Junk primary quiets down; secondary firmer on 'buying mood'; United Rentals, Ford gain

By Paul Deckelman and Paul A. Harris

New York, Oct. 19 -The high-yield market was seen firmer on Wednesday pretty much across the board, despite the stock market's retreat, although some traders saw the overall junk gains as small.

Among the names which were seen standing out was United Rentals Inc., which reported solidly higher third-quarter results.

Another upsider was Ford Motor Co., whose bonds cruised higher on market talk that the Number-Two domestic carmaker's paper - now right near the border between Junkbondland and high-grade territory might be headed for a ratings upgrade soon.

Hovnanian Enterprises, Inc.'s bonds were on the upside for a second day, possibly helped by a more bullish-than-expected report by the main U.S. homebuilding industry organization.

Sprint Nextel Corp.'s bonds were among the most active of the session on Wednesday, mostly up like virtually everyone else.

However, traders said that statistical performance measures, which had been solidly higher on Tuesday, turned mixed on Wednesday.

Activity in the primary market - which had seen several new-announcements in the past few sessions and several companies setting out to market new deals to prospective buyers, even without formal announcements - turned more muted on Wednesday. However there was one announcement of a new deal, made very late in the day, from River Rock Entertainment Authority, which said it plans to sell $205 million of senior notes due 2018.

Kinetic Concepts: Eying loan

The primary market continues to keep its sights trained on Kinetic Concepts Inc.'s debt financing, sources say.

"There is a fair amount of interest in the loan, but people are still trying to figure out where the bond will come together," according to a mutual fund manager who plays both bonds and loans.

The seven-year term loan B, now in the market at a size of $1.9 billion to $1.95 billion, down from the previous $2.2 billion, is talked at Libor plus 575 basis points with a 1.25% Libor floor and an original issue discount of 95½ to 96.

However the investor does not look for the deal to price at the cheap end of that price talk.

There are a couple of reasons for this, the investor explained.

One reason is the performance of recent loans that came at significant discounts and subsequently marched north of par.

Emdeon Inc.'s $1.224 billion Libor plus 550 bps seven-year term loan, which priced at 97, was at par 1/8 bid, par ½ offered at Wednesday's close.

Immucor Inc.'s Libor plus 575 bps seven-year term loan B, which priced at 96, closed at par ¼ bid, par ¾ offered on Wednesday.

The other reason the loan is unlikely to come at the cheap end of price talk is market conditions, the buy-sider said.

Outflows from bank loan funds have been moderating, and will likely continue to do so, the manager said, but stipulated that when the fund flow numbers surface on Thursday the bank loan fund flow number is still likely to be in the red.

Also the bid for bank loans seems to be returning.

"Market conditions will factor into how they price the loan," the fund manager said, "but don't look for them to leave as much on the table as they did for Emdeon and Immucor.

"I'm not looking for the Kinetic Concepts loan to trade up 3 points on the break."

Kinetic bond conversations

As for the bonds, the situation remains somewhat fluid, said the investor.

Conversations about Kinetic Concept's $1.65 billion equivalent of eight-year second-lien senior secured notes (B3/B/) have taken place in the context of 10½% to 11%. However market conditions will come to bear upon the ultimate pricing of the second lien notes, the manager said.

The bridge is capped at 10½%, the source added.

Contending that the bond deal is highly leveraged, the buy-sider said that two weeks ago it would not have gotten done at all.

Now, with the market having improved dramatically, and with Kinetic Concepts' loan going well, the bond deal should get done.

Some kind of calendar

The primary market remained quiet on Wednesday, with no deals pricing.

Canadian issuer GreenField Ethanol Inc. intends to run a roadshow, according to an offering memorandum dated Wednesday.

The company will roadshow C$175 million of five-year senior second lien notes (DBRS: B) notes starting on Monday through Nov. 2 in Vancouver, Montreal and Toronto.

Scotia Capital Inc. is the lead manager.

Proceeds will be used to repay debt, terminate amounts outstanding under existing interest rate swap agreements and for general corporate purposes.

In the dollar-denominated market, a modest calendar should soon start to take shape, according to buy-side and sell-side sources.

Technical forces alone indicate that there will soon be a calendar, according to a mutual fund manager who looks for the weekly reports of high yield fund flows, released each Thursday, to be strongly positive for the present week.

Also the market has regained most of the ground it lost in the early October sell-off, the buy-sider said.

The J.P. Morgan high yield index composite spread was 760 bps at the start of the Wednesday session. That is in from the wide of 864 bps on Oct. 4.

Some tightening remains to be done in order for the spread to match the 739 bps spread seen on Sept. 16, the buy-sider conceded. However things continued to improve on Wednesday - perhaps sufficient to return the spread to mid-September levels.

Issuers will be cautious, the investor said, adding that strong executions on deals now in the market could pave the way for a build to the forward calendar.

Chesapeake Oilfield Operating, LLC's $500 million offering of eight-year notes, announced on Tuesday, is being discussed in the context of a 7% to 7¼% yield, the buy-sider remarked and added that if conditions continue to improve the yield could go lower.

An investment banker from one of the high-yield syndicates looks for any build up in the forward calendar to be modest

This official has visibility on one to two more deals that could come in October.

All told, October issuance is unlikely to surpass $5 billion, the banker added.

November could produce $10 billion to $15 billion, the official said.

"There are people who need to get deals done before the end of the year," said the sell-sider.

"The calendar will start to come back, provided we avoid the kind of violent sell-offs that we saw earlier in the month."

A 'buying mood' takes hold

A secondary market trader said "in general, it seemed like things were up a little bit in the morning; then as everyone was trying to set higher prices with their offerings, it kind of came back. I see some stuff up, and some stuff down, maybe unchanged to up 1/8 [point] overall."

He said that the high yield CDX index "was basically flat today, but we're looking at, at least, a lot of the stuff we see, the CCCs, the single-Bs, are all up 2 to 4 points today.

"The traditional high yield stuff was up multiple points, again. It just seemed like folks were shopping, in a buying mood. But there's not a lot for sale."

He said that what frequently happened was that "stuff kind of gaps up - you bought all the bonds that were offered at 102. Where does more paper come - at 103? If it's a half-way decent yield, we'll take it."

Indicators turn mixed

Statistical performance indicators, which had firmed solidly on Tuesday, were seen mixed on Wednesday.

A trader said that the CDX North American series 17 High Yield index lost 5/16 of a point on Wednesday to end at 90 5/16 bid, 90 9/16 offered, after having gained 5/8 of a point on Tuesday.

But the KDP High Yield Daily index rose by 36 basis points on Wednesday to finish at 71.59, after having firmed by 17 bps on Tuesday. Its yield came in by 10 bps, to an even 8.00%, on top of the 5 bps tightening seen on Tuesday.

And the Merrill Lynch U.S. High Yield Master II index gained for a fourth consecutive session on Wednesday, rising by 0.677% on the session, which followed Tuesday's 0.068% advance.

That lifted the index's year-to-date gain to 1.061% on Wednesday from Tuesday's 0.381%.

The index continued to show considerable progress in bouncing back from its recent low point, the 3.998% deficit recorded Oct. 4, the year's worst showing. However, it still is well down from the peak gain for the year of 6.362%, which was set on July 26.

The junk market continued to firm even though stocks - which had gained solidly late in Tuesday's session on renewed hopeful talk of a solution to Europe's nagging debt problems - fell back on Wednesday on reports of an impasse in those European debt negotiations. A slide in tech-sector stocks, triggered by Apple Inc.'s failure to match Wall Street's sky-high earnings expectations for the Silicon Valley powerhouse, only added to equities' unease.

The bellwether Dow Jones industrial average - which on Tuesday had shot up by 180 points - retreated on Wednesday by 72.43 points, or 0.63%, to end at 11,504.62. The Standard & Poor's 500 index lost 1.26% while the Nasdaq Composite index was off by 2.01%.

United Rentals rallies

One of the day's notable gainers was United Rentals, whose bonds rose after the Greenwich, Conn.-based industrial equipment-rental company reported that its third-quarter earnings nearly tripled from a year earlier, as construction companies and other customers rented more equipment at higher rates, and the company was able to take market share from smaller competitors.

A trader said that there was "a lot going on in that today," seeing the company's 10 7/8% notes due 2016 get as good as 112½ before ending up 1 3/8 points on the day, last trading at 112 1/8. He saw its 8 3/8% notes due 2020 go up by 2¾ points to 1001/4.

At another desk, a trader saw United Rentals' 9¼% notes due 2019 finishing at 110 bid, 111 offered, after having been offered at 108¾ on Tuesday.

He also saw the 10 7/8s "pretty active today, trading as high as 112 3/8, up from 110¾ on Tuesday.

United Rentals reported third-quarter 2011 net income of $65 million, or 91 cents per diluted share, versus $23 million, or 33 cents per share a year earlier.

Adjusted earnings per share for the quarter, which excludes the impact of special items, was 92 cents per share, compared with 40 cents per share a year earlier. That beat Wall Street expectations of about 75 cents per share.

Revenues of $713 million, up 17% from a year ago, also topped analysts' forecasts in the area of $685 million.

The company's chief executive officer, Michael J. Kneeland told analysts on a Wednesday conference call following the late-Tuesday release of results for the quarter ended Sept. 30 that despite the United States going through what he called a "bumpy" recovery, "our company is outperforming the environment."

The CEO also expressed optimism over 2012, noting that the vast majority of its construction and industrial equipment-rental customers believe things will pick up, downplaying the notion of a "double-dip" recession.

Also on that call, the chief financial officer, William B. Plummer, said that the company had "a very nice liquidity position at the end of the quarter," and touted the positive effects of several recent capital structure transactions, including a new $1.8 billion asset-based senior secured revolving credit facility that the company entered into last week, replacing a smaller facility and extending the maturity by three years (see related story elsewhere in this issue).

Ford takes an upside ride

A trader saw Ford Motor's benchmark 7.45% bonds due 2031 bonds up 1½ points, rising to 116 bid, 117 offered.

He said that the Dearborn, Mich.-based automotive giant's bonds had firmed on market expectations that Ford will likely get a ratings upgrade.

Earlier this month, Moody's Investors Service announced that it was reviewing Ford's ratings for a possible upgrade following the news that the company had reached a tentative agreement with the United Auto Workers union on a four-year contract replacing the agreement, which expired on Sept. 14.

Moody's said at that time that it would review the corporate family rating and probability of default rating, now at Ba2, the secured bank debt at Baa3, and the senior unsecured debt at Ba3.

The Ford bonds were among the most actively traded junk issues, with over $17 million changing hands.

Another market source, who also pegged the Ford bonds around the 116 level, estimated that they were up as much as 4 points from recent dealings.

Hovnanian higher again

A trader saw Hovnanian Enterprises' 10 5/8% notes due 2016 trading up around 80 bid.

He called that up 2 points from the lows of Tuesday, when the bonds were offered at 78½ and up ¾ point from Tuesday's highs in the 79 area.

The Red Bank, N.J.-based homebuilder's bonds had moved up on Tuesday after an unexpectedly positive report from the homebuilding industry's main trade group, the National Association of Home Builders, gauging sentiment within the industry.

Sprint run continues

A trader said there was brisk trading in shorter-dated bonds from Overland Park, Kan.-based wireless operator Sprint Nextel Corp. and its Sprint Capital Corp. affiliate.

Sprint Capital's 8 3/8% notes due 2012 were up ¼ point at 100½ bid, on volume of over $25 million, tops among junk-rated issues on Wednesday. Its 6.9% notes due 2019 were down by 1/8 point at just over 86 bid, with volume of nearly $10 million.

Parent Sprint Nextel's 8 3/8% notes due 2017 ended at 93 5/16, up about 2 points on the day, on volume of $17 million.

Its 6% notes due 2016 gained 1 point to end at 871/2.

Emdeon hangs in

A trader said that the recently priced Emdeon Inc. 11% notes due 2019 "were not much different" on Wednesday than they had been on Tuesday, quoting them at 102¾ bid, 103 offered.

At another desk, a trader who saw those bonds there said they were up perhaps ¼ point on the bid side from Tuesday's finish.

The Nashville-based health-care administrative services provider's $375 million issue priced last Friday 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.

The deal, downsized from its original $750 million size when half of the issue was privately placed, came to market at par, and then traded up to around the 1021/2-103½ area in initial aftermarket dealings Friday, and then moved up to around 103 on Monday.

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