Cloud Peak deal prices; recent issues firm; Forest Oil keeps falling; funds rise $559 million

By Paul Deckelman and Paul A. Harris

New York, Feb. 27 - For a second consecutive session on Thursday, the high-yield primary sphere saw just one new deal pricing. Cloud Peak Energy Resources LLC did a $200 million 10-year issue through a pair of subsidiaries.

Those bonds firmed smartly when they were freed for aftermarket dealings, driven by pent-up investor demand for new paper - just as had been the case on Wednesday, when casino operator Greektown Holdings LLC/Greektown Mothership Corp. came to market with the day's sole transaction of new junk-rated, dollar-denominated paper from domestic or industrialized-country borrowers and then traded solidly higher.

Those Greektown bonds meanwhile added to their initial gains during Thursday's session, as did the new deals that priced earlier in the week from movie theater operator Regal Entertainment Group and from packaged foods producer TreeHouse Foods, Inc.

Away from the new-deal realm, Forest Oil Corp.'s bonds continued to nosedive for a second consecutive session in heavy trading as investors reacted badly to the energy company's poor quarterly earnings and pessimistic projections.

Momentive Performance Materials, Inc.'s paper was getting pounded for a third straight session as part of an overall recent slide in the name.

But J.C. Penney Co. Inc.'s bonds jumped by multiple points, given a boost by the retailer's improved quarterly results.

Statistical market-performance measures improved for a second straight session after having been mixed on Tuesday, ending higher across the board.

Another indicator - the flow of cash into and out of high-yield mutual funds and exchange-traded funds, considered a key barometer of junk market liquidity trends - posted its third consecutive sizable weekly gain.

Funds gain $559 million

As Thursday's Junkbondland activity was wrapping up, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that about $559 million more came into high-yield mutual funds and ETFs than had left them in the week ended Wednesday.

It was the third consecutive weekly gain seen by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., which reported an $804 million cash injection during the week ended Feb. 19 on top of a massive $1.45 billion cash addition the week before that, ended Feb. 12 - the biggest cash addition the funds have seen since the week of Oct. 23 last year, when a $2.02 billion net inflow was recorded, according to a Prospect News analysis of the figures.

The three straight inflows, totaling about $2.82 billion, represented a strong rebound from the two consecutive large downturns that preceded them - a $909 million outflow in the week ended Jan. 29 followed by a $972 million cash loss in the week ended Feb. 5.

Those twin downturns, totaling about $1.88 billion, had been the first outflows seen so far this year, according to the Prospect News analysis, and followed the three consecutive inflows with which the year opened, totaling about $1.13 billion.

Including the latest week's results, there have now been six inflows since the beginning of the year, versus the two outflows, resulting in a year-to-date cumulative net inflow of about $1.42 billion, according to the analysis.

In 2013, inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, according to the analysis.

Cumulative fund-flow estimates may be revised upward or downward or may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Another fund-tracking service, the Cambridge, Mass.-based EPFR Global, meantime reported an inflow for the week "about three times" that seen by AMG/Lipper. It too has seen six inflows in the eight weeks since the start of the year.

EPFR's methodology differs from AMG/Lipper's as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, as opposed to AMG/Lipper's strictly domestic orientation.

Analysts said that the sustained flows of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the more than $1 trillion junk market - has been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past two years and which has mostly continued on into the new year.

Cloud Peak, tight to talk

Thursday's dollar-denominated high-yield primary saw a single deal price.

Cloud Peak Energy Resources and Cloud Peak Energy Finance Corp. priced a $200 million issue of 10-year senior notes (B1/BB-) at par to yield 6 3/8%.

The yield printed at the tight end of yield talk that was set in the 6½% area.

Goldman Sachs & Co., RBC Capital Markets LLC, J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Credit Agricole Securities (USA) Inc. and Wells Fargo Securities LLC were the joint bookrunners for the debt refinancing deal.

Emeco roadshow starts Monday

In the wake of Cloud Peak Energy clearing the market, only one deal remains parked on the active forward calendar.

Australian mining equipment rental company Emeco Pty. Ltd. plans to start a roadshow on Monday for a $360 million offering of five-year senior secured notes.

The debt refinancing and general corporate purposes deal, via bookrunner Credit Suisse, is set to price late next week.

Kerneos upsizes

The euro-denominated primary also saw a single deal price.

France-based Kerneos Tech Group SAS priced an upsized €350 million two-part offering of seven-year senior secured notes (B2/B+) on Thursday, according to market sources.

A €200 million tranche of fixed-rate notes priced at par to yield 5¾%, at the tight end of the 5¾% to 6% price talk.

A €150 million tranche of floating-rate notes priced at par to yield Euribor plus 475 basis points. The reoffer price came on top of price talk. The Euribor spread came at the tight end of the 475 bps to 500 bps spread talk.

The fixed-rate tranche underwent a notable amount of tightening during the time that the deal was in the market, sources said.

Initial guidance on the fixed-rate tranche was 6½%.

The overall size of the transaction was increased from €335 million.

Goldman Sachs International was the bookrunner. Mizuho Securities was the co-manager.

Proceeds will be used to finance the acquisition of Kerneos by Astorg Partners. The additional €15 million of proceeds that resulted from the upsizing of the deal will be used to reduce Astorg's equity contribution to €195.5 million from €210.5 million.

Kerneos is a Paris-based manufacturer and supplier of calcium aluminate cements.

An expensive market

Steady cash inflows in the absence of a meaningful forward calendar have rendered the high-yield market "expensive," sources on both the buyside and sellside say.

A New York-based investor took a minute on Thursday to quantify just how expensive junk bonds have gotten.

Citing information gleaned from the BofA Merrill Lynch high-yield index, the investor said that the average high-yield coupon is 7.35%, the average price is 104.75, and the average yield to worst is 5.22%.

The good news is that a calendar is coming, investors say. Eight-year bonds that priced in 2010 are about to roll into their first calls, and at present rates it will make plenty of sense for the issuing companies to pay the call premium because those issuers will be realizing colossal interest savings, some perhaps as much as 300 bps.

The bad news is that the bonds being called are, with extremely few exceptions, presently trading at their call premiums. So an investor might roll into new paper and thereby remain more or less invested, but the new paper will be every bit as expensive as the old.

Raided by bank loan guys

Exacerbating the problem is the increasing prevalence of covenant-light loans in the leveraged loan market, the New York investor said.

A covenant-light loan enables an issuer to raise money that comes with the bank loan market's lower rates and to do so by means of a credit agreement bereft of some of the covenant encumbrances that a bank loan traditionally entails. Hence the issuer benefits from bank loan market rates, constrained only by high-yield bond equivalent covenants.

So a significant amount of supply that could come into the high-yield new issue market, with issuers seeking less-constrained capital, is now turning up in the loan market, further constricting the new issue pipeline, the investor said.

A correction might help

The high-yield market has gotten so expensive that a market correction might ultimately be the answer, market sources on both sides of the Atlantic conceded on Thursday.

"It's hard to see what the catalyst for a correction might be," said a London-based debt capital markets banker, who referred to Federal Reserve chair Janet Yellen's Thursday testimony before the Senate Banking Committee, which was widely perceived to imply that the Fed would proceed with a great deal of caution in terms of backing away from its accommodative policies.

For the New York-based investor, however, a correction, in light of the present circumstances, is not a question of "if" but "when."

"Sometimes this market resembles the game of musical chairs you played when you were a kid," the investor said.

"You know that the music is going to stop. You just don't know when.

"The trouble is that in this market when the music stops, they take away more than just one chair."

Cloud Peak climbs

In the secondary market, Cloud Peak's new 6 3/8% notes due 2024 were seen by traders having risen robustly when they were freed for aftermarket dealings, with one seeing the Gillette, Wyo.-based coal producer's issue at 102 7/8 bid, 103 3/8 offered, well up from their par pricing level.

A second trader pegged the bonds in a bid range of 102¾ to 1031/4, mentioning that it was all the more notable that the bonds were doing as well as they were given that at just $200 million, "that's a pretty small deal."

Recent deals rise

But that was in line with the stronger levels seen in the new bonds that came to market on Tuesday and Wednesday and were eagerly snapped up by investors starving for new paper.

For instance, one of the traders saw Greektown's new 8 7/8% senior secured notes due 2019 at 103 bid, 103¼ offered.

A second quoted the Detroit-based casino operator's new deal at 103¼ bid, 104 offered, calling them up about 1 point on the day.

Greektown had priced its $425 million scheduled forward calendar deal at par on Wednesday, and the new bonds had jumped to levels above 102, even 1023/4, when they were freed for secondary dealings.

A trader said that it was ":the same story" with Regal Entertainment Group's 5¾% notes due 2022, seeing those bonds rise by about ¾ point on Thursday to finish at 102¼ bid, 102 5/8 offered.

A second saw them up by a more conservative 1/8 point at 102 bid, 102½ offered.

The Knoxville, Tenn.-based movie theater operator priced a massively upsized $775 million drive-by offering of those bonds at par on Tuesday after more than doubling the deal's size from an originally announced $350 million.

The bonds moved up to above 101 bid in initial aftermarket dealings - over $80 million changed hands - and then continued to firm in Wednesday's action on volume of more than $30 million, moving up to a little bit under the 102 bid level.

More than $12 million of the bonds traded on Thursday.

TreeHouse Foods' 4 7/8% notes due 2022 were seen by a trader at 101½ bid, 101¾ offered, a gain of about 1/8 point. Mid-afternoon volume in the new deal topped the $8 million mark.

Oak Brook, Ill.-based TreeHouse - which claims to be the largest manufacturer of pickles and non-dairy powdered creamer in the United States and the largest manufacturer of private-label salad dressings, powdered drink mixes and instant hot cereals in the United States and Canada, based on sales volume - priced $400 million of the notes at par in a quickly shopped deal after upsizing the transaction from an originally announced $380 million. Those bonds came to market too late on Tuesday for any kind of real aftermarket dealings at that time.

The bonds were freed to trade on Wednesday and pushed up above the 101 bid level, on brisk volume of over $41 million.

Forest chopped down more

Away from the new deals, probably the busiest name in the larger world on Thursday was Forest Oil. A trader saw its 7¼% notes due 2019 "right at the top of the charts," with over $80 million of those bonds having changed hands. He quoted them down 1 point at 88 bid, 88½ offered, which came on top of the 8 or 9 point loss recorded on Wednesday that took the bonds down from near par to about 90 bid, with volume topping the $60 million mark.

He meantime saw its 7½% notes due 2020 down 5 or 6 points at 84¼ bid on volume of about $26 million or $27 million.

That followed Wednesday's 81/2-point plunge to below 90, although that decline was on just a fraction of the volume seen in the 7¼% notes.

And "Forest is not done losing," he warned. He saw one big trade in the 7¼% notes that took them down to 78¾ before the bonds bounced off that interim low to come back to around 88.

The bonds began sliding Wednesday after the Denver-based independent oil and natural gas exploration and production company reported fourth-quarter earnings per share of 2 cents for the quarter, missing analysts' consensus forecast of 3 cents.

Its revenues came in at $88.49 million, well below Wall Street expectations in the $96 million area.

Compounding investor angst, Forest reported a sharp decline in proved reserves at year's end from its year-earlier figures, largely due to asset divestitures, which were only partially offset by new discoveries.

But while Forest's New York Stock Exchange-traded shares swooned by more than 37% on over 13 times normal volume on Wednesday, on Thursday, the shares were actually up by 6 cents, or 2.99%, to end at $2.07, with 13.7 million shares traded, three times normal volume. Some cynics dismissed the rebound as a classic dead-cat bounce.

Momentive mauled again

Elsewhere, a trader said that "Moment" - i.e., Momentive Performance Materials - "keeps going on. That seems to be the active name of the last few days."

He saw its 9% second-lien notes due 2021 down between 1½ and 2½ point, at bid levels between 83½ and 841/2.

Albany, N.Y.-based specialty materials manufacturer Momentive's bonds have been sliding for days on fears the company will either have to restructure its $3.3 billion of debt or face a possible default somewhere down the line. The fears have been stoked by a recent warning to that effect from Standard & Poor's.

After falling 2 points on Wednesday, the 9% notes "weakened up further today," the trader said, with "plenty of volume," which he estimated at more than $30 million.

At another desk, a market source counted more than $33 million of those bonds having traded, placing them high up on the Most Actives list, and the bonds down 2½ points at 84 bid.

The first trader said the 11½% senior subordinated notes due 2016 were ending down around 27 or 28 bid, a loss of 3½ to 4 points, with more than $10 million having traded.

Another trader marveled that "a couple of days ago, they were in the 70s, and now they're around 28 to 32."

Momentive's secured 8 7/8% notes due 2020 and its 10% notes, also due in 2020, were holding steady in a 106 to 107 context, which he called virtually unchanged.

"They're just hanging there," a trader said.

Penney powers up

The big winner of the day was surely J.C. Penney, whose bonds and shares firmed smartly after the normally underperforming Plano, Texas-based department store retailer reported improved quarterly results.

Its busiest issue was the 7.4% bonds due 2037. More than $15 million of the bonds traded, rising 5 points on the day to end at 73 bid.

Penney's 6 3/8% bonds due 2036 were 3 points better at 71 bid on volume of over $6 million, while its 5.65% notes due 2020 gained 5¼ points to close at 78 bid, with over $4 million having changed hands.

Penney's NYSE-traded shares meantime zoomed by $1.51, or 25.34%, to $7.47 on volume of 114 million shares, which was not quite four times the usual turnover.

Penney - which shook up management last year in an effort to shake off the disastrous ill effects of previous management's unsuccessful changes in long-time policies - reported that same-store sales, a key retailing metric, rose by 2%, versus a year-earlier 32% plunge. In fact, it was the first such improvement in the key metric since back in 2011.

Penney's good showing may have rubbed off on some of its sector peers. Hoffman Estates, Ill.-based Sears Holdings Corp., which reported a narrower loss versus a year ago, also improved, its 6 5/8% notes due 2018 gaining 1½ points to end at 941/2.

Bon-Ton Stores Inc.'s 8% notes due 2021 edged up slightly to the 95 bid level on volume of over $13 million.

Market indicators up again

Statistical junk-market performance indicators were higher across the board on Thursday, their second consecutive stronger session. They had been mostly better on Wednesday after having turned mixed on Tuesday. Mixed and higher sessions have mostly been alternating for pretty much the past week or so.

The Markit Series 21 CDX North American High Yield index gained 9/32 point on Thursday to end at 108 bid, 108 1/8. It had been essentially unchanged on Wednesday and down 1/16 point on Tuesday. The index has been choppy over the past week or so, with mostly alternating days of gains and losses.

However, during that timeframe, the KDP High Yield Daily index and the Merrill Lynch High Yield Master II index have been bulwarks of consistency.

The KDP index recorded its 15th consecutive gain on Thursday, rising by 10 bps to go out at 75.33 after moving up by 8 bps on Wednesday.

Its yield, meanwhile, came in - also for a 15th consecutive session - declining by 4 bps on Thursday for a second straight day to finish at 5.18%.

And the widely followed Merrill Lynch index ran its consecutive gains streak to 17 on Thursday as it rose by 0.11%, a virtually identical gain to Wednesday's 0.112% improvement.

The latest upturn raised its year-to-date return to 2.628% -- its 13th consecutive new peak level for the year, versus 2.516% on Wednesday.

The index's yield to worst declined to 5.191%, its seventh straight new low for the year, eclipsing the previous 2014 low of 5.217% set on Wednesday. Those levels were well down from the 5.735% seen on Feb. 4, its highest point for the year so far.

Its spread to worst was 397 bps over comparable Treasuries,1 bp tighter than Wednesday's level and a new tight spread for the year so far, eclipsing the 398 bps spread that had been recorded back on Jan. 22 and matched on Wednesday. Those levels remained well in from Feb. 4's 444 bps, the wide point for the year so far.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.