New Transocean notes busy, better; primary quiet but hopeful; overall junk market stronger

By Paul Deckelman and Paul A. Harris

New York, July 8 – Transocean, Ltd.’s new seven-year notes were the main topic of interest in Friday’s high-yield market, traders said.

They saw the Swiss deep-water energy drilling contractor’s big new deal as easily the busiest credit in Junkbondland, and reported that after initially trading below its already heavily discounted issue price, the bonds rallied and ended the session modestly higher.

Transocean’s $1.25 billion offering had been the first new deal actually shopped around the junk market and brought to fruition since mid-June, leading primaryside players to hope that the long new-deal drought, largely due to generalized volatility in the capital markets, would indeed be over.

While there were no actual follow-on deals seen on Friday, some primary market participants suggested that investors’ hunger for good-yielding paper, plus favorable market technical conditions, could produce at least a modest amount of new-deal activity in the coming days and weeks.

In the secondary arena, apart from the busy trading in the new Transocean bonds, traders saw a generally stronger market Friday, no doubt helped by strength in equities, which firmed following a better-than-expected June jobs-creation number.

Notable gainers included both halves of last month’s big deal from computer manufacturer Dell, Inc.; energy credits such as California Resources Corp., helped by a rebound in oil prices after Thursday’s big slide; and embattled chemicals maker Chemours Co. and drug manufacturer Valeant Pharmaceuticals International Inc.

Among the few notable downsiders seen was communications satellite company Intelsat Jackson Holdings SA’s benchmark issue.

Statistical market performance measures were higher across the board for a second consecutive session on Friday, having strengthened on Thursday after having been mixed for three straight days before that.

The indicators were also stronger all around versus where they had finished out last Friday, July 1. It was their second week of universally stronger performances following one mixed week and a lower week before that.

Sisal roadshow

The new issue market put up a goose egg on Friday, with no deals pricing.

Dealers in Europe took the wraps off a decent-sized euro-denominated LBO deal.

Schumann SpA, a special-purpose vehicle created to facilitate the acquisition of Italy’s Sisal Group by CVC Capital Partners, plans to start a roadshow on Monday for a €725 million two-part offering of senior secured notes.

The offer is coming in tranches of six-year floating-rate notes and seven-year fixed-rate notes.

The roadshow wraps up on Thursday.

Global coordinator Morgan Stanley will bill and deliver. Credit Suisse and UniCredit are also global coordinators. BNP Paribas, Deutsche Bank and UBS are joint bookrunners.

Elsewhere a hunger for yield, especially among retail investors, will hopefully kindle activity in the new issue market in the week ahead, sources say.

That hunger is aggravated by the lack of offerings in the secondary market as investors are unwilling to offer bonds for sale.

To top it all off there seems to be plenty of cash to put to work, according to a trader who said that high-yield ETFs were in the market attempting to buy bonds throughout the post-Independence Day week.

Although the potential deal pipeline is not vast, the week ahead should produce primary market activity, sources said.

However no one volunteered potential issuer names on Friday.

New Transocean bonds better

In the secondary market, a trader said that the new 9% notes due 2023 from Transocean “started out weak – but they ended up stronger after a midday rally.”

He called the issue “the superstar of the day” in terms of interest from market participants, if not necessarily the magnitude of its gains.

He said that the bonds started out the day trading around the 97.5 bid level at which the issue had priced, then dipped down to 97 before bouncing back later in the day to go home around 98, giving the issue a modest gain for its first day of trading.

Another trader saw a similar trajectory, with the notes languishing in a 96½ to 97½ bid context early on, but then bouncing back to trade between 97¾ and 98¾ later on.

“They traded right up to 98” during the day, yet another trader suggested, before coming slightly off from that peak to finish somewhere between 97¾ and 98 bid.

“Holy cow!” he exclaimed, when he took a look at the Trace bond-tracking service and saw that over $125 million of the notes had changed hands, putting the notes easily at the top of the day’s Most Actives List.

Transocean, a Vernier, Switzerland-based deepwater energy drilling contractor, came to market with its $1.25 billion deal on Thursday.

The issue – priced as a regularly scheduled forward calendar issue by the company’s Houston-based wholly owned subsidiary Transocean Inc. – was actually downsized from the $1.5 billion originally announced on Tuesday when the company concurrently said that it would tender for up to $1 billion of its existing 2020, 2021 and 2022 notes, funding the tender from the proceeds of the bond deal.

Before the issue was priced, amid an increasingly wary investment community, Transocean was forced to extend the length of its call protection from three years to four years.

It also agreed to a change to the future guarantors covenant, which was modified to include the addition of 85% of drilling rig and drillship book value.

While it was originally expected that the deal would come to market priced between 98 and 99 in order to yield somewhere in the low 9% range, by the time it got done pricing had cheapened another 50 basis points to 97.5, producing a yield of 9.499%.

Senior analyst Philip C. Adams of the Gimme Credit investment advisory service said in a research note on Friday that, while the bond deal was downsized from $1.5 billion to $1.25 billion, “RIG will have sufficient proceeds to execute its $1.0 billion tender for 2020­2022 maturities, plus replenish cash used in recent months for open market debt repurchases.

“So, while it would have been nice to add an extra $250 million to its coffers, RIG is no worse off from a cash liquidity perspective, and better off from a debt maturity perspective – not a home run, but maybe a stand­up double,” the analyst concluded.

The primary comes back

Thursday’s Transocean deal was the first actual pricing seen in Junkbondland since back on June 20, when AmeriGas Partners LP, a Valley Forge, Pa.-based retail propane distributor, drove by the market with a $1.35 billion two-part offering, consisting of equally-sized $675 million tranches of eight- and 10-year senior notes.

Transocean lifted the year-to-date new-issuance total to $116.05 billion in 163 tranches, according to data compiled by Prospect News.

That was running some 36.9% behind the new-deal pace seen at this time last year, when $183.96 billion had priced in 295 tranches by this point on the calendar, the Prospect News data indicated.

Last week, this year’s new issuance had trailed 2015 by 37.5% year over year.

Bonds get a boost

Traders said that Friday’s junk market was stronger all around, with one of them opining that it was “up at least ½ point generically – and some of the bigger go-go issues were much better than even that.”

The market was seen to be taking its cue from stocks, which got a big shot in the arm early on when the Labor Department reported that non-farm payrolls in the United States swelled by 287,000 jobs in June – more than 100,000 more than what Wall Street had been expecting.

The figure was also a vast improvement from the anemic 38,000 jobs figure that had been reported a month ago for May.

With the wind from the jobs report in its sails, equities, which had fallen on Thursday amid new fears of weakened international economic growth, shot upwards on Friday. The bellwether Dow Jones Industrial average, which had lost 22.74 points, or 0.13%, on Thursday, its second downturn in three sessions, zoomed by 250.86 points, or 1.40% on Friday, ending at 18,146.74. Other, broader equity indexes experienced similar trajectories.

Dell among day’s leaders

Among specific junk bonds doing solidly better on Friday, a trader saw both halves of the big deal that Dell brought to market exactly a month ago.

He said that the Round Rock, Texas-based computer manufacturing giant’s 7 1/8% notes due 2024 gained 1 1/8 points on the day to close at 108 bid, on volume of over $23 million.

The other half of that issue – the 5 7/8% notes due 20226 – were up around 5/8 point on the day, ending at 105.25 on turnover of around $13 million.

Dell, through its Diamond 1 Finance Corp. and Diamond 2 Finance Corp. funding subsidiaries, priced $1.625 billion of each series of bonds at par on June 8 in a regularly scheduled forward calendar offering.

Energy shows improvement

A trader said that “anything energy related had a mini-rally today.”

He saw California Resources’ 6% notes due 2024 up ½ point at 50½ bid.

At another desk, a trader saw those bonds 1 point better, quoting them at 50 bid, 52 offered.

He also saw the Los Angeles-based oil and natural gas exploration and production company’s 8% notes due 2022 firm by 1½ points on the day, ending at 72 bid, with over $13 million traded.

The traders said that the energy credits were getting a boost from a rebound in oil prices. The benchmark U.S. crude grade, West Texas Intermediate for August delivery, rose by 27 cents per barrel, to $45.41, in Friday dealings on the New York Mercantile Exchange – a far cry from Thursday’s $2.29 per barrel slide.

Likewise, the global benchmark grade, Brent crude for September delivery, was up by 36 cents on Friday, settling at $46.76 per barrel on the London ICE Futures Exchange, after having plunged by $2.40 per barrel on Thursday.

Valeant, Chemours, move upward

Even bonds of companies recently under pressure were seen having improved on Friday.

For instance, a trader said that Valeant Pharmaceuticals International’s bonds “rose across their structure” on Friday, although he had seen no fresh positive news out on the beleaguered Laval, Que.-based drug manufacturer.

Valeant’s widely held 6 1/8% notes due 2025 rose by 1 7/8 points to 84¼ bid, with over 419 million having traded, while its 5½% notes due 2023 gained 7/8 point to end at 83 3/8 bid, on volume of over $21 million.

Valeant, which recently underwent a management change, has been trying to distance itself from recent troubles that have included official investigations as well as analysts’ statements that its business model – built on numerous acquisitions and large price hikes for acquired drug brands – was unsustainable.

Another name recently in the news in a negative light, Chemours, was also seen better Friday, with its 6 5/8% notes due 2023 at 84 bid, up 4¾ points, with over $16 million traded.

A trader saw the Wilmington, Del.-based chemical company’s 7% notes due 2025 up 4¼ points to 82½ bid.

Chemours, he said, “has really been up and down on a roller coaster this week, but now they’re rebounding.”

Trading has been volatile following the news earlier in the week of a multi-million-dollar judgement against Chemours and its former corporate parent, chemicals giant DuPont, in a suit brought by a former employee who had developed testicular cancer, which he blamed on his exposure to the chemicals DuPont used to make its famous Teflon coating for cookware.

The court held that Chemours, which was spun off from DuPont in 2014, was financially liable under the verdict due to the way its spinoff was structured.

Intelsat loses altitude

Traders said there were not many names standing out to the downside, but one which did drop noticeably was Intelsat Jackson; its benchmark 8% notes due 2024 were seen down some 2¾ points on the day at 94½ bid, a trader said, on volume of over $31 million.

He did not see any fresh negative news out on the Luxembourg-based communications satellite company that would explain the retreat.

Indicators up on day, week

Statistical market performance measures were higher across the board for a second consecutive session on Friday, having strengthened on Thursday after being mixed for three straight days before that.

The indicators were also stronger all around versus where they had finished out last Friday, July 1. It was their second week of universally stronger performances following one mixed week and a lower week before that.

The KDP High Yield Index firmed by 27 bps on Friday to end at 68.52, its eighth consecutive gain and ninth advance in the last 11 sessions. It had also risen by 12 bps on Thursday.

Its yield came in by 12 bps on Friday to 5.85% – its new low for the year. The old mark was Thursday’s 5.97%, which had tied the mark also set on June 9. It was its eighth straight narrowing after having widened for two sessions before that. It had also tightened by 6 bps on Thursday.

Those levels compared favorably with the 67.98 index reading and 6.07% yield seen last Friday.

The Markit Series 26 CDX Index shot upward by ¾ point on Friday to end at 103 15/16 bid, 104 offered, after having edged upward by 1/32 point on Thursday. It was the third straight upturn after two sessions on the downside earlier in the week. Counting four straight gains before that, Friday was the index’s seventh upturn in the last nine sessions.

Its level was well up from last Friday’s 103 9/32 bid, 103 5/16 offered.

And the Merrill Lynch High Yield Index rose by 0.503%, its second straight gain, on top of Thursday’s 0.422% improvement. Friday was the eighth gain in the last nine sessions.

That gain raised its year-to-date return to 10.885%, its second new peak level for the year, from Thursday’s 10.33%, the previous peak level.

For the week, the index rose 1.047%, its third straight weekly gain. It had been up by 0.134% last week.

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