Junk heads into break; RAAM deal ahead; NewPage pops again; funds lose $186 million

By Paul Deckelman and Paul A. Harris

New York, Sept. 3 - The junk bond market brought the curtain down on the summer season on Friday with a quiet and essentially abbreviated session heading into the three-day Labor Day holiday break, which includes Monday's full market shutdown.

Traders said that what little activity took place happened early in the day, with most players who were even in at all heading for the exits by about 12 noon ET. They saw action in only a smattering of names, and even then on light volume.

About the only real name of note was NewPage Corp., whose bonds soared on Wednesday in response to unexpectedly strong earnings guidance, and then continued to firm on Thursday. The bonds were again heard better on Friday, on relatively solid volume for such an otherwise quiet day.

Traders reported no further dealings in Mariner Energy Inc., whose bonds had briefly moved around at easier levels on Thursday on news of a fire at one of its Gulf of Mexico drilling platforms, before coming off those lows when it became apparent this would not turn into a replay of the BP plc oil-rig disaster.

In the new-deal realm, primary side sources indicated that RAAM Global Energy Co. is making plans to hit the road around mid-month to market a downsized $150 million offering of senior secured notes to potential investors. The Lexington, Ky.-based oil and gas company is a first-time junk issuer.

Junk funds lose $186 million

Market participants familiar with the weekly Lipper FMI high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. - considered a reliable barometer of overall market liquidity trends - said that those funds saw $186.2 million more leave than come into them in the week ended Wednesday. The fund flow numbers usually circulate through the market on Thursday afternoon, but did not emerge this week until Friday morning.

It was the first such cash loss after seven straight weeks of inflows dating back to mid-July, including the $315.491 million inflow seen in the previous week, ended Aug. 25. During that winning streak, the funds saw a cumulative net inflow of $4.474 billion, according to a Prospect News analysis of the figures provided by market sources. Analysts saw the inflows as continuing proof of investors' interest in the junk bond market and appetite for risk.

The latest week's outflow brought the year-to-date cumulative total for the weekly reporting funds down to $4.976 billion, according to the Prospect News analysis, down a little from the 2010 peak level so far of $5.162 billion, recorded in the Aug. 25 week. The funds hit their biggest year-to-date negative number so far in the week ended June 9, with a cumulative deficit of $475 million

With the 2010 third quarter - like the year itself - now about two-thirds gone, inflows have been seen in 23 weeks out of the 35 since the beginning of the year, while there have been 12 outflows, the analysis of the data indicated. After a strong start to the year, including a stretch from late February through late April that saw 10 consecutive weekly inflows totaling over $4 billion, the flows turned negative for six weeks in May and early June, with about that same total amount of net outflows. After that, the flows were choppy, with several weeks of gains followed by several weeks of losses, until the recent surge began in mid-July.

EPFR sees $144 million outflow

Another fund-tracking service - Cambridge, Mass.-based EPFR Global, whose methodology differs somewhat from AMG - meantime reported a $144 million outflow in the latest week, breaking the recent string of seven straight mostly large inflows, including at least two topping the $1 billion mark. The week before it had seen a $602 million inflow.

EPFR's analysts said in a research note that while most of the categories of bond funds which it tracks, such as emerging markets and global bond funds, "ended August much the same way they began it, with most of the major groups posting solid inflows ... the exception, not surprisingly, were high yield bond funds which saw a seven-week inflow streak come to an end as the latest spike in risk aversion caught up to them."

Reflecting the difference between the ways AMG and EPFR calculate their respective fund-flow totals - EPFR includes results from certain non-U.S. domiciled funds as well as the domestic funds - the service's year-to-date net inflow total now stands at $9.727 billion, down from the peak level of the year of $9.871 billion, seen the week before.

Any and all cumulative fund-flow totals, whether for AMG or EPFR, may be rounded up or down and could include unannounced revisions and adjustments to figures from prior weeks.

Outflow is no big deal

Traders queried by Prospect News seemed none too impressed by the outflow and did not worry that it represented some kind of a turning point for heretofore supportive investors to start abandoning the junk primary and secondary markets.

One shrugged off the modest cash loss as little more than "a rounding error," in terms of the overall cash coming in to the high yield arena.

Another called it "negligible, adding that "some money is finally going back into the equity funds, from what I understand."

He said that "psychologically," market players should be "feeling better, and would want to put more money to work, even though there was a small outflow

"So the feeling is that there may be some deals coming up" that they can invest in.

RAAM returns

No issues priced during the Friday session but one deal did resurface.

RAAM Global Energy plans to conduct an investor roadshow for a downsized $150 million offering of senior secured notes during the Sept. 13 week.

The notes are expected to price on Sept. 17.

Global Hunter Securities and Knight Capital Markets are the joint bookrunners.

The underwriters have expressed confidence in the market's acceptance of this first-time issuer, and they note the strong credit metrics and substantial equity cushion for this Gulf Coast oil and gas producer, an informed source remarked.

The Lexington, Ky.-based oil and gas company will use the proceeds to repay bank debt and for general corporate purposes.

The deal initially hit the market in mid-August, sized at $200 million and talked at the 12½% area.

Thin active calendar

The market headed into the three-day Labor Day holiday weekend - the traditional summer-fall transition in the junk bond market - with two deals on the forward calendar, which is two more than some market watchers had been expecting.

In addition to RAAM, Armtec Holdings Ltd. plans a Sept. 8 roadshow start for a C$150 million sale of seven-year senior unsecured notes (/B/).

The roadshow wraps up on Sept. 13, and the deal is expected to price early in the Sept. 13 week.

Scotia Capital and TD Securities will lead the transaction.

Meanwhile, the September pipeline grew during the run-up to Labor Day.

At Friday's close, the list of expected September deals included:

• Tomkins plc's $600 million of first-lien notes and $1 billion of second-lien notes as part of its LBO financing, to be led by Bank of America Merrill Lynch, Citigroup, Barclays Capital, RBC Capital Markets and UBS Securities.

The financing also includes a $1.6 billion credit facility that is set to launch at a Wednesday bank meeting;

• NBTY Inc.'s $900 million offering of senior unsecured notes, also an LBO deal, expected in late September via Bank of America Merrill Lynch is leading the LBO deal, with Barclays Capital Inc. and Credit Suisse;

• Abitibibowater Inc.'s $750 million of notes to help finance its exit from Chapter 11. Citigroup and Barclays Capital will lead the deal.

The exit financing also includes new bank debt set to launch at a Tuesday bank meeting;

• An offering of new notes from Alliant Techsystems, Inc., in a debt refinancing deal to be led by Bank of America Merrill Lynch; and

• From the euro-denominated junk market, Dürr AG's €100 million offering of five-year notes via Deutsche Bank Securities, also a debt refinancing.

Big September

Trailing measured forecasts which surfaced during the final full week of August, dealers began ramping up forecasts for September issuance as the pre-Labor Day week progressed.

At least three debt capital markets bankers, from three different institutions, see a possible record September ahead, implying that issuance will come in north of the standing September record - 2009's $20.4 billion, according to Prospect News data.

Earlier in the week one syndicate official said that the primary could crank out $30 billion before the end of September.

That figure seemed high to a banker who spoke later in the week.

"We're hearing $20 to $25 billion," said the official, who pointed out that with the Labor Day holiday, as well as Rosh Hashanah, cutting into market activity in the post-Labor Day week, the time frame for issuance is already constricted.

In any case, when market activity resumes on Tuesday it will do so with only $300 million of dollar-denominated junk issuance already in the book for September (Renhe Commercial Holdings Co. Ltd.'s 13% senior notes due 2016, which priced on Thursday).

However, one record that is almost certain to fall in the week ahead is the all-time yearly issuance record for dollar-denominated junk bonds.

With nearly four months of 2010 remaining to play out, high yield has seen $161.7 billion of year-to-date issuance as of Friday's close.

The standing record is 2009's $161.8 billion.

Market indicators' gains continue

Away from the new-deal world, a market source saw the CDX North American HY Series 14 index gain 3/8 point Friday to end at 97 5/8 bid, 97 7/8 offered, on top of the 5/8 point gain seen on Thursday and the full 1 point jump recorded on Wednesday. The index thus ended the week well up from the 96¼ bid, 96½ level at which it had finished the previous week, ended Aug. 27.

The KDP High Yield Daily index meantime rose by 10 basis points on Friday to 71.88, adding to the 13 bps gain seen on Thursday. Its yield came in by 3 bps, to 8.27%, following a decline of 4 bps on Thursday. For the week, the index ended improved from the 71.55 reading and 8.38% yield seen the previous Friday.

The Merrill Lynch High Yield Master II index advanced by 0.134% on Friday, after having risen 0.187% on Thursday. It ended the day with a year-to-date return of 9.053%, up from Thursday's 8.907%, and just slightly below its peak level for 2010 so far, the 9.085% recorded on Aug. 9. On the week, the index gained 0.544%, rising from the previous Friday's 8.463% year-to-date return.

Advancing issues beat decliners for a third consecutive session on Friday, holding a five-to-three edge, versus the six-to-five margin seen on Thursday.

Overall activity, represented by dollar-volume levels, plunged by nearly 58% on Friday, on top of the 23% slide seen on Thursday.

Typical of the low level of activity seen heading into the holiday, a trader lamented that he "did one stupid trade all day."

'There was nothing of significance today."

A second trader averred that "absolutely nothing" was going on.

"The market was probably better by ¼ to ½ [point]. After the employment number" - non-farm payrolls for August lost 54,000 jobs overall, only half the loss that many economists were expecting, although the unemployment rate crept up by 1/10 of a percentage point to 9.6% - "it seemed like there was some short-covering here and there before the weekend, but other than that, it's been a snoozer.

"It was pretty much a non-event."

"Everything was shut down by noon," a third trader said. "It was terrible. No stuff was happening."

He said generically speaking, "there was a little bit of strength."

He saw "BP stuff", meaning British oil giant BP plc and other companies involved with or affected by the long-running oil spill disaster in the Gulf of Mexico, was up by 1/8 to ¼ point. He meantime saw automotive bellwether General Motors Corp. "pretty sideways," its benchmark 8 3/8% bonds due 2033 hanging in around 32 bid.

"I don't think there was a ton of stuff really moving around significantly today. It was definitely the lightest volume day that that we've had all week."

NewPage rally rolls on

Among specific names, the recent surge in NewPage's bonds that has lifted its 10% notes due 2012 and 11 3/8% senior secured notes due 2014 by multiple points from the levels at which they started the week rolled into its third session on Friday.

"That thing has really bounced back," a trader said, seeing the 11 3/8%notes "up a lot today," quoting the bonds at 90 bid, 90 3/8 offered, on "pretty good volume for a day like this." About $8 million of the bonds changed hands in round lot, making NewPage one of the busiest bonds on the day in Junkbondland on a day when there really wasn't a lot of volume in most names. The low was 891/2, and the high 90 3/8.

"They have really gained momentum."

A market source at another desk was quoting the bonds up 1¼ points on the day at 90¼ bid.

Those bonds began the week at around 81 bid, but jumped to around the 87-88 level on Wednesday, in trading of over $100 million, in reaction to what one trader called "surprisingly strong" earnings guidance for the current third quarter and the fourth quarter. The rise continued on Thursday, and again on Friday.

The first trader meantime said he saw the 10% notes offered as high as 50, and quoted bid levels between 46¾ and 481/4, versus the most recent round-lot trade at 46¾ on Thursday. Those bonds, which had been trading in the mid 30s at the start of the week, jumped about 10 points to the 44 area on Wednesday on volume of about $40 million, and then continued to firm Thursday, and again on Friday.

Mariner flurry over with

A trader said that the activity in Mariner Energy which had been seen on Thursday on news of a fire aboard one of the Houston-based oil and gas exploration and production company's Gulf of Mexico drilling platforms off the Louisiana coast, "has pretty much run its course.

"You have an oil slick" - although news reports referred to it as just a "sheen" and officials said late Friday that it appeared that there had been no oil spill from the well associated with the burned platform, unlike what happened with the massive BP oil disaster in the Gulf some months ago - "but the merger [Mariner's pending $2.7 billion acquisition by Apache Corp.] is going through, so it was like a non-event."

He said news of the fire and the resulting minor pullback in some of Mariner's bond levels "kept us awake [on Thursday], but today, there was nothing like that, we can't be so lucky."

Mariner's bonds were quoted unchanged at Thursday's closing levels - the 8% notes due 2017 at 108½ bid, the 7½% notes due 2013 at 102 bid and the 11¾% notes due 2016 at 122 bid.

A 'subtle change'

In the absence of much specifically going on, a trader said that generally, "there is a constant flow to quality - the better names are being bid up," such as AES Corp. and Ball Corp. He said that there is "just insatiable demand" for such credits.

That market lust for better rated names comes at the expense of the lower-rated credits - the CCC paper and the like - which were so popular earlier in the year as investors were comforted by a rapidly declining default rate, even among the weaker names.

Now in that market segment, he said, "it's item-by-item, because there is a fear of a slowdown," which would likely hurt the weaker names first.

He said that many mutual funds "are getting defensive and buying high-coupon names - for example, Goodyear Tire & Rubber Co.'s 10½% notes due 2016 or Unisys Corp.'s 14½% senior secured notes due 2015.

The latter company, he said, "was recently upgraded" by the ratings agencies, because "the numbers were strong."

He said that his shop has recently been active in the Blue Bell, Pa.-based information technology company's 12½% notes due 2016, which have recently been trading in a 110-111 context, "and accounts that normally wouldn't buy those - now they're saying 'wait a minute - maybe we should just clip the coupon and buy them. If they get refinanced, great - and if they don't get refinanced, great'."

He said the same thing was going on with Unisys' 141/2s.

"I'm seeing buyers come in that I haven't seen in a long time, buying paper in the 118-119 range, which is nosebleed territory. So people are also content to clip a coupon on names that should be refinancing candidates up the road - and if they're not, it's still a great coupon, right?"

He further said that for a lot of accounts, "there's been a shift in psychology, from total-return to defensive-type buying."

At the other extreme, he said, "they're buying the Ball Corp. [bonds] and FerrellGas LP's 6¾% " notes due 2014 because they are quality names, "so you take a low coupon, and couple it with one of those high coupons, and the average rate of return is in the middle some place - and they're happy.

"So I do see that very subtle change."

He said that earlier in the year, accounts were "more aggressive," going into areas like homebuilders and gaming. "Now, it really comes down to what does the balance sheet look like? What are the cash flows? Balance sheet analysis is having much more of an impact on this market than it had a couple of months ago."

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