Primary quiet, though Charter, Frontier expected soon; Peabody slides after earnings warning

By Paul A. Harris and Paul Deckelman

New York, July 1 – The high-yield primary market opened the month of July, the year’s third quarter and its second half on Wednesday on a quiet note, with syndicate sources seeing no new offerings either announced or priced.

The primary’s relaxed tone is expected to continue until after the impending Independence Day holiday break in the United States, which begins with Friday’s scheduled full market shutdown.

However, the sources heard of at least two sizable deals from familiar Junkbondland names – currently buried deep within the forward calendar – that are expected to move up and possibly come to market in the week ahead.

They said cable operator Charter Communications Inc. could hit the market in the coming week with at least part of the $13.8 billion of debt it expects to issue to help finance its acquisition of sector peers TimeWarner Cable Inc. and Bright House Networks.

Meanwhile, phone firm Frontier Communications Corp. might possibly do as much as $8 billion of new bonds as early as the coming week to help fund its pending purchase of wireline assets from Verizon Communications Inc.

Away from the new-deal realm, Peabody Energy Corp.’s bonds fell after the big coal producer revised its previously issued earnings guidance downward, blaming the anticipated fall-off on weather-related shipment issues in the Powder River Basin of Wyoming and lower seaborne coal pricing.

Also in the energy world, California Resources Corp.’s bonds continued to slide in the face of falling oil prices.

Statistical market-performance measures turned higher across the board on Wednesday, after having been mixed on Tuesday and lower all around for three consecutive sessions before that. Wednesday’s was the first higher session seen since June 22.

Primary stays quiet

The primary market remained dormant during the first session of July.

No deals priced.

No deals were announced.

Four offerings, sized from $180 million to $265 million, remain in the market but are unlikely to price prior to the extended Independence Day holiday weekend in the United States, which commences following Thursday’s close, sources say.

July in the primary

Tentative forecasts of a pickup in new issue activity following the upcoming holiday weekend began to surface on Wednesday.

Charter Communications is expected to come to market in the week ahead with at least a portion of the bonds backing its $13.8 billion of bridge loan financing for the acquisition of Time Warner Cable Inc. and Bright House Networks, market sources say.

The borrowing entities will be Charter Communications Operating, LLC and CCO Holdings, LLC.

As reported, the bridge facility consists of a $6 billion secured bridge loan, a $3.5 billion unsecured loan from Charter Communications Operating and a $4.3 billion unsecured loan from CCO Holdings.

Credit Suisse, Goldman Sachs, BofA Merrill Lynch, Deutsche Bank and are the underwriters for the financing.

Meanwhile Frontier Communications could hit the leveraged markets with $8 billion of new debt – all of it possibly coming the form of high-yield bonds – as early as the July 6 week, sources say.

J.P. Morgan will lead the deal, a buyside source said, adding that the Frontier bridge loan was not syndicated and the financing is therefore on J.P. Morgan’s books.

Whether or not the deal hits the market in the week ahead will likely hinge on the level of stability in the global financial markets, an investor said, adding that it will be “a game-time decision.”

Sizable outflows

The leveraged markets saw substantial redemptions on Tuesday, the most recent session for which data was available at press time, a high-yield portfolio manager said.

High-yield ETFs saw $395 million of outflows.

Asset managers, meanwhile, sustained a whopping $800 million of redemptions.

Dedicated bank loan funds saw $285 million of outflows, which the manager characterized as a big number for that asset class.

The outflows followed in the wake of a big selloff on Monday, trailing concerns that there could be wider contagion from a possible default involving Greek sovereign debt, the source said.

The net asset valuations of high-yield portfolios fell between 4 cents and 9 cents on Monday, then saw a modest amount of improvement on Tuesday, the buysider added.

Week’s deals little seen

A secondary market trader called Wednesday’s session “pretty quiet,” with many people in a pre-holiday mode, and said that included trading activity – or the lack of same – in the new issues which have priced this week.

He saw “just a few trades” in Monday’s new issue of 5 7/8% notes due 2023 from SS&C Technologies Holdings Inc., with the new bonds in a 101½ to 102 context.

“It doesn’t look like a lot traded today.”

A trader at another desk also saw the bonds having moved up to 101½ to 102, which he called better by 3/8 point.

The Windsor, Conn.-based provider of financial services software and software-enabled services had priced its $600 million regularly scheduled forward calendar deal at par after the issue was upsized from an originally announced $500 million.

Those new bonds had initially traded on Monday in a 100½ to 101 bid context, then moved up a little on Tuesday to 101 1/8 to 101½.

One of the traders said that “it doesn’t look like a lot traded” in the new DAE Aviation Holdings Inc. 10% notes due 2023 that priced on Tuesday. He saw the bonds having firmed to a par to 100¼ bid context, but with “very little traded.”

A second market source saw the bonds moving around in a 99¾ to 100¼ bid range, up ¼ point on the day.

DAE, the indirect parent of Scottsdale, Ariz.-based aircraft engine repair and maintenance services provider StandardAero, priced its $485 million scheduled offering at 98.65 on Tuesday to yield 10¼%. The bonds had traded around 99½ to par later Tuesday.

Among other recently priced issues, a trader saw Ball Corp.’s new 5¼% notes due 2025 having moved up by ¼ point on Wednesday morning and holding to that 99½ bid level for the rest of the session.

The Broomfield, Colo.-based maker of metal beverage cans had priced its $1 billion drive-by offering at par on June 22.

Another market source said that Endo International plc’s 6% notes due 2023 moved up by 1/8 point to 102¾ bid, a gain of 1/8 on the day. Some $16 million changed hands.

The Dublin, Ireland-based pharmaceuticals manufacturer priced its $1.64 billion issue at par as a regularly scheduled deal via a trio of financing subsidiaries on June 24 after the transaction was upsized from an originally shopped $1.44 billion.

Peabody pummeled on outlook

Away from the new or recently priced deals, Peabody Energy’s bonds and shares were taking it on the chin on Wednesday as investors reacted to the St. Louis-based coal operator’s release late Tuesday of revised earnings guidance – with Peabody warning that 2015 second quarter adjusted EBITDA, as well as adjusted earnings per share, are now expected to be below their original targeted ranges due to weather-related shipment issues in the Southern Powder River Basin of Wyoming and lower seaborne coal pricing.

A trader said, for instance, that Peabody’s unsecured 6½% notes due 2020 and its 6¼% notes due 2021 were both moving around in a range of 30 to 33 bid.

He said the 6½s were last trading around 30½, on volume of over $10 million, “down a chunk – like 5 points from [Tuesday].” He also saw the 6¼s around 30, down 4 points on the day, with around $5 million changing hands.

He also saw Peabody’s 7 7/8% notes due 2026 trading at 31 bid, calling that down 1 or 2 points, with about $4 million or $5 million moving around

“As one goes, they all go,” he declared.

Another trader said that Peabody’s 6% notes due 2018, which “had gotten up close to 50” on Tuesday, “took it on the chin” on Wednesday, falling into a 43 to 45 range.

He saw the longer-dated notes such as the 2020s and 2021s trading around 30, “so those are down a couple of points as well.”

“BTU got hammered,” he concluded.

The first trader said that “the second-liens have held up – but their unsecured bonds are the ones that have gotten beat up.”

Demonstrating his point, he said the company’s 10% second-lien notes due 2022 were trading most of the day in a 60-62 context, which he said was “pretty much where they have been in the last couple of days.”

A second trader, though saw the bonds finishing at around 59½ bid, 61 offered, which he said was off “roughly 2 points or so” from the 62 level at which the bonds had gone home on Tuesday.

At another shop, those bonds were seen to have dipped to around 59-60.

A market source at another desk pegged the notes at 60½ bid, down 1½ points on the day, with more than $28 million traded, putting Peabody high up on the day’s Most Actives list.

The carnage in the unsecured debt extended to the company’s equities as well, with its New York Stock Exchange-traded shares plummeting by 41 cents, or 18.72%, to end at $1.78. Volume of over 72 million shares was around 4.5 times the norm.

When Peabody announced its results in late April for the 2015 first quarter ended March 31, it projected that adjusted EBITDA for the just-ended second quarter would likely come in somewhere between $135 million and $175 million, while its adjusted diluted loss per share would be in a range of 49 cents to 59 cents.

Peabody did not issue new anticipated adjusted EBITDA and per-share guidance on Wednesday, only saying that the results to be reported would be weaker than those earlier predictions.

In the first quarter, adjusted EBITDA was $165.6 million, with a diluted loss per share of 62 cents, including 23 cents per share related to the company’s refinancing of its then-outstanding 7 3/8% notes due 2016 using the proceeds from the March senior secured bond deal.

Peabody said that when it reports its second-quarter results, which are scheduled to be released on July 28, it expects its results to reflect a timing-related impact of about $40 million as a result of a series of substantial rain and flash flooding events in the southern part of the Powder River Basin, primarily in June, that reduced production by between 5 and 5.5 million tons.

Peabody said that it has largely resumed normal production levels and is scheduling to make up the deferred shipments in the current third quarter and in the fourth quarter.

The company said that it was also impacted by some $20 million from the effects of lower pricing on Australian metallurgical coal, with around half of that related to spot coal sales during the quarter and the other half related to reduced coal inventory valuation due to benchmark third-quarter settlements. Spot metallurgical coal prices declined 15% percent during the quarter before increasing in recent weeks, Peabody said.

California Resources retreats

A trader said that oil and natural gas names were being pushed around, with crude prices having fallen more than $2.50 per barrel on the benchmark West Texas Intermediate U.S. crude to below $57 per barrel.

For instance, he said that California Resources’ 6% notes due 2024 were down 1½ points, trading between 84 and 85 bid, on volume of over $35 million.

He said the Los Angeles-based exploration and production company’s 5% notes due 2020 were also 1½ points down, around 87-88, with over $10 million having traded.

Its 5½% notes due 2021 lost 1 point, ending at 85-86, with around $5 million changing hands.

Another trader said the company’s paper “continues to drift lower.”

The company’s bonds – already knocked down from the par level at which all three of those tranches had priced last September by the subsequent slide in crude oil prices – were further hammered last Friday, with all tranches falling into the 80s, after Blue Mountain Capital Management LLC, a brokerage firm, declared in a research note that “we believe that the company’s common stock is worthless and that its bonds are worth around 23 cents on the dollar, taking into account coupons and ultimate recovery upon default.”

It further said that “CRC’s oil fields have high overhead costs; proceeds from the sale of the oil and gas produced there “do not come close to covering its debt.”

There was no immediate response from California Resources.

Market quietly firmer

Despite the downturn in oil prices, a trader said that at his shop, at least, “we were hard-pressed to find weakness in some of the names that we were trafficking in. They really weren’t off at all, if any.”

He called that circumstance “kind of weird.”

He explained that “spreads in general were tighter today, and that kind of kept a bid to the market.

“With Treasuries off the way they were, I would have thought there would have been a little bit of weakness in the market, especially some of the kind of rate-sensitive BB names – but spreads were tighter and those type of names were a little bit better.”

Indicators head higher

Statistical market-performance measures accordingly turned higher across the board on Wednesday, after having been mixed on Tuesday and lower all around for three consecutive sessions before that. Wednesday’s was the first higher session seen since June 22.

The KDP High Yield Daily Index broke out of its slump, rising by 6 basis points to end Wednesday at 70.24 – its first winning sessions after five straight trading days on the downside, including Monday, when it had plunged by 20 bps and Tuesday, when it slid by another 14 bps.

Its yield, meanwhile, came in by 4 bps to finish at 5.70% – its first narrowing after four consecutive sessions of having widened out, including Tuesday, when it had risen by 1 bp, on top of Monday’s 8 bps jump.

The Markit Series 24 CDX North American High Yield Index saw its second gain in a row Wednesday after two straight losses. It improved by 9/32 point to go home at 106½ bid, 106 17/32 offered. The index had also risen by 15/32 point, after having nosedived by 1 3/32 points on Monday.

The Merrill Lynch North American Master II High Yield Index also made it two winning sessions in a row on Wednesday, advancing 0.208%, after having edged up by 0.044% on Tuesday, its first gain after five successive setbacks.

That improvement raised its year-to-date return to 2.707% from 2.494% on Tuesday, although those returns remain well down from the 4.062% reading recorded on May 29, the index’s peak level for the year so far.

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