New Fresenius, Calumet bonds firm; no further pricings to round out week; secondary slides

By Paul Deckelman and Paul A. Harris

New York, Sept. 9 - The high-yield primary market - which this week saw its first pricings in several weeks - finished out the week on Friday with no further new deals seen or announced. Still, the $578 million of paper that came down the chute this week was the most the junk market had knocked down since early August.

Both of the new deals which priced on Thursday after having been announced on Wednesday - from German healthcare provider Fresenius Medical Group AG and from a domestic chemical company, Calumet Specialty Products Partners, LP/Calumet Finance Corp. - were seen by traders having moved up a little from the discounted levels at which each offering had come to market.

Apart from trading in the new issues - and there wasn't all that much of that going on anyway - junk was in a funk, with a fall-off in activity levels, declines seen pretty much across the board in such familiar names as Caesars Entertainment Operating Co., Community Health Systems Inc. and Ford Motor Co., and statistical performance indicators off for both the day and the whole holiday-shortened week.

Traders chalked that malaise up, in part, to the battering which the equity markets took after a German senior official of the European Central Bank abruptly and unexpectedly bid that institution a permanent "auf Wiedersehen," reportedly leaving in a disagreement over the bank's policy of extensive purchases of debt issued by heavily-indebted, economically weaker member nations. The resignation raised new questions about the powerful body's course during Europe's ongoing debt crisis.

The traders also noted an unusually somber mood ahead of this weekend's events commemorating the 10th anniversary of the 9/11 attacks, and the usual dulling effect which late-summer Fridays have on the market.

Europe freezes primary

A distinctly European chill took hold of the high-yield market on Friday, sources said.

In the primary market no deals were priced, nor were there any announcements.

"I don't think much is going to happen in the markets until there is some clarity on this European situation," said a high yield mutual fund manager in the Midwestern United States.

The manager noted the declining value of the euro versus the dollar; the euro fell 1.66% against the dollar on Friday.

A syndicate banker agreed.

"Equities are off because of credit concerns in Europe," the banker said; the Dow Jones Industrial Average fell 2.69% on Friday.

"Nobody wants to bring a deal with all of that going on."

Fresenius, the way forward

On Friday players were keenly focused on the secondary market performance of Fresenius Medical Care AG's new 6½% seven-year senior notes (Ba2/BB/) which were priced Thursday in tranches sized at €400 million and $400 million.

Both tranches priced at 98.623 to yield 6¾%, and were holding in well during the Friday session.

The dollar-denominated notes were at par ¼ bid, par ¾ offered, up 1½ points, according to the mutual fund manager.

They had eased a bit from earlier Friday levels of par 3/8 bid, par 7/8 offered.

The Fresenius dollar-denominated tranche came 75 basis points behind trading levels of the existing bonds, so they featured a healthy new issue premium, a debt capital markets banker recounted.

"Fresenius is the type of issuer that can get a deal done. It's a solid company with high double-B ratings, and there was big demand for the bonds from both high-yield and investment-grade accounts," the sell-sider said.

The mutual fund manager said that in spite of the turbulence the market might remain open to double-B issuers, simply for the technical reason that asset managers are running out of investment options.

"Insurance funds and pension funds can't make things work on the returns they get on high-grade bonds and Treasuries," the manager said.

"Yield, yield, yield," the buy-sider extolled.

"For the right high-yield company these guys will be in the deal."

Parsing the flows

Lack of alternatives is presently pulling cash into high yield in spite of the volatility that has taken hold of the global capital markets, the fund manager said.

Recent reports from EPFR Global and Lipper-AMG seem to bear this out.

On Thursday EPFR reported $515 million of inflows to high-yield funds for the week to Wednesday. AMG reported $576 million of inflows for the same period.

"I had some money come in but I didn't spend it because there was not anything out there I wanted to buy," said a Boston-based asset manager whose portfolio includes stocks and high-yield bonds.

"Also, experience tells you that at times like this you have to be careful," the manager added.

"Accounts definitely have cash for the right credit," a syndicate banker said. "The overall lack of supply has allowed them to build up their cash arsenals.

"And there is a lot of liquidity, but only for select names...the HCAs of the world."

$578 million

With no deals pricing on Friday the post-Labor Day week came to a close having seen just $578 million price in two junk-rated dollar-denominated tranches.

In way of contrast, the post-Labor Day week of the history-making year of 2010 saw $3.8 billion in eight tranches.

The past week represents the lowest post Labor Day week primary market volume since the post-Labor Day week of 2008, which ended just 10 days before Lehman Brothers filed for bankruptcy protection. That post-Labor Day week saw no issuance whatsoever.

Factoring in the week's two deals, year-to-date high-yield issuance to Friday's close was $211.7 billion.

Empty calendar

The active forward calendar is empty, heading into the Sept. 12 week.

There is a healthy pipeline of deals awaiting some improvement in market conditions, sources say.

"Not everybody is willing to make a 75 basis points concession to market conditions," said a debt capital markets banker, who was referring to the above-mentioned Fresenius deal, which priced on Thursday.

Dealers and other bridge loan participants are keen to see the placement of bonds related to several committed financings.

Presently the most prominent name in discussions of committed financings is Sealed Air Corp., which is expected to sell $1.5 billion equivalent of junk to help fund Sealed Air's acquisition of Diversey Holdings Inc. from the Johnson family and Clayton, Dubilier & Rice LLC.

The bridge has been syndicated, which is one reason why the dealers are expected to brave the market.

"It will come," said a portfolio manager who is also a participant in the bridge.

"But I don't think it will come hell or high water," the buy-sider added.

"Until we get some clarity on this mess in Europe I don't think we're going to see much happen at all."

New Fresenius firms up...

The new dollar-denominated notes from Fresenius Medical U.S Finance "held up pretty well," a trader said, referring to the $400 million issue of 6½% notes due 2018, which the Bad Homburg, Germany-based provider of kidney dialysis products and services priced on Thursday.

Those bonds - upsized from the originally announced $300 million - came to market 98.623 to yield 6¾%, at the tight end of pre-deal price talk envisioning a yield of between 6¾% and 7%.

They were initially seen having moved up to around a 99 7/8 bid, 100 1/8 offered level.

On Friday, several traders saw the bonds having gotten a little better than that Thursday aftermarket, quoting them at 100½ bid, 100¾ offered.

The €400 million of euro-denominated seven-year paper from Fresenius Finance VIII SA was seen by a trader on Friday having gotten as good as 100 5/8 bid, 101 offered.

That was up smartly from the 99 3/8 bid, 99 5/8 offered levels at which those bonds traded right after their Thursday pricing. Like the dollar paper, the euro tranche has a 6½% coupon and priced at the same 98.623 to yield 6¾%. The issue was upsized to €400 million from the originally announced €300 million, after a third tranche that was part of the original deal, for €100 million of three-year floating-rate notes, was abandoned.

...as does Calumet

Thursday's other new deal, from Indianapolis-based chemical manufacturer Calumet Specialty Products Partners, was also seen having improved a little from the levels at which that $200 million issue of 9 3/8% notes due 2019 priced on Thursday.

Those bonds - having identical terms to the $400 million of notes which the company sold back in April, though they are not fungible - were announced on Wednesday and priced on Thursday at 93, in line with their price talk, and yielding 10.739%.

They priced too late in the session on Thursday for any kind of an aftermarket but on Friday one trader did see the notes having gotten up to 93½ bid, 94 offered.

Rest of market weighed down

One of the traders said that away from the excitement generated by the first new deals in several weeks - particularly the well-received Fresenius offering, which reportedly played to an order book of more than $3 billion - the rest of the market was "lackluster."

A second trader said that "stuff seems to be widening out in certain names where the seller still wants to get paid yesterday's level but the bid is down 2 markets. So we're seeing wide markets." However he said that there was also "other stuff, the kind of things being taken over, or taken out by something - those seem to be holding up okay."

In explaining the market's weak-kneed performance, he suggested that "everyone is kind of focusing on this somber 9/11 anniversary, and everyone was waiting for the President's [Thursday evening] speech, only he basically didn't give any details" about paying for the $447 million of new stimulus he proposed, "so now we've got to wait for the following Monday for details. So it's like this giant junk bond can has been kicked down the road.

"Depending on whom you hear it from, it could just be more of the same old same old - which will basically put us in a funk till the next election."

Other factors weighing on the market, he said, included Europe, where the financial markets were roiled by the unexpected news that Juergen Stark, a top official of the European Central Bank, is resigning well before the end of his term, reportedly because of his disagreement with the bank's expansive policy of propping up the weaker Eurozone economies by massive buying of their bonds; Stark's departure will remove a key voice for a "hawkish" tougher rate policy, calling into question the central bank's willingness to make tough choices in order to straighten out the continental debt crisis.

That investor angst was carried over to the U.S. financial markets, where, the trader noted, "it was down 300-plus points and the 10-year [Treasury] is trading at generational lows."

The bellwether Dow Jones Industrial Average lost 303.68 points, or 2.69%, on Friday to close at 10,992.13. That followed Thursday's drop of 119.05 points, or 1.04% on Thursday, which came after Federal Reserve chairman Ben Bernanke, during a speech, offered the markets no specific details on measures the Fed may take to deal with the continued weak economy.

Broader indexes like the Standard & Poor's 500 and the Nasdaq Composite, which like the Dow had also fallen on Thursday after rebounding on Wednesday from Tuesday's loss, finished Friday down by 2.67% and 2.42%, respectively.

Meanwhile, he said, "we're out there trying to buy stuff and we can't get anybody to sell it. And at the same time, no one wants to pay up for anything."

He said further that "it's the whole 9/11 thing" - especially keenly felt in New York, the epicenter of the attacks - "and you throw in all of the other stuff, and it's one big, exciting adventure - NOT."

Indicators off on day, week

Statistical measures of market performance, which on Thursday had been mixed, turned negative on Friday. They also showed a loss for the week, versus the gain seen for the previous week ended Sept. 2.

A trader saw the CDX North American Series 16 HY Index fall by 1 5/8 points on Friday to 91 3/8 bid, 91 5/8 offered, after having lost 5/8 point on Thursday.

For the week, the index was down sharply from the 93¼ bid, 93¾ offered reading seen the previous Friday.

The KDP High Yield Daily Index dropped by 26 bps on Friday to end at 72.24, after having risen by 7 bps on Thursday. Its yield rose by 8 bps Friday, to 7.78%, after coming in by 3 bps on Thursday. On a week-to-week basis, Friday's readings compare unfavorably with week-ago levels - a reading of 72.64 and a yield of 7.67%.

The Merrill Lynch U.S. High Yield Master II Index retreated by 0.124% on Friday, after having risen the previous two sessions, including Thursday's 0.175% advance. That left its year-to-date return at 1.954%, versus Thursday's 2.08% finish. On the week, the index declined by 0.339%, in contrast to its solid 1.501% advance the week before, which had followed a loss the previous week. Those cumulative levels remain well below the peak level for the year of 6.362%, set on July 26.

Harrah's hammered again

Among specific credits, a trader said that Caesars Entertainment's bonds - formerly and still more popularly known by their old name, Harrah's Entertainment - "keep getting weaker; they seem to be under pressure a little bit," with the Las Vegas-based casino giant's bottom line being hurt by the economic uncertainty which has caused many consumers to hang on to their wallets and forego trips to the company's pricy gaming palaces in places like Vegas, Atlantic City and the Mississippi Gulf Coast.

He said that the company's 12¾% notes due 2018 "were trading at a premium some months ago, then they were in the 90s and then the 80s." On Friday, he said that the bonds had fallen below the 80 mark, getting as low as 79 bid, so they are definitely under pressure."

The company's more popularly traded 10% notes due 2018 were down another nearly 3 points on Friday, finishing up at 71¼ bid, well down from the 75-77 context at which those bonds were trading just a week ago.

Among other familiar, well-traded names, a trader said, benchmark issuer Community Health Systems Inc.'s 8 7/8% notes due 2015 were trading down ¾ point on Friday at 100¼ bid, 100¾ offered.

Ford Motor Co.'s 7.45% bonds due 2031 were off 1 point at 108¾ bid, 109¾ offered.

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