Paragon, Covenant deals price to cap busier $6.8 billion week; new Paragons heavily traded

By Paul Deckelman and Paul A. Harris

New York, July 11 – The high-yield primary market closed out the week on Friday with a burst of activity. Syndicate sources saw $1.21 billion of new U.S. dollar-denominated, fully junk-rated paper appearing in the market – in contrast to Thursday’s session, which had produced nothing.

The big deal of the day was Paragon Offshore Ltd.’s $1.08 billion two-part transaction, consisting of $500 million of eight-year notes and $580 million of 10-year paper – although the Houston-based provider of offshore drilling services to the energy industry had to first downsize the deal and do some tinkering with its covenants.

The new Paragon Offshore bonds were the most actively traded issue in Junkbondland, firming when they hit the aftermarket.

Nashville-based healthcare operator Covenant Surgical Partners, Inc. did a $130 million offering of five-year senior secured notes. It was quoted solidly higher, although traders noted the small size of the credit in predicting it would not be in circulation for very long.

Those deals brought the week’s new issuance to $6.78 billion in 12 tranches, according to data compiled by Prospect News. That was up from the $4.46 billion which had come to market in six tranches the week before, which was shortened by the market closure in observance of Independence Day last Friday, July 4.

The week’s issuance meantime lifted the year-to-date tally of new junk paper to $187.44 billion in 354 tranches, according to the data – running 9.8% ahead of the pace seen in 2013, which was eventually a year of near-record new issuance. Issuance at this point in the calendar last year totaled $170.75 billion in 386 tranches.

The gap over last year’s issuance widened this week from about 6.5% last week, helped by a nearly total fall-off in junk issuance in the year-ago week.

Statistical indicators of junk market performance were meantime mixed on Friday, after having been lower across the board on Thursday.

But those indicators were lower all around versus where they had finished at the end of last week – the first down week after three straight weeks of mixed results.

Paragon prices downsized deal

Given that it was a summer Friday, the July 11 high-yield primary market session was a busy one both in Europe and the United States.

In the dollar-denominated junk market, two issuers priced a combined total of three tranches to raise an overall amount of $1.21 billion.

Paragon Offshore sold a downsized $1.08 billion two-part offering of senior notes (Ba3/B ).

The deal included a tranche of eight-year notes priced at par to yield 6¾%. The yield printed on top of yield talk that was increased from earlier talk in the 6¼% area.

Also part of the offering was a tranche of 10-year notes that priced at par to yield 7¼%. The yield came on top of yield talk that was increased from the 6¾% area.

The deal was reduced from $1,185,000,000, while a term loan that is being arranged concurrently was raised to $650 million from $545 million.

There were also covenant changes.

Deutsche Bank was a joint global coordinator and the left physical bookrunner. J.P. Morgan was a joint global coordinator and joint physical bookrunner.

Barclays, Citigroup, Credit Agricole, Credit Suisse, HSBC, SunTrust and Wells Fargo were joint bookrunners.

Proceeds will be used to help fund the spinoff of Paragon Offshore, a Houston-based offshore drilling company, from Noble Corp.

Paragon trades higher

In the secondary market, the Paragon 6¾% eight-year notes were seen at par 5/8 bid, 101 offered at Friday’s close, according to a trader who said that the highest print was 101.

The 7¼% 10-year notes were at par ½ bid, par ¾ offered.

Beginning on June 30 Rule 144A bonds began appearing immediately on Trace, which has lent more transparency to the high-yield market, the trader remarked.

“It’s not necessarily good for dealers because buyside guys can see where things are trading,” the source added.

“But it has resulted in greater clarity.”

Trace information now gives the actual sizes of trades up to $1 million; higher trades are just reported as being greater than $1 million, the trader said.

Upsized Covenant prices tight

Co-issuers Covenant Surgical Partners and Consolidated Pathology, Inc. priced an upsized $130 million issue of five-year senior secured notes at par to yield 8 ¾%.

The deal was increased from $120 million.

The yield printed at the tight end of the 8¾% to 9% yield talk.

Timing was moved forward. Previously the deal was expected to be in the market into the week ahead.

Moody’s Investors Service has assigned its B3 rating to the notes. Standard & Poor’s rates the notes at B-. Those ratings factor in the upsized amount, according to the source.

Imperial Capital was the bookrunner.

Proceeds will be used to refinance debt, as well as to fund future acquisitions and for general corporate purposes. Proceeds resulting from the $10 million upsizing will go to the balance sheet for acquisitions.

Elsewhere Fortress/Drawbridge Fund priced a $300 million high-grade issue of non-callable 5% seven-year senior notes (BBB) at a 313 basis points spread to Treasuries.

The deal sold at a reoffer price of 98.541 to yield 5¼%.

The yield printed on top of yield talk. The spread came in line with spread talk of Treasuries plus 311 bps.

Wells Fargo was the left bookrunner for the deal which was run as a joint effort on the high-yield and investment-grade syndicate desks. Natixis is the joint bookrunner.

Thom Europe at the wide end

In the European session, Paris-based jewelry retailer Thom Europe SAS priced a €345 million issue of 7 3/8% five-year notes (B2/B) at 99.488 to yield 7½%.

The yield printed at the wide end of the 7¼% to 7½% yield talk.

A proposed tranche of floating-rate notes was withdrawn.

Global coordinator and physical bookrunner Goldman Sachs will bill and deliver. Credit Suisse was also a global coordinator and physical bookrunner. SG CIB and Lloyds were joint bookrunners.

Proceeds will be used to repay bank debt.

CMC prices at tight end

Italian civil engineering firm CMC di Ravenna priced a €300 million issue of seven-year senior notes (B2/B/) at par to yield 7½%.

The yield printed at the tight end of the 7½% to 7¾% yield talk.

Global coordinator BNP Paribas will bill and deliver. UniCredit was also a global coordinator. Banca IMI was the joint bookrunner.

The Ravenna, Italy-based company plans to use the proceeds to refinance debt and for general corporate purposes.

The week ahead

The July 14 week gets underway with a substantial $3.3 billion calendar of announced dollar-denominated deals expected to clear before the Friday close

American Energy – Permian Basin, LLC is marketing $1.4 billion of senior notes (Caa1//) in three tranches.

A tranche of five-year floating-rate notes is in the market with initial guidance of Libor plus 600 basis points. A tranche of 6.25-year fixed-rate notes has initial guidance in the mid-7% range. A tranche of 7.25-year fixed-rate notes has initial guidance in the high-7% range.

Goldman Sachs is the bookrunner.

Triangle USA Petroleum Corp. is marketing $350 million of eight-year senior notes (Caal/CCC ) via Credit Suisse and BofA Merrill Lynch. Initial talk has the deal coming at 7% to 7¼%, a trader said.

Ipreo Holdings LLC plans to sell $200 million of eight-year notes (Caa2/CCC ) which are coming with initial guidance of 7% to 7¼%, a market source said.

BofA Merrill Lynch, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley and RBC are the joint bookrunners.

Northwest Hardwoods, Inc. is marketing a $300 million offering of seven-year senior secured notes via Morgan Stanley, Credit Suisse and Jefferies. That deal is being guided in the low-7% range.

And Light Tower Rentals, Inc. plans to sell $300 million of five-year senior secured notes (B2/B).

Left bookrunner Jefferies and joint bookrunner RBC are leading that deal which has initial guidance of 8% to 8¼%, a trader said.

New deals dominate secondary

In the secondary market, a trader said “it was a typical summer Friday,” with not much in the way of activity, outside of new and recently priced issues.

Clearly the most active issue was the new deal from Paragon Offshore.

Paragon Offshore’s new 7¼% notes due 2024 racked up more than $41 million in trading after the offshore energy drilling services provider’s two-part issue had priced. A market source saw those bonds having moved up 5/8 point to 100 5/8 from their par issue price.

The other half of that deal – Paragon’s 6¾% notes due 2022 – also traded around 100 5/8 near the close, he said, with over $16 million having changed hands.

A second trader saw the 6¾% notes trading in a 100½ to 100¾ bid context, “and the other one in that same sort of ZIP code.”

But another trader said that it was the more actively traded 7¼s that blazed the trail, moving as high as 101 bid after pricing, before settling in between 100½ and 100¾.

“I never saw the 6¾s trade by themselves,” he said – they were always in lockstep with the other issue.

Friday’s other new deal – Covenant Surgical Partners’ 8¾% senior secured notes due 2019 – was “fairly active,” a trader said, considering its relatively small size of $130 million. He saw the bonds get as good as a 101 to 101½ context, versus their par issue price.

While Fortress Drawbridge’s 5% notes due 2021 is not a junk bond, strictly speaking, due to its BBB rating, several high yield traders noted that the deal had traded up to around a 99½ to par context, well above its 98.541 issue price.

One of the traders said that away from the busy Paragon Offshore bonds, “Calpine and Sinclair were among the volume leaders in an otherwise pretty quiet market.”

Calpine Corp.’s 5¾% notes due January 2025 were up 1/8 point at 100 1/8 on volume of more than $15 million, while its 5 3/8% notes due January of 2023 were unchanged at 100¼ bid, with over $9 million traded.

The Houston-based power generator priced a quickly-shopped $1.55 billion of the former and $1.25 billion of the latter, each at par, on Tuesday.

Hunt Valley, Md. television station owner Sinclair Broadcast Group Inc.’s 5 5/8% notes due 2024 were seen at 100¼ bid, unchanged on the day, on volume of over $16 million. It had priced $550 million of the bonds at par in a quick-to-market transaction on Wednesday, after upsizing the deal from $450 million originally.

Caesars seen busy

Away from the new deals – and appropriately for a day dated 7-11 – a trader declared that casino powerhouse Caesars Entertainment Corp.’s bonds “have had a little action,” with its 9% notes due 2020 fairly busy in an otherwise largely becalmed junk secondary market.

He saw the bonds “a little better” at 84½ going home, which he said was ¾ point higher on the day. Turnover on the credit was $10 million to $12 million.

“It seemed like it was an active name today,” with between $150 million and $160 million having traded across the company’s whole capital structure, including the Harrah’s Entertainment Operating Co. legacy bonds.

The latter’s 10% notes due 2018 were trading around 36 or 37 bid, which he said was down about 1 point on the day – but on “not a lot of trading,” with only a few million of the bonds seen having changed hands.

He said that Caesar’s 8½% notes due 2020 were in an 84½ to 85½ bid context, “about where they were when they started the day.”

That bond too only saw a few million traded.

“The higher coupon notes were the ones who traded more,” he said, seeing the 11¼% notes due 2017 unchanged to up a little at 91 bid, 91½ offered, on volume of $5 million or so.

There was little seen in terms of concrete news about the company.

News reports, however, indicated that Caesars’ main operating division, Caesars Entertainment Operating Corp. – envisioning an eventual debt restructuring down the road – has retained the law firm of Kirkland & Ellis LLP to advise it on how to restructure its mountainous debt load.

Sun Products slips

Elsewhere, Sun Products Corp. “was a name that seemed to be drifting from its recent levels,” a trader said.

He said that the bonds touched as low as 84 on Friday, down from 87 at the beginning of the week, “and it was down close to a point today, from 85, where it was [Thursday].”

He cited the fact that Moody’s had downgraded the Wilton, Conn.-based manufacturer of branded and retailer brand fabric care and dish care products, and kept its outlook at negative, “so that’s probably what was driving it.”

Moody’s cut the company’s ratings – including its corporate family rating – to B3 from B2, cut its probability of default rating to B3-PD from B2-PD and its senior unsecured debt rating to Caa2 from Caa1.

Moody’s said the downgrades reflected recent deterioration in the company’s credit metrics due to heavy competition in the laundry-care category that will likely cause financial leverage to remain above the 6.5x debt/EBITDA threshold for at least several quarters, after over a year above the threshold already.

The company’s 8 7/8% notes due 2017 had gotten as low as 97 bid from levels above par at the beginning of the week, and were trading around 99½ on Friday, “so they definitely rebounded some from the lows.”

The company’s 9 7/8% notes due 2017 “was the one that was trading at the lower dollar prices,” he said. While he had not seen any actual dealings in the bonds Friday, he mused that “I would think that given the other ones [i.e. the 8 7/8s] have crept back up off their lows, that one should be pegged around 80.”

The 9 7/8s had gone home at the end of the previous week trading in a 91-92 context – but after opening around those same levels Monday morning, they began dropping into the 80s, hammered down to as low as 83 bid in a series of smallish odd-lot dealings, and slid further on Tuesday, bottoming out in a 76 to 77 context, before they started creeping back up from that nadir.

Another trader said the 9 7/8s were trading in a 77-78 context and the 8 7/8s were between 98 and par with most of the latter bonds between 99 and 99¾, on volume of around $6 million.

Clear Channel up on day

A trader said that Clear Channel Communications Inc.’s 10% notes due 2018 “are one of the higher-beta bonds – so when the market had its little downdraft [Thursday], they traded as low as 95 at the lows.”

He said the issue was “a little bit better today,” trading around 95½, “so those rebounded back from their losses of the previous day.”

However, he noted that the San Antonio, Texas-based diversified media company’s issue had fallen from 97 at the start of the week, “so it was down about 1½ points on the week.”

Indicators end week mixed

Statistical indicators of junk market performance were mixed on Friday, after having ended lower across the board on Thursday. But they were lower all around versus where they had closed the previous week, after three straight weeks of a mixed performance.

The KDP High Yield Daily Index dropped by 8 basis points to close at 74.62, its seventh straight downturn. On Thursday, it slid by 11 bps.

Its yield rose by 2 bps to 5.07%, on top of Thursday’s 5 bps increase. Friday was its sixth straight widening.

Those levels compared unfavorably with the 74.90 index reading and 4.97% yield seen at the close the previous week, on Thursday, July 3. The KDP Index was not published on Friday, July 4, due to the market close.

The Markit CDX Series 22 Index lost 1/16 point on Friday to end at 108½ bid, 108 9/16, its second straight loss; it had also fallen 5/32 point on Thursday.

The index was also down from 109 3/32 bid, 109 1/8 offered, seen last Friday, when the index did publish, despite the market holiday.

The widely followed Merrill Lynch High Yield Master II Index moved higher by 0.029% on Friday, its first gain after three straight losses, including Thursday’s downturn of 0.206%.

The gain lifted its year-to-date return to 5.503%, up from Thursday’s 5.472% close, though still below the 5.751% return recorded on Monday, the peak level for 2014.

On the week, the index lost 0.184%. It had gained 0.062% the previous week, lifting the year-to-date return to 5.697%.

© 2015 Prospect News.
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