Junk stumbles as stocks tumble; most issues off; CHC dives; Rock Ohio, Jeld-Wen shop deals

By Paul Deckelman and Paul A. Harris

New York, Aug. 2 - The much-ballyhooed debt-ceiling deal coming out Washington underwhelmed junk bond investors on Tuesday, and rather than waste time reveling in the fact that the United States will not default on its bonds and other obligations, high-yield market participants chose to follow the lead of stocks, which fell sharply on renewed worry about the weak economy.

Traders said that numerous junk issues were down pretty much across the board, with some losing multiple points, and statistical indicators were all obviously lower.

Notable losers included big, liquid names like Caesars Entertainment Inc. and the new HCA Inc. and Reynolds Group Holdings Ltd. mega-deals.

Besides the generalized sour sentiment, several issues suffered company-specific declines after releasing what was interpreted as bad news. MetroPCS Wireless Inc. got whacked on disappointing quarterly numbers, and CHC Helicopter Corp. fell to earth on the unexpected resignation of its chief financial officer.

While most issues were heading south, one of the few going in the opposite direction was the big new Ford Motor Credit Co. LLC deal from last week.

In the primary market, Rock Ohio Caesars LLC hit the road on Tuesday to market a $380 million seven-year secured deal, the proceeds of which will allow the gaming industry joint venture to develop two casinos in Ohio.

And Jeld-Wen, Inc., a maker of doors and windows for residential construction, is shopping $575 million of secured paper in connection with the announced sale of a majority stake in the company to Canadian investment firm Onex Corp.

Jeld-Wen launches $575 million

No new issues priced during the Tuesday primary market session.

Early in the day, there was news on the new issue front. Jeld-Wen launched a $575 million offering of seven-year senior secured notes (confirmed B3/expected CCC+). The deal is expected to price early in the week of Aug. 8.

Bank of America Merrill Lynch, Wells Fargo Securities LLC, Barclays Capital Inc. and KeyBanc Capital Markets Inc. are the joint bookrunners.

Proceeds, along with an investment by Onex Corp. and its affiliates, will be used to refinance debt and for general corporate purposes.

The issuing entity will be Jeld-Wen Escrow Corp., Inc., which will be merged with and into Jeld-Wen, Inc., a Klamath Falls, Ore.-based door and window manufacturer (see related story in this issue).

Rock Ohio starts roadshow

Rock Ohio Caesars began a roadshow on Tuesday for its $380 million offering of seven-year second-lien notes.

That deal is also set to price during the Aug. 8 week.

Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. are the joint bookrunners.

The issuing entities will be special-purpose vehicles ROC Finance LLC and ROC Finance 1 Corp.

Rock Ohio Caesars, a Cleveland-based casino entertainment company, plans to use the proceeds to fund the development of two casinos, Horseshoe Cleveland and Horseshoe Cincinnati.

Junk outperforming stocks

All three major indexes sustained declines of more than 2% on Tuesday. As the dust settled on the stock market in the United States, one high-yield mutual fund manager surveyed the financial landscape and found little to his liking.

"Once again you are hearing a lot of recession talk from investors," the manager said.

However, up until Tuesday, the high-yield market appeared to be on notably solid footing, the buysider said.

The Lipper high-yield index returned 5.21% for the year to Monday's close, the manager said. But the manager reckoned that the index sustained significant damage on Tuesday, possibly falling as low as 5% year-to-date.

At Tuesday's close, meanwhile, the year-to-date return for the S&P 500 index was negative 0.486%, the source added.

Swarmed with negatives

In addition to outperforming equities in year-to-date returns, the high-yield asset class has attracted cash, the manager noted.

Year-to-date cumulative flows to high-yield mutual funds total $4.3 billion in 21 weeks of inflows versus nine weeks of outflows, according to a Prospect News analysis of weekly reports from fund flow tracker Lipper-AMG.

"Flows for the present week are positive and were positive today," the mutual fund manager said on Tuesday.

"That could change," the manager warned, noting that there is a perception that fund managers are selling in anticipation of near-at-hand redemptions.

Stagflation not necessarily bad

One need not look far in the financial markets to discover catalysts for the negative sentiments that sparked Tuesday's stock sell-off, the fund manager said.

The markets anticipate spending cuts from the U.S. Government, which will constrict growth, the source said.

The debt of nursing home companies has already begun to drop on news of Medicare changes that are expected to reduce reimbursement rates to nursing facilities by 11.1% over the next fiscal year, the manager said.

Kindred Healthcare Inc.'s 8¼% senior notes due June 1, 2019, which priced at par on May 20, were holding in at the issue price at Monday's open but closed Tuesday at 91 bid, 92 offered.

In addition to government spending cuts, there remains abundant uncertainty about the sovereign debt of several distressed European Union member states, the fund manager added.

Also there is the perception that Chinese central bankers are bent upon ratcheting interest rates higher to slow the growth there.

"On top of everything else you have the uncertainty in Washington," the manager said, referring to the weeks-long political fight between the executive and legislative branches of the U.S. government regarding the debt ceiling.

That fight pretty much succeeded in snuffing out whatever consumer confidence still existed heading into summer, the buysider asserted.

"Put it all together and it's a recipe for stagflation," the junk bond investor reflected.

"But of course as we have seen in the past, high yield can perform fairly well in a stagflation scenario."

Debt deal is a dud

In the secondary arena, traders were pretty much unanimous that the compromise agreement to raise the federal debt ceiling and thus permit Uncle Sam to keep borrowing money to pay for an estimated 40% of Washington's ongoing expenses was anti-climactic. Most pundits and financial market observers had, in fact, correctly predicted that some kind of a deal would be worked out in order to keep the U.S. from technically defaulting by not making its bond payments. Recall that more than a month ago, in late June, the head of research for Barclays Capital, Larry Kantor, had predicted at a briefing for financial reporters that things would go right down to the wire and had asserted that "there's virtually zero chance that they actually default and don't make the payments." He also said at that time that even "if push came to shove and they didn't pass this, they'd choose to cut spending somewhere else."

Against this backdrop - that this outcome was widely expected anyway - a trader opined that "everybody has settled into that realization" that not much really came out of the debt-ceiling deal.

A second asked, rhetorically, "Guess we're not celebrating the new budget, are we?"

Yet another trader said flatly that Washington - despite the fact that they got something done - didn't exactly provide us, John Q. Public, with a "sense of confidence that those guys know what they're doing down there."

He continued that "as you kind of get through the one hurdle of the debt ceiling - and at the end of the day, I don't think there were really that many people that didn't think something was going to get done - it brings people's focus back to the economy, and it's a little uncertain at this point in time where growth is going to come from."

He theorized that "there's probably follow-through concern, in a sense, about the GDP report from last week, and on top of that the [Institute for Supply Management] report" on Monday.

On Friday, the government reported that the U.S. economy grew at a per-year pace of just 1.3% during the second quarter, well short of the 1.8% that economists were expecting - and it completely shocked the socks off Wall Street by revising the first-quarter growth rate down to 0.4% - only about one-fifth of the 1.9% growth rate the feds reported back in early May. That caused a number of economists to shop back their estimates for second-half growth.

As if that was not depressing enough, on Monday, the private Institute for Supply Management's widely followed estimate of manufacturing activity registered a reading of 50.9 in July - well down from 55.3 in June, down also from analyst estimates of about a 54 reading and only a little bit above the 50 reading that is the demarcation line separating a rising economy from a slowing one.

The weak economic numbers were seen as the catalyst behind the traumatic slide in stocks. The bellwether Dow Jones Industrial Average surrendered 265.87 points, or 2.19%, to fall below the psychologically important 12,000 mark and close at 11,866.62 on Tuesday. Other, broader indexes, like the S&P 500 and the Nasdaq, were off even more on a percentage basis.

Back in Junkbondland, a trader, with some understatement, declared that "the market got a little beat up. We all do invest in equities - and it's not pretty."

Market signs head lower

With stocks leading the way down, junk market measures likewise were on the slide.

A trader saw the CDX North American Series 16 High Yield index retreat 7/8 of a point on Tuesday to end at 99 bid, 99 1/8 offered after having lost 3/16 of a point on Monday.

The KDP High Yield Daily index plunged by 31 basis points on Tuesday to conclude the session at 75.13 after having risen by 4 bps on Monday. Its yield widened out by 11 bps, to 6.81%, after having come in by 1 bp on Monday.

And the Merrill Lynch High Yield Master II index lost a sizable 0.254% on Tuesday, wiping out Monday's hefty 0.227% gain and then some. It was the fourth loss for the index in the last five sessions, and it left the index's year-to-date return at 5.987%, down from Monday's 6.257% and down as well from its 2011 peak level of 6.362%, set last Tuesday.

'Seeing a correction'

One of the traders noted the psychological baggage of the disappointing debt deal and the weak numbers as well as other factors.

"It was a combination of things. The pendulum had probably swung too much in the other [i.e., bullish] direction from where we stood on an economic basis, and you're seeing a correction because of that."

On Tuesday, he said, "high-beta was down 1 to 2 [points] and more, in spots, and lower-beta was down ½ to 1 [point]. So there was definitely an amount of selling pressure on the high-yield market."

For instance, he said that the 10% notes due 2018 issued by the former Harrah's Operating Co. Inc. - the Las Vegas-based gaming giant now known as Caesars Entertainment - were trading down to levels as low as below 86 bid in afternoon dealings, a loss of almost 3 points from Monday morning.

At another desk, the bonds were seen going home at 86, which was estimated to be 3½ points down on the day. Nearly $45 million of the bonds traded, making it the most active purely junk-rated issue, although there was more trading in such split-rated crossover names that attract a lot of high-grade buyers like Anadarko Petroleum Corp. and CenturyLink, Inc.

"Your benchmark names saw the brunt of the selling," the trader said.

Other well-known high-yield names taking it on the chin on Tuesday, he said, included Dynegy Holdings, Inc., down 2 to 3 points, ATP Oil & Gas Corp., down a deuce, and Eastman Kodak Co., off 1 to 2 points.

"Everything was definitely softer," he concluded.

Another trader - in a twist on the old saw about how a rising tide lifts all boats - observed that "when the tide goes out, some are going out with the tide, and others are left stuck in the sand."

CHC Helicopter shot down

Maybe the biggest loser in the junk space on Tuesday was CHC Helicopter's 9¼% senior secured notes due 2020.

A market source saw the Richmond, B.C.-based helicopter services company's bonds lose altitude all the way down to 80 bid, 82 offered, versus their closing level Monday of 89½ bid, 90½ offered.

Besides the drag on junk bonds generally because of the down market, the source also noted that investors were surprised and dismayed by the company's announcement Tuesday that its executive vice president and chief financial officer, Rick Davis, will step down from those posts immediately. No explanation was given for his departure, although the announcement said that he will assist with the transition. Doug Yakola, a senior adviser at McKinsey & Co., will assume Davis' finance responsibilities on an interim basis while the company looks for a permanent replacement.

MetroPCS gets mauled

Unexpected bad news of another sort helped to push MetroPCS Wireless's 6 5/8% notes due 2020 down 3 points on the day, a trader said: the weak second-quarter numbers the Dallas-based pre-paid wireless service company reported on Tuesday.

Another market source, seeing the bonds ease to 99¾ bid, called it a loss of between 1 and 2 points. Almost $20 million of the bonds changed hands, making it one of the most actively traded junk issues.

MetroPCS reported that its net income for the quarter rose to $84 million, or 23 cents a share, from $80 million, or 22 cents a share, in the year-earlier period. However, Wall Street was looking for earnings in the range of 29 cents to 30 cents per share.

Sales for the quarter came in at $1.21 billion, less than the $1.23 billion analysts expected, while its rate of monthly churn, or lost customers, rose to 3.9% percent, well above the roughly 3.3% figure analysts had predicted.

New deals trade down

Traders noted that two of the huge new deals that priced last week had come in as investors took advantage of their liquidity and sold them out in line with pretty much the rest of the market.

A trader noted that Reynolds Group Holdings' 7 7/8% senior secured notes due 2019 dropped down to just a little bit above their issue price, trading at 99 7/8 bid, 100¼ offered. The New Zealand-based maker of Reynolds Wrap aluminum foil and other consumer packaging products priced its $1.5 billion of those notes last Tuesday at 99.268 to yield 8%, and they had immediately jumped to levels around 102 bid, 102½ offered. They then came down from those peaks to hold just a little bit above par by the middle of last week. By the end of last week, they had blipped back up to above the 101 level.

He saw the same up-and-down trajectory in the company's upsized $1 billion offering of 9 7/8% senior unsecured notes due 2019, which priced last Tuesday at 99.318 to yield 10%, then had gotten almost to 102, came back down and went back up to end the week around 101. They came back in on Tuesday to end at 99¼ bid, 99 5/8 offered.

"Everything came in today, with Treasuries going to the moon and stocks falling," he noted.

He also saw HCA's $3 billion of 6½% senior secured first-lien notes due 2020 having fallen by 1 point to the par level on volume of $40 million - one of the most active junkers of the day.

Those bonds, which priced last Tuesday at par, had initially not gone very far but then firmed to 101½ bid, 101¾ offered by the end of last week before giving up those gains on Tuesday.

The Nashville-based hospital operator's $2 billion issue of 7½% senior unsecured notes due 2022, which had also priced at par last Tuesday and then moved up to straddle 101 on Friday, were likewise lower on Tuesday, at 99 3/8 bid, which the trader said was down 1½ points.

Ford hangs in there

The exception to the rule was Ford Motor Credit's $1 billion offering of 5 7/8% notes due 2020, which priced at par last Wednesday and then proceeded to slowly crawl higher, getting to about 100½ bid, 100¾ offered on Friday.

In Tuesday's dealings, a trader saw the bonds having breached the 101 level, at 101 bid, 101 1/8 offered, which he called up one-eighth point to one-quarter point, on brisk trading of $17 million.

A second trader also saw the new Ford Credit bonds at that level but suggested that the movement was probably largely due to the strong upward move in U.S. Treasury issues, causing their yields to fall and widening the spreads with corporate bonds such as Ford. He said that such a movement would make the bonds attractive to those investors who trade issues on a spread basis.

© 2015 Prospect News.
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