Covanta, upsized AMD drive by; Covanta, Modular Space bonds trade up; funds gain $804 million

By Paul Deckelman and Paul A. Harris

New York, Feb. 20 - The high-yield primary sphere saw a pair of quickly shopped drive-by deals come to market on Thursday that totaled $1 billion of new fully junk-rated paper.

Covanta Holding Corp., a Fairfield, N.J.-based waste disposal, waste-to-energy and metals recycling company, priced $400 million of 10-year notes. Traders said that those bonds showed solid gains on heavy volume when they moved into the aftermarket.

The day's other dollar-denominated new issue came from Advanced Micro Devices Inc., which did an upsized $600 million of five-year notes. But the high-tech firm's deal priced too late in the session for any kind of secondary market activity.

Traders meantime saw Wednesday's five-year secured offering from Modular Space Corp., which priced too late in that session for any kind of aftermarket activity, firm smartly when it was freed for trading on Thursday, given a big boost by the issue's generous 10¼% coupon.

However, the opposite was the case with Wednesday's other deal, builder D.R. Horton Inc.'s five-year issue. Although it traded actively for a second straight session, its price was not much changed from issue. Some in the market suggested that its sparse, sub-4% coupon acted as a buzzkill for traditional junk investors, leaving the issue strictly to high-grade crossover buyers reaching down the credit curve to pick up some yield.

Away from the new deals, bonds of Walter Energy, Inc. and CC Media Holdings, Inc. were seen up after they reported fourth-quarter earnings.

Statistical market-performance indicators turned higher across the board on Thursday after having been mixed over the previous two sessions.

Another indicator - the flow of cash into and out of high-yield mutual funds and exchange-traded funds, considered a key barometer of junk market liquidity trends - notched its second consecutive weekly gain after having been strongly negative over the previous two weeks.

Funds gain $804 million

As Thursday's Junkbondland activity was wrapping up, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $804 million more came into high-yield mutual funds and exchange-traded funds than had left them in the week ended Wednesday.

It was the second consecutive weekly gain seen by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., which reported a $1.45 billion cash infusion during the week ended Feb. 12 - the biggest cash addition the funds have seen since the week of Oct. 23 last year, when a $2.02 billion net inflow was recorded, according to a Prospect News analysis of the figures.

Those two inflows, totaling $2.26 billion, represented a strong rebound from the two consecutive large downturns that preceded them, a $909 million outflow in the week ended Jan. 29 followed by a $972 million cash loss in the week ended Feb. 5.

Those twin downturns, totaling $1.88 billion, had been the first outflows seen so far this year, according to the Prospect News analysis, and followed the three consecutive inflows with which the year opened, which totaled about $1.13 billion.

Including the latest week's results, there have now been five inflows since the beginning of the year, versus the two outflows, resulting in a year-to-date cumulative net inflow of $1.51 billion, according to the analysis.

In 2013, inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, according to the analysis.

Cumulative fund-flow estimates may be revised upward or downward or may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime reported a $2 billion inflow for the week, which it said was "the fifth time in the past seven weeks that this fund group has recorded inflows." EPFR's methodology differs from AMG/Lipper's as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, as opposed to AMG/Lipper's strictly domestic orientation.

Analysts said that the sustained flows of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the more than $1 trillion junk market - have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past two years and which has mostly continued on into the new year.

AMD upsizes

Activity in Thursday's high-yield primary market was light and fleeting.

Two deals priced to generate an even $1 billion of proceeds.

Both deals came at the tight end of price talk.

One of the two came as a drive-by.

Advanced Micro Devices priced an upsized $600 million issue of five-year senior notes (B2/B) at par to yield 6¾%.

The deal was upsized from $500 million.

The yield printed at the tight end of the 6¾% to 7% yield talk.

BofA Merrill Lynch was the left bookrunner. J.P. Morgan Securities LLC was the joint bookrunner.

The Sunnyvale, Calif.-based semiconductor company plans to use the proceeds to repurchase up to $425 million of its 6% senior convertible notes due 2015 and up to $200 million of its 8 1/8% senior notes via tender offers.

Covanta at the tight end

Covanta priced a quick-to-market $400 million issue of 10-year senior notes (Ba3/B) at par to yield 5 7/8%.

The yield printed at the tight end of yield talk in the 6% area.

Barclays was the lead left bookrunner for the public offer. BofA Merrill Lynch, Citigroup Global Markets, JPMorgan, Morgan Stanley & Co. LLC and RBS Securities were joint bookrunners.

Proceeds will be used for general corporate purposes, including repayment of the company's 3¼% cash convertible notes at maturity.

Covanta bonds better

In the secondary market, a trader said that the new Covanta notes "were doing real well."

He saw those bonds having gotten as good as 101¾ bid after pricing at par, although he saw them later "settling in" in a 101 1/8 to 101 3/8 bid context.

A second trader pegged the bonds at 101 3/8 bid, 101 5/8 offered.

At another desk, a market source was quoting the notes at 101½ bid. He said the bonds were the day's clear volume leader, with over $55 million having changed hands.

New AMD a no-show

Advanced Micro Devices' 6¾% notes due 2019 came to market too late in the day for any kind of secondary dealings, a trader said.

However, the semiconductor manufacturer's existing 7¾% notes due 2020, which are not among the bonds that are to be taken out using the new-deal proceeds, were seen up by 1¾ points at 102½ bid.

Modular Space moves up

Wednesday's offering of 10¼% senior secured notes due 2019 from Modular Space proved to be a big hit with investors, who took those bonds solidly higher when they were freed for trading on Thursday.

A trader who saw those bonds get up to 103 5/8 bid, 104¼ offered declared that "the high coupon is causing them to trade at a sharp premium" to par, where the Berwyn, Pa.-based company, a seller of modular space structures and storage containers, priced its $375 million issue late Wednesday after upsizing the deal from an originally planned $365 million.

"They did very well," said a second trader, quoting the bonds up around a 103 to 103¼ context.

"That high coupon" was what was pushing the bonds up, he said. "Just clip a coupon, if you can."

A third trader saw the bonds up around 103½ bid to 104½ offered but said that he "did not see them trading very much."

Horton bonds busy again

That was in marked contrast to D.R. Horton's new 3¾% notes due 2019. Over $9 million of the bonds traded on Thursday, a respectably busy enough showing to put them on the Most Actives list.

On Wednesday, over $21 million had traded, landing them right at the top of the list.

However, a trader said that the Fort Worth, Texas-based homebuilder's new bonds "couldn't get out of their own way," trading right around the par level at which that $500 million drive-by issue had priced on Wednesday after upsizing from the originally announced $400 million.

He suggested that the low-coupon issue "seems a little ahead of the market."

Another market source, who saw the bonds creep up perhaps to 100 bid, said that the low coupon would excite very few standard junk accounts and would instead find its likeliest buyers among high-grade accounts reaching down into the junk precincts to pick up some yield in a crossover transaction.

Walter Energy improves

Away from the new deals, a market source saw Walter Energy's 9 7/8% notes due 2020 jump 2¾ points on the session to end at 79 bid, with over $15 million of the notes having changed hands.

That followed the Birmingham, Ala.-based metallurgical coal producer's relatively favorable fourth-quarter numbers.

It posted a smaller-than-expected fourth-quarter loss of 55 cents per share on an operating basis, well under the roughly 80 cents per share Wall Street had been looking for and less than its year-earlier 82 cents per share of red ink. It attributed the less-onerous loss to cost cutting and forecast a slight improvement in demand for metallurgical coal, which is used to make steel, in 2014.

Clear Channel moves up

Another company whose bonds rose after it reported earnings was CC Media Holdings, the parent company for Clear Channel Communications Inc. the giant San Antonio, Texas-based broadcasting and outdoor advertising company.

Its 5½% notes due 2016 rose 1 point to 93½ bid, while its 9% notes due 2021 were ½ point better at 104½ bid. More than $11 million of the latter bonds traded. Its 9% notes due 2019 were up about 5/8 point, to 105 3/8 bid, on volume of over $10 million.

However, one market participant quoted the company's busiest issue, its 14% notes due 2021, off by 1/8 point at 97 3/8 bid on volume of more than $35 million.

On their conference call, Clear Channel executives touted recent transactions that boosted the company's liquidity and expressed confidence on being able to repay bonds scheduled to mature this coming September and in May of next year. (See related story elsewhere in this issue.)

Market indicators improve

A trader called the overall market firm, saying he saw more buyers than sellers.

Statistical junk-market performance indicators were higher across the board on Thursday after having been mixed for two straight sessions before that. Those mixed sessions, in turn, had followed a string of eight consecutive sessions of having been higher.

The Markit Series 21 CDX North American High Yield index rose by 5/16 point on Thursday to end at 107 5/8 bid, 107¾ offered. On Wednesday, it had lost 15/32 point, its second downturn in a row.

The KDP High Yield Daily index recorded its 10th consecutive gain, rising by 6 basis points to close at 74.99, after pushing up by 11 bps on Wednesday.

Its yield meanwhile came in for 10th consecutive session on Thursday, falling by 4 bps for a second straight session to finish at 5.34%.

And the widely followed Merrill Lynch High Yield Master II index made it a full dozen straight advances on Thursday, rising by 0.056%. That gain followed Wednesday's 0.137% improvement.

The latest upturn raised its year-to-date return to 1.952% - its eighth consecutive new high level for 2014. That was up from 1.895% on Wednesday.

The index's yield to worst declined to 5.37% - its second straight new low for the year, eclipsing the previous 2014 low of 5.372% set on Wednesday. The levels were well down from 5.735% on Feb. 4, its peak yield level for the year so far.

Its spread to worst tightened to 407 bps over comparable Treasuries from 409 bps on Wednesday. Those spreads remained in from Feb. 4th's 444 bps, the wide point for the year so far, although they also were up from the tight spread for the year, 398 bps, recorded on Jan. 22.

© 2015 Prospect News.
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