SM Energy, Sally drive by; Jefferies looks like junk; Bon-Ton bombs; funds see inflows

By Paul Deckelman and Paul A. Harris

New York, Nov. 3 - The high-yield primary arena's drive-by derby continued on Thursday as two more quickly shopped deals came to market, for natural gas operator SM Energy Co. and for beauty-supply distributor Sally Holdings LLC and affiliate Sally Capital Inc.

They were the latest in a recent string of such opportunistically timed, suddenly priced deals seen in Junkbondland, including megadeals in the past week from CSC Holdings, LLC and Ford Motor Credit LLC.

The new SM Energy bonds firmed solidly after par pricing, but Sally Beauty arrived too late for any kind of dealings.

But traders said that the new-deal market pretty much took a back seat to the day's biggest disaster, Jefferies Group Inc.

Even without an official junk bond, its yields and spreads ballooned out to junk-like levels on heavy trading amid a stock downturn triggered by investor concern about its exposure to European debt.

Elsewhere, MF Global Holdings Inc.'s bonds - the previous market punching bag - were seen continuing to trade in the 40s on busy volume.

Yet another challenged credit on Thursday was Bon-Ton Department Stores, Inc., whose paper was punished on poor October sales results.

Despite those prominent problem names, junk overall was stronger, helped by a stock surge powered by the latest European debt news and decent earnings from a number of companies.

And high-yield mutual fund flows posted another big inflow, seen as a sign of renewed investor support for junk.

AMG posts $1.9 billion inflow

As Thursday's session was winding down, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week that ended Wednesday, $1.9 billion more came into those weekly reporting funds than left them.

It was the fourth consecutive cash infusion, including the spectacular $4.25 billion seen in the previous week ended Oct. 26, which was the biggest single weekly inflow recorded since Arcata, Calif.-based AMG began tracking fund flows in 1992.

During that four-week stretch, net inflows have totaled some $9.06 billion, according to a Prospect News analysis of the numbers.

The inflow also was the eighth such injection of liquidity into the market seen in the past nine weeks, according to the analysis.

The surge was broken only by a $363.14 million outflow in the week that ended Oct. 5.

During that stretch, dating to the week that ended Sept. 7, net inflows have amounted to $10.327 billion, an indicator that investors spooked by the severe market downturn seen in August had regained some trust in junk.

For the year as a whole, inflows have been seen in 29 weeks versus 15 outflows, according to the analysis.

Powered by the huge inflow in the latest week, year-to-date net inflows reached their strongest level, according to the analysis, with an estimated net of $9.806 billion more having come into the funds since the beginning of the year than having left them.

That eclipsed the old high-water mark of $7.906 billion set the week before.

While fund-flow patterns began the year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year, they turned choppy for several months after that with a couple of weeks of declines.

This was followed by several weeks of inflows, going back and forth. After a break to the upside in July when four straight inflows were recorded, August was a complete wipeout with the five downturns. That was followed by the revival since then.

EPFR: $2.78 billion inflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, also reported a fourth consecutive net addition to the funds, pegging it at $2.78 billion.

That followed the previous week's eye-popping $4.76 billion cash infusion - the most that EPFR has ever recorded.

On a year-to-date basis, flow totals rose to an estimated $5.82 billion from the previous week's $3.04 billion level.

EPFR's figures and those of AMG generally point in the same direction, although their actual numbers usually differ markedly since they calculate their respective fund-flow totals very differently.

EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds and counts exchange-traded funds excluded from the more narrowly focused AMG tally.

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

Analysts say the continued flow of fresh cash into junk - the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - has fueled the record new deal borrowing binges seen in both 2009 and then in 2010, as well as the robust secondary market seen in both years.

Those trends continued into 2011, although the market hit something of a dry patch in June, then seemed to recover in July, only to run into a brick wall for all of August.

Although judging by the patterns recently seen in the fund flows, the junk market seems to be in the process of righting itself and coming back.

The inflows reported by AMG and EPFR came as no real surprise to traders, who were predicting a probable large inflow based on recent market performance.

The Thursday primary market saw two issuers, each with a single tranche of notes, raise $1.1 billion.

Sally Holdings LLC and Sally Capital Inc. priced a massively upsized $750 million issue of eight-year senior notes (B1/BB+) at par to yield 6 7/8%, on the tight end of the 7% area price talk.

The deal was upsized from $450 million.

Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, J.P. Morgan and Wells Fargo were the joint bookrunners for the quick-to-market deal.

The proceeds will be used to redeem the company's 9¼% senior notes due 2014. The proceeds from the upsizing will be used to redeem the 10½% senior subordinated notes due 2016.

The deal went "unbelievably well" and played to an order book that was five times oversubscribed at the original amount, according to an informed source.

SM Energy: Minimal concession

Also on Thursday, SM Energy priced an upsized $350 million issue of 10-year senior notes (B1/BB) at par to yield 6½%.

The yield printed at the wide end of the 6 3/8% to 6½% price talk.

However, that talk was aggressive, according to a syndicate source, who added that initial rate discussions on the drive-by deal took place in the context of 6½% to 6¾%.

The new SM Energy 6½% notes due 2021 were up 2 points on the break, the source added, noting that in pricing Thursday's deal the Denver-based company made only a minimal concession to the present trading levels of its existing 6 5/8% notes due in February 2019.

Wells Fargo was the left bookrunner for Thursday's deal. Bank of America Merrill Lynch and J.P. Morgan were the joint bookrunners.

Drive-bys - get used to it

Drive-by deals, which have permeated the primary-market landscape of late, will remain the transactions of choice, at least in the near term, according to a high-yield syndicate banker.

"Who can plan a Monday-through-Friday roadshow while the euro is falling apart, coming back together and falling apart again on a daily basis?" the banker demanded to know.

So for the next couple of weeks, look for drive-by deals from familiar issuers who are coming to market with easy-to-understand stories, the banker advised.

However, for accounts keen to put cash to work in the primary market, the pipeline of such deals is limited, the syndicate official warned.

Over the next few days, there will be some large deals. The buyside is expected to be pushing and shoving to get pieces of them before that limited pipeline runs dry.

One deal that is on the radar screen is Peabody Energy Corp., which is expected to come with $1 billion of junk via Bank of America Merrill Lynch, UBS and Morgan Stanley.

It will use the proceeds to fund the acquisition of Macarthur Coal Ltd.

That deal could surface as early as the Nov. 7 week, the syndicate source advised.

Good timing for Faurecia

The euro-denominated market also saw action on Thursday.

French auto parts company Faurecia SA priced an upsized €350 million issue of 9 3/8% five-year senior notes (Ba3//) at 99.479 to yield 9½%, on top of the yield talk.

Credit Agricole CIB and Natixis were the global coordinators for the debt refinancing issue, which was upsized from €300 million.

BNP Paribas, Credit Agricole, Natixis and SG CIB were the joint bookrunners.

HSBC and Mitsubishi were the co-managers.

Credit Agricole will bill and deliver.

The transaction benefited from good timing, according to a market source who was watching the deal.

The source was referring to the festive atmosphere kindled in the European capital markets by Greek prime minister George Papandreou, who decided that Greek currency strategy ought not to go to Greek voters after all.

This festive air also was bolstered by the unexpected cut in euro zone interest rates by the new European Central Bank president Mario Draghi in his first day in office.

The Faurecia deal was massively oversubscribed, the market source added.

It came somewhat cheap, added the market source, who spotted the bonds trading at 102½ bid, 103 offered, after the London close on Thursday.

As the smoke lifted on Faurecia, there was one more euro-denominated junk deal left to clear.

Swedish cable operator Com Hem is marketing €287 million offering of eight-year senior unsecured notes (expected ratings Caa1/CCC+) via Goldman Sachs, Deutsche Bank, Morgan Stanley, UBS, Bank of America Merrill Lynch and Nordea.

Although official price talk had not surfaced as of Thursday's European close, rate discussions on the acquisition financing have taken place as high as 11½% to 12%, according to a London-based debt capital markets banker.

In the warm glow created on Thursday by Papandreou and Draghi, those rate discussions tightened, the source said, adding that Com Hem might come as low as 11¼% at a discount.

The source conceded that the rumor mill had the deal coming even tighter still - with a sub-11% yield.

Last Thursday, Com Hem priced a SEK 3.5 billion issue of 9¼% seven-year senior secured notes (B1/B) at 96.938 to yield 9 7/8%. That deal also was part of the acquisition financing.

Meanwhile, there is a European pipeline, the banker added. But this is somewhat subject to the daily pronouncements by politicians on the continent's credit situation, which have rendered new-issue strategy particularly tricky.

Regardless, the European accounts have a lot of cash that needs to be put to work, the sellsider said.

On the European primary-market approach ramp is Swedish burglar alarm company Securitas Direct AB, which is expected to take out the senior secured bridge financing with €900 million to €1 billion of notes.

Morgan Stanley, Goldman Sachs, Bank of America Merrill Lynch, Nordea, Nomura and HSBC provided the bridge, which backs the leveraged buyout of the company by Bain Capital.

The bond deal is expected to be secured, the source said, adding that the unsecured portion of the bridge, which was initially expected to be taken out by a bond deal, ended up in the mezzanine market.

SM Energy shows strength

When SM Energy's upsized new 10-year notes were freed for secondary dealings, several traders saw those bonds move above the 102 bid level, well up from par, where the $350 million deal had priced.

One trader saw the company's new notes get as good as 102½ bid, before easing back to about a 102 to 102¼ context.

No secondary for Sally

Traders saw no aftermarket action for the new bonds of Sally Holdings, noting that the upsized $700 million deal came to market too late for such trading.

The SM Energy and Sally Beauty were the latest in a series of recent drive-by deals, which have priced either the same day as announced or, at the latest, the following day, rather than follow the traditional forward calendar and roadshow route.

Among other such opportunistically timed and quickly marketed offering seen in just the past week were Spectrum Brands Inc.'s add-on deal that priced Wednesday; Tuesday's CNH Capital LLC; Monday's CSC Holdings and American Axle & Manufacturing Holdings, Inc.; Friday's Ford Motor Credit; and last Thursday's Oasis Petroleum Inc. issues.

A trader said that even while the market was open for the drive-bys, there conversely seemed to be no interest in any of the names, which have been sitting on the forward calendar, some for several weeks.

"No interest," he reiterated.

CSC seen steady

Among the recently priced offerings, Cablevision Systems Corp.'s new 6¾% notes due 2021 were seen by a trader on Thursday at 101½ bid, 102½ offered, up a little from the levels around 101 bid, 101¼ offered that had been seen on Wednesday.

The Bethpage, N.Y.-based cable system operator and professional sports team owner's $1 billion drive-by deal, which was radically upsized from the originally announced $500 million, priced late Monday at par via Cablevision's CSC Holdings unit.

They traded on Tuesday in a range from 99 7/8 bid, 100 3/8 offered to 100¼ bid, 100 5/8 offered, before moving up on Wednesday and Thursday.

Ford holds around issue

A market source saw brisk trading of more than $16 million in Friday's 3 7/8% notes due 2015 from Ford Motor Credit, making the bonds among the most active junk issues of the day.

The Dearborn, Mich.-based company's $1.25 billion drive-by deal was quoted at 100¼ bid, up from levels earlier in the week at 99 7/8 bid, 100 1/8 offered.

The financial arm of Ford Motor Co. had priced its deal on Friday at par.

Another trader said that parent carmaker Ford's 7.45% bonds due 2031 unchanged at 117½ bid, 118½ offered.

Jefferies gyrates lower

A junk-bond trader said the most interesting situation of entire day was neither the high-yield calendar nor was it MF Global.

It was Jefferies, as the New York-based investment bank's nominally high-grade ponds gyrated wildly, some of them trading down to levels normally associated with distressed debt.

But just like the company's shares, the bonds bounced off their badly oversold bottom levels.

A trader declared, "The bonds just got crushed."

He was referring to one issue: the 8½% notes due 2019, which fell as much as 23 points on the day from Wednesday's close above 103 bid. The notes went all the way down to 82 in intraday trading before coming back above 90 to close in the mid-90s, still down at least 8 points.

More than $50 million of those bonds changed hands.

Jefferies' issues were easily the most actively traded bonds of the day, with some racking up even heftier volume totals.

A market source said the company's 5 1/8% notes due 2018 zoomed to an astonishing $262 million traded by the time they closed at 88 bid.

Its shortest issue, the 7¾% notes due March 15, 2012, saw turnover of more than $124 million, ending around 98¾ bid, which was well down from week-earlier levels of about 1021/2. And that was down even from Wednesday's close at just below 101.

Shop till you drop

A high-yield trader said that those kind of movements - particularly among the shorter-dated paper - pushed yields up well above average junk yields, which currently hover a little more than 8%. This signals a possible buying opportunity.

"I spent a good portion of the morning talking to high-yield people, saying 'You gotta take a look at this,' " the market source said.

He said the company's 8½% notes due 2019 were closing around 95 to 96, after having traded as low as 82 earlier in the morning.

That low represented a yield of 12.17%, while the eventual close was still a hefty 9¼% to 9½% yield.

He saw the 6 7/8% notes due 2021 get as low as 85, or a 9.30% yield, while the bonds bounced off their lows to close at 87 bid for a 8.95% yield.

The 6.45% notes due 2027 were down to 77 at its low point, or a 9.27% yield. Its close at 79 yielded 8.98%. Unlike some of the other Jefferies bonds, these notes were not heavily traded with just one round-lot transaction seen all day.

Further out on the curve, Jefferies' 6¼% notes due 2036 hit a low of 74 bid on an 8.88% yield. The close at 78 bid yielded 8.38%.

In falling from recent levels, which for the shorter- and medium-term bonds were in most places at or above par, the market "went right by crossover, right by the mainstream high-yield guys," a source said.

Some Jefferies debt even hit the traditional benchmark for distressed issues, meaning spreads of more than 1,000 basis points.

For instance, a market source saw the March 2012 bonds' yield going home above 11½%, and with short-term Treasuries yielding practically nothing, a spread of almost 1,150 bps.

A trader characterized the latter bond as one of the most volatile in the whole capital structure, plunging as low as 86 bid during the day, though not on a large trade, before recovering to end in the upper 90s.

The bonds seemed to be moving in tandem with Jefferies' stock; its New York Stock Exchange-traded shares, which have been getting hit hard all week, fell as much as 20% in intra-day trading.

That was before coming off their lows, briefly moving into positive territory, then ending down 26 cents, or 2.12% on the day, at $12.01.

Volume of 45.8 million shares was nearly 18 times the norm.

While the stock managed to cut its losses, those shares still trade well below the nearly $15 level seen as recently as last Friday.

Punished by a perfect storm

As to what was hammering those bonds and shares down, a trader said it was a combination of factors, including market unease over whether Jefferies has any kind of substantial exposure to deeply troubled European debt.

The ratings downgrade on Thursday from the small but influential Egan-Jones agency, which rates the creditworthiness of financial companies, also had an effect.

A junk trader also mentioned Jefferies' prominent role as the lead underwriter on this past summer's $325 million bond issue by the beleaguered and now bankrupt MF Global Holdings Inc.

The trader cited investor fears that the investment bank might conceivably find itself "caught in the crossfire" of possible bondholder legal action against MF Global, which also faces severe regulatory and legal scrutiny over allegedly missing client funds.

A Jefferies spokesman on Thursday declined comment about the latter potential scenario.

But, the company has taken pains to reassure the markets that its exposure to MF Global and to Europe's sagging sovereign debt was small.

It said over the weekend that its exposure to MF Global was only about $9 million.

On Thursday, it put out several news releases outlining the limits of its exposure to the European sovereigns, explaining while it has long inventory of more than $2.684 billion, it also has offsetting short positions in such sovereign debt of $2.545 billion, as well as offsetting positions in futures instruments.

And the company said that among the sovereign issues of the economically weakest European nations - the so-called PIIGS consisting of Portugal, Ireland, Italy, Greece and Spain - it has just $3 million of exposure to Greece. And among the five countries, it has just combined net short exposure of about $38 million, or about 1% of the total value of Jefferies' shareholders' equity.

One of the factors giving Jefferies' stock, and presumably its bonds, a boost from their day's lows was an endorsement of sorts by prominent financial analyst Meredith Whitney, who told CNBC that the company is "conservative" in its outlook and should not be unfairly lumped in with the failed MF Global.

Among junk traders, opinion was mixed.

One trader said that while Jefferies was denying any major exposure to potentially bad debt, "When in doubt, people sell."

A second noted that the company's recent financial results were weak, which further spooked investors.

But a third trader said: "The people who were blowing out of these things today just panicked" and may have "thrown out the baby with the bathwater."

MF Global a little quieter

Back among the purely junk names, MF Global Holdings, which itself had been an investment-grade credit only about a week ago, was not as active as it has been of late, a trader said.

However, the bonds were seen moving lower.

Another trader said that the New York-based financial firm, which was downgraded to junk and driven into Chapter 11 this week after placing huge losing bets on European sovereign debt, still had good volume in its issues such as the 6¼% notes due 2016, which had recovered a little bit of ground during Wednesday's session, but was seen Thursday down 2 5/8 points, around 45½ bid.

He said the company's other bonds, including its 9% notes due 2038 and its two issues of convertible debt, were all "converging" around a 44 to 47 context.

Bon-Ton beaten down

Also lower were Bon-Ton Stores' notes. One trader said the York, Pa.-based retailer's 10¼% notes due 2014 lost as much as 11 points on the back of "cruddy numbers," falling to 75 bid.

Volume of more than $31 million was the heaviest among the purely junk issues, a market source said.

Bon-Ton fell after the retailer reported preliminary quarterly figures and lowered its outlook.

Kodak has negative numbers

Eastman Kodak Co. also reported disappointing earnings pm Thursday and indicated it was looking to secure as much as $500 million of loans to provide incremental liquidity.

Though there was little trading in the Rochester, N.Y.-based photographic products and digital imaging technology company's bonds, they were quoted weaker, according to traders. Its 7¼% notes due 2013 were in the lower 40s; and its 9 5/8% secured bonds due 2018 and 10¼% secureds due 2019 were in the 70s.

Stephanie N. Rotondo contributed to this report

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