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Published on 8/30/2013 in the Prospect News High Yield Daily.

Primary quiet; market easier heading into Labor Day break; Continental Resources, Radian better

By Paul Deckelman and Paul A. Harris

New York, Aug. 30 - The high-yield market closed out the month of August on Friday "a little weaker and very quiet," a trader said.

Not much was expected to happen in an abbreviated pre-holiday session ahead of the three-day Labor Day holiday weekend in the United States - and observers who predicted that would be the case were not disappointed.

The primary sphere went back into its late-summer snooze mode, after having seen its first dollar-denominated deal in almost two weeks on Thursday in a $1.25 billion offering of perpetual subordinated hybrid tier 1 notes from French banking concern Societe Generale.

With that out of the way, new-deal denizens were predicting that the upcoming week would likely be a quiet one, with the market closed on Monday for Labor Day and with the Rosh Hashanah holiday that starts on Wednesday evening and runs the rest of the week likely depressing attendance and activity levels.

With two-thirds of 2013 now history, year-to-date new issuance stood at $202.42 billion as the month ended, according to data compiled by Prospect News. That was running about 6.8% ahead of the $189.57 billion, which had priced at the same stage of what eventually turned out to be the record-setting year of 2012.

In the secondary realm, traders saw busy dealings in Continental Resources Inc.'s 10-year notes, which firmed solidly following the announcement that Standard &Poor's had upgraded the energy exploration and production company's ratings by one notch, lifting them out of Junkbondland and into investment-grade territory. The company remains technically split-rated since Moody's Investors Service still considers it a junk credit.

Radian Corp., Inc.'s 2017 bonds were seen having moved up in brisk trading on the news that the mortgage insurance company had reached an agreement with Freddie Mac on the treatment of thousands of delinquent loans held by the big government-sponsored enterprise that had been insured by Radian, eliminating the latter's exposure to claims.

AMR Corp.'s 2014 notes gained a little altitude, though on light trading, apparently given a lift by the news that a federal judge had sided with the airline operator and its prospective merger partner, US Airways Group, Inc., and against the federal government in setting a November date for the government's civil suit against the planned merger to start, rather than letting the suit first start to go to trial in March, as Washington had wanted.

Statistical market performance indicators turned mixed on the day, after having ended higher across the board on Thursday.

They were also mixed versus where the various indicators had closed out the previous week on Aug. 23, the second straight mixed reading on a week-to-week basis following four straight weeks when they had been lower all around.

Pre-holiday primary mute

The pre-Labor Day Friday session came and went with no news in the primary market.

No deals were announced and no deals priced.

The holiday-abbreviated Sept. 2 week is expected to be generally quiet.

One deal does appear on course for the week ahead. Mexico's RDS Ultra-Deepwater, Ltd. is expected to come to the high-yield bond market during the post-Labor Day week with an offer of $300 million or more high-yield bonds, according to a buyside source.

The company announced on Thursday that it is tendering for $270 million of its 11 7/8% senior secured notes due 2017 at $1,113.95 per $1,000 principal amount of notes.

The notes become callable in early 2014, the buysider said, but added that the company is electing to do the tender well ahead of the call date.

"They're thinking that rates could move against them and so they are getting ahead of that," the buysider said, adding that it would not be surprising to see other companies elect to go with a sooner-than-later refinancing strategy in anticipation of higher rates to come.

As reported, Credit Suisse, Citigroup, Deutsche Bank and Santander will lead the RDS Ultra-Deepwater deal.

Elsewhere, the post-Labor Day week could see one or two drive-by deals from well-known issuers, market sources said on Friday.

Autumn in the high-yield primary market, however, may not get under way in earnest until the week of Sept. 9.

A short, slow day

Although the Securities Industry and Financial Markets Association did not officially recommend an early close to the junk market and other debt markets ahead of the three-day Labor Day holiday break, the reality was that anything needing to get done got done early in the day, with many people making an early exit.

"The story is that everybody's checked out and nobody wants to pick anything up until next week," said one trader right around midday ET as he himself was headed for the door.

"That's all there is."

Continental Resources climbs

Among specific names, Continental Resources's 4½% notes due 2023 jumped to 98½ bid, a 21/2-point gain, on busy round-lot volume of more than $13 million after Standard & Poor's upgraded the Oklahoma City-based oil and natural gas exploration and production company's long-term corporate credit rating and senior unsecured debt to BBB- from BB+.

The company's 8¼% notes due 2019 were fairly busily traded as well, although strictly in mostly smallish odd-lot transactions, save for one large trade near the end of the day, a market source said, getting as good as 111½ bid before finally going home around 110¼ bid, still up some ¾ of a point on the day.

While S&P upgraded Continental to investment-grade status, Moody's Investment Service maintains its rating in the junk category at Ba2.

Despite the good news on the ratings front, Continental's NYSE-traded shares fell by $1.45, or 1.55%, to end at $92.26. Volume of 777,000 shares was down nearly 25% from the usual daily turnover.

Radian rises on Freddie deal

Radian Corp.'s 3% notes due 2017 firmed after the Philadelphia-based mortgage insurance company's Radian Guaranty subsidiary announced an agreement with Freddie Mac regarding a group of delinquent mortgage loans held by Freddie Mac that were insured by the Radian unit.

The notes moved above the 139 bid level before finally going out at 1381/2, a gain of some 2¼ points on the day from Thursday's close and more than 4 points from above its most recent round-lot trading levels, on volume of over $7 million.

The company's 9% bonds due 2017 gained 3/8 of a point to finish above the 113 mark, though there was one really sizable trade on the day.

The agreement with Freddie Mac covers 25,760 first-lien mortgage loans held by the government-sponsored enterprise that were insured by Radian Guaranty and that were delinquent as of Dec. 31, 2011.

It provides for the future treatment of these loans, including claim payments, loss mitigation activity and insurance coverage, and eliminates Radian Guaranty's claim exposure on 9,756 loans that were delinquent and 4,586 loans that were re-performing as of July 31 of this year.

Radian's New York Stock Exchange-traded shares initially were up by more than 4.5% on the news, before coming off those peaks to finish up 34 cents, or 2.57%, at $13.55. Volume of 8.8 million shares was about 1½ times the norm.

AMR firms after ruling

A trader said the only thing he saw during the session was that "AMR seemed to be a little active," with its 6¼% notes due 2014 having moved up to 100 7/8 bid, a gain of 5/8 points. Volume was over $3 million.

That followed a ruling by the Washington federal judge who will be hearing the Justice Department's civil lawsuit against the proposed $11 billion merger between AMR and US Airways Group.

Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia said Friday that the case will come to trial on Nov. 25 - a timetable favored by the airlines.

The Justice Department had wanted the trial to start in March, saying it needed more time to prepare for the complex case, but the airlines said that such a long delay would threaten their merger.

The judge apparently agreed, declaring that March was "too far off."

Fort Worth, Texas-based AMR is currently in bankruptcy proceedings, and its plan of reorganization is heavily dependent upon the merger with Tempe, Ariz.-based US Airways taking place. A confirmation hearing on the bankruptcy plan is scheduled to be held in New York on Sept. 12. The judge in that case on Thursday said from the bench that the arguments in favor of confirmation seemed "fairly persuasive."

While AMR's notes gained altitude, US Airways' 6 1/8% notes due 2018 actually eased on Friday, by some 2 points, to 91 7/8 bid, though there were only a small amount of relatively small trades involved.

AMR's over-the counter-traded shares rose 15 cents on Friday, or 4.42%, to end at $3.54 on volume of 17.3 million, almost twice the usual daily handle.

US Airways' NYSE-traded shares gained 20 cents, or 1.25%, to finish at $16.16. Volume of 7.5 million shares was slightly more than usual.

Market indicators turn mixed

Statistical junk market performance indicators turned mixed on Friday after having been higher across the board on Thursday, which followed three consecutive mixed sessions.

It was the second straight week that those market signposts were mixed versus the week before, which followed four straight weeks before that during which they had been lower all around week to week.

The Markit Series 20 CDX North American High Yield index lost ¼ of a point on Friday to end at 103¾ bid, 104 offered, after having risen by 7/32 of a point on Thursday, its second straight advance. It was also down from its level last Friday of 104 9/16 bid, 104¾ offered.

The KDP High Yield Daily index was up by 3 basis points on Friday to finish at 73.15, its second straight gain. It had advanced by 8 bps on Thursday.

The yield, meanwhile, came in by 1 bp to 6.30%, its second consecutive decline. The yield had gone down by 2 bps on Thursday.

Those levels compared favorably with its week-earlier index reading of 73.00 and yield of 6.33%.

And the widely followed Merrill Lynch High Yield Master II index rose by 0.085% on Friday, its second gain in a row. On Thursday, it had improved by a nearly identical 0.086% .

The gain raised the index's year-to-date return to 2.768% from Thursday's finish at 2.68%. That return remained well down from its peak level for the year so far of 5.835%, recorded on May 9, though still up solidly from its 2013 low point of 0.384%, set on June 25.

The index showed a one-week gain of 0.282%, rising from where it had finished the previous Friday for the first time after five straight weeks on the downside before that. On Aug. 23, it showed a 0.339% week-over-week decline, dropping the year-to-date return to 2.478%.

Christine Van Dusen contributed to this report


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