Junk market soldiers on despite stock swings; Crown Castle, other new deals seen firmer; NOVA rebound continues

By Paul Deckelman and Paul A. Harris

New York, Jan. 23 - The junk bond market was seen unchanged to off slightly in restrained trading on Friday as market participants stepped back to catch their breath after another busy week which saw junk pretty much able to withstand the gyrations of the stock market, sent on wild swings by investor worry about the rapidly eroding fortunes of the banking system and anemic corporate profits, topped off by Friday's disappointing numbers from the mighty General Electric Co.

Much of the junk market's attention on Friday - as has been the case for most of the holiday shortened week - was focused on the quartet of new issues which priced on Wednesday and Thursday. The $2 billion of new paper made this easily the biggest high yield week since spring 2008.

With those issues having successfully priced, players tracked their progress in the secondary markets - where the new bonds of Crown Castle International Corp., Petrohawk Energy Corp., Tennessee Gas Co. and Nielsen Finance LLC/Nielsen Finance Corp. were each seen trading above the levels at which they had come to market.

Apart from the new deals, there was further volatility in the bonds of NOVA Chemicals Corp., which first fell sharply on investor worries about the company's liquidity position, concentrated on a tranche of bonds set to mature on April 1, and which then recovered smartly after the Calgary, Alta.-based chemical manufacturer reassured the financial world that its liquidity and credit facility availability were more than sufficient to meet its coming obligations.

Market indicators modestly lower

The widely followed CDX High Yield 11 index of junk bond performance, which lost ¼ point on Thursday, was off by another ¼ point on Friday, a trader said, quoting it at 74 3/8 bid, 74 7/8 offered. The KDP High Yield Daily Index declined by 21 basis points to 53.98, while its yield widened 2 bps to 13.67%.

In the broader market, advancing issues continued to trail decliners, which widened their margin to around nine to seven. Overall market activity fell 23% from the levels seen in Thursday's session.

A trader said that it seemed the junk market "started out a little softer. Equities opened up a couple of hundred [points] down, and they've been climbing back all day, so our market opened up down."

Apart from the rash of new issues, which were seen firmer pretty much across the board, he called the rest of the market "situational - very situational." He said that "for the most part, guys are looking for solid credit stories at a discount, as cheap as they can buy them."

Going further down the credit ladder, he said, to "the CCC stuff, the real distressed-type names have few buyers - a lot of guys are looking, but there's not a lot of buying. But even that stuff is starting to trade a little better."

"Overall, although I see some negatives here," another trader said, "some downward pressure on some selected names, I think overall. High yield is really performing well considering how weak the stock market is, as far as the concern over our banking system.

"Obviously, the new issue pops are evidence on their own, but there's strength in other issues as well."

New issues take center stage

A trader said that the new issues "have really been the focus this week, you've had a series of deals." He noted that it's been "almost a year since we've had this kind of new-issue activity, and people are taking advantage. There are lots of guys out there, and lots of cash on the sidelines and a lot of guys looking to get involved in these new issues." He called trading in those new bonds "very volatile."

New Crown Castle bonds trade actively

He said that the new Crown Castle 9% notes due 2015, an upsized $900 million of which priced on Thursday at 90.416 and then traded as high as 94 later in that session, "opened up this morning at 93.5-94 and traded all the way down to 92.75," before coming off their lows to end around 94 bid, 94.5 offered. 'They came roaring back with the market."

Another trader saw the Houston-based communications antenna operator's new 9s extremely actively traded on the session, estimating that turnover was some $98 million - more than any other junk issue. He saw the bonds having moved up to a closing level of 94 bid from 93.5 at Thursday's close.

"It was very interesting how Crown Castle went up," and on such busy volume, he noted, chalking it up to overall market enthusiasm for the whole wireless telecommunications sector, since those wireless companies are absolutely dependent upon tower companies like Crown Castle to get their signals out.

At yet another desk, a trader saw the new bonds get as good as 94 bid, 95 offered late in the session.

Petrohawk grinds higher

A trader who had observed Crown Castle's mostly higher gyrations saw the "same thing:" going on with Petrohawk Energy's 10½% notes due 2014, an upsized $600 million of which priced Thursday at 91.279 bid, and then got as good as 92.5 bid, 93.25 offered. On Friday, he said the new bonds "retreated below issue bid," before firming off those lows to finish around 92 bid, 92.5 offered, "so they had a recovery as well."

Another trader saw them at 92.25 bid, 93.25 offered.

However, a third quoted the Houston-based independent oil and gas exploration and production operator's new bonds at 91.125 bid, 92 offered, and opined that the issue was "not a stellar performer" like the Crown Castle bonds.

New Nielsens not gaining

The trader also said that the new Nielsen 11 5/8% notes due 2014, an upsized $330 million of which had priced on Wednesday at 90, were likewise "not very stellar"; he quoted them at a wide 90 bid, 91.25 offered.

Those bonds had managed to get as high as 92 bid, 93 offered in Thursday's secondary dealings, and a second trader who quoted them at 91 bid, 91.5 offered, called them "off the highs, but still holding in."

Yet another trader saw the New York-based media information company's issue trading Friday at 90.25 bid, 91.25 offered, not too much above issue price.

Tennessee Gas takes off

Moving up a little on the quality scale, a trader saw "nothing but buyers" for the new split-rated 8% notes due 2016 issued by Tennessee Gas Pipeline, a unit of Houston-based El Paso Corp. Some $250 million of those bonds were priced Thursday at 94.881 and proceeded to move as high as 97.5 bid, 97.75 offered in initial aftermarket dealings. "They opened up, they stayed up, and they're just 98 bid out there, several points above issue."

Another trader also saw the energy pipeline company's new bonds at 98 bid, 99 offered, well above their issue price, although a third said that he had seen no dealings in the new credit during the session.

NOVA Chemicals remains volatile

Back among the established bonds, a trader said that "we saw NOVA Chemicals trade - there have been just a few sellers around" in Friday's market.

He saw the 7.40s, which had fallen earlier in the week on the grounds that "there were question as to whether they would be able to fund the takeout of those bonds when they mature in April. So there's a lot of confusion and misunderstanding, I think, about how much cash and how much [credit facility] availability."

He estimated that the company might have "close to $750 million in availability."

Those bonds, he said, had traded down over the previous several sessions - from levels close to 90 at the start of the week, all the way down to the low 60s on Wednesday and then on Thursday "they rocketed back to around 80," and were seen continuing upward from that point in Friday's dealings.

A second trader saw those bonds get as good as 83 bid on the session - he noted that represented a 122% yield to maturity - well up from the 80 level at which they had gone home on Thursday.

It was, he said, "really the only issue to show a jump in the multiple points on active dealings" - all other issues tending to the upside were up only fractionally, he said,."

A market source at another desk quoted the bonds trading above the 81 level, up more than a point on the day.

The first trader said that "we traded them on the way down, and we traded them on the way back up," he said. "For the most part, because they're a Canadian company, they had mostly Canadian buyers at lower levels - you've got to know the credit."

He meantime saw the company's other bonds, like its 6½% notes due 2012, "the longer issues, were trading in the 30s," in a 37-38 context.

The company said late Wednesday, after the bonds and its New York Stock Exchange-traded shares were decimated by market worries over its liquidity and debt position, that it had approximately $575 million of available liquidity as of Dec. 31, 2008, when its most recent quarter ended - more than enough to redeem the $250 million of outstanding 7.40% bonds. The company also said that it "continues to have full access to its credit facilities."

Apart from Nova, a trader said that generally, the sector "remains under pressure - the chemicals have just been getting clobbered, with oil prices going from $140 [per barrel of crude, seen over the summer] to the lower $30s, and now with the [NYMEX futures] contract changeover, they're right at $40."

It seems counterintuitive to cite the slide in oil prices as a negative factor for the petrochemical producers, since a rising price for oil threatens to shut the less well-positioned companies off from their supply of vital raw material. But he explained that "a lot of these guys have hedged positions [in oil] and own stuff at significantly higher prices."

Apart from that, he said, "a lot of these chemical companies have been under a tremendous amount of pressure, particularly with this recession and lower manufacturing activity and everything that goes along with it.

"It's really put a damper on the entire sector," which in addition to NOVA Chemicals' troubles has recently seen bankruptcy filings for Lyondell Chemical Co., a unit of LyondellBasell Industries AF, and Tronox Inc.

Rite Aid heading the wrong way

Apart from the NOVA Chemicals saga, a trader saw Rite Aid Corp.'s 10 3/8% notes due 2016 trading at 70 on a round-lot basis versus 72 on Thursday, on volume of $6.5 million. The Camp Hill, Pa.-based drugstore chain operator's 8 5/8% notes due 2015 were seen down more than 2 points to 32 bid.

Rite Aid, another trader said "was down a couple" of points, with its 6 7/8% notes due 2013 three-point losers at 22 bid, 25 offered.

Rite Aid retreated following the company's announcement that it is working on getting a new accounts receivable securitization loan, according to a market source, while another source argued that a downgrade from Moody's Investors Service "hurt more" than news of the new debt.

On Friday, Rite Aid revealed in an 8-K filed with the Securities and Exchange Commission that it has received a commitment for an up to $200 million second-lien accounts receivable securitization term loan due Sept. 14, 2010.

Proceeds will be used to provide funding for the acquisition of receivables. In addition, the company announced that it amended its existing receivables financing agreement, extending the commitment for 364 days until Jan. 21, 2010.

Citigroup is the lead arranger and bookrunner on the deal, and has committed to provide $100 million of the loan, while the remaining $100 million will be syndicated on a best efforts basis. After the news, Moody's said that it downgraded Rite Aid's corporate family ratings to Caa2 from Caa1, with a negative outlook, and its first-lien credit facility to B3 from B2.

The ratings agency said that the downgrade acknowledges the near to medium term pressures that Rite Aid's liquidity faces should it be unable to generate very significant improvements in its free cash flow and reflects the opinion that the current capital structure is "likely unsustainable at the current level of operating performance."

Moody's went on to say that it expects availability under Rite Aid's $1.75 billion asset-based revolver "will continue to erode unless the company is able to significantly reduce its free cash flow deficits through improvements in working capital and operating performance."

In addition, the newly revised corporate rating considers that the company's revolver and $145 million term loan mature in September 2010 and that, "given the current state of the credit markets, Rite Aid faces potential difficulties in refinancing these facilities," Moody's concluded.

Hovnanian up despite analyst's slam

A trader saw Hovnanian Enterprises Inc.'s 6 3/8% notes due 2014 at 28.5 bid, up about 2 points on the day. At another desk, the builder's 8% notes due 2012 were up 4 points at 38 bid.

The rise was all the more startling because a prominent analyst had predicted that the Red Bank, N.J.-based company - hard hit by the current downturn in homebuilding - was in potential danger of going out of business "absent a miracle" bolstering its equity and cash reserves

Analyst Vicki Bryan of the Gimme Credit investment research service made that dire prediction in a note on Friday, warning that while builders like Hovnanian "generated billions of dollars in tax refunds, asset sales and in savings by not buying land for development" last year, "there lucrative sources will not be available on the same scale this year, and there is little room to cut costs as revenue declines further."

Bryan said that Hovnanian and sector peer Beazer Homes USA Inc. "could fail in 2009 absent a miracle, and soon, that would shore up cash and equity."

Hovnanian in a statement said that it was not in trouble and has sufficient cash and only $100 million of debt coming due before 2012.

There was no immediate response from Atlanta-based Beazer.

$1.66 billion week

New issuance for the Jan. 19 to Jan. 23 week totaled $1.658 billion in three dollar-denominated, junk-rated tranches, topping the previous week's $1.38 billion equivalent.

In a year-over-year comparison with the opening weeks of 2008, the new year is off to a conspicuous start, sources say.

According to Prospect News data, dollar-denominated high-yield issuance for 2009 to Friday's close comes to $3.366 billion is six tranches, far surpassing the $850 million that priced in two tranches in 2008 to the Jan. 23 close.

The Thursday session saw Crown Castle International Corp. price the biggest deal in over half a year: a massively upsized $900 million issue of 9% six-year senior unsecured notes (B1/B) that came at 90.416 to yield 11¼%. It was increased from $600 million.

That was the biggest corporate deal since May 7, 2008, when DirecTV Holdings LLC and DirecTV Financing Co., Inc. priced a $1.35 billion.

Risk appetite resurfacing

In addition to the B1/B Crown Castle deal, the Jan. 19 week saw Petrohawk Energy Corp. price a $600 million B3/B rated offering of 10½% senior notes due Aug. 1, 2014, and Nielsen Finance LLC and Nielsen Finance Co. complete a Caa1/B- rated $330 million issue of 11 5/8% notes.

Hence it is difficult to escape the conclusion that these comparatively low-rated deals - albeit from sectors that are perceived as defensive, such as towers, energy and media ratings - indicate the re-emergence of an appetite for risk.

"There's all kinds of cash out there," a hedge fund manager commented, agreeing that the risk-appetite increased over the past four sessions.

A high-yield syndicate official also saw that increased appetite for risk.

"Participants should be cautious about piling into these deals," the official warned.

"I know that cash is building up pretty quickly, but I would hate to see the market get ahead of itself."

The week ahead

The final week of January gets underway with just one deal on the forward calendar.

Landry's Restaurants, Inc. is marketing a $270 million offering of senior secured notes due 2011. The roadshow will end during the week of Feb. 2.

Jefferies & Co. is the bookrunner for the debt refinancing and general corporate purposes deal.

Aside from Landry's, only one company has specified an intention to sell junk bonds in a deal expected to come in the near term.

Intelsat Subsidiary Holding Co., Ltd. has announced plans to fund a cash tender for two series of outstanding notes with an offering of new senior notes.

The early participation date for the tender is Jan. 28, and it expires on Feb. 11.

The deal is expected to be sized at $200 million and to be led by Goldman Sachs.

Pressed for other names on Friday, sell-side sources turned out empty pockets. However the drive-by primary market is expected to be at least somewhat active, sell-siders say.

Quick-to-market deals represent four of 2009's six dollar-denominated tranches. Of the issues priced thus far in the new year, only Fresenius US Finance II Inc. and MetroPCS Wireless took their deals on the road.

Finally, although HCA, Inc. has been expected to show up in the near term with a deal driven by reverse inquiry, a buy-side source familiar with that situation told Prospect News that HCA has no intention of paying a double-digit yield.

That likely freezes the company out of the present primary market, the source added.

HCA would do a deal in the 8% range or the 9% range, the buy-sider said.

However the reverse inquiry was predicated upon a rate of 12%.

Stephanie N. Rotondo and Sara Rosenberg contributed to this report.

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