Junk in strong rebound, led by ATP, other high-beta names; Kinetic Concepts upsizes offering

By Paul Deckelman and Paul A. Harris

New York, Oct. 5 - After being pounded around for a week, the high-yield market got its bearings and staged a strong rebound on Wednesday.

Traders said that the same volatile high-beta names which had been leading the way steadily downward over the last few days were leading everyone back up on Wednesday - credits like ATP Oil & Gas Corp., Eastman Kodak Co. and the old Harrah's Entertainment Operating Co., now known as Caesars Entertainment Corp.

Some of the recently priced new issues were also seen better on the day as they firmed from the lows to which they had fallen on Tuesday, including HCA Inc., Newfield Exploration Co. and Bill Barrett Co.

In the new-deal arena, syndicate sources heard that Kinetic Concepts Inc. had upsized the bond deal supporting the medical technology company's coming leveraged buyout to $2.55 million, with the company expected to hit the road next week to market the transaction to prospective investors.

They also heard that healthcare administrative services provider Emdeon Inc.'s planned $750 million bond deal will largely be taken down by just one investor, with the other half of the deal to go to the market.

Statistical indicators of junk market performance were up across the board for the first time in more than a week.

Still no new issues

Despite an improved overall tone in high yield, Wednesday's session saw no activity in the new issue market.

The newly rolled CDX 17 HY index ended 1 to 1¼ points higher on the day, according to various sources.

Cash bonds were unchanged to perhaps slightly better, according to a debt capital markets banker.

"Things are mixed," said a syndicate official, heading into the New York noon hour.

"Everyone is still scared. But with the massive sell-off we've seen over the past two days people are more willing to step in."

The fund flow picture remains negative, according to an investment banker who added that mutual funds sustained $210 million of outflows on Monday. The banker was relating fund flow data which he said had been reported late Tuesday by EPFR Global.

The banker expects weekly fund flows numbers, due to be reported on Thursday, to be negative, but not massively so.

Emdeon halves 'public' offer

Again on Wednesday primary market activity unfolded behind the scenes.

The launch of Emdeon's proposed senior notes offering is near at hand, according to a syndicate source, who added that the bonds could possibly hit the market late this week or sometime during the week ahead.

However qualified institutional investors will see only half the previously anticipated $750 million amount because a single purchaser will hold $375 million of Emdeon's nine-year senior notes, the source added.

The buyer was lined up as dealers took a "private placement" approach to marketing the transaction in recent days in response to volatility.

The deal due to hit the market in the near term is a $375 million tranche of eight-year senior notes, which will be presented via an investor roadshow.

Barclays Capital Inc., Bank of America Merrill Lynch, Citigroup Global Markets Inc., Goldman Sachs & Co. and SunTrust Robinson Robinson Humphrey are the joint bookrunners for Emdeon's Rule 144A bonds.

Proceeds will be used to help fund the buyout of the company by Blackstone Capital Partners VI LP.

Kinetic Concepts upsizes

Kinetic Concepts upsized its planned two-part offering of high-yield notes to $2.55 billion from $2.15 billion, and concurrently downsized its term loan by an identical amount, cutting it to $2.2 billion from $2.6 billion.

The LBO financing deal is expected to feature an upsized $1.65 billion tranche of 7.5-year senior secured second-lien notes. The tranche was increased from the previously anticipated $1.25 billion.

In addition, the note portion of the financing is set to include a $900 million tranche of eight-year senior unsecured notes. The amount of the unsecured tranche is unchanged.

Timing remains to be determined, however the bond deal could hit the market in mid-October, a syndicate source said on Wednesday.

The effort to syndicate the $2.15 billion of bridge loans backing the original amount of bonds, which was set to conclude on Oct. 7, has been made moot by the fact that the bond launch is near at hand, the source added.

Morgan Stanley & Co. LLC, Bank of America Merrill Lynch, Credit Suisse Securities (USA) LLC and RBC Capital Markets will be the joint bookrunners.

Meanwhile, Kinetic Concepts' $2.6 billion term loan launched on Wednesday.

Proceeds will be used to help fund the buyout of the company by Apax Partners, Canada Pension Plan Investment Board and the Public Sector Pension Investment Board.

Back on track?

A trader in the secondary market opined that "stuff seems like it's up slightly today - I wouldn't call any grand-slam home runs, but there was a much better tone to the market, if you can say that."

He quoted the familiar proverb about a rising tide lifting all boats, "except those which have a hole in them."

A second trader, noting the junk world's comeback after five consecutive sessions on the downside, called Wednesday's session "a nice bounce-back day.

"It's as if nothing wrong ever happened."

He said the market "definitely had a better tone," and saw that the move was being led by the volatile high-beta names, which had recently borne the brunt of investors' worries about the economy, domestic and global, and the viability of riskier asset classes like junk.

"The guys who had gotten hit the most, definitely benefitted the most today," he declared.

He estimated that "if you were a high-beta, you probably got back 1 to 2 points, high-quality, you probably got back ½ to 1 [point].

"It was pretty generic, across the board."

"There's still plenty of paper for sale," he continued. "Today was not the panacea for the market - but clearly, it was paper for sale at better levels than has been the case for the last couple of days."

Indicators point upward

Junk market statistical performance indicators were solidly higher on Wednesday, an improvement on Tuesday's session, which had been mixed though with a downside bias and several sessions before that during which they were on the slide.

A trader said that the CDX North American series 17 High Yield index rose by 15/16 point on Wednesday to close at 87 3/16 bid, 87 7/16 offered. The index had risen by 5/8 of a point on Tuesday.

The KDP High Yield Daily index rose by 19 basis points to 68.53. That followed its eye-popping 103 bps nosedive on Tuesday. Its yield came in by 4 bps to an even 9%, after having ballooned upward by 36 bps on Tuesday.

And the Merrill Lynch U.S. High Yield Master II index posted its first gain after five consecutive losses on Wednesday, as it rose by 0.171%. By contrast, on Tuesday it swooned 1.566%, its fifth straight downturn and the second-largest retreat the index has seen this year.

Wednesday's gain cut the index's year-to-date deficit 3.834% from Tuesday's 3.998%, the new low for the year. The deepening cumulative losses stood in stark contrast to the peak gain for the year of 6.362%, which was set on July 26.

The pace of junk market activity, as measured by dollar-price volume, was about unchanged from its levels on Tuesday, when it had jumped by 45% from the previous day's level.

Junk seemed to be following the trail blazed on Wednesday by equities, which saw the bellwether Dow Jones industrial average posting its second straight gain after several losses. The Dow, which on Tuesday had shot up in the final minutes to finish 153 points higher, rose Wednesday by another 131.24 points, or 1.21%, to close at 10,939.55.

The Standard & Poor's 500 index gained 1.79% on Wednesday, while the Nasdaq composite firmed by 2.32%.

Harrah's heads higher

Among specific names, a trader said that Caesars Entertainment's 12¾% notes due 2018 were up more than 5 points, last trading at 70¾ bid.

The Las Vegas-based gaming giant, still more popularly known in junk as Harrah's, "continued to snap back," another trader said, "adding a couple" on to its 10% notes due 2018, to 61 bid, 62 offered.

A market source saw those bonds trading at 61½ bid, up 2¼ points, on volume of more than $45 million, making them the busiest junk bonds of the day.

ATP shows improvement

Another volatile name which had been taking it on the chin over the past several sessions before it roared back upward on Wednesday was ATP Oil & Gas' 11 7/8% second lien senior secured notes due 2015. A trader saw them up by more than 6½ points on Wednesday, last trading at 66½ bid.

He saw "pretty good volume" on the Houston-based offshore energy operator's bonds, though it was nowhere near the nearly $90 million of that paper which changed hands on Tuesday, easily the busiest issue in Junkbondland.

Another source saw volume of about $18 million, which would still put the credit among the day's more active issues.

A trader called ATP "the poster child for what we were talking about, high-beta."

ATP's bonds had been getting crushed over the previous few sessions on apparent investor angst over soft world energy prices in the face of an economic slowdown, as well as more company-specific worries that ATP might not be able to fulfill its debt obligations when the bonds come due. Sentiment has also recently sourced since Moody's Investors Service issued a report early last week claiming that a restructuring was highly likely.

Kodak climb continues

Battered high-beta credit Eastman Kodak - whose unsecured bonds collapsed down into the 20s last week amid bankruptcy buzz about the iconic Rochester, N.Y.-based photographic products and digital imaging technology company following its hiring of a law firm that specializes in restructurings, only to firm solidly on Monday as it denied having any plans for filing Chapter 11 - were again on the upside on Wednesday.

A trader saw those 7¼% notes due 2013 get as good as almost 47 in odd-lot trading, although he said that was just "bits and pieces trading around, 100 bonds here, 200 bonds there."

However, he did see the bonds get up to about 45 bid in round lot trading, and called that a gain of 8 or 9 points.

A second trader agreed that the '13s were "up 5 to 10 points."

A trader said that he had seen no trading in Kodak's secured paper such as the 9¾% notes due 2018 and the 10 5/8% notes due 2019, which remained in the lower 70s.

Kodak's bonds have been given a boost all this week by the company's statement released late Friday, in which it said that it has no plans to seek protection from its bondholders and other creditors, maintaining that "it is not unusual for a company in transformation to explore all options and to engage a variety of outside advisers, including financial and legal advisers. Jones Day is one of a number of advisers that Kodak is working with in that regard."

Kodak proclaimed that it is "committed to meeting all of its obligations," and the company indicated on Monday that it had made the scheduled Oct. 1 interest payment of $14 million on its $400 million of 7% convertible notes due 2017.

Kodak also said in its statement that it "continues to actively pursue its previously announced strategy to monetize its digital imaging patent portfolio. Kodak remains focused on meeting its commitments to customers and suppliers, and on delivering on its strategy to become a profitable, sustainable digital company."

Recent deals rally

Wednesday's market rally also extended to recently priced deals, which had been struggling over the past few sessions.

A trader said that "the new ones all rallied by a half-point to a full point. There was a good tone to them."

Another trader said that HCA's 8% notes due 2018 began the day offered at 953/4, but by the end of the session he had seen those bonds move as high as 96¾ bid.

A market source at another desk, seeing $23 million of them trade, making them one of the busiest junk issues of the day, pegged those bonds even higher, at 98½ bid.

That was well up from Tuesday's level around 94¼ bid, 94 3/8 offered, although the bonds are still considerably down from the par level where the Nashville-based hospital operator's quickly shopped $500 million issue priced on Sept. 27.

The first trader saw Newfield Exploration's 5¾% notes due 2022 trade up to 98½ bid, a far cry from Tuesday, when they slid to 95½ bid, 96 offered.

Over $14 million of the bonds traded.

The Houston-based energy company's upsized offering of $750 million of bonds also came to market on Sept. 27. They priced at 99.956 to yield 5¾%.

Sector peer Bill Barrett Corp.'s 7 5/8% notes due 2019 were seen up by ¾ point at 96 3/8 bid, on busy volume of $14 million. That was still well under the par level where the Denver-based energy operator's upsized $400 million offering had priced on Sept. 20.

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