Chesapeake unit hits road with deal; market mostly firmer; El Paso firms; builders better

By Paul Deckelman and Paul A. Harris

New York, Oct. 18 - The high-yield market continued to churn on at mostly firmer levels on Tuesday, both anecdotally and according to statistical measures of market performance.

Traders said things were especially better later in the session as stocks staged a late rally on renewed talk of progress toward resolving Europe's debt crisis situation.

In the primary market, Chesapeake Oilfield Operating LLC - a subsidiary of well-known junker Chesapeake Energy Corp. - was heard to be in the market with a $500 million bond deal. It is expected to hit the road starting Wednesday to market the offering to prospective buyers.

Back on the secondary side of the fence, El Paso Corp.'s bonds - which on Monday had gyrated around at lower levels following the news that Kinder Morgan Inc. will acquire the natural gas pipeline operator - were firmer on the day. That continued the upside trend that had started late in Monday's session, when the bonds recovered much of their previous losses from earlier in the day.

Monday's big winner, energy operator Brigham Exploration Co. - whose bonds had jumped by multiple points in heavy trading that session on the news that the oil-shale producer will be bought by Norway's Statoil ASA - eased a little from those higher levels.

Away from energy, there was some firming in the bonds, and shares, of homebuilders like Hovnanian Enterprises, Inc., helped by a better-than-expected report from a housing industry trade group.

Chesapeake Oilfield launches

No new issues priced on Tuesday, but there was one new deal announcement.

Chesapeake Oilfield Operating will begin a roadshow on Wednesday for its $500 million offering of eight-year senior notes, which are set to price in the middle or late part of the Oct. 24 week.

Bank of America Merrill Lynch, Credit Agricole, Credit Suisse, Citigroup and Goldman Sachs are the joint bookrunners for the intercompany debt refinancing deal from the wholly owned subsidiary of Chesapeake Energy.

'Close to the vest'

It was standing room only at the Four Seasons Hotel in New York for the Kinetic Concepts Inc. roadshow on Tuesday, according to sources who were on hand.

The bond deal, $1.65 billion equivalent of eight-year second-lien senior secured notes (B3/B/), is said to have gained an enthusiastic following.

One thing it does not have is a number on the table in terms of yield, sources said.

Two buyside sources who attended said that rate conversations will no doubt begin to take place soon.

"We're playing our cards close to the vest on this one," a syndicate source conceded during a late Tuesday telephone call.

"The roadshow has been going well, and the market has really been rallying," the official said, adding that premature rate talk can be overtaken by positive events - which could favor the issuer - just as easily as it can be overtaken by negative events.

Also, the issuer and the dealers are keen to see how the Kinetic Concepts bank loan goes.

The seven-year term loan B, now in the market, was downsized to a range of $1.9 billion to $1.95 billion from the previous $2.2 billion amount. Also, a new $250 million to $300 million five-year term loan C was added.

Price talk on the term loan B remained at Libor plus 575 basis points with a 1.25% Libor floor and an original issue discount of 95½ to 96. The term loan C is talked 75 bps inside the term loan B.

People want yield

A mutual fund manager who plays both loans and bonds said that at six-times leverage through the second-lien notes, the Kinetic Concepts bond deal should come with some big-time double-digit yield.

However the buysider did concede that the high-yield market is undergoing a huge rally.

The Lipper High Yield index was down half a point, year-to-date, late Tuesday afternoon, said the investor, who noted that the index has rallied well over 4¼% since Oct. 4, when the year-to-date return stood at negative 4.84%.

"The inflows we're seeing are unbelievable," the manager added, asserting that a technical rally in high yield is just about inevitable.

When asked to explain the inflows, the fund manager simply replied, "People want yield."

Expressing the belief that inflows of retail cash are being seen throughout the market, the buysider said that under ordinary circumstances it would be reasonable to expect a forward calendar to take shape sooner than later.

"It might not happen this time," the investor said.

"The banks don't want to take on any risk right now. So when the sponsors are coming to the banks for financing, the banks are presenting them with bridge caps that are so high they don't make sense for the deals that the sponsors are trying to put together."

This investor lays the ultimate blame at the feet of the Old World.

"People want some clarity on what this European credit situation is going to be," the investor said.

"The banks want to know how far the contagion might spread."

Tuesday's stock market rally in the United States - which gave a lift to the high-yield market - was said to be driven by a news report out of Europe that France and Germany are willing to boost the euro zone's bailout fund.

However for the high-yield investor in the United States, that news seemed like rather thin gruel in terms of explaining a 2% rally in the S&P 500.

A syndicate banker, reached just a short time later, offered little to counter the investor's expectation of a slow primary market in the near term.

Aside from Tuesday's announcement by Chesapeake Oilfield Operating, the banker professed visibility on a new deal that could be announced this week but would more likely be announced next week.

Emdeon eases a little

A secondary market trader said that the recently priced Emdeon Inc. 11% notes due 2019 "came in a little" in Tuesday's dealings.

He saw the Nashville-based health-care administrative services provider's $375 million issue "freely offered" around the 1021/2-102 5/8 level after having traded as high as 103 in Monday's dealings.

Emdeon issued the bonds through its Beagle Acquisition Corp. subsidiary to help fund the pending acquisition of the company by Blackstone Capital Partners VI LP and Hellman & Freidman LLC. It priced the deal, downsized from its original $750 million size when half of the issue was privately placed, at par on Friday. The bonds had traded up to around the 1021/2-103½ area in initial aftermarket dealings after pricing and moved up to around 103 on Monday.

The trader said that "the interesting thing about Emdeon is that Goldman [Sachs] still owns $375 million of the bonds that they didn't market," since the big New York based investment bank's various affiliates took up that amount of the bonds before they priced.

Goldman, he declared "is going to make some money on that, I have no doubt, because the credit's fine."

Health care dominates calendar

The trader opined that as for the pending new deals on the forward calendar, for names such as Kinetic Concepts, "these will take care of themselves, I think."

He said that San Antonio-based medical technology company Kinetic Concepts "will be the same thing" as Emdeon, in terms of being a well-received deal that should have no trouble getting done, when its $1.65 billion equivalent second-lien senior secured notes due 2019 - downsized from an original $2.55 billion equivalent - do price following the conclusion of this week's U.S. roadshow.

Noting the fact that Kinetic is a health-care name, like Emdeon and like the pending calendar deals for MannKind Corp., a Valencia, Calif.-based biopharmaceutical company, and Acadia Healthcare, Inc., a Franklin, Tenn.-based inpatient behavioral health-care services provider, the trader said that health care "is kind of an interesting area." He said that the sector "is relatively benign, and it's viewed as recession resistant, so it plays into the fears [among investors] of a double-dip [recession]. People have a certain sense of security - they aren't afraid to put money into that."

On the other hand, he speculated that "if the Republicans do gain control of the White House" next year "or gain control of the Senate as well as the House, they're going to appeal Obamacare, or major sections of it," which could put the whole sector in flux.

Indicators move higher

Away from the primaryside, a trader said that the CDX North American series 17 High Yield index gained 5/8 of a point on Tuesday to end at 90 5/8 bid, 90 7/8 offered after having lost 1 1/8 points on Monday.

The KDP High Yield Daily index firmed by 17 bps to close on Tuesday at 71.23, on top of Monday's 6 bps gain. Its yield narrowed by 5 bps on Tuesday to 8.10% after having come in by 3 bps on Monday.

And the Merrill Lynch U.S. High Yield Master II index recorded its third straight advance on Tuesday, firming by 0.068% on the session, which followed Monday's 0.311% rise.

That lifted the index's year-to-date gain to 0.381% on Tuesday from Monday's 0.313%.

That's a considerable improvement from its widest loss of the year, the 3.998% deficit recorded Oct. 4. However, it still stands in stark contrast to the peak gain for the year of 6.362%, which was set on July 26.

A trader characterized Tuesday's session as "kind of a mixed bag today, although I will say there is beaucoup cash out there" to fuel buying.

He said that Junkbondland's performance was also being helped by "the high-grade and the crossover guys coming into this market place."

"Overall," a second trader said, "things moved up today." He noted that "equities had a lot of fun today," roaring back from early weakness to close the day smartly higher. The bellwether Dow Jones industrial average - which on Monday had fallen nearly 250 points - on Tuesday rebounding by 180.05 points, or 1.58%, to end at 11,577.05. The Standard & Poor's 500 index gained 2.04% while the Nasdaq Composite index was up by 1.63%, all of them given a lift by renewed hopeful talk of a solution to Europe's nagging debt problems.

The first trader said that initially, "we started off with the Street trying to take things lower. Then, people started to say that if [bond prices] are going back down, 'there are a few things that I'd like to buy because I've got some cash.' They started to try and lift some offerings and the offerings weren't there - surprise, surprise."

After that, he said, "the next thing you know, we were off to the races. At about 3 o'clock [ET], the rumors hit that there was an agreement between France and Germany to increase the backstop on [European] debt to €2 trillion" from the previously planned €400 billion.

El Paso improves

Among specific names, El Paso's bonds were better, firming off the levels at which they had closed on Monday - and those closing levels were well up from the lows that the paper had hit earlier Monday on initially negative investor reaction to the news that cross-town Houston neighbor Kinder Morgan will buy El Paso in a $21 billion cash-and-stock deal. Including debt, the enterprise value of the deal is $38 billion.

El Paso, a natural gas exploration and production company and pipeline operator, "has been all over the place" in the past two days, a trader said.

"On Monday, they closed down from Friday's levels by between 1 and 4 points," depending upon the issue - and even that was an improvement off intra-day lows earlier.

On Tuesday, the trader saw the company's 6 7/8% notes due 2014 trading in "a wide" 108-111 context, while its 7% notes due 2017 and its 7¼% notes due 2018 were both at 111 bid, 112 offered.

He called all three levels up by between a half-point and 1 full point from Monday.

The 5% notes due 2021 issued by the company's El Paso Pipeline Partners Operating Co. gained more than 2½ points on the day to end at 102¾ bid.

Brigham steps back

Also in the energy sphere, Brigham Exploration's 6 7/8% notes due 2019 were seen down about three-eights of a points at 109 7/8 bid. As had been the case on Monday, the Austin, Texas-based energy operator's bonds were among the busiest in the junk space on Tuesday, with over $22 million changing hands.

Brigham's bonds shot skyward to the tune of 10 or 11 points on Monday on the news that Norway's Statoil agreed to buy the oil-shale company in a deal valued at $4.7 billion, including debt assumption.

Builders get a boost

Bonds of various homebuilders rose, along with their stocks, following an unexpectedly positive report from the National Association of Home Builders, the key industry trade group.

A trader said Hovnanian Enterprises' bonds were "up a couple of points" and "traded in decent size." He saw the Red Bank, N.J.-based builder's 10 5/8% notes due 2016 trading between 79 and 80, up 3 points from their Monday lows. He said that the bonds had gained 1½ points on Monday from their mid-70s lows and added another 1½ points on Tuesday.

He saw Beazer Homes USA Inc.'s 8 1/8% notes due 2016 up 1 point, in a 68 1/2-70 range, "but there was not much trading in that, it was just really one trade of size."

He said the Atlanta-based builder's 9 1/8% notes due 2018 were about unchanged, moving within a 621/2-to-64 range. He said that the bonds ended the day at the higher level, "unchanged, that's where they've been, but there was a little activity in those."

Beazer's 9 1/8% notes due 2019 "had a little activity, a couple of trades there," at 611/2-621/2. He said to "call it unchanged, but on little volume."

The sector's bonds rose after the homebuilders' association reported that its index of homebuilder sentiment rose to 18. That was up from last month's reading of 14 and also up from analysts' expectations of a 15 reading. However, that gauge remains well below the 50 mark - the dividing line between optimism in the industry, on the upside, and pessimism, on the downside.

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