Upsized Qwest leads $2 billion primary session, new TXU bonds jump; funds gain $288 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 7 - Having had a couple of warm-up sessions at the start of the week, the high yield primary market hit its stride and was firing on all cylinders on Thursday, as five deals totaling $1.9 billion and C$300 million priced - the kind of busy day that new-dealers had seen during the frenetic borrowing binge that characterized much of the 2009 fourth quarter, particularly in early and mid-December. All of the day's deals were upsized from their originally planned levels, all were opportunistically timed drive-by offerings which had either been announced earlier Thursday, or, at the earliest, on Wednesday and all priced at the tight end of talk.

The big deal of the day was Qwest Communications International Inc.'s $800 million offering of eight-year senior notes, increased from the $500 million which the Denver-based telecommunications company had announced earlier in the session. Qwest was also the day's final pricing, coming way too late for any kind of aftermarket action.

Also appearing late in the day was Kansas City Southern de Mexico SA de CV -- the Mexican unit of U.S. transportation operator Kansas City Southern Railway Co. - which did a $300 million offering of eight-year notes, upsized from $250 million, and also appeared too late in the day to trade in the secondary.

Traders in that market never even missed the Kansas City deal - because they were too busy trading Energy Future Holdings Corp.'s new $500 million issue of 10-year senior secured notes, upsized from $300 million, at sharply higher levels versus their pricing.

Also pricing was Paetec Holding Corp.'s $300 million add-on issue of senior secured 2017 notes, which was likewise upsized from the originally announced $275 million. The bonds traded around their issue price.

And Canadian cable operator Videotron Ltee. similarly grew the size of its loonie-denominated 10-year bond deal, to C$300 million from the C$200 million originally shopped around to investors.

Among recently priced issues, Ply Gem Industries Inc.'s upsized offering of 4.5-year subordinated notes, which popped right up by several points following its debut on Wednesday, was seen pretty much holding at those exalted levels.

However, Level 3 Financing Inc.'s eight-year issue, which had firmed solidly on Wednesday from Tuesday pricing, gave up some of those gains Thursday.

Away from the new-issue market, and from trading in new or recently priced paper, the junk secondary was seen continuing the firming trend in effect since the start of the year. Energy Future Holding Corp.'s existing bonds were trading robustly higher for a second consecutive session, helped by the buzz generated by the Texas utility operator's new deal and its sterling aftermarket performance.

From the distressed-debt precincts came word of brisk activity at firmer levels in the legacy bonds of the collapsed Lehman Brothers Holdings Inc.

Junk funds draw $288 million

As trading was winding down for the day, market participants familiar with the high yield mutual fund-flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday, some $288 million more came into the weekly-reporting funds than left them, with the funds starting the new year the same way they had ended the old one. The previous week, ended last Wednesday, Dec. 30, had seen a $347 million cash infusion to the funds, which brought the final inflow total for 2009 to a record $20.56 billion, according to a Prospect News analysis of the AMG figures. During 2009, inflows had been seen in fully 47 weeks out of the year, against only five generally isolated outflows.

The latest week's inflow was the 20th consecutive weekly advance, a winning streak that dates all the way back to mid-August, after the last outflow of 2009 had been seen - a lonely $89.9 million outflow recorded in the week ended Aug. 19. Since then, inflows have totaled $6.835 billion, according to the Prospect News analysis.

Those kind of sustained inflows - which also included the over $12 billion which came into a separate category of funds that report on a monthly basis, rather than weekly, swelling 2009's aggregate mutual fund inflow to a record $32 billion plus - made it possible for the junk market to come roaring back last year from 2008's staggering 25%-plus loss and sharply reduced primary activity totals. Total junk market returns for 2009 had finished at a truly eye-popping 57.512% as of the close last Thursday, Dec. 31, according to the authoritative Merrill Lynch High Yield Master II index - the peak level for the year, as high yield handily beat virtually every other major investment asset class.

The heavy inflows also fueled last year's primary market revival, with the $160.028 billion of new dollar-denominated high yield debt issued in the U.S. market, as of the Dec. 31 year-end close -- $129.202 billion of it from domestic issuers - running some 120.87% ahead of the feeble pace of 2008, while the domestic issuance represented a 115.82% gain over the 2008 levels. Industrialized-country global issuance in all major currencies of $174.902 billion equivalent was a blistering 171.05% ahead of 2008's pace.

With funds still flowing in and Junkbondland 2010 set to continue the strong trend seen in 2009 - at least for the beginning of the year, until other asset classes begin to attract some money away from high yield and the inflows start to dry up, according to most forecasters - primary issuance as of Wednesday's close stood at $790 million in two deals, versus nothing on the board a year earlier. Year-to-date secondary market returns for the new year, according to the Merrill Lynch Index already totaled an impressive 1.321%

EPFR sees flows continuing

Another fund-tracking service, EPFR Global of Cambridge, Mass., which uses a different methodology from AMG, saw "solid" inflows of some $452 million for the first week of the new year. Its analysts said that the inflows "occurred against a backdrop of aggressive issuance by sovereign and corporate borrowers anxious to tap the market while risk appetite is high ... and the yields demanded by investors low."

EPFR said the inflow for the week ended Wednesday was the seventh in the last 10 weeks. It followed the $433 million cash infusion seen in the Dec. 30 week, which had brought the agency's full-year 2009 total to $22.9 billion, a record, this "despite a surge in debt issuance and numerous high profile ratings downgrades."

While the EPFR numbers generally point in the same direction as AMG's - with an exception to the rule here and there - the exact magnitude of those figures differs since EPFR includes in its calculations some funds domiciled outside of the United States.

All cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise less of the total monies floating around the high yield universe.

Qwest massively upsized

Qwest Communications completed Thursday's biggest deal, a massively upsized $800 million issue of 7 1/8% eight-year senior notes (Ba3/B+/BB+) that priced at 98.44 to yield 7 3/8%.

The yield printed at the tight end of the 7 3/8% to 7½% price talk. The amount was upsized from $500 million.

Deutsche Bank Securities, Bank of America Merrill Lynch, Barclays Capital, Citigroup, Goldman Sachs & Co., JP Morgan, Morgan Stanley and Wells Fargo Securities were joint bookrunners for the quick-to-market issue.

Proceeds will be used for general corporate purposes, including repayment of debt, and funding and refinancing investments in the company's and its subsidiaries' telecommunications assets.

The notes, which came at 98.44, were trading at 99 bid, 99¼ offered in the secondary market, according to a high-yield mutual fund manager, who remarked that the new Qwest Communications International 7 1/8% notes due 2018 were fully priced.

Energy Future at tight end

Meanwhile Energy Future Holdings priced an upsized $500 million issue of 10-year senior secured notes (Caa3/B+) at par to yield 10%.

The yield printed at the tight end of the 10% to 10¼% yield talk. The amount was raised from $300 million.

Citigroup Global Markets Inc., Goldman Sachs & Co., J.P. Morgan Securities Inc. and Credit Suisse were joint bookrunners.

Proceeds will be used for general or other corporate purposes, which may include working capital, investment in business initiatives, capital expenditures and debt repayment.

The deal went well, according to a syndicate source.

Kansas City Southern de Mexico prices

Elsewhere Kansas City Southern de México priced an upsized $300 million issue of 8% eight-year senior notes (B2/B+) at 98.55 to yield 8¼% on Thursday.

The yield printed at the tight end of the 8 3/8% area price talk. The deal was upsized from $250 million.

Bank of America Merrill Lynch, JP Morgan and Scotia Capital were joint bookrunners for the quick-to-market deal.

Proceeds will be used to redeem a portion of the company's 9 3/8% senior notes due 2012.

Not much on the table

Discussions of a deal to address Kansas City Southern de Mexico's debt maturing in 2012 began three weeks ago, according to an asset manager involved in the credit.

However, those discussions began in the context of an 8 7/8% yield, the source added.

Since that time the market moved 30 to 40 basis points, the manager allowed.

Even in that context, though, the new 2018 bonds would have made more sense had they come with a yield of 8 3/8% to 8½%, the source asserted.

No doubt the company - having seen its issues in the not-too-distant past rocket higher in the secondary market - held the feet of its investment bankers to the fire, making certain, given the present hot market conditions, that not too much would be left on the table for investors, the manager said.

The manager, who stayed in the deal at 7¼%, saw the bonds trading 0.25 to 0.5 points higher in the secondary, and remarked that, like the above-mentioned Qwest bonds, the Kansas City Southern de Mexico 7¼% notes due 2018 were fully priced.

Paetec upsizes add-on

Elsewhere, Paetec Holding priced an upsized $300 million add-on to its 8 7/8% senior secured notes due June 30, 2017 (B1/B) at 100.528 to yield 8¾%.

The yield printed on top of yield talk. The issue price came rich to the 100.50 price talk. It was increased from $275 million.

Bank of America Merrill Lynch and Deutsche Bank Securities Inc. were joint bookrunners for the debt refinancing deal.

Videotron at the tight end

Finally, Videotron priced an upsized C$300 million issue of 10-year senior notes (Ba2/BB-) at par to yield 7 1/8%, on Thursday.

The yield printed at the tight end of the 7¼% area price talk while the amount was increased from C$200 million..

RBC Capital Markets, Scotia Capital and TD Securities were joint bookrunners for the debt refinancing and general corporate purposes deal.

TXU trades terrifically

When the new Energy Future Holdings issue of 10% senior secured notes due 2020 was freed for secondary dealings, a trader saw the former TXU Corp.'s new bonds jump "immediately" up to the 104 level and beyond; when the paper reached 1041/4, "there were a couple of guys trying to hit that bid."

By the end of the session, the bonds had come in slightly from those peaks, to around 103½ bid, 104 offered.

That was still sharply higher than the par level at which the Dallas-based utility operator and merchant power company had priced its deal earlier in the session.

Among Energy Future Holdings' existing bonds, a trader said that the notes - which had risen on Wednesday after the announcement of the coming big bond deal - "were trading all over the place," but on balance, were "a little firmer, certainly as the deal priced and after."

A market source elsewhere pegged the company's 11¼% notes due 2017 at 79 bid, up 3½ points, while its 10 7/8% notes due 2017 were seen up more than 4 points at the 90 level, both in fairly busy dealings.

Yet another source reported that the 111/4s gained 3¾ points to 791/4, with over $32 million having changed hands by mid-afternoon. The 10 7/8s were ¾ point better at just under 88, while another company unit, Texas Competitive Electric Holdings Corp.'s 10¼% notes due 2015, rose more than 2½ points to also finish around the 88 mark.

The TXU 6.55% bonds due 2034 gained nearly 4 points to the 53 level.

Paetec deal edges upward

A trader saw Paetec Holdings' new 8 7/8% senior secured notes due 2017 trading at 100¾ bid, 101¼ offered, "ah, up a little bit" from the 100.528 level at which the Fairport, N.Y.-based integrated communications services company priced its issue earlier in the session.

Another trader said that "right out of the box," he saw a 101 bid for the credit. However, an hour or two later, they had softened slightly to 100¾ bid, 101¼ offered.

The second trader meantime saw Paetec's existing 9½% notes due 2015 trading in a range of 97¾ to 981/2, with most of the trades going off in a 98-98¼ context, up 1½ to 2 points from recent levels, on "pretty good volume" of over $14 million

Ply Gem rests on its laurels

A trader saw Ply Gem Industries' 13 1/8% senior subordinated notes due 2014 at 101½ bid, 102½ offered - well up from the 97.139 level at which the Cary, N.C.-based building products manufacturer had priced its $150 million bond offering - upsized from $110 million - on Wednesday to yield 14%.

Those bonds "had a great pop [Wednesday] afternoon. Almost instantly they went up to 101 bid, and really didn't soften up. It was up slightly from [Wednesday's] initial pop."

Level 3 levels off

A trader saw Level 3 Financing's new 10% notes due 2018 as having backed off a little from the highs which they hit on Wednesday, a day after the company - a subsidiary of Broomfield, Colo.-based telecommunications infrastructure company Level 3 Communications Inc. - priced its $640 million bond deal at 97.982 to yield 10 3/8%.

He said the bonds had gotten as high as 101 bid on Wednesday. "They kind of ran those things right up, but then I think there must have been some sellers," because "they traded right back down," ending Thursday at 99 bid, 99¾ offered.

A second trader said that he had not seen "huge activity" in the new paper, but did see those bonds come down to 99¼ bid, 99½ from the earlier levels above par.

Market indicators turn mixed

Back among statistical measures of market performance not related to the new-deal market, a trader saw the CDX Series 13 index down about ¼ point on Thursday to end at 100 5/16 bid, 100 9/16 offered, after having held steady on Wednesday.

But the KDP High Yield Daily Index meanwhile rose by 11 basis points on Thursday, to 72.06, after having jumped 35 bps on Wednesday. Its yield, however, widened by 5 bps to 7.82%, after having tightened by 13 bps the previous session.

Advancing issues continued to lead decliners, although their previous advantage of better than two to one had narrowed to about eight to five.

Overall market activity, as measured by dollar volume levels, slowed by nearly 16% from Wednesday's busy pace.

The market, a trader said, "is very well bid here."

Another said that apart from the activity in popular new-issue paper like the TXU deal, "everything is just bid without. It's just unrelenting.

Noting the reported mutual fund inflow - a sign of continued easy and ample market liquidity - he declared that "we're just seeing lots of buyers."

But not a lot of sellers.

A trader - noting that dealers currently have very low inventory levels - said it "seems so true right now" that trades are coming out of the clients. That is, if they are willing to sell.

"On the dealer side, towards year-end, everybody was just lightening up on their positions for their year-end mark, so now nobody has any real inventory to offer the clients. So everyone is trying to work on orders or buy stuff off customers, and it just seems like there's not a lot of paper out there to buy, right now."

The only trouble with that strategy, he said was that "everybody's just kind of sitting and holding," in expectation that the paper they've got is going to continue to firm, at least over the next few weeks to several months.

It's not hard to see why such a belief would be widespread among investors. The trader cited the recent example of one fund manager - who won an award for producing great returns last year, describing the secret of his success: it was quite simple, he said, "everything we owned just went up. We really didn't do anything. We just sat on everything - and it just went up."

And for the moment, he continued, that strategy is working out. "I really don't see anything going down."

Lehman leaps forward

A trader said that Lehman Brothers Holdings Inc.'s paper "has really been a story this week - it's really very active and up several points."

Lehman's 6 5/8% notes due 2012 were being quoted Wednesday up nearly 2 points on the day at 21¾ bid, in brisk trading, although the company's 5 5/8% notes due 2013 - a big winner on Wednesday, when the bonds gained well over a point to just under 23 bid, were seen to have eased slightly from that peak in Thursday's session, again in fairly active dealings.

The trader said that he was "not really sure what the end-game is here. I don't know why" the legacy bonds of the bankrupt New York-based investment bank - which collapsed in the fall of 2008 and whose operations have now largely been absorbed by Barclays Bank -- are attracting such interest.

Another trader said that the Lehman paper was "making a real comeback," suggesting that "people are thinking that some of that mortgage portfolio that the legacy Lehman is long, is going to be doing a little bit better, with everything else up. So the paper is up a couple of points."

He saw the notes having moved from the mid-teens range into the lower 20s, "maybe 22-23 on some of the bigger benchmark-type names."

Even though Lehman as a viable company no longer exists, "the bonds are still outstanding. There's still a claim in bankruptcy that hasn't really been resolved.

"That's why they're up, the first trader agreed, "but only time will tell."

CIT climb continues

Also among the financials, a trader said that CIT Group Inc.'s 7% notes due 2016 were trading in an 89-90 range, while its 7s due 2017 were around 89. Among the shorter-dated paper, its 2015 notes were around 91½ on the bid side.

At another desk, a market source quoted the 2016 bonds up as much as 4 7/8 points on the day, pegging them at 92½ on brisk volume of over $35 million at mid-afternoon, while the 2017s were up 1 1/8 point at 89, with over $25 million having changed hands.

CIT's 7% notes due 2015 were seen up nearly 2 points at just under 91, while its 2014 notes were firm at 92. The 7% notes due 2013 were quoted up 1¼ points at 94 bid.

However, another market source, while seeing its 7% notes due 2013 up nearly 3½ points at 95¾ bid and its 2016 bonds at just under 90, up nearly a point, called the 17s down ½ at 89.

The CIT series A second-priority secured notes, totaling $21.04 billion, were issued in five tranches carrying maturities of between 2013 and 2017, with a 7% coupon, at the time of the New York-based commercial lender's Dec. 10 emergence from Chapter 11, and have been among the most actively traded high yield bonds on many days since then. Its $2.15 billion of series B 10¼% second-priority secured notes, also issued in five tranches maturing between 2013 and 2017, trade less actively; they were last seen all hovering a point or so above par.

More upside for Zions

In the crossover market, a trader said that the Zions Bancorporation 7 ¾% notes due 2014 "continue to be pretty active," trading between 90 and 901/2, which he called up from levels they held several days ago.

He said that the bonds firmed on "not huge volume" - perhaps around $4.5 million, with the bulk of activity coming in a range of 901/4-91, although he saw some odd lots trading higher.

Considered a five-B credit, Zions - whose bonds are mostly unrated by Moody's Investors Service, are rated BB+, BBB- or not rated by Standard & Poor's and are mostly rated BBB by Fitch Ratings - attracts interest from both the high-grade market as crossover players look for yield, and from junk investors seeking to add a little quality to their portfolios.

"It's just interesting," he noted - those bonds are getting more interest [from investors] while at the same time, the equity is up big over the last couple of days."

He observed that the Salt Lake City, Utah-based regional banking company's Nasdaq-traded shares have also been going up each day -- $1.20 on Wednesday, and another $1.68, or 11.20% on Thursday, to end at $16.68. At the beginning of the year, he further pointed out, the shares were trading in the mid-$13 level, and have jumped around $3 in just four sessions, with Thursday's showing about four to five times the average volume.

However, he had heard no specific news that might explain such a sharp rise, such as takeover chatter or another positive development.

He said that "earnings are coming out later in the month, so I guess it's the quiet period for the company."

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