Quiet primary ends shortened week; new Standard Industries busy; Freeport, oils back off peaks

By Paul Deckelman and Paul A. Harris

New York, Feb. 19 – Things were quiet in the high-yield primary market on Friday, ending a holiday-shortened week that saw only one genuine junk bond deal come to market, along with a pair of split-rated offerings that did attract some junk market interest.

The largest and most recent of these – Thursday’s upsized two-part offering from roofing and insulation products maker Standard Industries, Inc. – was busily traded on Friday, with both tranches firming from their par issue prices

Traders saw considerably less activity in the other split-rated transaction – healthcare REIT Medical Properties Trust, Inc.’s eight-year notes – and in the one junk issue of the week, from Prestige Brands Holdings, Inc. But both ended the week above their issue price.

The $350 million Prestige Brands deal was the only fully junk-rated and dollar-denominated deal of the week – which saw one fewer session due to Monday’s Presidents Day holiday. The week’s total was down from the $591 million which priced last week, ended Feb. 12.

The week’s issuance raised the year-to-date total of new junk paper to $10.38 billion in 18 tranches, according to data compiled by Prospect News – although that lagged the equivalent year ago issuance of $40.58 billion in 62 tranches by some 74.4%.

Away from the new issues, traders said that Friday saw a modest market pullback from the robust levels seen earlier in the week, including such recent powerhouse names as Freeport-McMoRan Inc. and Whiting Petroleum Corp., which had been up solidly in very active trading over the previous few sessions.

Statistical market performance measures turned lower across the board on Friday, after having been mixed on Thursday and higher all around during the three consecutive sessions before that. It was the second lower session out of the last six.

For the week, however, those market measures were higher versus where they had finished out last Friday – their first all-around stronger week after two straight weeks on the slide, and their third higher week out of the last five.

Primary repricing

The Friday session failed to produce any primary market news.

The most recent news came Thursday when Standard Industries priced $1 billion of split-rated senior notes (Ba2/BBB-) in two $500 million tranches, one of five-year notes which priced at par to yield 5 1/8% and one of seven-year notes which priced at par to yield 5½%.

It was the third split-rated deal to price in the past week although the $2 billion offering by General Motors Corp. attracted less attention in the high-yield market.

On Wednesday Medical Properties Trust priced an upsized $500 million issue of split-rated senior notes due March 1, 2024 (Ba1/BBB-) at par to yield 6 3/8%.

“Two years ago a single B company could get a deal done at 6 3/8%,” a debt capital markets banker commented on Friday.

The market is repricing, the banker said.

Right now the primary market is open but issuers, recognizing that the cost of capital has been climbing, are reticent to come, especially with opportunistic deals.

That could soon change, said the banker, citing a recent report from UBS which holds that there is $1 trillion of refinancing that needs to happen in the high-yield bond and leveraged loan markets by 2020.

And even though rates have climbed they may not have reached their peaks, the banker added.

The bad news may not all be priced into the market, the source remarked.

Especially in the energy sector the damage continues to pile up, the source noted, citing a Friday report from Moody’s on the credit ratings of nine Baa-rated U.S. exploration and production companies, along with two associated midstream entities.

The agency confirmed three companies’ ratings and downgraded three other companies by one notch, two companies by two notches, two companies by three notches and one company by four notches.

All told, Moody’s opened the fallen angel hatch for half a dozen companies to which it assigned speculative-grade senior unsecured ratings on Friday.

Anadarko Petroleum Corp.’s ratings went to Ba1 from Baa2, Western Gas Partners, LP’s went to Ba1 from Baa3, Continental Resources, Inc.’s went to Ba3 from Baa3, Hess Corp.’s went to Ba1 from Baa2, Murphy Oil Corp. went to B1 from Baa3, and Southwestern Energy Co. went to B1 from Baa3.

The Moody’s news moved the needle, the banker said, noting that subsequent to the release distressed energy paper was generically 56 bid, down from 59 bid before the Moody’s news hit the tape.

So the bad news in the high-yield market may not yet be totally priced in, the source remarked.

Solera in the week ahead

There was a single deal in the market at Friday’s close.

Solera, LLC is marketing $2.03 billion equivalent of eight-year senior notes (Caa1/B-) in tranches of euro-denominated and dollar-denominated notes.

The proposed dollar-denominated notes appear to be shaping up in a 9½% to 10% yield range, a market source said on Friday.

Pressed for tips on new issues headed to market in the week ahead, syndicate bankers turned out empty pockets.

The primary market is open but there is not a lot of business to be done, an official said.

Inflows on Thursday

Cash flows for the dedicated high-yield funds were positive on Thursday, the most recent session for which data was available at press time, according to a trader.

High-yield ETFs saw $159 million of inflows on the day.

Actively managed funds saw $40 million of inflows on Thursday.

The news follows a report late Thursday that the funds saw an anemic, but positive, $66 million of inflows for the week to last Wednesday’s close, sources said, citing a weekly report from Lipper AMG.

The daily cash flows for dedicated bank loan funds were decidedly negative on Thursday, however. The loan funds saw $125 million of outflows on the day, the trader said.

Standard Industries trades up

In the secondary market, traders said that all eyes were on the new Standard Industries two-part drive-by megadeal which had priced on Thursday.

One trader said that “both [tranches] were trading pretty well,” seeing the 5 1/8% notes due 2021 late in the session at 101¼ bid, and the 5½% notes due 2023 at 100¾ bid.

A second trader said that the Parsippany, N.J.-based roofing and insulation products maker’s new bonds “were flying around pretty good.”

He said that at his shop, “we got a little active in Standard this morning.”

He said that by mid-morning, the five-year notes were in a 100 5/8 to 100 7/8 bid context versus their par issue price and “pretty active,” while the seven-year notes were moving around between 100½ and 100¾ bid.

He said that the new bonds were “pretty firm as we exited the day,” with the five-years at 100 7/8 to 101 3/8 – “they definitely firmed up,” he declared – while the seven-year paper essentially held its morning gains.

“Both caught a bid,” after we had traded them with a mid-par handle.”

At yet another desk, a trader said that the two Standard Industry tranches were right near the top of the day’s Most Actives list, with about $47 million of each tranche having changed hands.

He saw the five-year notes ending at 101 1/8 bid and the seven-year paper at 100½ bid.

Recent issues quiet

The trader said that “outside of that [Standard Industries], “we didn’t have a whole lot going on today.”

For instance, there was considerably less action seen in the other two deals which had priced in Junkbondland during the week – the $500 million Medical Properties Trust offering and the $350 million Prestige Brands transactions.

A market source said that around $5 million of Medical Properties Trust’s 6 3/8% notes due 2024 had traded, with the bonds up ¼ point at 101 5/8 bid.

At another desk, a trader said that during the morning, the bonds had traded in a 101¼ to 102 bid context, versus their late-Thursday levels between 101¾ to 102, “so it was same kind of levels.”

By around the mid-day mark, he had seen “a couple of round lots” trading between 101 3/8 and 101 5/8 bid.

Yet another trader saw them around 101½ bid.

The handful of trades stood in contrast to the brisk activity levels seen earlier in the week.

The Birmingham, Ala.-based healthcare-oriented real estate investment trust’s quickly shopped new deal had priced at par on Wednesday after having been upsized to $500 million from an originally announced $400 million.

Over $48 million of the new notes traded after they were freed for secondary market dealings, getting as good as 101 5/8 bid by Wednesday’s close and setting the stage for Thursday’s continuing gains to the 101½ to 102 bid context, with over $16 million traded.

Traders said the new issue attracted attention from traditional junk bond investors as well as high-yield accounts able to play in split-rated deals to pick up yield, helped by what one junk market player called “a respectable coupon.”

For a second consecutive session, traders saw not much activity around the new Prestige Brands Holdings paper – 6 3/8% notes due 2024, like the Medical Properties Trust issue but fully junk rated.

A trader said that he had seen “only a few trades” on Friday, around the 101½ bid level, “so they didn’t really move much,”

At another desk, a market source saw them “pretty wide today,” pegging the bonds in a 101 to 102 range, but also seeing them move between 101½ and 102¼.

Only around $3 million of the notes traded Friday, another source said, seeing them actually off ½ point from Thursday’s closing levels, finishing at 101½ bid.

The Tarrytown, N.Y.-based distributor of brand-name over-the-counter healthcare and household cleaning products had priced its quick-to-market $350 million offering at par on Tuesday via its wholly owned Prestige Brands, Inc. subsidiary.

The four-times oversubscribed deal jumped to around 101 3/8 bid, with over $37 million of the new bonds having changed hands.

They continued to firm on Wednesday to around a 101¾ bid level, with over $26 million of the notes traded.

Volume dwindled markedly on Thursday, even as the bonds had moved up to around 101¾ to 102 bid.

Freeport, Whiting fall back

Away from the new deals, a traders said that some of the bonds which had been notable gainers on sizable volume the last several sessions had pulled back from their peak levels during Friday’s dealings.

For instance, he saw Freeport-McMoRan’s paper “definitely pulling back,” calling the Phoenix-based copper and gold mining and oil and natural gas company’s paper “off slightly, ¼ to ¾ point, all across their [capital structure].

Earlier in the week, the bonds had firmed on news that Freeport will sell a 13% stake in one of its mining joint ventures to its partner in that venture for $1 billion and use the sale proceeds to cut its sizable debt.

The trader also saw energy names – which had been riding a wave of positive momentum along with crude oil prices – also moving back a little from those highs as the crude surge dissipated.

He saw Denver-based oil and natural gas operator Whiting Petroleum’s 5% notes due 2019 down a deuce on the day at 46¼ bid, “after the name had seen some pretty good moves this week.”

He likewise saw EP Energy Corp.’s 9 3/8% notes due 2020 down ¾ point on Friday to 23¼ bid.

“It looks like we’re seeing some weakness” among the energy and natural resources names,” he said, but added “nothing drastic.”

Market quiets down

All told, one of the traders said, “it seemed to be definitely pretty quiet in the afternoon – kind of a typical type Friday.”

He said the market volatility was “kind of evening out.”

He said that in terms of offer-wanted or bid-wanted lists, “there was one big transition guy who was out there with a bunch of lists this week.”

He thought that “the ETFs were relatively quiet.”

He said that “we didn’t see the big swings in equities today, we didn’t see it yesterday.”

As a result, he continued, “our market was kind of sideways” on Thursday and again on Friday.

He said that junk “definitely rallied throughout the course of the week on a bunch of stuff up 1 or 2 points – but that was largely done prior to Thursday.

“The last two days have been kind of quiet.”

Indicators down on day, up on week

Statistical market performance measures turned lower across the board on Friday, after having been mixed on Thursday and higher all around during the three consecutive sessions before that. It was the second lower session out of the last six.

For the week, however, those market measures were higher versus where they had finished out last Friday – their first all-around stronger week after two straight weeks on the slide, and their third higher week out of the last five.

The KDP High Yield Daily Index fell by 6 basis points on Friday to close at 62.43, its first loss after four straight gains and its second loss in the last six sessions. On Thursday, the index had risen by 35 bps.

Its yield rose by 2 bps to 7.28%, its first widening after four consecutive sessions during which the index had tightened. It was the second widening in the last six sessions. On Thursday, the yield had come by 11 bps.

Those levels compared favorably to the 61.39 index reading and 7.61% yield seen last Friday.

The Markit Series 25 CDX North American High Yield Index lost 3/16 point on Friday, finishing at 97 13/16 bid, 97 7/8 offered. It was the index’s second straight loss after four successive advances, and its fourth loss in the last eight sessions. On Thursday, it had eased by 1/32 point.

But the index was up from 97 1/8 bid, 97 5/32 last Friday.

The Merrill Lynch North American High Yield Master II Index was also on the downside for the first time after five straight gains, dropping by 0.25%. It had improved by 0.419% on Thursday.

Friday’s loss raised the index’s year-to-date deficit to 3.161% from 2.918% on Thursday, although it remained down from the 5.142% loss seen last Thursday, which had been its first cumulative loss greater than 5% this year and a new mark for the worst cumulative deficit for the year, topping the old mark of 4.364%, set last Tuesday.

For the week, though, the index was up by 1.519%, its first weekly gain after two straight weekly losses and its third gain in the last five weeks. The index had lost 1.975% last week, finishing with a 4.61% year-to-date loss that Friday.

© 2015 Prospect News.
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