Quiet primary prepares for Gateway deal, new-issue revival seen ahead; Murray Energy, AerCap rise

By Paul Deckelman and Paul A. Harris

New York, Feb. 14 – It was another quiet day in Junkbondland’s primary sphere on Tuesday, with no new U.S. dollar-denominated and fully junk-rated offerings from domestic or industrialized-country borrowers heard to have priced for a second consecutive session.

However, syndicate sources said that price talk surfaced on Canadian gaming company Gateway Casinos & Entertainment Ltd.’s upcoming offering of seven-year secured notes, with pricing expected early Wednesday.

The sources meantime were looking for a pickup soon in primaryside activity, with multiple new-deal announcements expected later in the week.

Among recently priced issues, trading was again brisk in Cliffs Natural Resources Inc.’s new seven-year notes, which pushed back up after Monday’s retreat. Block Communications Inc. continued to strengthen in active trading.

But the market’s overall focus shifted away from recently priced new deals and back to established issues.

Coal producer Murray Energy Corp.’s notes shot up in heavy trading.

Aircraft leasing company AerCap Holdings NV’s several series of bonds took flight, on active volume, after Moody’s Investors Service lifted its corporate family and unsecured bond ratings to investment grade.

Statistical market performance measures posted their fourth consecutive stronger session on Tuesday, and their seventh such higher session in the last 10 trading days. The indicators had turned higher across the board this past Thursday, after having been lower all around on Wednesday and mixed for two straight sessions before that, and then held those gains on Friday, Monday and again on Tuesday.

Gateway Casino talk 8¼% to 8½%

For the second consecutive session the dollar-denominated primary market put up a goose egg on Tuesday.

No deals were priced.

No deals were announced.

Gateway Casinos & Entertainment Ltd. circulated yield talk on the only dollar deal now in the market.

The Burnaby, B.C.-based gaming properties company talked its $255 million offering of seven-year second priority senior secured notes (Caa1/CCC+) to yield 8¼% to 8½%.

Talk comes tight to initial guidance in the mid 8% area.

The deal, via Morgan Stanley, SunTrust, BMO, Macquarie, CIBC and National Bank of Canada, is set to price on Wednesday morning.

Primary to reactivate

Look for deal announcements as soon as tomorrow, but certainly before the end of the week, a debt capital markets banker said on Tuesday.

Companies will be getting through their earnings blackouts, the source said.

There will be deals this week and next week.

“The market has been too good for too long for issuers to ignore it,” the banker said.

Not that the primary market has been all that quiet, the source added.

Dollar-denominated new-issue volume for the year to mid-February is the biggest seen in that timeframe in the past four years.

Apprehensions that took hold in late 2016 that a rampant appetite for floating-rate debt in a rising rate scenario would steer issuers into the leveraged loan market, away from fixed-rate junk, may have been overblown, the banker said, allowing that the loan market has certainly caused some erosion of junk issuance, as some companies have downsized the bond portions of their financings and upsized loan portions.

Also some companies that came with second-lien loans might otherwise have turned up in the high yield, the banker added.

An investor whose portfolio includes both bonds and bank loans also looks for things to pick up on the junk calendar.

“People have cash coming in,” the investor said.

“The market's hot.

“The high-yield index is now yielding 6%.”

The dealers are generally prepared to bring bond deals in such circumstances, the source added.

Circumstances in the near-term might inhibit issuance somewhat, the investor warned.

A lot of participants in New York will be out during the week ahead, following the three-day Presidents Day holiday weekend, which gets underway following Friday's close.

And the week after that is the JP Morgan Global High Yield & Leveraged Finance Conference, scheduled to take place from Feb. 27 through March 1 in Miami.

Sizable Monday inflows

The dedicated high-yield bond funds saw solid daily inflows on Monday, the most recent session for which data was available at press time, the investor said.

High-yield ETFs saw $232 million of inflows on the day.

Asset managers saw $205 million of inflows on Monday.

For the asset managers Monday's inflow is notably large, the investor said.

Cliffs climbs back up

In the secondary market, Cliffs Natural Resources’ new 5¾% notes due 2025 were on the rebound Tuesday, after having lost about ½ point in Monday’s active trading and finished below their par issue price.

That weakness seemed to persist in the early going on Tuesday as well – at least for a while.

“Cliffs traded below par earlier,” a trader said, “but it since has popped back up.”

He saw those notes going home around a 100¼ bid level.

Another trader pegged the bonds at 100 1/8 bid, calling that a 3/8 point gain, on volume of around $14 million.

But that was well down from the more than $68 million of those notes which had traded lower on Monday.

The Cleveland-based iron ore producer’s $500 million quick-to-market deal had priced at par on Friday and then had posted modest initial aftermarket gains, with around $34 million changing hands.

The company meantime got a thumbs up from Gimme Credit senior analyst Evan Mann, who said in a research note on Tuesday that Cliffs’ recently announced fourth quarter adjusted EBITDA “exceeded the consensus estimate and culminated a year in which the company defied the skeptics and staged an impressive financial comeback.”

He noted that the company’s year-end liquidity and free cash flow both showed improvement and that Cliffs was able to reduce its total debt load by $542 million last year, bringing it down to $2.2 billion.

Further debt-cutting is on tap, with the proceeds from the new bond deal and a recent $591 million equity issuance slated to be used to take out the company’s existing $291 million of 8% 1.5-lien notes due 2020 and $430 million of 7¾% second- lien notes due 2020 via redemption, as well as funding a tender offer for up to $250 million of its unsecured 5.9% senior notes due 2020, 4.8% senior notes due 2020, and 4.875% senior notes due 2021.

Mann further noted company expectations of improved results as United States steel industry macro conditions improve, adding that “we expect CLF's operating turnaround to continue through 2017 with more improvement in the company's credit ratios” and reaffirming “outperform” rating on its bonds.

Block bonds again better

Also among the recently priced issues, the new Block Communications Inc. 6 7/8% notes due 2025 continued to move up, with a trader seeing “more volume in them today,” with over $16 million having moved around, well up from Monday, when there had been only a couple of round-lot trades.

He saw the notes up ¾ point on the day, ending at 104¼ bid.

At another desk, a market source located the bonds at 104 3/8 bid, calling that a 5/8 point gain on the session.

The Toledo, Ohio-based diversified media company had priced $500 million of those notes at par in a quickly shopped deal on Thursday, after upsizing the offering from an originally announced $350 million. The new issue immediately leaped above the 102 mark when the notes began trading later that same session and had firmed higher to above the 103 bid range on Friday and up to 104 by Monday.

Murray Energy moves up

Away from the new issues, a trader said Murray Energy’s 11¼% notes due 2021 “were grinding higher throughout the day,” finally ending up some 4 points on the session at 79¼ bid.

A second trader also saw the bonds with a 4-point gain, locating them at 78 15/16 bid.

That was a clear turnaround from Monday, when they had lost ¼ point to close the session at 75 bid, on far less volume.

He estimated volume at more than $63 million, easily topping the day’s Most Actives list.

The bonds zoomed after the St. Clairsville, Ohio-based coal producer got a lift from preliminary quarterly results released by Foresight Energy, a thermal coal producer in which Murray Energy holds about a 50% limited- partnership interest.

AerCap flies on ratings upgrade

Elsewhere, traders said that AerCap Holdings’ bonds were heading skyward, after Moody’s Investors Service lifted the Amsterdam-based aircraft leasing company’s corporate family and unsecured bond ratings to investment-grade status.

Its 4 5/8% notes due 2020 pushed up to above the 106 bid level, with over $42 million traded, while its 4½% notes due 2021 likewise firmed by around ¼ point to the above the 105½ bid level, with over $36 million having changed hands.

Moody’s upped the rating to Baa3 from Ba1, with a stable outlook.

It said the upgrade is based on AerCap's strengthened competitive positioning in commercial aircraft leasing, improving fleet composition, and effective liquidity and lease risk management in advance of the increase in the company's scheduled deliveries of new aircraft from Boeing and Airbus over the next three years.

The upgrade also reflects the agency’s expectation that AerCap will continue to generate profitability and cash flows that compare favorably to peers while maintaining adequate capital strength and a strong liquidity runway.

Indicators remain strong

Statistical market performance measures posted their fourth consecutive stronger session on Tuesday and their seventh such higher session in the last 10 trading days. The indicators had turned higher across the board this past Thursday, after having been lower all around on Wednesday and mixed for two straight sessions before that, and then held those gains on Friday, Monday and again on Tuesday.

The KDP High Yield index rose by 2 basis points on Tuesday to end at 72.28, its fourth straight gain and its ninth rise in the last 10 sessions. It was also up by 3 bps on Monday.

Its yield came in by 1 bp to finish at 5.07%, after having been unchanged on Monday. It was the yield’s second tightening in the last three sessions, having also narrowed by 2 bps on Friday.

The Markit CDX Series 27 High Yield index posted its fourth consecutive gain and its seventh upturn in the last 10 sessions; it edged up by a little more than 1/32 point to close at 107 11/16 bid, 107¾ offered, after having improved by nearly ¼ point on Monday.

And the Merrill Lynch High Yield index moved up for a fourth successive session on Tuesday, gaining 0.049%, on top of Monday’s 0.121% rise. It was the index’s ninth gain in the last 10 sessions.

That raised the index’s year-to-date return to 2.069% from 2.019% on Monday, establishing a second straight new peak level for the year.

Colin Hanner contributed to this review

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