Paetec pops on Windstream buyout; Main Street deal dropped in favor of loan; Ford, HCA busy

By Paul Deckelman and Paul A. Harris

New York, Aug. 1 - The junk market turned the calendar page to August on Monday with news of a big merger & acquisition deal pushing the bonds of the target company up solidly, as Windstream Corp. agreed to acquire fellow telecommunications operator Paetec Holding Corp. in a transaction valued at $2.3 billion, including the assumption of $1.4 billion of Paetec debt.

While Paetec's paper popped, Windstream's notes were seen lower on the prospect of an increased debt burden for the company.'

Medical names such as Kindred Healthcare Inc. were anything but robust on Monday, as they reeled in the wake of Friday's announcement from the government that skilled-nursing facilities companies will be hit with targeted reimbursement cuts under the Medicare program. The sector weakness spread to hospital names like Community Health Systems Inc. on investor fears that the big new debt ceiling agreement emerging from Capitol Hill will lead to further Medicare cuts that will slam health care operators' revenues.

The new bonds from another of those hospital operators - HCA Inc. - were among the most actively traded on Monday, along with Ford Motor Credit Co. LLC's new issue.

With HCA and Ford Credit having led a tremendously busy week in the new deal arena last week, as over $10 billion of bonds priced, the primaryside cupboard has been pretty much swept bare, with only one medium-sized deal being actively marketed. The forward calendar got even thinner on the news that Main Street Personal Finance, Inc. will do its needed financing via a private loan deal, rather than the expected $95 million bond issue.

Back in the secondary sphere, things were seen as mostly quiet. Statistical indicators, which were generally easy on Friday, turned mixed on the day Monday.

The lessons of HCA

While economic headlines have tended to be dire and political headlines have been less than persuasive, the primary market appears to remain open, sources said on Monday.

Sellsiders pointed to HCA's massively upsized $5 billion two-part drive-by deal, which priced early last week.

"For a deal to upsize to $5 billion from $1 billion tells you there is some cash out there to put to work," a senior syndicate official said.

Not only did the deal upsize, HCA walked away with friendly rates, the source added.

To recap, the upsized deal included a $3 billion tranche of 6½% 8.5-year senior secured first-lien notes (Ba2/BB) and $2 billion of 7½% 10.5-year senior unsecured notes (B3/B-).

Both priced at par and came at the wide end of price talk for the respective tranches: 6 3/8% to 6½% for the secured bonds and 7 3/8% to 7½% for the unsecured issue.

J.P. Morgan Securities LLC, Barclays Capital Inc., Bank of America Merrill Lynch, Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Wells Fargo Securities LLC were the joint bookrunners.

Plenty of cash

The senior official, who at the end of 2010 forecast that 2011 issuance would come below 2010's record $292.6 billion, hedged his bets on Monday.

"Depending upon what you count, we're running 46% to 48% ahead of last year's pace," the official said, adding that a decent post-Labor Day primary market should easily produce a new record yearly issuance total. The 2011 year-to-date total stood at $209.8 billion at Monday's close.

In the waning days of 2010, this syndicate source commented that the high-yield market could not rally indefinitely and predicted some event would sideline the primary, possible Europe.

"That did happen," the official asserted.

"It's just that the market didn't get sidelined for very long. You saw some profit-taking, which came in the form of a big outflow," the investment banker added, pointing to the record-setting $3.43 billion outflow from the high-yield mutual funds for the week to June 29, reported by Lipper-AMG, which was followed by another $321 million outflow for the final full week of June."

Those outflows coincided with a barrage of negative credit news regarding Greece, Italy and Ireland.

"Since that time, you've seen most of that cash come back in," the banker maintained, pointing to positive weekly flows of $884 million, $1.3 billion and $287 million during the three-week period ending July 18.

"And of course those fund flow numbers really doesn't give you much of a sense of how much cash is out there," the banker said.

"The weekly fund flow numbers represent a very small percentage of the cash to be put to work in the high yield.

"They just provide a sense of the trend."

Looking to September

In keeping with the tradition of the Dog Days in the primary market, dealers forecast that August will generate a meager amount of new issuance at best.

"The primary market feels okay, but people are now focused on macroeconomic numbers," a syndicate banker said on Monday morning, referring in particular to a weaker-than-expected ISM Manufacturing survey for July, which rocked the stock markets.

"Issuance has been slow during the past two months, so there is some pent-up cash just from coupon payments," the banker added.

Another syndicate source also forecast a slow August, with a deal here and there.

"There is a post-Labor Day calendar," the source added, noting that merger & acquisition activity and LBOs now taking shape will almost certainly translate into primary market activity in the fall.

"And you will continue to see well-healed high-yield issuers refinance debt," the banker added, again noting last week's HCA deal.

New Ford, HCA notes busy

A trader said that Ford Motor Credit's new 5 7/8% notes due 2021 were up about one-eighth to one-quarter of a point on the day, seeing the bonds trading "on either side" of a 1003/4-100 7/8 bid range.

That was up from the par issue price at which the Dearborn, Mich.-based automotive financing arm of Ford Motor Co. had brought its quickly shopped $1 billion bond deal to market on Wednesday and up as well from the initial aftermarket levels in a par to100½ range, which the bonds achieved after they had begun trading around.

A market source said that those bonds had racked up at least $18 million of turnover - not bad for a generally quiet day - putting them at or near the top of the Junkbondland most-actives list. He saw the bonds trading at 1003/4.

The source also said that as of mid-afternoon, around $14 million of HCA's new 6½% senior secured first-lien notes due 2020 had changed hands and around $12 million of the Nashville-based hospital operator's 7½% notes due 2022.

A trader at another shop said that both tranches of the HCA bonds were trading in the 101-101½ context, with the 71/2s "by one-eight-point less."

Both huge tranches of those bonds - the $3 billion of 2020s and the $2 billion of 2022s - priced at par on Tuesday and initially stayed not far from that issue price, but had gained more than a point in Thursday's dealings, holding those levels since then.

A trader said that much of the trading in the new HCA and Ford issues "seemed to be mostly investment-grade accounts" looking to pick up some yield by dipping down, credit-quality-wise, into the upper reaches of the junk market.

Indicators turn mixed

Away from the new-deal precincts, traders noted that market statistical indicators, which had been soft on Friday for a third consecutive day, firmed a little bit on Monday to end more or less mixed.

A trader saw the CDX North American Series 16 HY Index down by 3/16 of a point on Monday to finish at 99 15/16 bid, 100 1/16 offered, on top of the 5/16 of a point loss seen on Friday.

The KDP High Yield Daily Index rose by 4 basis points on Monday to close at 75.44, after having plunged by 12 bps on Friday.

Its yield came in by 1 bp, to 6.70%, after having risen by 5 bps on Friday.

The Merrill Lynch High Yield Master II Index broke a three-session losing streak on Monday, gaining 0.227% versus Friday's 0.041% retreat. The gain lifted the index's year-to-date return to 6.257% from 6.206% on Friday, although it remains below its year-to-date peak level of 6.362% set last Tuesday.

Despite that better showing in the key index, a trader said that "the market felt a little heavy."

He added: "For the most part, I think that things hung in there."

He opined that perhaps the heavy feeling came because "maybe people panicked and did a lot of redemptions - it's hard to tell. It will be interesting to see the redemption [fund flow] number this week, I'll tell you that. A lot of people yanked their money out of the funds; they were freaking out on Friday."

Another trader said that "it's been kind of a dull day, except for watching [news on] TV and watching the occasional group of politicians coming out and saying things that are Saturday Night Live material."

A trader said that the trading related to the Paetec deal "was the excitement," and apart from that, "the rest of the world was just sitting around waiting for the debt-limit to be resolved."

He added: "If it doesn't pass," the scheduled Monday vote by the House of Representatives, which it did later in the day, "then what do you do tomorrow?"

Another trader agreed that "there's definitely been a lot of" market inactivity in the face of confusion about the debt ceiling compromise and what it may mean for individual companies and sector.

Paetec pops on deal

Among specific names, a trader said that the Paetec 9½% notes due 2015 "really were the only ones that were really active," seeing them up 1 point to 105 3/8 bid.

However, he also saw at least some activity going on in the company's 9 7/8% notes due 2018, pegging them at 113 bid, a gain of about 6 points from last week, when they had gone home in a 106-107 context.

Another trader said that the Paetec deal was "the only other thing going on away from the trading in the new issues."

He said that the Fairport, N.Y.-based telecommunications company's 91/2s "were the most active" in the company's capital structure, seeing more than $15 million of the bonds having traded up to about a 105½ level, which he called up 1¼ point.

He also saw about $12 million of the 9 7/8s changing hands calling them up 6 points at 113¼ bid, 113¾ offered, although he noted that those levels also reflected the fact that the issue "hasn't traded in a while."

The company's 8 7/8% notes due 2017 were at 112 bid, 113 offered, although he said that trading was all in small transactions.

Paetec's Nasdaq-traded shares rose 91 cents, or 20.59%, to end the day at $5.33 on volume of 32.2 million - more than 32 times the usual turnover.

The bonds and the shares rose after Little Rock, Ark.-based telecom operator Windstream announced that it has agreed to buy sector peer Paetec for $891 million in an all-stock deal and assume or redeem $1.4 billion of Paetec debt, bringing the total value of the transaction to $2.3 billion.

Windstream bondholders were not thrilled at the prospect of taking on that much debt, dropping its 8 1/8% notes due 2018 by 1 point, to 107¼ bid.

Health care looks anemic

Away from the M&A-driven moves in Paetec paper, a trader noted, "You've had some big drops in some of the health care paper," particularly that of nursing home operators.

He singled out Kindred Healthcare's 8¼% notes due 2019, which had been trading around par as late as last Friday, but fell to current levels around 92½ bid, 93 offered, hurt by the Friday announcement from Medicare officials that they were cutting reimbursements to skilled nursing facilities by more than 11% during the fiscal year scheduled to start on Oct. 1.

Like a strain of the flu, the weakness quickly spread to other names in the sector, he said, such as Community Health Systems' 8 7/8% secured notes due 2015, which were off ¼ of a point to 102¼ bid, 102 ¾ offered.

Apria Healthcare's 11¼% notes due 2014 lost half a point to end at 102½ bid.

Besides the Friday announcement, the bonds and shares of the health care providers were seen down on the prospects of cuts in Medicaid and Medicare as part of the new debt-ceiling deal in Washington.

Catalyst gets clobbered

A trader said: "From the opening this morning, I saw Catalyst go on a ride," after the Richmond, B.C.-based paper manufacturer reported poor earnings.

"They had numbers out," he said, "and it was just ugly."

He said that he "didn't think there was much volume, but [levels] sure did go on a ride. It was pretty interesting."

He saw the company's 7 3/8% notes due 2014 were being quoted down as much as 12 points from their prior levels at one point in the day, bottoming at around a 40-42 context, while the company's 11% senior secured notes due 2016 were seen during the morning at 70-73, down 8 points from their Friday finish.

By the end of the day, he saw the 7 3/8s having come off their lows a little to end around 43 bid, 45 offered, while the 11s were going home at 74 bid, 75 offered, "so they were up off the bottom. So down 8 [points], up 4 [from the bottom], they're still down 4 for the day."

He noted that the 11% notes are 144A, "so you really can't see how much volume there was, but there definitely wasn't any volume in the 7 3/8s. They were just quoted down. I would say that the 11s definitely traded more, and they were definitely heavily traded," even though there was no visibility on just how much.

A second trader said the Catalyst secured notes traded down as much as "7 or eight points," but saw trades "in the middle of the day" around the 73 level versus a price of 80 bid on Friday, "so definitely" they were off.

Another trader said he didn't think any of the 7 3/s8 actually traded, "so it'll probably work out to the upper 40s."

Catalyst, which runs five mills in British Columbia and one in Arizona, disclosed that during the second quarter ended June 30, it lost C$47.4 million, or 13 cents per share, on C$297.8 million of revenue. That compares favorably to its year-earlier per-share loss of 96 Canadian cents, although that earlier period included unusual expenditures, such as the cost of closing down its Elk Falls, B.C. mill and paper recycling division.

Excluding such non-recurring gains and losses, including C$5.7 million of costs during the latest quarter related to fires at two of its mills, the company lost C$46.9 million in the quarter, or 12 Canadian cents per share, versus its adjusted 11 cent per-share loss a year ago.

The loss was also wider than the first quarter, when Catalyst lost C12.9 million, or 3 cents per share, on C$303.6 million of revenue. Ex-special items, the first-quarter loss came toC23.6 million, or 6 Canadian cents per share.

Catalyst blamed its wider sequential loss on reduced production and increased maintenance costs and downtime - particularly at its Powell River and Snowflake mills, each of which suffered a fire.

The company also cited a slackening off of buying by Chinese customers, and the strength of the Canadian dollar, which makes Catalyst's products more expensive to non-Canadian customers.

Catalyst's chief executive officer, Kevin J. Clarke, predicted that in the current second half of the year, demand for coated and uncoated papers is likely to firm up while pulp prices recover from their summer downturn. But demand for the grades of paper used in phone books and other directories, as well as for newsprint, will continue their long decline.

Catalyst's total liquidity at the end of the quarter was C$136.4 million, down from C$208.3 million at the end of the year-earlier quarter. This was primarily due to a lower borrowing base associated with its amended revolving asset-based loan facility. In late May, the company and its bankers agreed to reduce the size of that loan to C$175 million from C$330 million and extend the maturity to May 31, 2016 from Aug. 13, 2013.

Catalyst also cited the impact of a decrease in cash on hand and an increase in letters of credit.

NewPage not connected

A trader said that while the Catalyst paper was being quoted and traded at considerably lower levels on the company's numbers, "I don't think that [sector peer] NewPage really followed - why should they?"

He quoted the Miamisburg, Ohio-based coated paper manufacturing company's 11 3/8% first-lien senior secured notes at 89½ bid, 90½ offered, while its 10% second-lien notes due notes due 2012 were at 23 bid, 125 offered.

He said those levels were "pretty much where they started the day," allowing that the 11 3/8s might be "down slightly," meaning about a half-point on "decent volume," while the 10s may have been off by a point in "moderate trading."

A second trader said that the NewPage bonds "started out weaker, down a quarter, and is probably unchanged at the close, pegging the bonds at around 90-901/4.

At another desk, a market source quoted the 11 3/8s at 89 7/8 bid, while seeing the 10s at 23. He saw fairly active dealings in both issues, estimating volume in the 11 3/8s at about $9.5 million at mid-afternoon, while seeing $7 million of turnover - enough to put both issues near the top of the day's most actives list.

Hovnanian holds levels

Elsewhere, a trader said that Hovnanian Enterprises Inc.'s' 10 5/8% notes due 2016 "has been a pretty active name," quoting the Red Bank, N.J.-based homebuilder's credit at 93 bid, 94 offered, which said was in line with recent levels, "but I've just seen them quoted a lot."

He said that credit default swaps protecting Hovnanian holders against a potential defaults "definitely are actively quoted."

At another desk, a trader said that Hovnanian "was pretty active," seeing the 11 7/8% notes due 2015 were up a point to 63 bid, 63 ¾ offered, "though I don't know why."

The Hovnanian bonds had been getting pushed around last week, traders said, on a combination of investor angst about continued weak housing sales and home prices, proven by recent federal and industry data, as well as fears that home mortgage deductibility could in theory be on the chopping block as Washington looks for new revenues through tax code revisions, although it appears no such actions will be immediately taken, according to news reports about the much-heralded debt ceiling agreement.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.