Tesla megadeal caps $8 billion week, eases slightly; Thursday deals busy; Hexion gets hit

By Paul Deckelman and Paul A. Harris

New York, Aug. 11 – The high-yield primary market priced just one new issue on Friday – but what a giant-sized deal it was.

In one of the biggest junk bond offerings so far this year, Silicon Valley-based electric car manufacturer Tesla, Inc. priced an upsized $1.8 billion offering of eight-year notes, which was heard to have played to orders amounting to more than twice that figure.

Traders said the new bonds were finishing a little below their par issue price on heavy volume.

Tesla’s upsized megadeal closed out a busier week which saw $8 billion of new dollar-denominated high-yield paper price – the heaviest new issuance total seen in Junkbondland since the end of May, according to data compiled by Prospect News.

Traders meantime saw considerable activity in some of the new deals which had priced during the week, including Thursday’s issue from biopharmaceutical services company Parexel International Corp., which topped the Most Actives list for a second consecutive session.

There was also brisk volume in Thursday’s offering from British telecom company Cable & Wireless Communications plc and in Tuesday’s megadeal from fast-food eateries operator Restaurant Brands International, Inc.

Away from the new issues, specialty chemical manufacture Hexion Inc.’s several issues were under pressure after it reported disappointing second-quarter results.

Statistical market performance measures turned mixed on Friday after three consecutive sessions during which they had been lower across the board. The indicators had also been mixed on Monday, after two weaker sessions in a row before that.

But the indicators were ending the week lower all around versus where they had been last Friday, when they had been mixed. And that mixed week had followed three straight weeks in a row on the upside.

Tesla upsizes

The deal that generated the biggest buzz in the market during the Aug. 7 week crossed the finish line Friday.

Tesla priced an upsized $1.8 billion issue of eight-year senior notes (B3/B-) at par to yield 5.3%.

The amount was increased from $1.5 billion.

The yield printed slightly wide of the 5¼% yield talk.

Word circulated the market on Friday morning that Tesla’s offer – then sized at $1.5 billion – was playing to $4 billion of orders in a book that included straight high-yield accounts as well as investment-grade, convertibles and equity investors.

Goldman Sachs was the lead left bookrunner.

The Palo Alto, Calif.-based automaker, energy storage company and solar panel manufacturer plans to use the proceeds, including the additional proceeds resulting from the $300 million upsizing of the deal, to further strengthen its balance sheet during a period of rapid scaling with the launch of its Model 3 and for general corporate purposes.

The week ahead

The Aug. 14 week is set to get underway with a modest active calendar.

ClubCorp Holdings Inc. was scheduled to wrap up the roadshow for its $475 million offering of eight-year senior notes (Caa1/CCC+) on Friday.

The buyout deal, in the market via RBC, Citigroup, Barclays, Credit Suisse, Deutsche Bank and Goldman Sachs, is scheduled to price Monday.

Big River Steel LLC is on the road with a $500 million offering of eight-year senior notes (B3/B).

The debt refinancing deal is helmed by Goldman Sachs.

The roadshow wraps up on Monday.

And Staples Inc. is roadshowing a $1.3 billion offering of eight-year senior notes (expected ratings B3/B-), via BofA Merrill Lynch, set to price early in the Aug. 14 week.

Proceeds will be used to help fund the acquisition of Staples by Sycamore Partners.

The aforementioned deals will likely be joined by some drive-by business, especially in the early part of the Aug. 14 week, sources say.

The dealers may do one last jam job before the market goes into late-summer hibernation, a trader said.

Busiest primary week since May

Friday’s giant-sized $1.8 billion offering from Tesla was the biggest junk bond deal to hit the market since broadcaster SiriusXM Radio Inc.’s $2 billion two-part megadeal priced on June 26 and the largest single-tranche transaction since hospital operator Community Health Systems, Inc.’s $2.2 billion issue of seven-year notes got done on March 7, according to data compiled by Prospect News.

It raised the week’s total of new dollar-denominated and fully junk-rated paper from domestic or industrialized-country borrowers to $8.05 billion in 12 tranches, according to the data, topping the already formidable $7.54 billion of such paper which had priced in 14 tranches the week before, ended Aug. 4.

This week thus surpassed last week as the busiest Junkbondland primary week since the week ended May 26, when $9.69 billion came to market in 18 tranches.

This week’s barrage of new of deals lifted year-to-date issuance for 2017 to $169.56 billion in 315 tranches, running about 19.7% ahead of the $141.62 billion which had priced in 207 tranches by this point on the 2016 calendar, the Prospect News data indicated.

Tesla trades off

When Tesla’s new 5.3% notes due 2025 were freed for trading, they were seen easing from their par issue price in heavy volume.

A market source quoted the bonds going home at 99¾ bid, with over $52 million changing hands.

At another desk, a trader saw the new paper in a 99 3/8 to 99 5/8 bid context.

Recent deals stay busy

For a second consecutive session, the new Parexel 6 3/8% notes due 2025 were the most active issue in the junk precincts.

A market source saw more than $58 million traded, with the notes off 3/8 point, right at par bid.

On Thursday, more than $65 million of the Waltham, Mass.-based biopharmaceutical services company’s new deal had changed hands by the close, a market source said.

Parexel had priced its $770 million regularly scheduled forward calendar offering at par on Thursday after it was upsized from $750 million.

Thursday’s other new deal – Cable & Wireless’ 6 7/8% notes due 2027 – was seen finishing the day at 100¼ bid, up ¼ point on the day, with over $20 million traded.

The London-based telecommunications company – owned by Denver-based international communications conglomerate Liberty Global plc, the world’s largest non-U.S. broadband internet service provider – priced its $700 million forward calendar deal at par.

Elsewhere among recently priced names, Restaurant Brands International’s 5% senior secured notes due 2025 gained 5/8 point in Friday’s dealings to close at 100 7/8 bid on volume of over $20 million.

The Oakville, Ont.-based company – which operates and franchises the Burger King, Tim Hortons and Popeyes Louisiana Kitchen quick-service restaurant chains in the United States, Canada and internationally – priced $ 1.3 billion of the notes at par on Tuesday after that quick-to-market transaction was upsized from an originally announced $1 billion.

Hexion gets hammered

Away from the new deals, traders saw Hexion’s bonds as the problem credit of the day.

Its 9% notes due 2022 were beaten down 4½ points on the day to 67 bid, with over $10 million traded, while its 6 5/8% notes due 2020 lost 5/8 point on the day, ending at 91 bid, with over $14 million traded.

Traders blamed the carnage on investor reaction to the company’s second-quarter results.

For the quarter, the Columbus, Ohio-based specialty chemical manufacturer reported a net loss of $34 million on sales of $912 million.

On the sales side, that was a decline of 4% year over year, though the decrease was due in large part to the impact of recent divestures. When accounting for the asset sales, sales improved 7%.

Segment EBITDA meantime fell 23% to $100 million. When adjusted for the divestures, the decline was 13%.

At the end of the quarter, Hexion had $323 million in liquidity compared to its $3.7 billion in debt.

Indicators turn mixed

Statistical market performance measures turned mixed on Friday after three consecutive sessions on Tuesday, Wednesday and Thursday during which they had been lower across the board. The indicators had also been mixed on Monday after two weaker sessions in a row before that.

But the indicators were ending the week lower all around versus where they had been last Friday, when they had been mixed. And that mixed week had followed three straight weeks in a row on the upside.

The KDP High Yield Daily Index saw its fourth consecutive big loss and its seventh straight downturn overall on Friday, plummeting by 17 basis points to end at 71.96. The index had also plunged by 15 bps on Thursday after nosediving on Wednesday by 14 bps, on top of Tuesday’s 11 bps swoon.

Its yield rose by 6 bps to 5.26% after widening out by 5 bps on Wednesday and again on Thursday. It was the fifth successive rise for the yield, which had also been up by 3 bps on Tuesday and by 1 bp on Monday.

Those levels compared unfavorably with the 72.56 index reading and 5.06% yield recorded last Friday, Aug. 4.

However, the Markit CDX Series 28 High Yield Index broke out of its six-session slump on Friday to close higher, edging up by a little more than 1/16 point to 106 9/16 bid, 106 19/32 offered. On Thursday it dropped by more than ½ point, on top of Wednesday’s more than ¼ point retreat.

But those levels were still below last Friday’s 107 17/32 bid, 107 19/32 offered.

The Merrill Lynch North American High Yield Index stayed on the downside for a fourth straight session on Friday, losing 0.09% after backtracking by 0.289% Thursday. This followed losses of 0.361% on Wednesday and 0.067% on Tuesday.

The latest loss cut the index’s year-to-date return to 5.317% from 5.412% on Thursday.

It was down as well from last Wednesday’s close at 6.233%, its 2017 year-to-date peak level.

For the week, the index dropped by 0.786%, its first weekly loss after four straight weekly gains, including last week’s 0.025% advance.

-Stephanie N. Rotondo contributed to this review

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