Split-rated ILFC prices, draws junk interest; AK Steel gyrates; United Rentals quiets down

By Paul Deckelman and Paul A. Harris

New York, Dec. 19 - While high-yield primaryside activity was supposed to be pretty much over for the year, Junkbondland players saw a new deal - of sorts - on Monday, as International Lease Finance Corp. (ILFC) came to market with an upsized, split-rated offering of 10-year notes.

The issue drew considerable interest from high-yield accounts based both on its very junk-like coupon, as well as the absence of anything else happening.

The new bonds were seen to have traded fairly actively in a narrow range at or just below their par issue price.

There also was some trading, though not on particularly big volume, in the new add-on bonds sold earlier this month by Ford Motor Credit Co. LLC and NII Capital Corp., which both stayed anchored to their most recent trading levels.

Away from the new-issue domain, there was a fair amount of trading in AK Steel Corp.'s bonds, as investors continued to analyze the metals manufacturer's recent financial guidance.

There was some trading in United Rentals, Inc.'s bonds, though far less than was seen on Friday when the equipment-rental company announced an agreement to acquire industry peer RSC Holdings, Inc.

United Rentals' bonds fell on Friday on news that the company would do a big, new junk bond megadeal to finance that transaction. They were down again on Monday as well.

Also from the merger-and-acquisition world, the news that wireless telecommunications giant AT&T Corp. has abandoned its efforts to acquire smaller rival T-Mobile arrived too late in the session to give much of a boost to the bonds of Sprint Nextel Corp.

Sprint Nextel is the most obvious beneficiary of such a development and Sprint's shares rose in aftermarket dealings.

And Vulcan Materials Co. bonds, which had shot up solidly a week ago on news that competitor Martin Marietta Materials, Inc. was making a hostile takeover run at Vulcan, continued the process of coming in from the initial peak levels that they hit right after the takeover news.

International Lease deal

Although no straight-junk issues came to the primary market on Monday, International Lease Finance priced an upsized, split-rated $650 million issue of 8 5/8% 10-year senior notes (B1/BBB-/BB) at par to yield 8.623%.

The deal, which was upsized from $500 million, priced in line with the 8 5/8%-area price talk, which had tightened from earlier talk of 8 5/8% to 8¾%.

Citigroup, Deutsche Bank Securities Inc., Goldman Sachs and Morgan Stanley were the active bookrunners.

The split-rated deal had the novel aspect of actually sporting one single-B rating in the form of the B1 from Moody's, a trader from the crossover space observed.

There was very little new issue concession in the 8 5/8% coupon, added the trader who saw the deal trading around par bid, shortly after the terms rolled out.

"It's pretty active around par, but I have the feeling we're going to see better sellers," the trader added.

The source added that there seemed to be a high amount of flipping on the break.

The upsized $650 million deal played to about $1.5 billion of orders, the majority of which were high-yield accounts, although there were some high-grade players in the deal, according to a syndicate source.

With no provision against upsizing, the company increased the deal to $650 million from $500 million when it secured the 8 5/8% rate, the source added.

European accounts cash heavy

While fund flows to high-yield accounts in the United States have been positive during four of the past six weeks, European accounts have seen six successive outflows during the past six weeks, according to a sellside source in London.

Nevertheless, European accounts are believed to be heavy with cash, the source added.

"Those flows don't really tell the story," the banker said.

First, there has been no calendar in Europe during the second half of 2011.

Second, there is nothing to buy in the secondary market, as the European market labors under a greater degree of illiquidity than is true of the conspicuously illiquid market in the United States.

And third, coupon payments continue apace, increasing the accounts' cash buildup.

The London-based investment banker told of a call from one investor who was ordered by the fund's management to put some cash to work.

Another anecdote related the story of a European high-yield account that was recently 20% cash.

Quiet week expected

The high-yield primary market is expected to see an extremely limited amount of activity for the remainder of the pre-Christmas week, sources said on Monday.

Tuesday's sell-off in the stock market did not improve the primary market's pre-Christmas prospects, one investment banker observed.

However, there could be business in the form of a relatively small drive-by deal, a syndicate source said.

Should that deal be rolled out, it would most likely take place on Tuesday, the source added.

Junk players fly with ILFC

With nothing happening in the primary market from purely junk issuers, several secondary traders noted that high-yield accounts were setting their sights just a little higher, climbing aboard the new deal from International Lease Finance.

One said that the new 8 5/8% notes due in January of 2022 were trading at 99 5/8 bid, 100 1/8 offered, after the $650 million deal - upsized from an originally planned $500 million - priced at par earlier in the session.

However, he said that as the afternoon wore on, the bonds moved up to about 99 7/8 bid, 100 1/8 offered.

"That's more the market now," he said.

A second trader said the new bonds had opened up at 99½ bid, par offered. He heard that one or more of the deal's several underwriters might be "out there, supposedly bidding par," although he said the Street level was at 991/2-par.

"It's interesting to see a bunch of trades at par and some at 99½ and 993/4. My bet is the dealer that buys at par is the lead [underwriter]. The Street's a little lower. It kind of went out pretty lethargic with equity market ratcheting down again at the close."

"Every ratings agency has a different rating for it," the trader said.

Moody's Investors Service rated the deal at B1, Standard & Poor's gave it a just barely investment-grade rating at BBB- and Fitch pegged the bonds at BB.

With those kinds of ratings, "I think they're predominantly traded by high-yield guys," he declared.

"There are AIG bonds that are higher rated that trade out of high-grade hands, but I would say that 80% of the I-Lease bonds, or more, are traded by high-yields desks."

He said he had seen "a number of par trades and a few 99½ and 99¾ trades on Trace here."

Yet another trader also saw the new bonds going out at 993/4-par.

Among the company's existing bonds, its 8¾% notes due 2017 were seen up by ¼ point at 103½ bid, although its 5¾% notes due 2016 dropped by ¾ point to 92½ bid.

Ford Credit fairly active

Among the recently priced issues, a market source saw some activity Monday in Ford Motor Credit's 5 7/8% notes due 2021, though the bonds were still anchored around recent trading levels.

More than $8 million of those add-on notes traded on Monday, mostly tethered to recent trading levels in the mid-102 area; although at one point, quotes as good as 104¾ were heard.

However, the bonds were seen ending at about 1021/4, down from Friday's round-lot levels in the 102½ area.

Ford Credit - the loan-financing arm of Dearborn, Mich.-based automotive giant Ford Motor Co. - had priced its $1 billion drive-by transaction on Dec. 5 at 101.80 to yield 5 5/8%, versus the 5 7/8% yield at which the original $1 billion tranche of those bonds had priced back in August.

After pricing, the new bonds quickly shot above 102 bid and mostly stayed in that vicinity.

Heavy initial dealings of more than $100 million each for the first several days that the bonds traded have given way to more normal-sized trading activity.

New NII also trades

Another somewhat busy bond in Monday's generally dull dealings were the new 7 5/8% notes due 2021 that NII Capital priced as an add-on to its existing notes of the same terms.

A trader said Monday that more than $7 million of the bonds had changed hands, making it one of the busier high-yield issues.

The bonds traded around 98 5/8 bid, up from the 98 1/8 bid level seen late Friday.

NII Capital is a unit of Reston, Va.-based NII Holdings Inc., the now-independent former international arm of Sprint Nextel Corp.

The company, which provides wireless service to markets in Latin America, came to market on Dec. 5 with its fully fungible $700 million add-on to the existing $750 million of bonds that priced at par back in March.

The new bonds - upsized from an originally announced $500 million - priced at 98.5 to yield 7.852%, actually wide of the original tranche's 7 5/8% yield.

While those new bonds initially firmed after pricing, those quick gains faded later on in the Dec. 5 week, dropping to bid levels below 98.0, before managing to come back up to current levels.

T-Mobile news comes too late

Sprint's bonds were seen little changed Monday in the wake of the not-so-unexpected news released after the stock market closed that Sprint's much bigger rival, AT&T, halted efforts to buy T-Mobile USA for $39 billion.

It will instead walk away from the deal and pay a break-up fee to T-Mobile's owners, taking a $4 billion earnings charge.

Overland Park, Kan.-based Sprint, the third-largest U.S. wireless company, had vehemently opposed AT&T's acquisition efforts.

AT&T, the No. 2 industry player, sought out T- Mobile, which is ranked at No. 4, in hopes of leapfrogging the current industry leader, Verizon Wireless.

Sprint feared that letting the one-time "Ma Bell" buy T-Mobile would put itself at an even greater competitive disadvantage.

Federal authorities agreed, with both the Justice Department and the Federal Communications Commission filing objections on antitrust grounds and ultimately causing AT&T to drop the transaction.

But because of the lateness of the hour - well after 4 p.m. ET - there really were no dealings in Sprint on Monday.

Sprint's busiest issue, its Sprint Capital Corp. 6 7/8% bonds due 2028, saw only about $4 million of large-trade turnover. Those bonds ended down a bit, at 68 7/16 bid.

The one Sprint issue that seemed to have reacted to the news with a few late-session trades was parent Sprint Nextel's 6% notes due 2016, which began the day at just under the 77 level, but went home at 80¾ bid, up 4 points on the day. But a market source described volume as thin and consisting entirely of unrepresentative smallish odd-lot trades.

Sprint's New York Stock Exchange-traded shares went home down 9 cents on the day, or 4%, at $2.16, as the stock market closed before the AT&T/T-Mobile announcement. Volume of 28 million shares was less than half the norm.

But in after-hours trading, the shares firmed smartly, gaining 16 cents, or 7.41%, to end at $2.32.

AK Steel is active

Elsewhere, AK Steel's 7 5/8% notes due 2020 was one of the busiest junk bonds on Monday with more than $15 million changing hands.

The West Chester, Ohio-based specialty alloy producer's bonds gyrated between 92½ on the low end to 97½ on the high side before finally going out quoted at 96¼ bid - down 1¼ points from Friday's close, but up 1¼ points from Friday's last sizable trade, a market source said.

AK said late last week that it expects shipments and selling prices to rise in the fourth quarter from a year earlier, while operating costs are expected to fall from the previous quarter.

United Rentals still struggles

A trader said that United Rentals' 8 3/8% notes due 2022 "had a couple of million trading," quoting the bonds up slightly at around the 96 bid level. He called that a gain of ¼ to ½ point above where the bonds had finished on Friday.

However, the bonds remained well below the levels they held on Thursday, the last session before Friday's announcement that Greenwich, Conn.-based equipment-rental giant United would acquire smaller rival RSC Holdings, issuing $2.2 billion of new junk bonds and drawing on existing credit facilities to fund the deal.

News of those planned borrowings and investor worries about what it would do to the company's leverage profile sent the bonds lower on Friday.

Vulcan retreat continues

Vulcan Materials' 6½% notes due 2016 were seen by a trader down ¾ point on the day at 103.

That continues the fall for the Birmingham, Ala.-based construction materials company's bonds, which were as good as 105 bid - a gain of more than 7 points - a week ago on the news that sector peer Martin Marietta Materials would try to take over Vulcan, an effort the latter company's management has vowed to reject.

Hovnanian gets hammered

A trader said that K. Hovnanian Enterprises Inc.'s bonds "went on a ride," moving lower on the day.

He saw the Red Bank, N.J.-based homebuilder's 10 7/8% notes due 2016 quoted down about 3 points on the day, to 71. "But there was not much volume at all in them, just a couple of trades," the trader said.

Hovnanian last week reported in its fourth-quarter and full-year results that it continues to lose money. The company also said it does not expect the downturn in the national housing market to end in the next two years.

Vermilion flat

In the Canadian high-yield market, Vermilion Energy Inc.'s bonds were unchanged after the company announced plans to buy interests in six French oil producing fields for C$115 million from Total SA.

Its 6½% senior notes due 2016 traded unchanged at 102.25, 104.25, a trader said.

Calgary, Alta.-based oil and gas producer Vermilion sold C$225 million of the 6½% notes at par on Feb. 3.

The acquisition is expected to close in late January.

On Nov. 28, Vermilion sold C$263 million of common stock to reduce debt and fund the company's development capital program and prospective acquisitions and for general purposes.

Cristal Cody contributed to this report

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