Warrior, Brand price, new QTS firms; Rite Aid off on Amazon fears, funds gain $123 million

By Paul Deckelman and Paul A. Harris

New York, Oct 26 – The high-yield primary market saw a pair of new dollar-denominated and fully junk-rated issues get done on Thursday as miner Warrior Met Coal, Inc. priced a $350 million forward calendar issue of seven-year secured notes.

And Brand Industrial Services, Inc. did a quickly shopped $300 million add-on the existing $700 million of eight-year notes that the company sold earlier this year.

Traders did not immediately report any initial aftermarket levels for the day’s new deals.

The traders meanwhile saw Wednesday’s new eight-year deal from data-centers company Quality Tech, LP and its affiliated QTS Finance Corp. firm smartly in active volume.

Away from the new deals, Rite Aid Corp. notes were seen dropping by multiple points amid news reports that internet retailing giant Amazon.com had received pharmaceutical wholesale licenses from a number of states, sparking investor fears that it could try to enter the drugstore market.

Similar fears of Amazon competition had sparked a fall in Staples, Inc. bonds on Tuesday and again on Wednesday – but those bonds were on the rebound on Thursday.

Intelsat SA’s notes fell, along with the communications satellite company’s shares, on disappointing third-quarter numbers.

Statistical market performance measures were lower for a second consecutive session on Thursday. They had turned southward on Wednesday for the first time in nearly two weeks.

But another statistical indicator – flows of investor 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 – moved back into positive territory this week with a modest net inflow, rebounding from a net outflow seen last week. Some $123 million more came into those weekly-reporting-only domestic funds than left them in the form of investor redemptions during the week ended Wednesday, Oct. 25, versus the previous week’s $450 million outflow (see related story elsewhere in this issue).

Warrior prices after changes

In Thursday’s primary market Warrior Met Coal priced a $350 million issue of seven-year senior secured notes (B3/B-) at par to yield 8%.

The yield printed on top of final yield talk, and tight to the earlier 8% to 8¼% talk.

Preliminary guidance had been in the mid 7% area.

The Brookwood, Ala.-based metallurgical coal producer brought covenant changes to the deal.

These included the removal of a special call provision that would have allowed the issuer to redeem 10% of the notes annually at 103 during the three-year non-call period, after which the notes become callable at par plus 50% of the coupon.

Another investor-friendly concession involved the annual dividend basket. It was initially reduced to an annual amount of $11 million from the original level of 6% of market capitalization. However when the deal launched Thursday afternoon investors gave part of dividend capacity back to the company by increasing the basket to an annual amount of $15 million from the $11 million limit that had been announced earlier in the day.

Other covenant changes impose and/or increase restrictions upon how the company may disburse cash and incur debt.

Goldman Sachs was the left bookrunner. Citigroup, Credit Suisse, Morgan Stanley, BMO and RBC were the joint bookrunners for the dividend deal.

Coal deals

The fact that Warrior Met Coal was in the market to fund a dividend factored into the headwinds the deal faced, market sources said.

Back in March, the Ala.-based coal producer withdrew a $350 million seven-year covenant-light first-lien term loan B from the syndicated loan market because prices and terms were not acceptable to shareholders.

As with Thursday’s bond deal, the withdrawn loan was in the market to fund a dividend to shareholders.

Another factor that impeded Warrior Met was the fact that it emanates from the coal sector, which is in the throes of a “secular decline” having to do with cleaner and relatively inexpensive alternatives such as natural gas, sources say.

As a result, high-yield investors are not beating down the doors when issuers from the beleaguered sector show up in the junk bond market, traders say.

The travails of Warrior Met Coal also appear to be weighing on a deal now in the market from Consol Mining Corp.

The Pittsburgh-based coal mine operator is aiming to sell a $350 million offering of senior secured second-lien notes due 2025 (B3/CCC+) in a deal being led by JP Morgan.

It was announced Monday and expected to price before the end of the week.

For that to happen there is wood to chop, traders say.

Price indications making the rounds early Thursday were in the 9% area, a trader said, adding that at that level the $350 million deal generated about $100 million of “very clubby” interest among investors.

Push that yield to 9½%, make some investor-friendly tweaks to the covenants and offer the notes at a discount and it will likely get done, sources say.

Brand taps 8½% notes

Away from the coal sector, Brand Industrial Services priced a $300 million add-on to its 8½% senior notes due July 15, 2025 (Caa2/CCC+) at 105.5 to yield 7.299% in a quick-to-market trade.

The reoffer price came at the cheap end of the 105.5 to 106 price talk.

Barclays was the left bookrunner for the Rule 144A and Regulation S for life add-on. Goldman Sachs & Co., Natixis, ING, SG CIB, Credit Agricole CIB and SMBC Nikko were the joint bookrunners.

The Kennesaw, Ga.-based provider of specialized services to energy, industrial and infrastructure customers plans to use the proceeds to pay off its revolving credit facility, as well as to partially repay amounts outstanding under its accounts receivable financing facility and for general corporate purposes including potential acquisitions.

FXI sets talk in 8% area

FXI Holdings, Inc. talked its $500 million offering of seven-year senior secured notes (B2/B) to yield in the 8% area.

The buyout deal, in the market via left bookrunner Jefferies, is set to price on Friday.

FXI’s offer is two-times oversubscribed, a trader said on Thursday.

Goeasy talked at 8% to 8¼%

First-time issuer goeasy Ltd. talked its $300 million offering of five-year senior notes (Ba3/BB-) to yield 8% to 8¼%.

The debt refinancing and general corporate purposes deal, in the market via left bookrunner Wells Fargo and joint bookrunner BMO, is also set to price Friday.

CURO tapping 12% notes

CURO Financial Technologies Corp. plans to price a $135 million tack-on to its 12% senior secured notes due March 1, 2019 on Friday.

Credit Suisse and Jefferies are the joint bookrunners.

The Wichita, Kan.-based consumer finance company plans to use the proceeds to fund a distribution to shareholders.

Takko completes two-part deal

In the European market, German apparel retailer Takko Group priced €510 million of senior secured notes due 2023 (B2/B) in two tranches on Thursday.

The debt refinancing deal included €285 million of 5 3/8% fixed-notes notes and €225 million of three-month Euribor plus 537.5 basis points floating-rate notes.

Global coordinator and joint bookrunner Deutsche Bank will bill and deliver. Credit Suisse, UniCredit Bank and Credit Agricole CIB were also joint global coordinators and joint bookrunners. Goldman Sachs International was also a joint bookrunner.

Shop Direct downsizes

Shop Direct Funding plc talked a downsized £550 million offering of five-year fixed-rate senior secured notes in the 7% area.

Official talk comes on top of initial price talk.

The deal size is decreased from £700 million and a proposed tranche of floating-rate notes is withdrawn.

With the downsize, a proposed dividend to shareholders is withdrawn from the use of proceeds. The revised use of proceeds is debt refinancing.

There was also a covenant change: the shareholder distribution basket is reduced to £50 million from £200 million.

With the revisions the deal remains in the market an extra day. Books close at 6 a.m. ET Friday and the notes are set to price thereafter. Books were previously scheduled to close on Thursday.

Global coordinator and lead left bookrunner Barclays will bill and deliver.

Recent concessions to buyers

A considerable portion of the news in the new issue market has been laced with investor-friendly concessions such as those reported above, involving more restrictive covenants and in some cases revised uses of proceeds.

But has the high-yield market suddenly become an investor-friendly place to shop?

Not necessarily, a trader said on Thursday.

The concessions are coming from issuers in beleaguered sectors and first time or off-the-run issuers, the trader said, adding that deal sizes tend to not be huge.

Such deals are always a tougher sell, the trader said, and with a bunch of them hitting the market at once, investors naturally suspect that there is a “get it while you can” factor at play among issuers.

Bring a big deal from an on-the-run issuer and it will be a totally different story, the trader said.

Indeed, Wind Tre SpA earlier in the week priced an upsized €7,325,000,000 equivalent amount of senior secured notes (B1/BB-/BB) in a four-part offering that saw all tranches blow through initial guidance and price tighter than or at the tight ends of official talk.

The sole dollar tranche was $2 billion of eight-year fixed-rate notes which priced at par to yield 5%. The yield printed 12.5 basis points inside of yield talk that was set in the 5¼% area. Initial guidance was in the low-to-mid 5% area.

ETFs see big outflow

Daily cash flows for dedicated high-yield bond funds were negative on Wednesday, a trader said.

High-yield ETFs sustained $568 million of outflows on the day, the biggest outflow from the ETFs since June 21, the trader said.

Actively managed high-yield funds experienced $95 million of outflows on Wednesday.

The daily flows of the dedicated bank loan funds were flat to slightly negative on Wednesday, the trader said, adding that the loan funds sustained $5 million of outflows on the day.

Day’s deals unseen

In the secondary sphere, a trader said he’d heard gray market quotes in a “102ish” context for the new Warrior Met Coal 8% senior secured notes due 2024 but had seen no actual trades in the issue.

And traders likewise did not immediately report any initial aftermarket activity in Brand Industrial Services’ 8½% notes due July 15, 2025, the subject of the add on priced Thursday by the company.

QTS paper trades up

On the other hand, Wednesday’s new offering from Quality Tech, LP and QTS Finance Corp. firmed solidly in active dealings.

A trader said that the Overland Park, Kan.-based data centers company’s new deal had pushed up to 101½ bid while at another desk a market source saw it doing even better, going home at 101 7/8 bid on volume of more than $21 million – enough activity to put the credit high up on the day’s Most Actives list.

That $400 million drive-by deal had priced at par after being upsized from an originally announced $350 million.

Wind Tre remains firm

Also among the new and recently priced issues, traders saw continued gains in Tuesday’s giant-sized dollar-denominated piece from Italian telecommunications company Wind Tre’s megadeal.

One trader quoted those 5% senior secured notes due January 2026 at 100 5/8 bid, calling them up 1/8 point on the day, with over $19 million of the notes having changed hands.

At another desk, the paper was seen holding steady in a 100½ to 100 5/8 bid context.

Wind priced $2 billion of those 8.25-year notes at par on Tuesday as part of a four-part €7,325,000,000 equivalent regularly scheduled forward calendar offering that also included three tranches of euro-denominated notes.

The dollar bonds had traded up by nearly 1 point in active initial Tuesday dealings, only to fall back from those peak levels on Wednesday, when it was the busiest bond of the session, with over $69 million of volume.

Monday’s deals little changed

The traders meantime saw little real activity in Monday’s two new issues.

One trader quoted Global Ship Lease, Inc.’s 9 7/8% first-priority senior secured notes anchored around 101 3/8 bid, near where the London-based containership charter company’s $360 million forward calendar offering had finished trading on Wednesday.

Those notes had priced at 99 on Monday to yield 10.128%, firming to their current levels on Tuesday and Wednesday.

And the trader saw Netflix, Inc.’s 4 7/8% notes due in April of 2028 at 99 bid, about even with Wednesday’s closing levels.

The Scotts Valley, Calif.-based provider of streaming internet entertainment content had priced its quickly shopped $1.6 billion offering at par on Monday. The bonds had stayed at that level on Tuesday but then nosedived around 1 point in heavy trading on Wednesday, down to their current levels.

Rite Aid retreats

Away from those new or recently priced issue, traders saw a big fall in Rite Aid’s paper on Thursday.

“There was weakness in Rite Aid on renewed Amazon fears,” one said, quoting the Camp Hill, Pa.-based Number-Three U.S. drugstore chain operator’s 6 1/8% notes due 2023 down nearly 3 points on the day, falling below 93 bid.

Another trader agreed, seeing the notes down 3 points at 92¾ bid on volume of more than $47 million, easily Junkbondland’s busiest credit of the day.

Rite Aid’s 6¾% notes due 2021 fell 1 5/8 points to end at 99 5/8 bid, on more than $12 million of turnover.

He said the bonds fell “after headlines about Amazon obtaining pharmaceutical licenses in a bunch of states spooked investors.”

The St. Louis Post-Dispatch reported that Amazon had attained authorization for wholesale pharmacy licenses in about a dozen states, sparking fears that the internet retailing behemoth would try to muscle into the prescription drug business at the expense of established operators such as Rite Aid and its large rivals CVS Caremark and Walgreens-Boots Alliance.

Rite Aid’s New York Stock Exchange-traded shares dropped by 11 cents, or 6.18%, to end at $1.68 on volume of 34.2 million shares, around 1½ times the norm.

Staples straightens out

Similar investor fears of possible Amazonian domination of its industry had bedeviled the bonds and shares of Framingham, Mass.-based office supplies retailer Staples on Tuesday and again on Wednesday.

But in Thursday dealings, a trader said that Staples’ 8½% notes due 2025 “did a little better,” a trader said. He quoted the notes at 90¼ bid, calling that a ¾ point gain.

He saw them rally “a point to 1½ points” to around 91½ bid, with over $22 million having traded.

Intelsat slides

Traders saw Intelsat’s paper trade down, after the Luxembourg-based communications satellite company reported disappointing third-quarter earnings.

Intelsat “was obviously active on their earnings, and weaker,” one trader said, seeing the company’s Intelsat (Luxembourg) SA 7¾% notes due 2021 “down a couple” of points at 66½ bid, 67 offering, with over $38 million traded.

He said that its Intelsat Jackson Holdings SA 9¾% secured notes due 2025 eased by 1 to 1¼ points to bid levels around 101 to 101½ on volume of over $24 million.

Its NYSE-traded shares swooned by $1.15, or 19.36%, ending at $4.79. Volume of 2.65 million was over four times the norm.

Company executives meanwhile said that Intelsat – which did a big junk bond deal earlier in the year to refinance bonds coming due in 2019 – had ample time to consider its options for its term loan debt maturing in 2019, as well as its Intelsat Jackson bonds due in 2020 and 2021 (see related story elsewhere in this issue).

Indicators remain weak

Statistical market performance measures were lower for a second consecutive session on Thursday. They had turned southward on Wednesday for the first time in nearly two weeks after being mixed for a third straight session on Tuesday and higher across the board for three trading days in a row before that.

The KDP High Yield Daily Index dropped by 8 basis points Thursday to end at 72.34, on top of Wednesday’s 7 bps slide, after ending unchanged on Tuesday and gaining 3 bps on Monday.

Its yield rose by 1 bp to 5.18%, its second straight widening out. The yield had risen by 3 bps on Wednesday after coming in by 1 bp on Tuesday, which in turn had followed two unchanged sessions on Friday and again on Monday.

The Markit CDX Series 29 High Yield Index retreated for a fourth day in a row, easing almost 1/16 point to finish at 108 3/16 bid, 108 7/32 offered. It had given up 7/32 point on Wednesday, after posting smaller losses on Monday and Tuesday – its first downturns after six successive gains.

The Merrill Lynch North American High Yield Index finished on the downside for a second straight session on Thursday, after easing on Wednesday, its first setback after seven straight advances.

It fell by 0.009% in addition to Wednesday’s 0.183% loss.

Thursday’s retreat dropped its year-to-date return to 7.43%, down from 7.439% on Wednesday and from Tuesday’s 7.636%, which had established a sixth straight new 2017 year-to-date peak level.

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