Planned Spectrum deal upsizes; ATP, Transocean again busy; funds drop $759 million on week

By Paul Deckelman and Paul A. Harris

New York, June 3 - Spectrum Brands Inc. looks set to possibly become the sole company to borrow in the junk market this week, and only the second in the past two weeks. High yield syndicate sources heard Thursday that the Atlanta-based consumer products company's offering of eight-year senior secured notes had been upsized to $750 million from the originally announced $500 million. They also heard price talk on the issue. The deal could price as soon as Friday, following the closing of the order books at mid-morning.

No other deals were seen on the verge of an imminent pricing on Thursday, although several offerings on the forward calendar, for Willbros Group, Inc., Cedar Fair, LP and Citgo Petroleum Corp., continue to be regarded as day to day, with pricing a possibility - or not - depending on perceived market conditions.

Traders once again saw brisk activity in ATP Oil & Gas Corp.'s bonds, which have been bouncing around over the past few sessions after having gotten clobbered earlier in the week as a reflection of continued investor angst over the prospects for energy companies which, like Houston-based ATP, have considerable offshore reserves which they may not be able to access in the wake of the federal ban on new drilling permits.

There was also brisk activity in oil drilling rig operator Transocean Inc.'s bonds - nominally still investment grade but increasingly traded as if they were junk as high-grade accounts dump the company's debt, fearing the fallout from its role at the center of the Deepwater Horizon oil rig disaster in the Gulf of Mexico.

Junk funds lose $759 million

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 $759.2 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 fifth consecutive outflow that the junk market has seen, including the $1.35 billion cash bleed recorded in the previous week, ended Wednesday, May 26. Over the past five weeks, the junk funds have seen a net outflow of $4.304 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.

The year-to-date net funds flow figure moved into the red, to the tune of $218 million, versus the previous week's net inflow figure of about $541 million, according to the Prospect News analysis. The latest figure is a far cry from the peak net inflow level for the year of $4.086 billion, which had been seen in the week ended April 28, and is not that far off its low point for the year, a net outflow of $357 million seen in the week ended Feb. 17, which had been the first such year-to-date net loss for the funds since early April of 2008, according to the analysis.

Even counting the latest week's downturn, inflows have still now been seen in 14 weeks out of the 22 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. There have been eight outflows in 2010 - the five 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. However, some market participants, noting the way that junk seemed to have recovered somewhat from the beating it took early last week, had been looking for a smaller outflow, or maybe even a cash infusion

Large outflow a surprise

The present week's $759 million outflow is by all means a substantial one, market sources agreed on Thursday afternoon, as the AMG number circulated.

Also it is a surprising number, given the fact that the week encompassed in the reporting period straddles the three-day Memorial Day holiday weekend in the United States, a syndicate official said.

What makes the number surprising is its relative size, contrasted by the low volumes of the Thursday session and the shortened Friday session heading into the Memorial Day weekend, as well as the post-Memorial Day Tuesday and Wednesday sessions, during which players were slow to trickle back to their desks, the source added.

One possible explanation: a lot of investors who were overly long high yield in March and April are now purposefully reducing their positions, the official surmised.

The outflow was the first time the funds have seen five straight outflows since the Lehman Brothers blowup in September 2008, according to a market source.

The five consecutive outflows which got underway during the week ending May 5 - when the funds lost $127 million - now totals $4.3 billion of outflows over the entire five-week period, according to a market source.

Hence the magnitude of the most recent five-week run of outflows is far higher than that of the five weeks of negative flows which got underway in September 2008, when the funds saw a total of $1.7 billion of negative flows.

EPFR sees $816 million cash exit

Another fund-tracking service - Cambridge, Mass.-based EPFR Global, whose methodology differs somewhat from AMG - meantime reported that $816 million more left the funds than came into them in the latest week.

That cash exodus follows a big $1.89 billion bleed seen the previous week, ended May 26. In line with the pattern seen in the AMG figures, the EPFR statistics have now shown five consecutive weeks of outflows, totaling $5.926 billion, including a $2.1 billion hemorrhage seen in the May 12th week, which EPFR said was the worst single outflow since the first quarter of 2005.

Reflecting the difference between the ways AMG and EPFR calculate their respective fund-flow totals - EPFR includes results from certain non-U.S. domiciled funds as well as the domestic funds - those five outflows, taken together, have brought the service's year-to-date net inflow total down to $2.6 billion, versus its peak level of $8.59 billion seen in the last week of April after 10 straight weeks of inflows starting in late February.

Any and all cumulative fund-flow totals, whether for AMG or EPFR, 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, and EPFR posting similarly robust numbers - 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%.

Spectrum upsizes

In keeping with the trend of the post-Memorial Day week in the primary market, the Thursday session was a quiet one.

News surfaced on what could be the only deal to price during the May-June crossover week.

Shifting $250 million to its high-yield bond deal from its bank loan, Spectrum Brands, Inc. talked an upsized $750 million offer of eight-year first-priority senior secured notes (B2/B/) to yield in the 9¾% area.

The Madison, Wis.-based consumer products company upsized the bonds from $500 million.

The order books close at 10 a.m. ET on Friday.

Along with upsizing the bonds, Spectrum Brands downsized its term loan to $750 million from $1 billion.

Credit Suisse, Bank of America Merrill Lynch and Deutsche Bank Securities Inc. are the joint bookrunners for the acquisition financing bond deal.

Market indicators keep firming

A trader saw the CDX North American HY Series 14 Index closing Thursday up 1/8 point on the session to end at 94 7/8 bid, 95 3/8 offered, after having gained ¾ point on Wednesday.

Meanwhile, the KDP High Yield Daily Index firmed by 10 basis points on Thursday to end at 69.91, after having eased by 6 bps on Wednesday. Its yield tightened by 4 bps to 8.89%, after having been unchanged on Wednesday.

Advancing issues jumped back out ahead of decliners by a seven-to-five margin on Thursday, after having trailed them the previous two sessions including Wednesday, when the margin of difference was just a couple of dozen issues out of more than 1,300 tracked.

Overall market activity, represented by dollar-volume levels, fell around 7% on Thursday, after having nearly doubled - up 93% - on Wednesday from the previous session's pace.

A trader aid overall, "we were up a little today."

More gyrations from ATP

A trader said that ATP Oil & Gas "was the big name of the day again," with its 11 7/8% second-lien senior secured notes due 2015 trading as high a 78 bid, before going out around a bid level of 721/2-73.

"That was a real hot one," he said.

Another trader also saw the notes finishing around 73 after gyrating around wildly during the day; he saw them finish up Wednesday's dealings around 73 bid, 74 offered, but at the opening on Thursday, he quoted them up a little at 75 bid, 76 offered. By the end of the day, he too saw them sink back down to around 72¾ bid, 73¼ offered.

ATP had priced $1.5 billion of the bonds on April 19 at 99.531 to yield 12%. That pricing came the day before the oil drilling rig Deepwater Horizon, owned by Transocean and under lease to international oil major BP plc, exploded, burned and capsized in the Gulf of Mexico, about 40 miles southeast of the Louisiana coast. The mishap killed 11 workers and injured 17 others and started the massive oil leak, which has still not been brought under control more than six weeks later.

The new bonds initially shrugged off the news and firmed to the 102-103 region, before starting to come down in the weeks that followed when it became apparent that the oil-rig explosion and resulting environmental problems had been far more serious than initially thought, leading to a government-ordered moratorium on new drilling in the Gulf - a potentially severe blow to a company like ATP, which has most of its proven reserves there. The bonds cratered in the mid-60s earlier this week on the news that BP's efforts to stop the leak, which the company called its "top kill" maneuver, had not been successful and the oil was still spewing from the shattered well.

But after having been beaten down far enough, the paper seemed to be coming back on Wednesday and at least held their own at those somewhat higher levels on Thursday.

"They got a little oversold," the first trader theorized, "and the stock was up today." ATP's Nasdaq-traded - which on Tuesday had plunged some 18% on the day but which then regained about 6% on Wednesday - added on another 35 cents, or 3.79%, on Thursday to finish at $9.59. Volume was 13.7 million shares, or more than four times the usual daily handle.

He said that "no one really knows" what's going on to push the bonds first down and then back up during the week, but off its highs on Thursday. But he suggested that "it got oversold, and there was a big seller. It was more technicals" coming into play.

"Everyone is watching what's happening in the Gulf here, how much they're going to be affected."

He said that "there's supposed to be a new well that they don't know if they're going to get approval or not, and I think that's what's driving the trading."

He further said that ATP sector peers like "Energy XXI, McMoRan [Exploration], all of that stuff was up in sympathy, but obviously not as much as [ATP on Wednesday and Thursday]."

He saw Energy XXI's bonds like its 10% notes due 2013 up around a point in a 97ish context. McMoRan Exploration's 11 7/8% notes due 2014 were up 2 points at just below 102.

"It's all Gulf-related s-t," he summed it up.

Transocean paces market again

A trader said of Transocean Inc.'s nominally investment grade bonds - now trading off some junk bond desks after falling sharply on Wednesday - that "a lot of 'em are trading," up a couple of points from Wednesday's levels, which had been reached "on huge volume."

He said Transocean stock and its bonds each up by several points.

Another trader saw Transocean's 5¼% notes due 2013 up ½ to ¾ point at 94½ bid, 95½ offered, while its 6% notes due 2018 were unchanged at 92½ bid, 93½ offered.

He said that there was "plenty good volume " in those two issues, estimating that over $60 million of each had changed hands - only two-thirds of the over $90 million of each traded on Wednesday, but "still nothing to sneeze at."

He also saw Transocean's 6.80% bonds due 2038 were "up a good 2 points" at 86 bid, 88 offered.

A trader said that the brisk trading in energy names "was most of it" in high yield on Thursday. Apart from issues like ATP and Transocean," it's been very quiet. Trading volumes are down substantially - I mean really, really down."

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