Constellation prices $800 million two-parter; Nova Chemicals bonds busy, hold gains; market firm

By Paul Deckelman and Paul A. Harris

New York, Oct. 20 – The high-yield market was seen firmer all around on Monday, building on the hefty gains notched on Thursday and – especially – Friday.

Primaryside activity, which had temporarily stalled out earlier last week amid continued unsettled conditions before re-starting with Friday’s deal from Nova Chemicals Corp., kept its momentum going on Monday with a quickly shopped $800 million two-part offering from beer, wine and spirits importer and producer Constellation Brands, Inc. That new deal saw little aftermarket activity.

Nova Chemicals’ 10.5-year drive-by issue, meantime, was the focus of heavy trading, with the bonds seen having improved upon the solid gains notched during Friday’s initial aftermarket trading.

New deal name Dynegy Inc. was also busy – and better – on Monday. The power-generation company’s bonds too had firmed smartly on Friday, also in heavy trading, and extended those gains on Monday.

Apart from those issues that have already priced, primaryside players were anticipating a sizable dollar-denominated transaction on Tuesday from German industrial bearing manufacturer Schaeffler AG, which is bringing €1.2 billion equivalent of euro- and dollar-denominated paper to market via a financing subsidiary. The dollar portion of the three-part deal includes tranches of five- and eight-year notes, with tranche sizes to be set before pricing.

Away from the new deal arena, traders reported solid gains in Peabody Energy Corp.’s bonds, after the coal producer reported a narrower-than-expected third-quarter loss.

Statistical indicators of junk market performance improved across the board for a third consecutive session on Monday.

Constellation prices tight

The primary market appeared to regain its legs on Monday, sources said.

The session saw $800 million of drive-by issuance, as well as the formation of a forward calendar that has lately been empty due to volatility in the global capital markets.

The session's issuance came in two equal-sized tranches from a single issuer from the tip-top of the speculative-grade credit ratings spectrum.

Constellation Brands priced $800 million of non-callable senior notes (Ba1/BB+/BB+) in two $400 million tranches, both of which priced with yields at the tight end of talk.

The deal, which priced in a Monday drive-by, featured five-year notes that priced at par to yield 3 7/8%, versus yield talk in the 4% area and 10-year notes which priced at par to yield 4¾%, versus the 4¾% to 5% yield talk.

BofA Merrill Lynch was the left bookrunner for the debt refinancing and general corporate purposes deal along with J.P. Morgan, Rabobank, Wells Fargo and SunTrust.

Schaeffler three-part deal

Schaeffler Holding Finance BV plans to price €1.2 billion equivalent of senior secured PIK toggle notes (expected ratings B1/B) in three tranches on Tuesday.

The debt refinancing deal was announced on Monday, and price talk for the two dollar-denominated tranches surfaced late in the session.

A tranche of dollar-denominated five-year notes, callable after two years at par plus 50% of the coupon, is talked to yield 6¼% to 6½%.

A tranche of dollar-denominated eight-year notes, callable after four years at par plus 50% of the coupon, is talked to yield 6¾% to 7%.

The deal also features a tranche of euro-denominated seven-year notes, callable after three years at par plus 50% of the coupon. Price talk on the euro-denominated notes is expected early Tuesday morning.

Tranche sizes remain to be determined.

Books for the dollar-denominated tranches close at 9 a.m. ET Tuesday, and the deal is set to price thereafter.

Global coordinator and joint bookrunner Deutsche Bank will bill and deliver for the dollar-denominated notes, while global coordinator and joint bookrunner HSBC will bill and deliver for the euro-denominated notes.

Citigroup is also a global coordinator and joint bookrunner.

Commerzbank, JPMorgan and UniCredit are also joint bookrunners.

Tesoro $1.3 billion deal

Tesoro Logistics LP and Tesoro Logistics Finance Corp. started a roadshow on Monday for a $1.3 billion two-part offering of senior notes (existing ratings Ba3/BB), according to a market source.

The deal, which is set to price during the middle part of the present week, features a tranche of five-year notes, which become callable at par one month prior to maturity but is otherwise non-callable.

There is also a tranche of eight-year notes, which come with four years of call protection and feature a three-year 35% equity clawback.

BofA Merrill Lynch, RBS, Barclays, Citigroup, J.P. Morgan, MUFG, RBC, UBS and Wells Fargo are the joint bookrunners.

Proceeds, along with a new amended and restated revolver and a concurrent public equity offering, will be used to repay existing revolver debt and fund the acquisition of QEP Field Services, LLC's midstream business for $2.5 billion, which includes $230 million to refinance QEP debt.

Proceeds will also be used for general partnership purposes.

Essar Steel Algoma roadshow

Essar Steel Algoma Inc. plans to start a roadshow on Tuesday for a $625 million offering of secured notes in two tranches.

The debt refinancing deal includes $350 million of five-year senior secured notes (Ba3/B+) and $275 million of seven-year junior secured notes (B3/B-).

Deutsche Bank is the left bookrunner. Goldman Sachs and Jefferies are the joint bookrunners.

The notes are expected to price in the middle part of the Oct. 27 week, in conjunction with the concurrent $350 million term loan.

New Constellation little seen

In the secondary market, Constellation Brands’ new two-part bond issue priced fairly late in the day with traders seeing little or no initial aftermarket action.

One trader said its 4¾% notes due 2024 were being quoted at 100½ bid, “but we haven’t seen the other side.”

He did not hear any quotes or see any activity in the other half of that $800 million transaction, the 3 7/8% notes due 2019.

The Victor, N.Y.-based alcoholic beverage manufacturer and importer’s existing 6% notes due 2022 gained 3/16 of a point on Monday, a market source said, closing at 111¼ bid on volume of more than $12 million, putting it fairly high up on the Most Actives list.

The company’s 7¼% notes due 2017 were also at 111¼ bid, unchanged on the day, with over $10 million having changed hands.

Nova Chemicals reaction

Friday’s quick-to-market offering from Nova Chemicals was seen by the traders having firmed from the solid gains that were notched in initial late-session aftermarket trading after the $500 million 10.5-year issue priced at par.

One trader saw the new 5% notes due May 1, 2025 up ¼ of a point on Monday at 101¼ bid, 101½ offered, on “pretty good volume” of over $30 million.

At another desk, the Calgary, Alta.-based plastics and chemicals producer’s bonds were seen up 1/8 of a point, at 101¼ bid, with volume estimated at over $34 million.

Dynegy, CalRes action continues

There were continued dealings in Dynegy’s giant-sized three-part offering, which priced on Oct. 10.

A trader saw the Houston-based power generation company’s 6¼% notes due 2019 up ¼ of a point at 102 bid on volume of about $15 million.

He saw the 7 3/8% notes due 2022 up ½ of a point at 103 bid, on turnover of about $12 million.

However, he said there was “no significant size to report” on the new 7 5/8% notes due 2024, with just a few odd-lot transactions.

A second trader pegged the 6¼s in a 101½-to-102 context, calling that unchanged on the day. He saw the 7 3/8s up ½ of a point at 102¾ bid, 103¼ offered, while the 7 5/8s traded between 103 and 103½, up 3/8 of a point.

Dynegy priced $2.1 billion of the 6¾% notes, $1.75 billion of the 7 3/8% notes and $1 billion of the 7 5/8% notes, all at par. The new 6¾% paper had traded around or slightly below par, with the other two tranches initially at or slightly above par.

But all three tranches had improved handsomely to near their current levels on dealings on Thursday and Friday.

Yet another trader said, “We saw trades in Dynegy here and there, but not like CalRes,” referring to the $5 billion three-part offering brought to market on last month by Los Angeles-based California Resources Corp., an oil and natural gas exploration and production company.

Even though the deal is more than a month old now, “the CalRes bonds still trade a fair amount,” he said.

“The 6s were definitely better, and I’m sure the three parts of the deal were all better. Obviously, it’s a $5 billion three-part, so they’re active and liquid at this point.”

The company’s 6% notes due 2024 were the busiest CalRes bond on Monday, with over $12 million traded.

However, another market source said those bonds were actually off by about 3/16, at just over 103 bid.

CalRes priced $2.25 billion of the 6% notes at par on Sept. 11, along with $1 billion 5% notes due 2020 and $1.75 billion of 5½% notes due 2021, both of which also priced at par.

The 5% notes were recently seen around the 102¼ bid level and the 5½s were around 103¼ bid.

Peabody higher on earnings

Away from the new deals, Peabody Energy reported a wider loss in the third quarter as revenue declined.

A trader said the 6¼% notes due 2021 were “by far the most active” of the company’s bonds, which finished the day “better.”

He pegged the issue at 94, up about 3 points.

Another market source saw the notes up 2¾ points on the day at 94¼ bid, with over $29 million of the notes having moved around.

For the quarter, the St. Louis-based coal producer’s U.S. mining revenue dropped 2.7% to $1.02 billion, though revenue per ton inched up a touch to $21.24. Australian revenues dropped 4.1% to $676.3 million, which equaled a 13.4% slide in revenue per ton.

Total net loss was $150.6 million, or 56 cents per share. That compared to the previous year’s loss of $26.1 million, or 10 cents per share.

Excluding certain items, loss per share was 59 cents.

With or without those items, the loss came in better than the company’s projected 63 cents to 69 cents per share.

Total revenue decreased 4.2% to $1.72 billion, beating analysts’ estimates of $1.64 billion.

For the fiscal year, the company is forecasting an adjusted per-share loss of $1.38 to $1.48.

Indicators stay strong

Overall, a trader said, “we’re definitely seeing a bounce-back” from the lows hit in the early part of last week.

“On Friday, there was a market rally. Today, things were firm around those Friday levels,” with additional gains on most names of about ¼ on top of Friday’s strong advances.

“Last week,” another trader said, “it seemed like everyone was going to get Ebola and the junk market was going to go to zero. Now this week, everything seems just fine. Go figure.”

Statistical indicators of junk market performance improved across the board for a third consecutive session on Monday.

The KDP High Yield Daily index saw its third consecutive gain, 12 basis points to close at 71.88, after having jumped by 72 bps on Friday.

The yield came in by 10 bps on Monday, to 5.55%, after having tightened by 26 bps on Friday.

The Markit CDX Series 23 index was up for a fourth third straight session on Monday, gaining 7/16 of a point to end at 106 1/16 bid, 106 1/8 offered. On Friday, it had advanced by 21/32 bps.

The Merrill Lynch High Yield Master II index posted its third successive gain on Monday, finishing up by 0.118%. On Friday, the index had soared by 1.066% - its biggest single session gain of the year so far, easily eclipsing last Monday’s 0.56% rise and one of the biggest one-day improvement on record.

The latest gain lifted its year-to-date return to 3.855%, up from Friday’s 3.732%.

However, the year-to-date return remains well down from its peak level of the year so far, 5.847%, set on Sept. 1, when the index was published even though the junk market was essentially closed due to the Labor Day holiday break.

According to the Finra-Bloomberg Active US High Yield Bond index, Monday’s junk market volume was $4.032 billion, down from Friday’s $4.781billion.

The index saw its third straight gain, with a total return of 315.39, up from Friday’s 315.09. Its yield declined on Monday to 6.01% from Friday’s 6.02%.

Stephanie N. Rotundo contributed to this review

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