Junk gets quiet start to week; Kabel Deutschland prices euro deal; Zayo holds most gains

By Paul Deckelman

New York, June 18 - The high-yield market saw a quiet start to the new week Monday with no deals pricing in the dollar-denominated domestic primary sphere, even in the wake of last week's hugely successful pricing of Zayo Group LLC's two-part mega-deal.

While there were high hopes that the greatly oversubscribed, crisply executed and well-received offering might be just the spark needed to revive a recently sagging junk bond new-issue market, traders said the reality is that most borrowers are wary of doing anything until there's some visibility on a solution to Europe's debt crisis.

There was no such solution anywhere in sight Monday - even after the weekend elections in Greece did not result in a much-feared turn for the worst.

Traders said that rather than being heartened, borrowers and investors have moved on to the next worry du jour.

However, the lack of an immediate debacle following the Greek vote did encourage one European issuer - German cable operator Kabel Deutschland Holdings AG - to opportunistically price a tranche of five-year notes that was on the forward calendar for some weeks, although that deal turned out to be smaller than anticipated.

Another Continental cabler, France's Numericable, also was heard by junk-market sources to have scheduled a non-deal roadshow, during which company executives could meet with U.S. investors later this week.

The traders saw Zayo's new bonds mostly holding on to the strong gains they notched after the issue priced last week, although activity was limited.

Away from the new deal, Nokia Corp.'s bonds were once again busy Monday, after having gyrated around crazily last week as the cellphone maker announced job reductions and lowered guidance.

Statistical measures of junk market performance were mixed on the day.

Monday market malaise

When a high-yield trader was asked what, if anything, was going on in Junkbondland on Monday, he succinctly replied, "Pretty much nothing. Volume on Trace was slow."

A second trader called the day's activity level "excruciatingly slow," while a third termed it "ridiculously slow."

The first trader said he saw a flurry of activity toward the end of the day, but it was mostly in cross-over, low-coupon names like as Ford Motor Credit Co. LLC and SLM Corp., whose bonds are trading at low yields that hold little interest to junk investors.

For instance, Ford Credit's 5% notes due 2018 were quoted trading above the 107 mark, putting their yield down around the 3.6% range. More than $16 million of those bonds from the Dearborn, Mich.-based loan financing arm of carmaker Ford Motor Co. traded on Monday. Its 5 7/8% notes due 2021 traded at 112, for a 4.2% yield, on volume of more than $10 million.

Likewise, Newark, Del.-based education finance company SLM's 5 3/8% notes due 2014 traded at 105, pushing their yield down to about the 2.6% level, on mid-afternoon volume of more than $14 million.

'Too many headlines'

"It seems like we've entered into a quiet period," the trader said, with most junk activity seeming to be at a standstill.

He said that it was "not necessarily due to fund flows," which are a measure of overall liquidity trends in the junk market.

While these were decidedly negative for a period of four weeks, in which time outflows from the funds totaled more than $6 billion, the flows reported last week were on the positive side. The AMG unit of Thomson Reuters LLC's Lipper analytics division reported $568 million more coming into the funds than leaving them, while rival fund-tracking service EPF R Global, using a different methodology, pegged the inflow at $391 million.

Rather, this is a case of "folks just sitting on their cash, waiting to see what the next European headlines will bring," the trader said.

In the wake of the weekend elections in Greece, the main establishment center-right party and its largest rival, the center-left Socialist party, appear to have won enough seats to have a parliamentary majority should they choose to join forces in a coalition government.

Both parties are on record as supporting recent efforts by other European countries and their central banks to bail debt-laden Athens out, even though fringe opposition parties in Greece denounced the austerity cuts that would be imposed on public spending.

Going into the weekend vote, there were fears in the financial markets that big gains by the anti-austerity parties could scuttle any bailout plan, perhaps leading to a Greek default or that country's withdrawal or ouster from the European Union's common currency set-up.

The trader said that last night, equity futures were up 100 points following the end of the voting and the release of the results. "But they opened this morning down 100 points," he said. "That was a really long-lived rally."

With the Greek vote now old news, equities on Monday turned mixed after being up for two straight sessions Thursday and Friday on expectations that if the electoral results did produce another immediate crisis, the European Central Bank and other major central banks, including the U.S. Federal Reserve, would step in with coordinated action to keep the markets liquid.

The bellwether Dow Jones Industrial Average posted its first loss in three sessions, ending down 25.35 points, or 0.20%, at 12,741.82, although the broader Standard & Poor's 500 index rose 0.14% and the Nasdaq index was up 0.78%.

"There's just too many headlines," a second trader said. "Everybody just wants to wait for the headline risk to go away a little bit."

Despite the relatively calming news from Greece, investors had a new worry.

"First thing this morning, everyone was in a panic over Spain because their bonds [yields] went above 7%," a trader said. "It's a new name to worry about."

New-issuance muted

Traders said that international concerns, as well as continued worries about the weakness of the U.S. economy, also were conspiring to restrain new junk-market issuance, even in the wake of Thursday's hugely successful launch of Zayo Group's new $1.25 billion two-part issue.

The Louisville, Colo.-based provider of fiber-based bandwidth infrastructure and network-neutral collocation and interconnection services priced $750 million of 8 1/8% senior secured notes due January 2020 at par Thursday and $500 million of 10 1/8% senior unsecured notes due July 2020, also at par, in support of its planned $2.2 billion acquisition of AboveNet, Inc., a White Plains, N.Y.-based provider of high-bandwidth connectivity solutions for businesses and carriers.

The deal was heard by syndicate sources to have been more than three times oversubscribed and both tranches priced inside of their respective price-talk levels of 8¼% and 10¼%, respectively. When they hit the aftermarket, both deals shot up handsomely, with the 8 1/8s seen by one market source "wrapped around" 102½ bid, while the 10 1/8s were likewise wrapped around 103. On Friday, those bonds moved up further, with both tranches quoted above 103 bid; on Monday, a trader saw the 8 1/8s inside a context of 103 to 1031/2, while the 10 1/8s were at 103½ bid.

A second trader said Monday that he saw both tranches at 102¾ bid, with no offer levels, which is where they were on Friday and today as well.

In the wake of Thursday's high-flying new deal, some market participants expressed the hope there might be a pickup of new activity with Zayo breaking the ice and showing that a credit with modest ratings (B1/B on the secured piece, Caa1/CCC+ on the unsecured) could do well, even in the current uncertain and volatile environment.

So far, though, that anticipated pick up just hasn't happened, high-yield syndicate sources said.

Chang, Engility on the road

The only things going on in the domestic arena right now are a pair of deals that could come to market late in the week.

P.F. Chang's China Bistro, Inc., a Scottsdale, Ariz.-based operator of Asian-themed restaurants, was scheduled to begin a roadshow Monday for its $300 million offering of eight-year notes. The proceeds will go to partially finance the acquisition of the company by Centerbridge Capital Partners.

That deal is expected to price by the end of the week.

The Rule 144A for-life deal is being brought to market via Deutsche Bank Securities Inc., Wells Fargo Securities LLC and Barclays Capital Inc.

Engility Corp. - currently a unit of New York-based defense contractor L-3 Communications Holdings Inc. also hit the road in Boston and New York at the end of last week to start marketing its $250 million offering of seven-year senior notes.

The proceeds from that bond issue, together with the proceeds of a new senior secured credit facility, will be used to pay a special cash distribution to L-3 as part of Chantilly, Va.-based Engility's coming spin-off from L-3.

The 144A deal, sold with registration rights, will come to market via Bank of America Merrill Lynch, Barclays, Credit Agricole Securities (USA) Inc. and Sun Trust Robinson Humphrey Inc.

Kabel Deutschland prices deal

However, the relatively benign news out of Greece seemed to provide a window of opportunity for an issuer to slip in a new deal on Monday.

Kabel Deutschland Holding AG was heard by high-yield syndicate sources as pricing an upsized €400 million issue of five-year senior notes (B1/B) at par to yield 6.5%.

The issue came at the tight end of pre-deal market price talk envisioning a yield of between 6.50% and 6.75%.

The deal was brought to market via book-running managers Morgan Stanley & Co. Inc., Deutsche Bank Securities Inc. and Goldman Sachs & Co.

The quick-to-market bond deal from the holding company unit of Unterfoehring, Germany-based cable operator Kabel Deutschland GmbH, was upsized from the €300 million originally announced earlier in the session, although it was less than the €600 million that junk-market players were expecting for some weeks.

The proceeds will be used to repay about two-thirds of a €600 million bridge loan that financed Kabel Deutschland's recently announced acquisition of Tele Columbus GmbH, believed to be the third-largest German cable operator.

Under terms of that deal announced May 21, Kabel Deutschland will acquire Tele Columbus for €603 million, including the repayment in full of about €600 million of Tele Columbus debt plus accrued interest, bringing the total price tag to some €618 million ($786 million equivalent).

The company said at the time the acquisition was announced that the €600 million bridge financing arranged by Morgan Stanley, Deutsche Bank and Goldman Sachs would be available for the 12 months following the announcement of the acquisition and may either be refinanced or will automatically roll into a permanent financing.

A trader said that because the Kabel Deutschland deal was denominated in euros, it held absolutely no interest from most domestic high-yield accounts, which only trade in dollar-denominated paper.

Numericable plans roadshow

Another European cable name - Numericable - was meanwhile heard to have scheduled a non-deal U.S. roadshow for later this week.

High-yield market sources said that the Lille, France-based cable operator and J.P. Morgan Securities LLC have scheduled the presentations from Wednesday through Friday, including group meetings with investors on Wednesday in New York and Thursday in Boston.

Numericable last visited the high-yield bond market Feb. 10, when its Numericable Finance & Co. SCA unit priced a €350 million issue of 12 3/8% seven-year senior secured notes (B2/B/) at 97.181 to yield 13%.

That deal, which came to market after a roadshow, printed on top of price talk in the 13% area.

The proceeds were used for debt refinancing.

Market measurers mixed

Away from the new deals, a trader saw the Markit Group CDX North American Series 18 High Yield Index was off by about a quarter point Monday, its first such loss after two straight gains. It ended at 94 3/8 bid, 94 5/8 offered, after rising by 3/8 point on Friday.

The KDP High Yield Daily Index posted its third straight gain, finishing up 6 basis points at 72.39, on top of the 7 bps gain seen Friday. Its yield came in by 2 bps, to 7.01%, after having narrowed by 8 bps on Friday.

And the widely followed Merrill Lynch U.S. High Yield Master II Index was up for a fourth straight session on Monday, gaining 0.162%, on top of Friday's 0.155% advance.

The latest gain lifted its year-to-date return to 5.559% from 5.387% on Friday, its highest level since the 6.19% level seen on May 15 - but still well down from its peak level for 2012 so far, 6.80%, set on May 7.

Nokia name busy

Among specific issues, Finnish phone maker Nokia was one of the busier names of the day, with a market source seeing its 5 3/8% notes due 2019 trading more than $14 million at mid-afternoon.

He saw those bonds going home at 77 bid.

A second trader saw them unchanged at 78 bid, while the company's 6 5/8% bonds due 2039 were up by a half-point, trading at 75 bid.

A second trader said the 19s were going out at 77 5/8 bid, which he called unchanged. "Or maybe a tad better than Friday's levels," he said.

The Nokia bonds were gyrating last week after the struggling cell phone manufacturer announced another big round of job reductions on top of the more than 10,000 jobs it was forced to cut last year. It also announced other cost reductions in response to sagging sales and lowered its overall earnings guidance.

The bonds fell at that time into the mid- to upper-70s from pre-news levels around 83 to 84 and have yet to recover.

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