Pharma space under pressure; Rackspace higher; Tallgrass negative; oil names rise

By James McCandless and Paul A. Harris

San Antonio, Aug. 28 – High -yield secondary trading saw more focus on pharma and energy tranches.

Teva Pharmaceutical Industries Ltd.’s and Endo International plc’s notes trended lower amid news that a competitor is in talks to settle all opioid-related lawsuits against it for billions.

Meanwhile, software name Rackspace Inc.’s issues moved up after the company held a conference call on its latest earnings report.

In energy, Tallgrass Energy LP’s paper dropped after a majority shareholder offered the company a buyout deal that would take it private.

As oil futures gain, Oasis Petroleum Inc.’s and Diamond Offshore Drilling, Inc.’s notes rose in kind.

In telecom, Vodafone Group plc’s issues gained.

While the primary market remained quiet, the pipeline started to hum with names as Sept. 3 approaches and activity is expected to resume.

Busy September taking shape

The dollar-denominated new issue market remained dormant on Wednesday, and is expected to stay that way for another week, at which time market participants – many now taking mandatory vacations – will retake their desks following the extended Labor Day holiday weekend in the United States, which concludes when the market reopens on Tuesday, Sept. 3.

Forecasts for the post-Labor Day period have tended to be cautious.

However, events now appear to be overtaking forecasts for tepid September issuance which surfaced during the trade war-generated market volatility seen during the past fortnight.

High-yield market technicals are generally good, sources say.

Investors have cash to put to work.

And opportunities to lock in seven- to 10-year capital at ultra-low rates – with benchmark rates on government bonds now tumbling throughout the industrialized world – will likely tempt the timidest issuer to give the market a try, they add.

Headlining fall issuance is a visible $20 billion to $25 billion pipeline of merger and acquisition related committed financings, some of them backed by short-term bridge loans that dealers will be keen to replace with bonds and syndicated loans, sources say.

A bridged $450 million offering of senior secured notes backing the buyout of Shutterfly Inc. by Apollo Global Management LLC is expected to factor into what is taking shape as a busy post-Labor Day new issue calendar, an informed source said on Wednesday.

Barclays, Citigroup Global Markets Inc. and SunTrust Robinson Humphrey Inc. provided the debt commitment.

Presidio Inc. is expected to come to the leverage markets with $1,775,000,000 of high-yield bond and bank loan debt in the late September to early October time frame.

Citigroup Global Markets Inc., J.P. Morgan Securities LLC and RBC Capital Markets LLC provided the debt commitment (see related stories in this issue).

Other post-Labor Day names are expected to include Centene Corp., which earlier obtained commitments for a $8.35 billion senior unsecured bridge loan backing Centene's acquisition of WellCare Health Plans Inc., and Zayo Group Holdings Inc. which has a $2,775,000,000 senior unsecured bridge backing the buyout of the company by Digital Colony Partners and the EQT Infrastructure IV fund, sources say.

Add to that a steady pipeline of opportunistic debt refinancing deals, a syndicate banker said on Wednesday.

There were prospective opportunistic issuers with deals lined up for early-to-mid August that backed away from the market because of the volatility trailing in the wake of tit-for-tat trade war headlines that went back and forth between the leaders of China and the United States, the banker said.

Some of those issuers even pondered late August drive-by deals, but reconsidered in light of how many participants are away from work in this customarily dormant, illiquid market interval, the source added.

Barring renewed market turmoil of the kind seen in early-to-mid August those issuers can be expected to show up sooner than later in September, the source advised.

September is shaping up to be an active month in the primary market, and should get rolling relatively quickly following the upcoming Labor Day holiday, sources say.

Healthy European September

The new issue market in Europe can also be expected to get rolling quickly, and to be busy, a London-based debt capital markets banker said on Wednesday.

As in the United States, there is a pipeline of mergers and acquisitions deals, as well as debt refinancings that will be opportunistic, the banker said.

Market technicals are strong, the London-based banker added.

Away from the known pipeline, underwriting groups have been fairly active, and are expected to continue to be active, which should translate into supply in three to four months.

There is always the risk of “macro everything,” the source noted, specifying that such a list would include Brexit, trade wars and sundry geopolitical developments.

However, the London banker said Brexit, in particular, may no longer have the power to absolutely cut the legs out from under the market.

There is “Brexit fatigue,” the banker said.

Developments have become impossible to predict.

People are finding that trading on a short-term basis, to the drumbeat of these headlines, has been unsuccessful.

Pharma weaker

Distressed pharma tranches, like Teva’s, continued to show weakness, traders said.

The 2.8% senior notes due 2023 lost ½ point to close at 83½ bid. The 6¾% senior notes due 2028 shaved off ¼ point to close at 83 bid.

The Petach Tikva, Israel-based generic drug producer’s notes were among the most active in the space amid more developments in the opioid lawsuit landscape.

Late Tuesday, news broke that competitor Purdue Pharmaceuticals is considering a deal to settle more than 2,000 lawsuits against it for $12 billion.

Purdue’s alleged involvement in the opioid epidemic has been one of the highest profiled.

The news comes on the heels of a settlement order in Oklahoma, where a district judge ordered Johnson & Johnson to pay $572 million to the state earlier in the week.

Analysts have said that the industry could pay billions more.

“I don’t know how much, say, Teva will have to pay, but the numbers are pretty grim,” a trader said.

Dublin-based peer Endo’s issues also declined.

The 6% senior notes due 2023 declined by 1¼ points to close at 64½ bid. The 6% senior notes moved down 2½ points to close at 61 bid.

Rackspace positive

Meanwhile, Rackspace’s paper was moving upward, market sources said.

The 8 5/8% senior paper due 2024 added 2¾ points to close at 90½ bid.

The 8 5/8% notes saw about $16 million on the tape.

The San Antonio-based private cloud computing name held a conference call with stakeholders on Wednesday.

“It’s private, but from what we can tell it looks like the holders are happy,” a trader said.

The company’s notes have been volatile over the last year as it works to revitalize the business, marked by hundreds of layoffs and the replacement of its senior management.

Tallgrass drops

In energy, Tallgrass’ notes dropped during the Wednesday session, traders said.

The 5½% senior notes due 2028 slid 3½ points to close at 94½ bid.

The notes saw about $16 million trading.

After the Tuesday close, news broke that the Leawood, Kan.-based energy transportation name had received a buyout offer from private equity firm Blackstone that would take the company private.

Blackstone already owns 44.2 percent of the company’s common stock, offering $19.20 per share for the outstanding amount.

The stock has lost about 40 percent of its value recently, coinciding with pressure on its issues.

“The equity has gotten destroyed over the last few months so it seems opportunistic for both sides,” a trader said.

Oil better

As oil futures rose, distressed energy tranches saw a bump, market sources said.

As government benchmarks showed that U.S. crude oil stockpiles dropped, futures shot up.

West Texas Intermediate crude oil futures for October delivery racked up 85 cents to close the session at $55.78 per barrel.

North Sea Brent crude oil futures for October delivery settled at $60.49 per barrel after a 98-cent pickup.

Houston-based producer Oasis’ issues added value on Wednesday.

The 6¼% senior notes due 2026 rose ½ point to close at 80 bid.

Houston-based driller Diamond Offshore’s paper was also positive.

The 7 7/8% senior notes due 2025 added 3¼ points to close at 92½ bid. The 5.7% senior notes due 2039 garnered ½ point to close at 62¼ bid.

Vodafone gains

In telecom, Vodafone’s longer-term notes saw a modest gain, traders said.

The 7% notes due 2079 picked up ½ point to close at 113½ bid.

The Newbury, England-based telecom name has seen positive attention recently with a positive first-quarter earnings report and turnaround strategy.

Indexes up

Three high-yield indexes kept a positive streak alive.

The KDP High Yield Daily index picked up 5 basis points to end the session at 71.65 with the yield declining to 5.46%.

The index gained by 7 bps on Tuesday, 2 bps on Monday and rose 3 bps on Friday

The ICE BofAML US High Yield index improved by 10.9 bps on Wednesday with the year-to-date return now at 10.905%.

The index gained 12 bps on Tuesday, edged up 6.6 bps on Monday and lost 9.9 bps on Friday.

The index remains above the 10% threshold, which was reached last Monday.

The CDX High Yield 30 index rose 34.84 bps, ending the session at 106.3499.

The index garnered 36.63 bps on Tuesday, improved by 35.41 bps on Monday and rose by 36.2 bps on Friday.

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