Hot Topic, Approach Resources price; Jack Cooper on tap; funds plunge by record $4.6 billion

By Paul Deckelman and Paul A. Harris

New York, June 6 - After several sessions of relative inactivity, the high-yield primary market was back on track on Thursday, pricing two transactions collectively worth $605 million. They were the first dollar-denominated, fully junk-rated deals from domestic or industrialized-country issuers since Monday.

Energy operator Approach Resources Inc. priced $250 million of eight-year notes, and specialty retailer Hot Topic, Inc. did a quickly shopped $355 million issue of eight-year secured notes, which priced at a sizable discount to par.

With both of those offerings appearing fairly late in the day, traders reported no immediate aftermarket activity in either credit.

High-yield syndicate sources saw at least two other prospective deals getting warmed up for possible pricing on Friday: Warren Resources, Inc., another energy name, and Jack Cooper Holdings Corp., which transports large numbers of new and used cars and light trucks to automobile dealerships around the United States. Price talk emerged on both expected deals.

Away from the dollar segment of the market, the sources said that British prepared foods producer Bakkavor Group Ltd. priced a sterling-denominated issue of seven-year secured notes via a financing subsidiary.

In the secondary arena, traders saw what one called "a mixed bag" with no particular direction. Statistical indicators of market performance turned mixed for the first time in five sessions after having been universally on the slide, although the ones with negative readings were hitting new marks for the year.

And a key indicator of overall junk bond market liquidity trends, the flow of cash into and out of high-yield mutual funds and exchange-traded funds, posted its biggest-ever weekly outflow, according to one of the major fund-tracking services. The huge loss was seen reflecting junk investors' sudden adoption of a considerably more cautious stance than they had shown when Junkbondland seemed to be in a more swashbuckling mood as recently as just a month ago.

AMG sees $4.6 billion outflow

As Thursday's activity was winding down, junk market participants familiar with the fund-flow statistics generated by AMG Data Services said that during the week ended Wednesday, $4.6 billion more left those funds than came into them.

It was the largest outflow ever recorded by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., easily eclipsing the previous record-high cash hemorrhage of $3.43 billion, which was seen during the week ended June 22, 2011. It was also larger than the biggest outflows seen in each of the past two years: last year's biggest loss of $2.93 billion, set exactly a year ago in the week ended June 6, 2012, and the most massive cash loss previously seen this year, the $1.38 billion outflow seen in the week ended Feb. 6.

The huge outflow was the second consecutive cash loss seen by AMG/Lipper, completely dwarfing what would normally be considered a pretty hefty outflow in its own right - the net $874.68 million that left the market in the week ended May 29.

According to a Prospect News analysis of the AMG/ Lipper figures, with 23 weeks in the books so far this year, there have now been 14 inflows and nine outflows reported.

However, the cumulative net flow of money, which up till now had been on the positive side all year, swung into the red this week to the tune of an estimated $2.38 billion from the prior week's year-to-date net inflow figure of $2.23 billion, according to the analysis.

As of press time on Thursday evening, there had been no sign of the fund-flow figures from the other major fund-tracking service, Cambridge, Mass.-based EPFR Global, whose numbers normally also circulate in the market on Thursday.

EPFR uses a different methodology than AMG/Lipper to calculate its numbers, including many non-U.S.-domiciled funds in its universe, while its more established rival's numbers are based strictly on domestic funds it surveys. But while that can result in the two services' numbers diverging widely, the two companies' results generally point in the same direction more often than not.

Cumulative fund-flow estimates, whether from EPFR or from AMG/Lipper, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

The continued flow of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the roughly $1 trillion junk market - has been seen by analysts as a key element behind the high-yield secondary sphere's strong performance last year versus other fixed-income asset classes and its record active new-deal pace, which easily topped the $350 billion mark - patterns of primary activity and secondary strength that have mostly continued this year, at least till now.

Outflow no surprise

Although the sheer size of the latest outflow was stunning, market participants were not surprised to see a king-sized cash bleed from the funds this week given the junk market's relatively poor performance in recent sessions.

Several traders said during the week that they had heard of large outflows, particularly from the volatile ETF sector, as investors fearful of possibly higher interest rates cashed out - huge. That was a reflection of the investors' fears that the Federal Reserve may soon choose to begin throttling back on the expansive easy-liquidity policies it has pursued over the past several years in an effort to boost economic activity by keeping interest rates at or near historic lows.

Even before the AMG/Lipper numbers were released, a trader opined that "the rumor is [the outflow number] is a big one, and I'm sure there's going to be a big number coming out of the ETFs."

AMG/Lipper said that around two-thirds of the latest week's gigantic cash drain, or $3.2 billion, came from traditional high-yield mutual funds, while the remaining $1.4 billion was attributed to redemptions from ETFs, which have emerged as a wildly popular investment vehicle just in the past two years.

A primaryside source noted that one reason why the latest number was so much bigger than anything that came before it was that "only in 2012 and 2013 have you had a really significant ETF factor."

While ETFs were around even before the last two years, it is really only in 2012 and 2013 that they have come into their own, market observers say, now making up fully a one-third chunk of the funds portion of the overall high-yield universe.

The source noted that the big cash pullout from the volatile ETFs is "a novelty of this present market."

Another source, when asked whether the pullback of cash out of the funds was orderly, replied that it was "an orderly selling panic," as oxymoronic as that may seem.

He said that the market was in a "risk-off mode."

A trader at another shop declared that "the fund-flow numbers and the May jobs numbers [scheduled to be released by the government early Friday] are going to set the tone for the rest of this week and next week."

Hot Topic prices secured notes

Against a backdrop of volatility in the global capital markets, two issuers completed deals in the dollar-denominated high-yield primary market on Thursday.

Both executions bore scars. One deal came well wide of talk while the other came at the wide end, and both underwent structural changes.

Hot Topic priced a $355 million issue of 9¼% eight-year senior secured notes (B2/B) at 98.618 to yield 9½%.

The yield printed 37.5 basis points beyond the wide end of yield talk that was set in the 9% area.

Early in the day, with stock indexes in the United States well into the red, a high-yield mutual fund manager put in an order for Hot Topic bonds at 10¼%, and for a while it appeared as though that might be the level at which the deal cleared, the buysider said.

However, stocks reversed course and ended up posting solid gains, so late in the session the dealer called back to say there was a book built at 9½%, and that's where the deal would print, so this investor was ultimately cut back.

"Two weeks ago that deal would have gotten done in the low eights," the investor said, noting that the additional cost of capital would inevitably alter the company's free cash picture for the worse.

BofA Merrill Lynch and Jefferies LLC were the joint bookrunners for the issue, which was increased in size from $350 million.

The notes feature a make-whole call at Treasuries plus 50 bps until June 15, 2016, after which they become callable at 106.938. A special call provision that would have allowed the issuer to redeem 10% of the notes annually at 103 during the non-call period was eliminated.

Proceeds, together with cash on hand and an equity contribution, will be used to fund the proposed acquisition of Hot Topic by affiliates of Sycamore Partners Management LLC.

Approach, at the wide end

Approach Resources priced a $250 million issue of eight-year senior notes (B3/B-) at par to yield 7% on Thursday, according to a market source.

The yield printed at the wide end of the 6¾% to 7% yield talk.

J.P. Morgan Securities LLC, RBC Capital Markets LLC and KeyBanc Capital Markets Inc. were the joint bookrunners.

A proposed special one-year 110% change-of-control redemption provision was eliminated.

Proceeds will be used to refinance the company's revolver.

Bakkavor weathers the backup

Prior to markets opening in the United States, volatility was vigorously rocking markets in Europe, with all the major stock indexes in the red, and euro-denominated high yield and emerging markets credit spreads were 25 bps to 50 bps wider on the day.

Nevertheless, Bakkavor Finance (2) plc priced a £150 million issue of 8¾% seven-year senior secured notes (B2/B-) at 98.72 to yield 9%.

The yield printed at the wide end of the revised 8¾% to 9% yield talk; previous talk was 8% to 8¼%.

Joint bookrunner Barclays will bill and deliver. BofA Merrill Lynch, HSBC, Mizuho, Rabobank and Royal Bank of Scotland were also joint bookrunners.

The London-based manufacturer of prepared foods plans to use the proceeds, along with proceeds from a new credit facility, to refinance debt.

Talking the deals

Amid Thursday's volatility, two prospective issuers put out price talk on deals expected to price on Friday.

Jack Cooper Holdings talked its $225 million offering of senior secured second-lien notes due 2020 (B2/B-) with a yield in the 8¾% area.

Wells Fargo Securities LLC is the left bookrunner, and Barclays is the joint bookrunner.

And Warren Resources set yield talk for its $200 million offering of eight-year senior notes (Caa1/CCC+) at 8¼% to 8½%.

BMO Capital Markets is the bookrunner.

Redemptions and erased gains

On the heels of news circulating the market that the high-yield asset class has sustained history-making outflows for the week to Wednesday's close, one investor said that in the past three weeks the high-yield index has now given back all of its 2013 gains.

On May 9, the composite yield was 5.03%, the all-time tight, the buysider recounted. A week later on May 17 it had widened to 5.26%. Heading into Memorial Day it was 5.73%.

Yesterday it closed at 6.14%, the investor said, adding that news of the massive, history-making $4.6 billion of outflows from high-yield funds for the week to Wednesday would probably push that yield to 6.2% heading into Friday.

Portents for the primary

The Thursday session in the primary market ended with several question marks.

Aside from the price talk that circulated on Jack Cooper and Warren Resources, there are five deals parked on the active forward calendar that were announced as possible business for the week of June 3.

But dealers were mum as to price talk and timing on those deals heading into Friday.

Against the specter of redemptions, new issues are not attractive, a fund manager said on Thursday.

Often in order to own new issues it is necessary to sell something to raise the cash, and presently you would suffer a loss if you did that, the investor said.

"You're not buying new issues if you're in a cash-raising mode," the source stated.

"Last week there were outflows, but people had cash and didn't panic.

"Now you have to be in front of liquidity.

"But I'm actually encouraged by the fact that this week's outflow is so large. It explains why the bid evaporated."

Day's deals not seen

In the secondary realm, a trader speaking well after 4:30 p.m. ET, by which time the junk market is usually winding down for the day, said that he had not seen the new Approach Resources 7% notes due 2021 trading around after their pricing.

The Fort Worth, Texas-based oil and gas exploration and production company's transaction priced at par.

There was also no sign of Hot Topic's new 9¼% secured notes due 2021.

Primaryside sources said that the City of Industry, Calif.-based specialty retailer of pop culture-influenced licensed apparel's offering came to market even after Approach had priced.

A 'mixed bag' on the day

A trader characterized Thursday's session as "kind of a mixed bag. The market tried to open up better this morning then kind of fell flat and backed off again."

However, after hitting those day's lows, "it looks like there's short-covering" in some credits.

"On a few issues, there were better bids around going into the equity market close."

Stocks saw a choppy, volatile session that finally ended on a positive note, even as investors set up their positions ahead of the scheduled Friday morning release of the May jobs data. The bellwether Dow Jones industrial average swung nearly 200 points from its session low to the day's high before ending up 80.03 points, or 0.53%, at 15,040.62.

The Labor Department is scheduled to release employment data for May at 8:30 a.m. ET on Friday. Analysts on average expect the always closely watched non-farm payrolls number to show creation of about 170,000 new jobs during the month, a little more than April's 165,000, with the official jobless rate holding steady at 7.5%.

Back in the junk precincts, the trader said, "those investors were getting ready for tomorrow."

He said that toward the day's end, the junk market "looked like it was trying to recover from the lower levels this morning on the stuff that traded down, but there was not a lot of follow-through.

"I think we'll get that tomorrow or Monday."

He said that no particular names really stood out, either on volume or on price movements.

He characterized the market as "trying to get back to around unchanged."

"Some [issues] were up, and some were down," he said.

Ahern off a little

Among recently priced deals, Ahern Rentals Inc.'s' 9½% second-priority senior secured notes due 2018 were seen by a trader having eased by ¼ point on the session. He said the bonds went home at 100½ bid, 101¼ offered. That small downturn followed Wednesday's 11/4-point drop.

A second trader pegged the bonds at 100¼ bid, 101¾ offered, calling them down as much as 1¼ point on the day from Wednesday's levels.

Ahern, a Las Vegas-based construction equipment-rental company currently in the final stages of a Chapter 11 reorganization, priced $420 million of those bonds at par this past Friday after upsizing the deal from $415 million originally. The bonds got as good as a 102-to-103 context before coming off those peak levels.

Market indicators turn mixed

Away from the new-deal realm, statistical junk performance indicators turned mixed on Thursday after having fallen across the board for the previous four sessions.

The Markit Series 20 CDX North American High Yield index rebounded solidly on Thursday, snapping a four-session losing streak by gaining 5/8 point to end at 103 23/32 bid, 103 25/32 offered. On Wednesday, it had slid by 29/32.

However, the KDP High Yield Daily index remained stuck in a rut for a 10th consecutive session Thursday. It plunged by 21 bps to close at 74.30, marking its third consecutive new low, eclipsing the old low point of 74.51 recorded on Wednesday, when the index had swooned by 50 bps. Wednesday marked the first time this year that the index had fallen below the psychologically potent 75.00 mark.

The KDP index's yield meantime rose by 9 bps, finishing at 5.86%, its 10th consecutive increase. On Wednesday, it had ballooned out by 17 bps.

And the widely followed Merrill Lynch High Yield Master II index eased by 0.11% on Thursday, its eighth straight loss. That followed Wednesday's 0.69% nosedive.

The latest downturn cut its year-to-date return to 2.899% from Wednesday's 3.012% and marked the first time that cumulative return figure had fallen below 3% since April 1, when it stood at 2.948%.

The index's yield to worst hit its second consecutive new high for 2013 as it climbed to 6.16% Thursday from 6.118% on Wednesday, the previous zenith and the first time this year the yield had moved above 6%.

Its spread to worst versus Treasuries widened out to 514 bps from Wednesday's 509 bps. Thursday marked a new 2013 high point for that measure, beating the old mark of 510 bps recorded back on Feb. 7. It was the fattest average junk bond spread since the 523 bps mark at which the index had ended on the last day of 2012.

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