Primary week ends with zero pricings; Dynegy plans huge deal while bonds drop; Momentive mauled

By Paul Deckelman and Paul A. Harris

New York, Aug. 22 – The high-yield primary closed out the week on Friday having gone 0 for 5, as no deals priced with the market mired in its traditional late-August summer doldrums.

Although there were no pricings, there was one deal announcement, from the Houston-based power generating company Dynegy Inc., which plans to issue about $5 billion of unsecured bonds as part of the funding for its more than $6 billion purchase of generation assets from Duke Energy and from Energy Capital Partners in a pair of separate transactions.

The news of the coming massive bond deal from Dynegy hammered the company’s existing bonds down by as much as 3 points during the session, in heavy trading. Later in the day, however, that paper was heard by traders to have come off its lows, while still ending well down from its pre-news levels.

That was one of the few things that stood out in a largely becalmed secondary market, which saw numerous participants cut out early – if they had been in at all – a typical summer Friday story.

There was also brisk trading seen in the bonds of Momentive Performance Materials Inc., the bankrupt maker of silicon and other specialty industrial materials. Those bonds dropped amid investor worry that the judge overseeing the company’s contentious reorganization may side with Momentive in its dispute with those bondholders over whether they are owed any special interest payments.

Back in the primary sphere, the complete lack of issuance of any new dollar-denominated, fully junk-rated paper from domestic or industrialized-country borrowers during the week represented the ultimate slowdown from even the sleepy week ended Aug. 15, when $1.06 billion came to market in four tranches, according to data compiled by Prospect News.

That pattern of slowing activity has been going on for several weeks now. Issuance the week ended Aug. 8 totaled $2.16 billion in 10 tranches, which in turn was down from the $6.04 billion in 17 tranches from the week ended Aug. 1.

With nothing across on the week, year-to-date issuance for 2014 so far stood at some $206.61 billion in 410 tranches – unchanged from the end of last week, which was running about 1.9% ahead of the $202.59 billion that had priced in 473 tranches by this point on the calendar last year, according to the data.

That was somewhat narrower than the roughly 2.4% gap between the year-to-date volumes for this year and last seen a week ago, facilitated by a modest amount of primary-market activity in the year-ago week.

Statistical market performance indicators ended mixed for a third consecutive session, after having been up across the board for two sessions before that. However, for a third consecutive week, they all showed week-over-week improvement from where they had finished the previous Friday.

Dynegy brings $5 billion

Although no deals priced on Friday, the market heard one deal announcement – and it was a whopper.

Dynegy is planning to issue $4.9 billion to $5.1 billion of unsecured bonds and to obtain $950 million of incremental revolving credit facilities to help fund two separate definitive sets of agreements to acquire the ownership interests in certain Midwest generation assets from Duke Energy and EquiPower Resources Corp. and Brayton Point Holdings LLC from Energy Capital Partners, according to a company presentation.

Morgan Stanley is the left lead on all financing.

Committed bridge financing is in place for the transaction purchase price and liquidity facilities.

Other funds for the transaction will come from $1 billion to $1.1 billion of new equity and $200 million of common stock issued to Energy Capital Partners Equity.

Closing is expected by the end of the first quarter in 2015.

Trudging toward September

Apart from Dynegy, the primary market passed a quiet August Friday.

And the quiet is expected to persist into the pre-Labor Day week ahead.

A massive September calendar is taking shape, sources say. One forecast had the calendar topping the $40 billion mark, which it has done in only three previous months, two of which were the previous two Septembers: September 2012, which saw $44.4 billion in 86 junk-rated, dollar-denominated tranches, and September 2013, which saw $46.9 billion in 67 deals, the standing record for monthly issuance.

However, if the dealers are lining deals up for early September, they are doing so quietly, sources say.

Only one deal is officially announced as September business.

SFX Entertainment, Inc. is expected to launch a to-be-determined amount of add-on notes to its outstanding issue of 9 5/8% second-lien senior secured due Feb. 1, 2019 (existing ratings Caa1/B-) following the Aug. 29 expiration of a current consent solicitation for an amendment to the outstanding 9 5/8% notes.

Barclays, which is leading the consent, is expected to be lead left for the add-on.

Market watchers also look for Jupiter Resources Ltd. to return to the market in early September with its $1.13 billion offering of senior notes to fund the acquisition of Bighorn from Encana, a deal sidelined by market volatility in late July and early August. However, no announcement has been made.

Announcements notwithstanding, nearly the entire known pipeline of deals will be done in September, pending market conditions, a portfolio manager asserted.

Market activity restrained

With the primary market essentially dead outside of the Dynegy announcement, traders said there wasn’t very much life seen in the secondary realm either, although they said that this was typical for a Friday session late in August.

“I didn’t see much action message-wise,” said one trader, commenting on the overall lack of transaction communications at his shop.

A second said that as has been the case for the last few days, the bulk of the activity was limited to issues having specific news out on them.

Dynegy down on deal news

One of the most noticeable of the latter group was Dynegy itself, whose 5 7/8% notes due 2023 took a nosedive on the news that power generation company plans to issue around $5 billion of new bonds, less than two years after its emergence from bankruptcy in October of 2012.

A market source said that more than $30 million of the notes traded on the session, plunging to under 95 bid from pre-news levels above 98,

However, another trader noted, “It looks like they’re coming back a little” after bottoming at about 94 15/16, seeing the paper regain part of its losses to close at 96½ bid, still down 1½ points on the day.

While news of the upcoming deal – and especially the company’s plan to take on massive new debt to finance it – proved to be unpopular in Junkbondland, it went over well elsewhere.

The company’s bank debt was seen unchanged to up around ¼ of a point, probably helped by Standard & Poor’s action raising Dynegy’s corporate credit rating to B+ from B based on expectations of lower business risk with the acquisition of about 12,300 MW of merchant power generation capacity and upping its senior secured debt rating to BB.

S&P declared that the acquisition “will improve Dynegy's scale and market diversity materially by adding a large footprint in the favorable PJM and NePool power markets where Dynegy has limited presence.”

However, it merely affirmed Dynegy's senior unsecured debt rating at B+ in view of the substantial new unsecured debt issuance planned to finance the purchase.

Equity investors, though, were enthusiastic; Dynegy’s New York Stock Exchange-traded shares jumped by $2.60, or 8.75%., to end at $32.32, on volume of some 15.4 million shares, more than 15 times the norm.

Momentive moves down

About the only name busier than Dynegy, one market source said, was Momentive Performance Materials, specifically its 8 7/8% first-lien notes due 2020.

Those bonds dropped by some 2½ points on the day to end at 98½ bid, on volume of more than $52 million.

Momentive’s 10% 1.5-lien notes due 2020 also took it on the chin, falling some 2¾ points to end at 98¾ bid.

The fall in the notes comes against a backdrop of four days of hearings this week at the White Plains, N.Y.-based federal bankruptcy court overseeing the Waterford, N.Y.-based silicon producer’s reorganization.

The process has been anything but smooth, with some groups of bondholders and Momentive itself filing motions against one another. Among the legal sniping going on, Momentive sued holders of its 8 7/8% first-lien debt and 10% 1.5-lien paper, saying it doesn’t owe them any kind of special premium payments for unpaid interest.

Under the company’s proposed plan of reorganization, those holders would get full principal repayment, but not the interest they are seeking.

Bankruptcy judge Robert Drain is scheduled to rule Monday on the various competing claims, which also include objections to the plan by holders of the company’s 11½% senior subordinated notes due 2016, who currently stand to get nothing under the proposed plan, causing those bonds to slide by 15 to 20 cents on the dollar this week, into the mid-single digits.

Indicators mixed on day, up on week

Statistical indicators of junk market performance remained mixed for a third straight day on Friday, after having been mostly higher over the two previous sessions before that and over four of the prior five sessions.

However, they were up across the board versus their levels the previous Friday for a third straight week.

The KDP High Yield Daily index fell for a second day, after having been higher over the previous 12 consecutive sessions. It ended down 4 basis points at 74.03, after having eased by 6 bps on Thursday. Its yield rose by 1 bp to 5.04%, breaking a string of 13 straight sessions in which it had come in, including Thursday, when it had declined by 2 bps.

Those levels compared favorably with the 73.83 index reading and 5.17% yield seen the previous Friday, Aug.15.

The Markit CDX Series 22 index fell by 5/16 of a point on Friday to end at 107 29/32 bid, 107 31/32 offered, after having risen by 9/32 of a point on Thursday.

But it was up from the previous Friday’s 107 9/16 bid, 107 11/16 offered level.

The widely followed Merrill Lynch High Yield Master II index posted its 10th consecutive winning session, gaining 0.009% on top of Thursday’s 0.037% advance.

The latest upturn lifted the index’s year-to-date return to 5.632% from Thursday’s 5.623% level, although it still lagged the 5.751% return recorded on July 7, the peak level so far for 2014.

For the week, it was up by 0.38%, its third consecutive weekly gain. The index had zoomed by 1.057% the previous week – its biggest gain so far this year – to end at 5.232%.

Sara Rosenberg contributed to this market commentary

© 2015 Prospect News.
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