New TransUnion better; BP, ATP rebound; Neiman unmoved by upgrade; funds off $310 million

By Paul A. Harris and Stephanie N. Rotondo

St. Louis and Portland, Ore., June 10 - The secondary high-yield market ended Thursday's session mixed, but some sources believed that strength was on its way. Meanwhile, the primary market remained quiet, with only one new deal, a $645 million issue of eight-year notes from TransUnion LLC and TransUnion Financing Corp.

According to one trader, the market started off "trading off to sideways." However, "that really changed in the last hour of the day," as volumes picked up and bonds caught "a bit of an underlying bid, which I think will continue into [Friday]," he said.

In the new and recent issues realm, TransUnion's new 11 3/8% notes due 2018 traded up upon hitting the market. But the recent Triumph Group Inc. notes remained right around where they came earlier in the week.

Meanwhile, traders said it was BP plc that was the nom du jour, as has been the trend of late. But after being on the weak side for the last few sessions, the bonds managed to move up 2 to 3 points, which in turn also helped sector peer ATP Oil & Gas Corp. gain some ground.

Neiman Marcus Group Inc. received an upgrade from Moody's Investors Service during Thursday trading. Traders reported that, while the bonds were trading actively, they were not much changed on the news.

Among other retail credits, Blockbuster Inc.'s bonds might have found a floor, according to one market source. The Dallas-based movie rental chain's debt dipped more in trading.

And, Lyondell Chemical Co.'s notes were among the day's most active. Still, traders saw the bonds finishing the day unchanged.

Junk funds lose $310 million

And as the day's dealings were wrapping up, participants familiar with the weekly high yield mutual fund-flow numbers compiled by AMG Data Services of Arcata, Calif. - considered a reliable barometer of overall junk market liquidity trends - said that in the week ended Wednesday $309.6 million more left those weekly-reporting high yield funds than came into them - a sign of investor unease with the junk market.

It was the sixth consecutive outflow that the junk market has seen, including the $759.2 million cash bleed recorded in the previous week, ended Wednesday, June 2. Over the past six weeks, the junk funds have seen a net outflow of $4.613 billion, according to a Prospect News analysis of the figures provided by market sources. That cumulative loss also includes an even more massive $1.69 billion hemorrhage seen in the week ended May 12, the largest such outflow in at least five years and by some accounts, the third-largest since record-keeping started in 1992.

Counting the latest week's downturn, inflows have now been seen in 14 weeks out of the 23 since the beginning of the year, including a 10-week winning streak that stretched from late-February through the end of April, during which time $4.443 billion more came into the funds than left them, according to the analysis. However, the momentum seems to have clearly shifted into negative territory of late. There have been nine outflows in 2010 - the six most recent, as noted, and three other cash drains recorded in January and in February, with the latter two each over $900 million, for a total of $1.9 billion.

As has been the case over each of the last few weeks, the latest outflow was not that much of a surprise, given the recent struggles of the secondary junk market, both anecdotally and as measured by widely followed statistical indexes, which indicated that there had been considerable redemptions from the funds.

Any and all cumulative fund-flow totals can include unannounced revisions and adjustments to figures from prior weeks.

The flow of money into and out of the junk bond funds is seen as a generally reliable barometer of overall high yield market liquidity trends - although they comprise less of the total monies floating around the high yield universe than they did in the past. Last year's strong pattern of inflows - with AMG reporting over $20 billion having come in to the weekly-reporting funds over the course of the year, along with over $10 billion more into funds which only report on a monthly, rather than weekly basis - was seen as a proxy for the overall surge of liquidity into the junk market from all sources, which helped to fuel record 2009 new-issuance of over $160 billion and unprecedented secondary returns topping 57%.

The same pattern of strong fund flows - producing the same kind of strong primary and secondary performances - had mostly been holding sway over the first months of this year as well, at least until the last month and a half.

Market mixed, new TransUnion better

Market indexes were mixed during Thursday trading, which also saw a new issue from TransUnion.

The KDP High Yield Index closed at 69.27, with a 9.11% yield. That compared to Wednesday's reading of 69.31, with a 9.07% yield.

However, a market source said the CDX High Yield Index had firmed a point, leaving it 93 5/8 bid, 94 1/8 offered.

TransUnion's new $645 million of 11 3/8% notes due 2018 performed in line with the CDX, ending up at 101¼ bid, 102¼ offered, a source said. The bonds - which were sold in a 144A private placement - priced at par.

Among other recent deals, a trader said that Triumph Group's recent 8 5/8% notes due 2018 were trading around "99 and change." The deal priced on Tuesday at 99.27.

However, the trader also noted that "a lot" of Triumph's 8% notes due 2017 changed hands. He saw them falling "a couple points" to end at 923/4.

But even market benchmarks, like General Motors Corp.'s 8 3/8% notes due 2033 and Ford Motor Co.'s 7.45% notes due 2031 were mixed, according to a source. GM's bonds slipped a bit to 31 bid, 31½ offered, while Ford's debt remained unchanged at 85½ bid, 86½ offered.

BP, ATP regain ground

Oil companies got a boost during Thursday trading, traders reported, with BP - which is now trading off of junk desks - leading the way.

Oil producer BP saw its bonds "bounce back by 2 to 3 points," a trader said.

The trader said the 5¼% notes due 2013 were the "most active" at 95 3/8, up 3 points, while the 3 7/8% notes due 2015 were also up 3 at 901/2. The 1.55% notes due 2011 were meantime up a deuce at 941/2.

Another trader said BP's bonds "made up the bulk of trading," with "hundreds of millions" turning over. He pegged the 3 7/8% notes at 88 bid, 90 offered.

"Everybody is feeling around," he said, noting that part of the gyrations in the debt was "half sentiment driven."

"Lots of people are selling one to buy another," he added.

Also in the oil arena, ATP Oil & Gas' 11 7/8% notes due 2015 firmed up slightly after being on the losing end for the last few sessions.

A trader quoted the paper at 66 bid, 68 offered.

"That's up a good point," he said.

At another desk, a trader said the notes opened up the day stronger at 66 bid, 67 offered. However, the bonds gained little momentum and stayed there throughout the day, he added.

Still, not everyone understands BP's fall to junk status.

"It doesn't make sense," BP spokesman Toby Odone was quoted as saying in a Bloomberg report. "We are generating significant cash flow because the oil price is higher than $60 a barrel. We have a strong asset base."

BP remained in headlines on Thursday, as it was announced that the company would give $75 million to three states - Alabama, Florida and Mississippi - in order to help with clean up efforts related to the Gulf of Mexico oil leak. That is in addition to the funds BP has already committed to Louisiana.

Also on Thursday, government officials called for the company to halt its dividend payments.

BP's current containment plan is estimated to be getting 630,000 gallons of the gushing oil. The company said it planned to launch a second oil-catching system over the weekend.

Neiman little fazed by upgrade

Neiman Marcus Group's 9% notes due 2015 saw "a decent amount of trading," according to one trader.

The trader deemed the debt "kind of where it's been, maybe fractionally better" at 991/4.

The 10 3/8% notes due 2015 were meantime unchanged at par.

Moody's upgraded the Dallas-based luxury retailer's rating to B3 from Caa1 on Thursday, citing improved operating performance. In its earnings release on Tuesday, Neiman reported a third-quarter net income of $18.5 million, which compared to a $3.1 million loss the year before.

Trader: Blockbuster finds a floor

Elsewhere in the retail space, Blockbuster's 9% notes due 2012 might have found a bottom, at least in the opinion of one market source.

The source saw the bonds at 8 3/8 bid, 9 offered.

"People have found the place where they think it will sit for awhile," he said.

Another trader placed the notes at 83/4, calling it "down another buck."

And, Rite Aid Corp.'s 8 5/8% notes due 2015 were seen slipping nearly 2 points, ending at 77½ bid.

Lyondell active, but steady

Though there has not been any news out, a trader said that Lyondell Chemical's debt "has been active of late."

He added that the bonds ended the day "kind of where they have been," quoting the 11% notes due 2018 at 105½ bid, 106½ offered. He noted that about $25 million of the bonds changed hands.

The trader also saw the 8% notes due 2017 at par ½ bid, 101 offered.

Lyondell Chemical, now known as LyondellBasell Industries, is a Houston-based chemical manufacturer.

TransUnion, priced to sell

TransUnion and TransUnion Financing priced Thursday's only high-yield deal - a $645 million issue of eight-year senior notes (B3/B-) that came at par to yield 11 3/8%.

The yield printed at the tight end of the 11½% area price talk.

J.P. Morgan Securities Inc., Bank of America Merrill Lynch, Deutsche Bank Securities Inc. and Credit Suisse were the joint bookrunners.

While marketing the deal, TransUnion modified the bond covenants as well as the language of the bond indenture.

Also during the marketing process the Chicago-based provider of credit information attached registration rights to the notes, which initially came to market as a Rule 144A for life offering.

Proceeds will be used to finance a portion of the purchase of TransUnion Corp. equity in connection with the acquisition of the company by Madison Dearborn Partners and to help repay debt.

TransUnion was priced to sell, according to a high-yield mutual fund manager, who spotted the new par-pricing 11 3/8% notes due 2018 trading at 101¾ bid, 102 1/8 offered at 4:37 p.m. ET Thursday.

High-yield got a modest boost Thursday as U.S. stock indexes enjoyed 2¾%-plus rallies, the fund manager said.

However cash bonds, trading in thin volume, underperformed stocks, the source added.

Meanwhile the CDX High Yield 14 Index gained a point on the day, closing at 93¼ bid, according to a debt capital markets banker.

Loan-to-bond spread

TransUnion's acquisition financing also included an upsized $950 million (from $940 million) Libor plus 500 bps term loan, which priced at 98.50, with a 1.75% Libor floor.

Calculating by means of the Libor spread, the Libor floor, the issue price and the maturity (the loan is expected to be called in four years), a syndicate banker said that the implied yield of the loan is 7 1/8%, rendering a spread of approximately 425 bps between the implied yield of the loan, and the 11 3/8% bond yield.

Lately that metric - the loan-to-bond spread - has been a factor, as a number of accounts have been seen playing both the loan and bond portions of debt financings, the syndicate official said.

Those spreads seem to be coming in the high-300 bps to mid-400 bps context, the source added.

For instance, the official said, the implied yield of BWAY Holdings' new term loan is 5 5/8%, while the new BWAY Holdings bonds yield 10¼% (463 bps loan-to-bond spread).

The Triumph Group term loan had a 4 5/8% implied yield, while the bonds came yielding 8¾% (413 bps spread).

Dave & Busters' term loan priced with an implied yield of 6¼%, while the bonds printed with a 10% yield (375 bps spread).

"As loans have backed up over the past three weeks, accounts have been paying attention to that spread," the syndicate official asserted.

Fund manager doesn't care

Meanwhile a bank loan mutual fund manager told Prospect News that the relationship between the implied spread of the loan and the yield of the bond is of no interest.

Most accounts would not trade to one or the other because of a spread difference, the buysider asserted.

"I doubt there's good academic work to support loss rates that are fairly compensated for by spread differences," the source added.

Loan "yield" is a genuinely meaningless concept, typically taken as an internal rate of return (IRR) on a forward Libor curve when in fact maturity (the single biggest cash inflow in the IRR calculation) will not occur on the maturity date 99.5% of the time because the loan will prepay, both early and often, the fund manager stated.

Different loans have very different potentials to prepay in various patterns, so a consistent "spread" difference between loans and bonds is in fact proof that there's no analytical basis for it.

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