Pre-holiday primary silent, new deals trade up in firm market; Nortel sizzles as Kodak fizzles

By Paul Deckelman and Paul A. Harris

New York, July 1 - The third quarter, and second half of 2011 officially got under way on Friday, but it did so not with a bang, but a whimper, at least on the primary side.

There were no pre-July 4th fireworks to be seen in the new-deal arena, with the immediate forward calendar having pretty much been cleared on Thursday with the pricing of restructured deals from inVentiv Health, Inc. and Lawson Software, Inc./SoftBrands, Inc.

Those offerings, along with transactions earlier in the week from the likes of Crown Media Holdings, Inc., National CineMedia, Inc. and Canada's Husky Injection MoldingSystems, Ltd., brought total issuance for the week to around the $2 billion level, making the week easily one of the slowest this year.

But while new-deal players pretty much snoozed, secondary junk marketeers cruised.

The aforementioned new deals for the most part continued to trade well up from their respective issue prices - especially Lawson, heard to have jumped 5 or 6 points in the aftermarket.

Overall, the secondary market shrugged off Thursday's news of yet another big outflow in high yield mutual funds - seen as a key proxy for overall Junkbondland liquidity trends - and performance indicators pointed solidly higher.

The big winner on the day was Nortel Networks, Corp., whose bonds soared as much as 10 points on the results of the auction for the bankrupt Canadian communications equipment manufacturer's portfolio of valuable patents, with far more money for the bondholders and other creditors raised than initially expected.

But Eastman Kodak Co.'s bonds and shares shrank, as the photographic products and digital imaging company failed to win a victory in a patent-infringement case it brought against several smartphone makers, instead getting only an inconclusive judicial ruling, at least for now.

One small euro deal

The high-yield primary market became a ghost town on Friday, a syndicate official said.

With the ranks of dealers and investors thinned by the pending three-day weekend in the United States, no issues were priced.

One deal popped onto the radar screen, a small euro-denominated offering from a German candy-maker.

Katjes International GmbH & Co. KG will begin a subscription period on Monday for a €30 million offering of 7 1/8% five-year fixed-rate notes (Creditform BB+).

IKB Deutsche Industriebank is managing the deal.

Proceeds will be used to fund potential acquisitions, repay shareholder loans and pay down debt.

The deal is likely being steered to retail investors, according to a source who works on a London syndicate desk.

$2 billion week

"Volatility" turned out to be the watchword of the June-July crossover week.

Sources remarked on the rollercoaster ride that European Union credit took as bankers and finance ministers wrestled with the persistent difficulties of Greece's sovereign debt.

Another factor - this one positive, however - was the release of 60 million barrels of crude oil by the United States and the International Energy Agency on June 24, a high-yield mutual fund manager said.

Despite the volatility, the primary market saw $2 billion of issuance in six junk-rated dollar-denominated tranches.

That was the third-lowest weekly dollar amount of issuance so far in 2011, and it leaves the year-to-date issuance total at $192 billion in 433 tranches as of Friday's close.

CMS Energy: a drive-away

Most of the week's completed transactions generated plenty of chatter around the market, but little in the way of official color.

A couple of them, in particular Thursday's Lawson Software deal, became the subject of intense negotiations between the bond investors, the bank loan investors and the dealers, according to a mutual fund manager who took part in those negotiations, and who spoke on background.

Although Lawson ultimately got it deal done, the yield on the $560 million issue was 13¼%, 175 bps beyond the wide end of the original 11¼% to 11½% price talk.

However it was a deal that didn't get done that was on the mind of a debt capital markets banker who fielded a Friday telephone call from Prospect News.

On Monday, June 27, CMS Energy Corp. launched a $180 million offering of non-callable 10-year senior notes (Ba1/BB+), then postponed the deal around midday due to adverse market, the banker recounted, calculating that it could not have been in the market for much more than three hours.

The deal came via BNP Paribas, Mitsubishi, RBS, SunTrust and UBS Investment Bank, an entirely different syndicate from the one which ran a transaction on May 9 that saw CMS Energy walk away with an astonishing 2¾% coupon on its $250 million of senior notes due May 15, 2014 (Ba1/BB+/BB+).

The earlier deal, which priced at a 185 basis points spread to Treasuries, was led by Barclays, Citigroup, Deutsche Bank, J.P. Morgan and Bank of America Merrill Lynch.

Both deals, despite their speculative-grade ratings, were transacted on the investment-grade syndicate desks, sources said.

When CMS returned to the market at the beginning of the past week the 2¾% paper, which priced on May 9, was trading with an implied yield in the low 4% range, said the debt capital markets banker.

Although no price talk circulated on the postponed June 27 deal, the whisper which moved around the market before it was pulled was in the mid 4% context.

"Why, when you get what must be a record coupon on a deal in May, do you come back in June with a new deal run by an entirely different team of underwriters?" the banker wanted to know.

A Friday call to the company, seeking an answer to that very question, went unanswered.

The CMS Energy 2¾% notes due 2014, which priced at Treasuries plus 185 bps, were trading Friday at 190 bps bid, according to hedge fund manager who calculated that the implied yield was approximately 3.7%.

A healthy pipeline, but...

When players resume their places on Tuesday following the holiday, they will be looking at a forward calendar that is notably sparse.

That could easily change, a syndicate banker said on Friday.

"Everybody knows that there is a healthy pipeline," the banker said.

"What we need is a sustained period of stability."

Against the backdrop of volatility in late June, recent issues have performed okay, given the circumstances, the source said.

However investors are unlikely to sell recent deals at a loss in order to make way for a new calendar.

In order for the new issue market to really get its legs those recent deals are going to have to improve to their issue prices and at least a little bit beyond, the banker said.

Lawson leaps in secondary

A trader said that the new issues that priced during the week "did OK" - and a case in point was Lawson Software's new 11½% seven-year senior notes, which had priced late in the session on Thursday at 92.143 to yield 13¼%, well outside of the original price talk of 11¼% to 11½%.

The trader quoted the new bonds as having done "extraordinarily well, up quite a bit," in moving up to the 98¼ level.

"Wow!" another trader exclaimed. "They really DID move up." He saw the bonds - which had seen no aftermarket on Thursday, owing to the lateness of the hour at which they priced - as having opened in early morning dealings on Friday at 95½ bid, 96½ offered, and then having continued to firm as the day wore on to 98 bid, 99 offered

Price talk on the $560 million offering had come out back on Tuesday, and a pricing was a possibility then, but the deal did not come at that time, or on Wednesday; instead negotiations between the company, its underwriters and bond and bank loan investors carried on into Wednesday night, before the deal was finally set in stone on Thursday.

The bonds priced after the deal was chopped down from an eight-year issue, as originally announced, to seven years, and covenant changes were made.

The deal's official issuers are SoftBrands, Inc. - like Lawson a software company - and Atlantis Merger Sub Inc., which will be merged into Lawson when St. Paul, Minn.-based Lawson is acquired by GGC Software Holdings Inc., an affiliate of Golden Gate Capital and SoftBrands parent Infor Global Solutions, in a $2 billion deal partially funded with the bond-issue proceeds.

inVentiv is up

Thursday's other new deal - for inVentiv Health, Inc., a Somerset, N.J.-based provider of clinical and consulting services to the healthcare industry - was also seen on Friday doing a brisk business at higher aftermarket levels.

A trader saw its $390 million issue of 10% senior notes due 2018 at 97½ bid on Friday, up about ½ point from where they had ended on Thursday.

A second trader pegged the bonds at 97 7/8 bid, 98 5/8 offered.

Those bonds had priced at 95 to yield 11.031%, at the rich end of the 94 to 95 price talk, and had gotten as good as between 96½ and 97 in Thursday's secondary trading.

The inVentiv deal was originally shopped around the market as an eight-year issue maturing in 2019 - but the company abandoned that plan and instead opted to make its new deal a mirror tranche to its existing $275 million of 10% 2018 notes, which priced a year ago. The new bonds will carry the same terms as the original issue but are non-fungible with those bonds.

Proceeds from the deal will help fund the acquisition of PharmaNet Development Group, a Princeton, N.J.-based provider of drug development services.

Wednesday deals hold gains

Looking at the deals which priced during Wednesday's session, a trader said that Crown Media Holdings, Inc.'s 10½% notes due 2019 were "trading like a hot IPO."

The Studio City, Calif.-based cable network operator's $300 million issue priced at par on Wednesday and those bonds had hit the aftermarket trading at 101½ bid, 102 offered, before moving up to 103 bid, 103½ offered.

On Friday, the trader saw the bonds still trading at lofty levels, quoting them at 103¼ bid, 104 offered.

A second trader had them at 103¼ bid, 103¾ offered.

One of the traders also saw the new 7 7/8% notes due 2021 issued by National CineMedia, LLC at 101 7/8 bid, 102 3/8 offered on Friday.

The Centennial, Colo.-based company, which digitally distributes advertising and entertainment content to more than 1,400 movie theaters in the United States, priced its $200 million issue at par Wednesday, too late for any aftermarket dealings that session. They moved up in Thursday's aftermarket to above the 101 level, and continued to firm from there.

Traders on Friday saw no dealings, though in another Wednesday offering - Husky Injection Molding Systems' 10½%/12½% cash/payment-in-kind toggle notes due 2019.

The Canadian company, which produces machinery used by the plastics packaging industry, priced its $570 million issue at par on Wednesday, but was not seen initially trading around.

They were quoted on Friday at 100 1/8 bid, 100 5/8 offered.

Firmer market seen

A trader opined that "we really had a good day today. The market was really hoppin' away," extending the gains seen earlier in the week, and especially during Thursday's strong session.

Even more notable, was the fact that the upturn and the stronger levels in both the new-deal market and existing, established secondary bonds came "despite those inflows."

Market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI, which circulate on Thursday afternoons, said that in the week ended Wednesday, $321 million more left those weekly-reporting funds than came into them.

It was the fifth consecutive week in which net outflows were seen, although the latest week's downturn was only a small fraction of the breath-taking $3.43 billion cash hemorrhage seen the week before, ended June 22

Market signals up on day, week

Statistical measures of market performance - which on Thursday continued to show the strength seen on Wednesday - extended that trend on Friday, and for the first time in a number of weeks were up versus their levels on the previous Friday.

A trader saw the CDX North American Series 16 HY Index jump by 11/16 on Friday to end at 102¼ bid, 102 3/8 offered, on top of the 13/16 point gain on Thursday. The index also ended well up from its week-earlier close at 99 7/16 bid, 99 9/16 offered.

The KDP High Yield Daily Index gained 9 basis points on Friday to finish at 75.15, after having zoomed by 26 bps on Thursday. Its yield fell by 2 bps to 6.85%, on top of the 9 bps decline seen Wednesday. For the week, the index showed improvement from 74.72 the previous Friday, when the yield was 6.99%.

And the Merrill Lynch High Yield Master II Index showed its third consecutive gain on Friday, up by 0.142%, on top of Thursday's 0.408% advance, the biggest single-day gain this year. That lifted its year-date return to 5.082% - the first time the cumulative return figure has been above the psychologically potent 5% mark since June 13. It was up from 4.933% on Tuesday, though still well down from its year-to-date peak level of 6.071%, which was reached on May 20.

The index was up on the week by 0.726%, the first week in the last six which did not see a Friday-to-Friday decline.

Nortel is hot...

Among specific issues, a trader in distressed-debt paper said that Friday's session was "pretty quiet - it seems like all Nortel today!"

He saw the bankrupt Canadian telecommunications equipment maker's 10¾% notes due 2016 and 10 1/8% notes due 2013 jump to a 107-108 context from Thursday's closing levels around 96 bid, 97 offered, following the news of the results of the auction for the company's patents, which was won by a consortium willing to pay $4.5 billion - far more than the original $900 million bid by Google. Among the participants in the winning group are such high-tech heavyweights as Apple Inc., Microsoft Corp., Ericsson, Sony and Research in Motion.

After peaking around 107, he said that the bonds were "settling in" around 105 bid.

He said there was "a lot - lot, lot, lot of trading, huge size, all day long." There were "just pages and pages of quotes."

The bonds "went up by 10 points to around 106-107ish, now they're finishing around 105, still up 9 points."

He also saw the company's convertible issues, like the 1¾% notes due 2012 and 2 1/8% notes due 2014 move up on the news from their late-Thursday levels around 91 bid, 92 offered. He said that the bonds hit a high around 97-97½ but were ending up 4 or 5 points in the 95-96 area.

"There was a bunch trading in all of these," he said. "Everything else looks pretty meager.

"Nortel overshadowed everything. They're big issues and it was a big move. So that's why I am seeing pages and pages."

A second trader said that Nortel was "trading like crazy, up 10 points, then they backed off,"

He saw the bonds going out at 105¼ bid, 105¾ offered, down from highs at 1071/4.

He said the bonds had traded earlier in the week at 94½ "so they moved up quite a bit."

...but Kodak is not

On the other hand, Eastman Kodak's debt dropped Friday following a late Thursday ruling from the U.S. International Trade Commission on the company's patent infringement case against Apple Inc. and Research In Motion Ltd.

"They were definitely lower but I didn't see any real trading," a trader said. He noted that the "converts were off a good bit," with the 7% convertible notes due 2017 falling about 7 points to the low 80s.

The 10 5/8% notes due 2019 meantime dipped "a couple points" to be quoted in the mid-90s.

Another trader said he was seeing "real wide markets" for the Rochester, N.Y.-based company's bonds.

He saw the 7¼% notes due 2013 trade at 91, down from 94 bid, 95 offered on Thursday.

"Right out of the gate, you saw low bids and wide markets," he said. Initially, the issue was quoted at 88 bid, 96 offered, then 90 bid, 95 offered. "Then it started to tighten up a little" to 91 bid, 95 offered.

Still, he said, trading was thin.

The case has to do with a patent that relates to a method invented by Kodak for previewing images, which was validated by the U.S. Patent and Trademark Office in December 2010. Kodak initially filed an ITC complaint against Apple and RIM on Jan. 14, 2010, asserting that Apple's iPhones and RIM's camera-enabled Blackberry devices infringe a Kodak patent covering technology related to a method for previewing images.

In its ruling Thursday, the ITC elected to "affirm in part, reverse in part, and remand in part," the final initial determination issued by the presiding administrative law judge on Jan. 24.

The panel did find in favor of Kodak on certain issues, such as "the meaning of the patent term 'at least three different colors,'" Kodak said in a statement. "The commission agreed with Kodak that all of Apple and RIM's accused phones infringe this term."

"We are gratified that the commission has decided to modify in our favor the judge's initial recommendation," said Laura G. Quatela, general counsel, chief intellectual property officer, in the statement. "As we have said from the start, we remain extremely confident this case will ultimately conclude in Kodak's favor."

A final ruling target date of Aug. 30 has been set.

Stephanie N. Rotondo contributed to this report

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