Junk market ends wild week on positive note; Crown Rock, Delta price as primary gets busier

By Paul Deckelman and Paul A. Harris

New York, Aug. 12 - If high-yield market players were holding their necks by Friday afternoon and seeking a lawyer for their whiplash, well, who could really blame them?

The junk market closed out one of its wildest, most volatile weeks ever on a positive note on Friday, stringing together a second consecutive winning session, following the lead of the newly revived equity markets.

The week had begun with a massive plunge after Standard & Poor's downgraded U.S. government debt from an AAA rating for the first time ever, followed by a rebound on Tuesday, another downturn on Wednesday and gains on Thursday and again on Friday.

Advancing issues clearly outnumbered decliners for the first time in over a week, and many of those gainers were up by multiple points. Big winners included such health care benchmarks as Community Health Systems Inc. and the new HCA Inc. deal, as well as other familiar names: Caesars Entertainment Corp., ATP Oil & Gas Corp. and Rite Aid Corp.

Statistical indicators of market performance, which had been getting hammered all week, were unambiguously higher for the first time in many days - but they remained well below their week-ago levels.

The primary market saw two issues price - regular junk bonds for Texas energy operator Crown Rock, LP and pass-through certificates for Delta Air Lines Inc.

That brought the week's new issuance total to above $600 million - not a busy week by any standard but certainly much improved from the week before, the year's slowest so far, when the market knocked down just one new issue totaling a meager $200 million.

CrownRock prices five-years

A pair of issuers, each bringing a single tranche of notes, raised $241 million in the primary market on Friday.

CrownRock priced a $150 million issue of 10% five-year senior notes (Caa2/CCC/) at 92.681 to yield 12%.

The yield printed on top of yield talk. The reoffer price came in line with discount talk of about 7.5 points.

Credit Suisse Securities (USA) LLC ran the books for the quick-to-market deal.

The Midland, Texas-based energy company plans to use the proceeds to execute its drilling program for 2011 and 2012, to repay existing debt and for general corporate purposes.

Delta prices pass throughs

Delta Air Lines priced a $102 million issue of pass-through certificates, series 2011-1B, due Oct. 15, 2014 (Ba3/BB/) at par to yield 7 1/8%.

Citigroup ran the books for the quick-to-market issuem which was priced on the investment-grade syndicate desk.

Proceeds will initially be escrowed and will eventually be used to free aircraft from indentures related to previous certificate issues and for general corporate purposes.

$867 million week

With Friday's two deals in the mix, the week's total issuance came to $667 million in three junk-rated dollar-denominated tranches.

That tops the previous week's $200 million in a single tranche, which was the slowest week of the year. The week just concluded is the second slowest in terms of both dollar-amount and deal volume.

It extends year-to-date issuance to $210.6 billion in 468 tranches.

Price talk a moving target

The see-sawing stock markets have generally carried high-yield bond sentiment along with them, a mutual fund manager said on Friday.

HCA, Inc.'s 7½% senior notes due February 2022, which priced at par on July 26 in a $2 billion issue, were 96½ bid heading into Friday's close, the investor said.

Before volatility took hold of the junk market, those notes traded as high as 101½ bid, 102 offered.

However, last Monday, with fear gripping the markets and portfolio managers needing to raise cash in the face of redemptions, the recently minted HCA 7½% notes traded as low as 91 bid, the fund manager said.

That kind of volatility has rendered price talk on pending issues a moving target, the manager said.

A case in point is Immucor Inc.'s $400 million offering of eight-year senior notes (Caa1/B-), the manager said.

The deal kicked off on Wednesday and is expected to price on Tuesday.

"A month ago that deal would have gotten done at 8¾% to 9%," the manager said.

However, given the volatility in the market and the record redemptions that have hit the funds, whispers were heard in a context of 12¼%, within shouting distance of the caps on the fully syndicated Immucor bridge loan, said the investor.

That was the Tuesday-Wednesday time frame, the manager reflected.

In spite of Thursday's news that global bond funds sustained a record $6.71 billion of outflows in the week ended Wednesday, according to a report by EPFR Global, Thursday was a positive day in terms of how the market moved. And the market continued to move in a positive direction on Friday.

So by late Friday morning, syndicate sales forces were once again canvassing the accounts regarding where - i.e., at what yield - they cared about Immucor.

"It was a 'sliding-scale' conversation," the buysider recalled.

"I think that if the market continues to be positive on Monday, it could get done in the context of 11¼% to 11½%.

"If the market continues to improve, they could probably get it done with a 10-handle, but I don't think that they should," the investor said.

"If they price it at 11¼% and it trades up a point or two, that will create some positive sentiment."

That sentiment is important at a time when the accounts are struggling with redemptions and price depreciation in their portfolios, the source added.

The buysider expects official price talk to surface Monday and believes it is possible that should market conditions remain positive, the deal could actually price late Monday, although the Immucor deal is actually scheduled to price on Tuesday.

A syndicate official, meanwhile, said that the deal could come together in the mid-to-high 10% range.

After all, it's August

The improvement seen in high yield on Thursday and Friday notwithstanding, the primary market is unlikely to see a substantial pickup in deal announcements prior to Labor Day, market sources say.

"It's still August," a syndicate official pointed out on Friday, adding that despite the recent market location, 2011 has been a very busy year in the new issue market.

Syndicate officials and investors put off vacations until the later part of August, and now that vacation window is upon us, sources say.

Also, the recent volatility has caused pricing to back up, an investor said.

"Why do a deal now, at 11%, when you could maybe get it done for 10% if you wait three weeks?"

New deals improve

When the new CrownRock five-year notes were freed for secondary dealings, one trader said that he saw no trace of them at all, but at another desk, a trader estimated them at a level of 93½ bid, up from their 92.681 issue price.

Yet another trader guessed that the bonds would be in a 93-95 context.

Thursday's $380 million offering from Cleveland-based casino developer Rock Ohio Caesars Ltd. was seen by a trader to have moved up to a 100¼ bid and then, later, to 100½ bid, 101½ offered.

That was well up from the 98.266 level at which the bonds priced on Thursday to yield 12½%

A second trader saw a 100½ bid for a $500,000 block of bonds, but nothing after that, while a third pegged them a little more conservatively at 99½ bid, 100½ offered.

That was not too far from the 99¼ bid level at which several of the traders had seen the issue on Thursday shortly after it had priced.

There was no reported aftermarket activity in the Delta Air Lines pass-through certificates due 2014.

Market signs up on day

Away from the new deal arena, market statistical indicators, which had been in negative territory on Wednesday and turned mixed on Thursday, were solidly positive on Friday for the first time in more than a week.

A trader saw the CDX North American Series 16 HY Index up a full point on Friday to end at 94 bid, 94¼ offered, after having risen by 1/8 of a point on Thursday.

However, on the week, the index remained well down from the 96¾ bid, 96 7/8 offered at which it had closed out the previous week ended Aug. 5.

The KDP High Yield Daily Index firmed smartly on Friday, rising by 48 basis points to end at 71.96, after having slid by 20 bps on Thursday to close at 71.48 - its lowest close since the 71.41 recorded on July 13, 2010.

Its yield narrowed by 18 bps, to 7.97%, after having risen by 7 bps points on Thursday.

But the index still showed considerable deterioration on the week from the 73.98 close and a 7.22% yield seen the previous Friday.

And the Merrill Lynch U.S. High Yield Master II Index gained 0.689%, snapping a skid of eight consecutive downside sessions, including Thursday's when the index fell by 0.762%.

The gain lifted the index's year-to-date return to 1.325%, more than doubling it from the previous session's 0.631%, which had been the lowest level for the index since the 0.622% seen on Jan. 5. However, it remained well below the peak level for the year of 6.362%, set on July 26.

For the week, the index showed a 2.833% loss, its third straight weekly setback.

A crazy market

A trader characterized Friday's session, at his shop, anyway, as "a nutty day here," adding that the secondary market has just been "so cuckoo."

With equities continuing to lead the way, as has been the case pretty much all week long - the bellwether Dow Jones Industrial Average gained 125.71 points, or 1.13%, to finish at 11,269.02 - the junk market had what one market source characterized as "a clearly better tone."

The first trader opined: "Certain names were getting better, maybe because they were beat up so much."

Rite Aid leads a rally

One example, he said, was Rite Aid Corp.

Earlier in the week, the Camp Hill, Pa.-based drugstore chain operator's bonds - a familiar presence in Junkbondland - had been getting knocked around along with the rest of the market. Its 8 5/8% notes due 2015 had been trading at 90½ at the end of last week, but then swooned to 84½ on Monday, when junk generally was caught in the midst of a massive selloff.

Those bonds managed to come off those lows and get back to around the 86 level at mid-week, and by late Friday had battled back to about 871/2.

Another market source said the Rite Aid bonds had gained as much at 2¾ points on the session to end at that level.

Another such beaten-up name, which came back, he said, was San Antonio, Texas-based media company Clear Channel Communications Inc.

The trader said that Franklin, Tenn.-based hospital operator Community Health Systems' 8 7/8% second-lien senior secured notes due 2015 "have bounced back by over 2 points" from lows hit earlier in the week.

He said that the $3 billion issue had fallen from levels around or above par last week to a 98 bid level on Tuesday, but had worked their way back to par by Friday, "decidedly better."

He said that "people sold it in the beginning because it was big and liquid," so they could always find a buyer.

Community Health's sector peer and Tennessee neighbor in nearby Nashville, HCA Inc.'s huge recent two-part deal was also going wildly up and down, a good barometer for the overall junk market.

Its new 7½% senior unsecured notes due 2022, $2 billion of which had priced at par on July 26, had swooned down to levels around 90 bid, 91 offered from recent highs in the 96-97 area, but on Friday the trader saw them having come back to 97 bid, 97½ offered.

The company's new 6½% first-lien senior secured notes due 2020 were going out at 99½ bid, par offered. Earlier in the week, they had fallen to around 94½ bid, before pushing their way back up as the week wore on.

The company had priced $3 billion of those bonds at par on July 26 as part of the same two-part deal as the 71/2s.

A market source at another desk saw HCA's outstanding 6¾% notes due 2013 up 1 5/8 point, at 102¼ bid.

Caesars seen better

Another well-traded credit was the 10% notes due 2018 of Caesars Entertainment - the Las Vegas-based gaming giant formerly known as Harrah's Entertainment.

hose bonds were whacked down more than 4¾ points during Monday's big selloff, but then gyrated around after that and were seen on Friday trading at 81 bid, although that was still below the mid-80s levels at which the bonds had traded last week.

ATP shows improvement

Also on the comeback trail was Houston-based energy acquisition and production company ATP Oil & Gas.

Its 11 7/8% senior secured notes due 2015 were seen on Friday trading as high as 91 bid, up 5 points from recent levels.

Those bonds had been trading last Friday in a range of 87 to 90, before going out at 89 bid, 90 offered, then falling to 85½ during Monday's junk market meltdown and sliding further on Tuesday to 83-84 bid, starting the long climb from there back up above 90.

Bond buyback time?

One of the traders said that even though there is a feeling of wariness in the high-yield market after the week's gyrations and those of the week before, "a majority of the people feel that the high-yield market is oversold and that it's a good time for companies to buy back their debt [on the open market].

"And a lot of companies are buying back their debt."

Companies frequently are reluctant to disclose whether they will buy back some of their debt, he suggested, because "they don't want a lot of people to know if they are or aren't because that pushes the price up in their face."

Whatever they may or may not be saying publicly, he asserted, "cash-rich companies may be looking at [going into the open market and taking out] their bonds at prices they could only dream about two weeks ago."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.