Split-rated Standard Industries prices; energy up though crude rise slows; funds gain $66 million

By Paul Deckelman

New York, Feb. 18 – For a second straight session, the high-yield market found its new-deal action sitting on the fence between junk bonds and investment grade.

Syndicate sources said that Standard Industries, Inc., a maker of roofing and insulation supplies, priced an upsized $1 billion two-part split-rated offering on Thursday, consisting of five-year and seven-year notes.

That drive-by offering – reworked from what was originally just a tranche of five-year notes – came to market too late in the session for any immediate aftermarket activity to be seen.

The Standard Industries deal followed in the footsteps of Wednesday’s considerably smaller, single-tranche offering from Medical Properties Trust, Inc. – another quickly shopped, split-rated deal which saw some high-yield market interest as well as the expected attention from investment-grade accounts.

The healthcare real estate investment trust’s paper, meantime added to its initial aftermarket gains, firming Thursday in moderately busy dealings.

Away from the new-deal arena, Freeport-McMoRan Inc.’s split-rated issues continued to dominate the Most Actives list, extending the metals mining and energy company’s recent upside momentum.

Energy issues also continued to firm, even though the recent surge in world crude oil prices moderated on Thursday on news of mounting stockpiles of crude and refined product in the United States.

The news did not deter the continued rebound in Whiting Petroleum Corp.’s notes, or in Denbury Resources Inc., the latter despite posting an unexpected quarterly loss.

Statistical measures of junk market performance turned mixed, after having been higher across the board for the previous three consecutive sessions. Before that, they had been lower last Thursday and mixed for two sessions last Tuesday and Wednesday.

Another numerical gauge – flows of cash into or out of high-yield mutual funds and exchange-traded funds, which are considered a reliable barometer of overall junk market liquidity trends – broke out of their recent rut, posting a $65.5 million inflow during the latest trading week. That snapped a two-week losing streak, although more weekly outflows than inflows have still been seen so far this year.

Standard Industries prices

The sole news of the day coming out of the primary market revolved around Standard Industries – a Parsippany, N.J.-based manufacturer of roofing materials and insulation products – which priced an upsized $1 billion of split-rated (Ba2/BBB-) five-year and seven-year senior notes on Thursday.

High-yield syndicate sources said that the issue had been upsized from the originally planned $650 million.

The offering was also restructured to add the tranche of seven-year paper to the original single tranche of five-year notes.

The deal consisted of $500 million of five-year notes, which priced at par to yield 5 1/8%, tight to price talk which had envisioned a yield of 5¼%.

The other half of the transaction – $500 million of seven-year notes – also priced at par, yielding 5½%, in line with expectations.

The quickly shopped deal was brought to market via joint global coordinators Bank of American Merrill Lynch, which is handling the billing and delivery, and Deutsche Bank Securities Inc.

Citigroup Global Markets Inc. and Goldman Sachs & Co. were joint bookrunners on the deal.

Issuer Standard Industries plans to use proceeds help finance the acquisition of Herlev, Denmark-based Icopal, a leading European manufacturer of roofing and other waterproofing products, from Investcorp Ltd. for €1 billion.

The purchase is expected to close during the second quarter.

The issue priced late in the day, with traders reporting no immediate aftermarket activity.

Medical Properties stays busy

The traders said that the 6 3/8% notes due 2024 from Medical Properties Trust which priced on Wednesday were active on Thursday; one market source said that over $16 million of the notes changed hands. He saw the bonds at 102 bid, a gain of 3/8 point on the session.

A second trader saw the paper in a range of 101¾ to 102 bid, calling it up ¼ point on the day.

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

Traders said the new issue attracted attention from traditional junk bond investors as well as investment-grade accounts able to play in split-rated deals to pick up yield, helped by a solid coupon.

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.

Prestige Brands little traded

In contrast, traders saw little activity on Thursday in Prestige Brands Holdings Inc.’s new issue, which had priced on Tuesday.

“There was not a lot of volume” in the credit on Thursday said one trader, who pegged the bonds at 101¾ bid, which he called about unchanged on the day.

Another market source said the notes were going out at 102 bid, which he called up ¼ point on the day, but only on a small handful of sizable trades.

The Tarrytown, N.Y.-based distributor of brand-name over-the-counter healthcare and household cleaning products 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.

Freeport keeps firming

Away from the new issues, a trader said that Freeport-McMoRan paper – once again – was topping the most actives list, just as it had done on Tuesday and again on Wednesday.

And once again, those split-rated (B1/BBB-) notes were on the rise, with “their whole structure up 1 to 2 points or so.”

He saw the Phoenix-based copper and gold mining company and oil and natural gas producer’s 3.55% notes due 2022 up a deuce on the day at 57 bid, calling that credit “their busiest,” with over $42 million of the bonds having traded, easily leading the Most Active issues.

A second trader saw those notes finishing more than 1½ points better at 56¾ bid.

The issue had also risen by around 2½ points on Tuesday and gained another 3¾ points Wednesday, setting the stage for Thursday’s continued climb.

Its 5.4% bonds due 2034 rose by 1½ points Thursday to 49¼ bid, with over $26 million traded. Those gains came on top of the 3 point advance racked up on Tuesday in active trading, with another 2 points up on Wednesday’s session.

The notes have been rising on plans unveiled on Tuesday, calling for the company to sell 13% of its ownership interest in its Morenci unincorporated joint mining venture to its Japan-based partner, Sumitomo Metal Mining Co., Ltd. Freeport will thus reduce its stake in the joint venture to 72% from 85%, with Sumitomo and its affiliates upping their participation to 28 % from 15% currently.

Freeport expects to reap $1 billion in cash from the transaction and use the asset-sale proceeds to reduce its estimated debt.

Energy upswing continues

Energy issues continued to gain, even though the meteoric recent rise in crude oil prices were seen to have slowed on Thursday.

Whiting Petroleum’s 5% notes due 2019 gained ¼ point to end at 47¾ bid, with over $19 million traded.

The Denver-based oil and natural gas exploration and production company’s 6¼% notes due 2023 firmed by ½ point to 47¼, with over $16 million traded.

And its 5¾% notes due 2021 ended at 47¾ bid, up ¾ point, with $13 million of turnover.

Another notable gainer was Denbury Resources.

A trader said Denbury Resources’ debt ended with a firm feel, even though another market source had seen the bonds softening in early trading.

The first trader saw the 4 5/8% notes due 2023 inching up over a point to 19¼, as the 5½% notes due 2022 added half a point to close at 21¼.

However, earlier in the day, a source saw the 6 5/8% notes due 2021 trading with a 23 handle, off a deuce.

For the fourth quarter, Plano, Texas-based Denbury reported a loss of $885.1 million, or $2.56 per share. On an adjusted basis, loss per share was a penny.

Revenue came to $269.6 million.

For the year, the company posted a loss of $4.39 billion, or $12.57 per share. Revenue was $1.26 billion.

Additionally, the company said it was looking to spend just $200 million in 2016 on capital expenditures. That was about half of what was spent in 2015.

Still, there were bright spots to the company’s results.

In 2015, free cash flows were $390 million. Of that amount, $220 million was used to reduce bank debt to $175 million, providing Denbury with liquidity of over $1 billion.

At the end of the year, total debt stood at $3.3 billion.

Oil rise slows

The gains in oil issues came even as the sharp rise in world crude oil price over the past few sessions slowed markedly. The U.S. benchmark grade West Texas Intermediate for March delivery edged up just 11 cents in Thursday trading on the New York Mercantile Exchange, to $30.77 per barrel.

And global benchmark Brent crude for April delivery fell 22 cents on the London ICE Futures Exchange, to $34.28.

The crude price surge of the last few days – fueled by indications that global producers like Russia and Saudi Arabia were finally agreeing on measures to curb oil output and strengthen prices – was blunted on Thursday as the U.S. government’s energy information agency reported record U.S. crude stockpiles in the latest week, as well as increased stocks of distilled product such as gasoline or heating fuel.

Indicators turn mixed

Statistical measures of junk market performance turned mixed on Thursday after having been higher across the board the three sessions before that. It was the third mixed session in the last seven.

The KDP High Yield Daily Index gained 35 basis points on Thursday to close at 62.49, its fourth straight gain and fifth in the last six sessions. It had also risen by 45 bps on Wednesday.

Its yield tightened by 11 bps on Thursday, to 7.26%, its fourth straight narrowing and its fifth such decline in the last six sessions. It had also come in by 21 bps on Wednesday.

However, the Markit Series 25 CDX North American High Yield Index eased by 1/32 point on Thursday, finishing at 98 bid, 98 1/32 offered – its first loss after four straight gains and third loss in the last seven sessions. On Wednesday, the index had risen by 5/8 point.

The Merrill Lynch North American High Yield Master II Index improved by 0.419% on Thursday, its fifth straight rise and sixth in the last seven days.

It had also risen by 0.791% on Wednesday.

Thursday’s upturn cut the index’s year-to-date loss to 2.918% from 3.323% on Wednesday. It was further 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.

Last Thursday’s closing loss had also surpassed the year-end 2015 loss of 4.643%, which had been the previous biggest loss the index had seen since it plunged more than 30% in 2008.

Junk funds post gains

High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – broke out of their recent rut, posting a $65.5 million inflow during the latest week. That snapped a two-week losing streak, although more weekly outflows than inflows have still been seen so far this year. (see related story elsewhere in this issue).

-Stephanie N. Rotondo contributed to this review

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