Market quiet in short pre-holiday session, but U.S. Steel, Forest Oil busy, Linn again easier

By Paul Deckelman and Paul A. Harris

New York, July 3 - The high-yield market, as generally expected, had an uneventful and abbreviated pre-holiday session on Wednesday.

Most of the day's action was wrapped up by noon ET, well in advance of the 2 p.m. ET early close ahead of Thursday's Independence Day holiday recommended by the Securities Industry and Financial Markets Association.

Traders said that junk was generally firmer, although they saw little in the way of extensive trading activity.

Among the volume leaders on the overall quiet day were bonds of Forest Oil Corp., although the quantity was mostly due to a sizable amount of smallish, odd-lot trades, with no fresh news seen about the energy producer that might explain its sudden popularity.

It was also a relatively active day for United States Steel Corp.'s bonds, seen to have eased slightly, though on decent round-lot volume, along with a decline in its shares; the gyrations followed Tuesday's filing of an international unfair trade practices case by the company and other domestic manufacturers of steel pipe used by the energy industry against their foreign rivals.

Linn Energy LLC's bonds were off for a second consecutive session in the wake of a Securities and Exchange Commission probe of its proposed acquisition of Berry Petroleum Co., whose bonds actually firmed. Linn's shares also slid - badly - for a second straight day on the news.

Statistical measures of junk market performance were mixed for a second straight session.

On the primaryside, no new-deal news was seen emerging from either the United States or Europe, although the latter segment has recently gained more investor attention as interest-rate concerns have weighed on the domestic primary sphere.

No news, no deals

As expected, the primary market passed the shortened, pre-holiday Wednesday session without producing any news.

No deals priced and none were announced ahead of the July 4 holiday, which many market participants are transforming into a four-day weekend by taking vacation time on Friday.

Since Friday is a workday in the bond market, there will be participants on hand, but little, if any, primary market activity is expected, sources said on Wednesday.

Looking to the July 8 week, only two deals remain on the active forward calendar.

Germany-based clutch-maker FTE Automotive GmbH began a roadshow on Tuesday in Frankfurt for its €240 million offering of seven-year notes (expected ratings confirmed B1/expected B).

The deal is expected to price during the middle part of the July 8 week via sole bookrunner Morgan Stanley.

And France's Technicolor remains in the market with a bond deal, according to an informed source.

The company ran a mid-June roadshow for a $330 million offering of seven-year senior secured notes (expected ratings B3/B), after which it went silent.

The deal, however, is still alive, according to the source, who added that the size and structure may be subject to review.

It is being led by joint bookrunners J.P. Morgan, Goldman Sachs and Morgan Stanley.

A mostly silent session

In the secondary market, a trader said that there was "not a whole lot going on, to say the least."

He added that "it was pretty dead quiet."

A second trader added that overall, the market basically was up by ¼ point to ½ point, on average, mostly "on the short end of the curve."

He described volume as "extremely light" and commented that there were a lot of odd-lot trades being done, as participants just cleaned things up, "but nothing crazy."

Forest firms on odd lots

One credit that saw quite a bit of activity in mostly smallish off-lots - with "pages and pages of it on Trace," a market source said - was Forest Oil Corp.'s 7¼% notes due 2019.

The market source saw over $11 million of the notes having changed hands by around midday, although all but about $3 million of actual round-lot transactions came in assorted small pieces of a few thousand bonds here and there.

Still, the volume total made it clearly the busiest solidly junk-rated issue on a Trace "high yield" list dominated, as usual, by split-rated or only quasi-junk names of more interest to high-grade investors as crossover plays reaching for yield, including Ford Motor Credit Co., Dollar General Corp., American International Group, Inc. and Plains Exploration & Production Co.

Looking at all of the numerous trades, the Forest Oil bonds were seen having dropped about a point on the day to a closing level of 96, but screening out all of the smaller trades, they actually gained about ½ point on the session to end at 95½ bid, a source said. At another desk, the bonds were seen by another source as going out at 95¾ bid, up ¾ point on the day.

There was no fresh news seen about the Denver-based independent oil and natural gas exploration and production company that might explain the surge in activity in the notes, which are normally not among the high-yield volume leaders.

Forest's New York Stock Exchange-traded shares were unchanged on the day at $4.15, on volume of 981,000, less than a quarter of the usual daily turnover.

Linn continues to lag

Also in the energy arena, Linn Energy's notes were seen on the downside for a second consecutive session in the wake of the news that the SEC is looking into the Houston-based energy operator's pending acquisition of sector peer Berry Petroleum Co.

Linn's 8 5/8% notes due 2020 eased by 1½ points to go out at 101 bid on round-lot volume of over $4 million. After the final sizable trade of the day had been recorded, there was a flurry of smallish trades that dropped those bonds further, into the upper 90s.

Linn's 6½% notes due 2019 retreated almost 3 points on the day to 95½ bid, although a trader noted that there was only one large trade during the session at that level; meanwhile, the bonds' price gyrated all day between 93 bid on the low end and 99 at the top in odd-lot dealings.

Linn's 7¾% notes due 2021 were seen going home off ¼ point at 98¾ bid, though on considerably lighter volume.

On the stock side, investors remained wigged out by news of the SEC scrutiny on the Berry deal; Linn's Nasdaq-traded shares, which had plunged by almost 19% on Tuesday on 10 times their normal volume, slid by another $4.26, or 15.75%, on Wednesday to close at $22.79. Volume of 21.9 million shares was over seven times the norm.

In February, Linn and Denver-based Berry announced an agreement under which Linn and its LinnCo LLC subsidiary would acquire Berry in an all-stock deal valued at $4.3 billion, including Linn's assumption of Berry's debt. Berry shareholders would receive 1.25 common LinnCo shares for each common share of Berry outstanding prior to the merger, with the consideration to be received by Berry shareholders thus valued at $46.2375 per Berry share.

Late Monday, Linn disclosed that the SEC's regional office in Fort Worth had begun a private, non-public inquiry regarding Linn and LinnCo, requesting "the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Co., and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy."

Although bond and stock investors seem to be behaving otherwise, Linn's announcement pointed out that "the SEC has stated that the fact of the inquiry should not be construed as an indication that the SEC or its staff has a negative view of any entity, individual or security."

Linn and LinnCo "are cooperating fully with the SEC in this matter," the company said. It added that "although the impact of the inquiry on the timing of LinnCo's proposed merger with Berry Petroleum Co. is difficult to predict, LinnCo and LINN remain committed to the completion of the transaction."

While Linn's shares have been taking a pounding, and its bonds have been in retreat the last two days on news of the SEC investigation, Berry's 6 3/8% notes due 2022 were seen unchanged on Tuesday and had actually gained ½ point on Wednesday to close at 100½ bid, with over $4 million having changed hands.

Berry's NYSE-traded shares, which had fallen by nearly 6% on Tuesday on nine times their normal volume, edged up on Wednesday by 24 cents, or 0.6%, to end at $40.10. Volume of 1.3 million shares was nearly twice the usual figure.

U.S. Steel active, slightly softer

One of the busiest issues in Junkbondland on Wednesday, aside from Forest Oil's notes, was U.S. Steel's 6.65% bonds due 2037. Over $10 million of that paper was seen having traded by midday, with over $8 million of that attributable to big round-lot transactions.

The Pittsburgh-based steel manufacturer's bonds were marginally easier, ending at just above the 84 bid level.

Its NYSE-traded shares were meantime down by $1.07, or 5.56%, ending at $18.18 on volume of 10.8 million shares, slightly higher than normal. The shares dropped on profit-taking after having gained some ground on Tuesday on the news that the company was among several American petitioners filing a case against foreign rivals before the U.S. International Trade Commission, seeking to stem what they say is a flood of unfairly traded products from nine countries: India, the Philippines, Saudi Arabia, South Korea, Taiwan, Thailand, Turkey, Ukraine and Vietnam.

They asked the commission to investigate imports of some "oil country tubular goods" - steel piping used in various energy-related applications - from the named countries.

Cengage bonds continue rise

Traders said that Cengage Learning Acquisitions Inc.'s bonds continued to firm on Wednesday, replicating the action seen on Tuesday, when those bonds had improved after the Stamford, Conn.-based educational content, software and services company filed for bankruptcy.

One trader said that the 10½% notes due 2015 and 12% notes due 2019 were both trading in a 19 to 21 bid range, while its 11½% first-lien notes due 2020 were trading in a 72 to 74 bid context. All of the bonds were trading flat, or without their accrued interest, after the company sought protection from its bondholders and other creditors via a Chapter 11 filing with the U.S. Bankruptcy Court in New York.

The trader said that the 10½% notes had been trading between 13 and 16 on Tuesday, "so they were up 2 or 3 points."

A second noted that the bonds had traded in the lower teens before the bankruptcy filing, and then had moved up by several points on Tuesday after the filing, continuing the momentum on Wednesday as investors jockeyed for position, handicapping the theoretical recovery rates attached to the various classes of notes.

"That's been the theme here," he concluded.

Market indicators stay mixed

Statistical junk market performance indicators were mixed for a second straight session on Wednesday after having been higher across the board on Monday.

The Markit Series 20 CDX North American High Yield index edged up by 1/16 point to close at 103 3/16 bid, 103¼ offered. On Tuesday, it had lost 3/8 point.

However, the KDP High Yield Daily index saw its five-session streak of higher index levels and falling yields snapped on Wednesday.

The index lost 4 basis points to end 73.02, after having gained 7 bps on Tuesday.

Its yield meanwhile rose by 2 bps on Wednesday, to 6.36%, after having declined by 3 bps on Tuesday.

And the widely followed Merrill Lynch High Yield Master II index also saw its first loss in six sessions, as it dropped by 0.69%, versus Tuesday's 0.095% gain, which had been its fifth straight advance.

Wednesday's loss dropped the index's year-to-date return back to 1.699%, down from Tuesday's 1.739%, although it remained well up from last Tuesday's 0.384% reading - its lowest level for the year.

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