loan the company was doing to help finance an acquisition, with several saying that the bridge “got hung up.”

While the bonds fell into the low 90s subsequently in active dealings – in line with the slide experienced last week by sector peer Valeant Pharmaceuticals – they began recovering lost ground at the end of last week and have continued to firm to current levels.

Valeant bonds bounce

Valeant’s bonds, meanwhile, were seen higher across the capital structure on Wednesday after having recently been beaten down.

The Laval, Quebec-based specialty pharmaceuticals manufacturer’s most widely traded issue, its 6 1/8% notes due 2025, were seen up by just under 2 points at around 86½ bid, on volume of over $24 million.

In contrast, those bonds had swooned by 2¼ points on Monday and were off another 1 point on Tuesday, on volume of $72 million and $87 million, respectively.

Valeant’s 5 7/8% notes due 2023, also under pressure recently, jumped by 2 7/8 points on Wednesday to 87 3/8 bid, with over $23 million traded.

The company’s bonds had gotten hammered down last week after short-selling firm Citron Research put out a report warning that Valeant might be engaging in fraudulent transactions by using a chain of specialty pharmacies as one of the sales channels for its various drugs. It even likened the situation to that of failed corrupt energy company Enron Corp.

Valeant hotly denied the accusations, attacking the data in the report as “false” and “misleading.” On Monday, Valeant held a conference call on which its senior executives sought to address the issues raised last week in Citron’s report. They explained Valeant’s relationship with the specialty pharmacy company, Philidor RX Services LLC, and contended that no inappropriate treatment of revenues had occurred. Valeant further said that whatever sales had been generated through this channel were not material to the company’s overall operations. It also likened Citron to someone shouting “fire” in a crowded theater in order to spark a panic and announced that it had requested that the Securities and Exchange Commission investigate whether Citron profited from last week’s fall in Valeant’s bonds and shares.

Bombardier gains on aid report

Bonds of another Canadian company that has recently seen some hard times, Montreal-based aircraft and railroad equipment manufacturer Bombardier, got a boost on Wednesday as a newspaper in that city, La Presse, reported that Quebec’s provincial government would be unveiling an aid package for company on Thursday, the same day that it reports third-quarter earnings.

That news pushed Bombardier’s 6 1/8% notes due 2023 up 3 points to 80½ bid, with over $34 million traded.

Its 7½% notes due 2025 gained 2¼ points, to 82 bid, while its 6% notes due 2022 rose nearly 3 points, to 80¼ bid, both on volume of about $25 million.

Its Toronto Stock Exchange-traded shares gained 16 Canadian cents, or 11.03%, on Wednesday, ending at C$9.61. Volume of 18.6 million shares was over three times the norm.

Bombardier’s bottom line has been dented in recent months by a falloff in sales of private business jets due to economic slowdowns in China and elsewhere. Its problems have been compounded by the slow pace of the progress the company has been making in finally rolling out its long-awaited CSeries medium-range jetliner.

Indicators show improvement

Statistical measures of junk market performance turned higher across the board on Wednesday after two straight sessions on the downside; they had turned lower all around on Monday and had stayed down there on Tuesday after having been higher on Friday and mixed for three straight sessions before that.

Wednesday was the second stronger session in the last four sessions, the fourth in the last nine sessions and the sixth such better session in the last 15 trading days.

The KDP High Yield Daily index rose by 7 basis points on Wednesday to end at 67.29 after having lost ground the two sessions before that, including Tuesday, when it plunged by 17 bps.

Wednesday’s gain was its second in the last four sessions, its sixth in the last nine sessions and its 12th such upturn in the last 17 trading days.

Its yield came in by 8 bps to finish at 6.47% after having risen by 7 bps Monday and by another 8 bps on Tuesday.

Wednesday’s decline in the yield was its second narrowing in the last four sessions, its fifth in the last nine sessions and its 11th such tightening in the last 17 trading days.

The Markit Series 25 CDX North American High Yield index moved up by 5/16 point on Wednesday to go home at 103 3/16 bid, 103¼ offered after having lost ground the previous two days, including Tuesday’s 3/32 point easing.

Wednesday’s advance was its third in the last five sessions, its sixth in the last 10 sessions and, longer-term, its eight such firming in the last 16 trading days.

The Merrill Lynch North American Master II High Yield index edged up by 0.076% on Wednesday, its first gain after two straight losses, including Tuesday’s 0.158 % retreat.

Wednesday’s improvement was its second in the last four sessions, its sixth in the last nine sessions and its 12th such victory in the last 18 trading days.

The gain raised the index’s year-to-date return to 0.124% from 0.048% on Tuesday. Those levels, while modest, still remained well above the index’s worst 2015 year-to-date deficit, the 3.069% of red ink recorded on Oct. 2 – the market measure’s lowest level since Oct. 5, 2011, when it had shown a 3.834% year-to-date deficit.

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