Primary ends $3.4 billion week on quiet note, new Kindred megadeal busy; energy resumes slide

By Paul Deckelman and Paul A. Harris

New York, Dec. 12 – The high-yield primary sphere closed out the week on Friday quietly, with syndicate sources not reporting the pricing of any new deals.

Two prospective issues that had been expected to possibly come to market during the session – from gaming industry services provider Global Cash Access Holdings Inc. and from industrial and commercial holding company Real Alloy Holding Inc. – remained unpriced as activity wound down for the day.

The lack of pricing activity left the week’s tally of new dollar-denominated, fully junk-rated paper just shy of $3.4 billion in seven tranches, according to data compiled by Prospect News. That was slightly above the $3.34 billion which had gotten done in nine tranches the week before, ended Dec. 5.

The week’s issuance brought the domestic and industrialized-nation dollar junk market’s year-to-date total to $313.58 billion in 586 tranches, according to the data – marginally behind the $316.31 billion that had priced in 662 tranches by this time on the calendar last year. This year’s new issuance had actually led last year’s pace for a number of months, but the gap had lately dwindled and ultimately allowed last year to get back in the lead due to recently deteriorating junk market conditions, which have curtailed new issuance activity.

Thursday’s two-part megadeal from hospital and healthcare facilities operator Kindred Healthcare Inc. was meanwhile among the busiest credits in Junkbondland; both tranches of that transaction were seen trading around or slightly under their respective par issue prices.

Away from the new deals, after a one-session breather on Thursday during which the recently hard-hit energy names had stepped back and had not been seen among the volume leaders, sliding badly in response to falling world crude oil prices, those oil and natural gas names resumed their nosedive with a vengeance on Friday.

Traders said that credits such as California Resources Corp., Linn Energy LLC, Halcon Resources Corp. and Chesapeake Energy Corp. were once again all seen retreating in active trading. Oil prices, meanwhile, plummeted to new five-year lows on world commodity exchanges.

Statistical indicators of market performance headed to their third consecutive across-the board loss on Friday, and were finishing down from where they had closed the previous Friday for a second straight week.

Primary quiet

The primary market remained largely dormant on Friday, sources said.

Two deals that were on the calendar throughout the week as business expected to clear by Friday’s close still remained on the calendar at press time.

Global Cash Access Holdings is in the market with a $700 million two-part offering of high-yield notes, a $350 million tranche of senior secured notes due March 15, 2021 (B1/B+) and a $350 million tranche of senior unsecured notes due Jan. 15, 2022 (Caa1/CCC+).

And Real Alloy Holding Inc./Signature Group Holdings, Inc. is believed to still be in the market with a $300 million offering of five-year senior secured notes.

No price talk was available on either deal, market sources said on Friday.

Heading into the weekend it seemed possible that new issue activity for the year 2014 has concluded, sources said. However no one would rule out the possibility that the week ahead could see some primary market activity.

Outflows continue

Right now the market is on hold, an investor said, and added that high yield and emerging markets – anything with any exposure to crude oil prices – widened substantially on Friday.

The investor reported seeing bid-wanted-in-competition lists “from every ETF” during the session.

Meanwhile dedicated high-yield funds continue to see negative cash flows, according to an asset manager.

Trailing news that Lipper-AMG tracked $1.89 billion of aggregate outflows for the week to Wednesday’s close, daily numbers from the first day of the present reporting period, Thursday, continued negative, with high-yield ETFs sustaining $47 million of outflows while actively managed funds saw $205 million of outflows, the investor said.

Less dire in Europe

In Europe things seemed less dire to a debt capital markets banker who spoke late in the London day.

The iTraxx Crossover index was at 365 basis points bid on Friday, 30 bps wider over the past two days, the banker said.

“That’s not a huge move,” the source remarked, and noted that in the middle of October the index was substantially wider, at 400 bps bid.

Likewise the cash flows for dedicated high-yield funds in Europe seem less negative than for their counterparts in the United States, the banker said, adding that flows have been neutral to slightly negative.

The next big deal out of Europe could be Altice SA with €5 billion equivalent of secured and unsecured notes to help finance the acquisition of the Portuguese assets of Portugal Telecom from Grupo Oi SA, according to the source.

That deal, coming via Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, BNP Paribas, Citigroup, Credit Agricole, HSBC, Nomura and SG CIB, almost certainly will not come before the new year, the source added.

New Kindred bonds busy

In the secondary market, both tranches of Thursday’s big new deal from Kindred Healthcare Escrow Corp. II, a unit of Louisville, Ky.-based hospital and healthcare facilities operator Kindred Healthcare Inc., were seen actively trading around.

A market source said that the company’s 8% notes due January 2020 were easily the busiest junk bonds of the day, racking up more than $92 million of turnover. He quoted the notes right at par, unchanged from their issue price.

He meanwhile saw the other half of that $1.35 billion megadeal, the 8¾% notes due January 2023, at 99 3/8 bid, which he called down 3/8 point on the day, with over $21 million having changed hands.

At another desk, the 8% five-year notes were pegged at 99 7/8 bid, 100½ offered, while the 8¾% eight-year paper was in a 99 to 99½ bid context.

Another trader opined that “that thing came actually back a little bit – but definitely struggled.”

He said the five-year bonds had traded during the morning as low as the 99¼ region, but had reached a par bid by the afternoon.

“I think that gradually, as the flippers got out of the way and the bonds that were in weak hands cleared, they started to do a little better.”

As for the eight-year piece, he said it was still in a 99 1/8 to 99½ context, with not much activity seen after midday.

The deal that ultimately came to market on Thursday was quite different than the one that the company had initially shopped around. Kindred originally planned to offer tranches of eight- and 10-year notes – but syndicate sources heard Wednesday that the 10-year paper had been jettisoned, replaced by a five-year tranche, which was presumably more palatable to investors.

The after being pushed back a day to allow for those changes, the issue finally priced on Thursday, consisting of $750 million of the 8% 2020 notes and $600 million of the 8¾% 2023 notes.

Both tranches priced at par – after their tranche sizes were also rejiggered, with $50 million switched from the eight-year tranches, which originally was $650 million, to the five-year piece, which had originally been planned at $700 million.

Senior analyst Vicki Bryan of the Gimme Credit independent advisory service said in a research note on Friday that Kindred did not have the luxury that some potential issuers have had of electing not to do its deal in the face of current market conditions, since it had to pay off the short-term bank debt that it took on to fund its acquisition of sector peer Gentiva Health Services Inc.

After making the requisite changes to get the deal done, Bryan said that the resulting transaction was “a solid win for investors, who netted an above­average yield and unusually high coupon these days for the healthcare sector and the high-yield market on the whole, both features which afford above­average downside protection versus the heavily skewed high-yield universe of low-handled debt after several years now of refinancings at notably low yields.”

She said that “the net increase in interest costs [resulting from the bond deal] remains manageable,” calling the impact on Kindred’s credit metrics “negligible,” and keeping her “outperform” rating on the company.

Energy slide resumes

Apart from the strong interest in Kindred, falling energy prices – and with them, falling energy company bonds – were once again the major theme. That was in contrast to Thursday, when only California Resources had been among the 20 most actively traded junk issues, and only showed a relatively small decline, versus the larger losses that name and other energy-company credits had racked up in heavy trading earlier in the week as the financial markets continued to react to continuing oil price declines.

“Overall, the market was down at least ½ point, and anything in energy was down a point again, and in some cases more,” a trader said.

The sliding energy names “got everyone’s attention and were pulling everything else down with it.”

California Resources’ 6% notes due 2024 finished down 1¼ points at 82 bid, on volume of $69 million, making the Los Angeles-based exploration and production company’s issue the busiest in the junk space other than the new Kindred five-years.

Houston-based Linn Energy’s 6½% notes due 2019 fell more than 2½ points to close around 78½, while the debt of another Houston E&P operator, Halcon Resources’ 8 7/8% notes due 2021, retreated 1½ points to 67½ bid, with about $14 million of each bond having traded.

Oklahoma City-based natural gas and oil producer Chesapeake’s 5¾% notes due 2023 were down by 1 5/8 points on the day at 97 7/8, with $13 million traded.

Canadian oilfield services company Tervita Corp., which provides environmental services to the oil and gas industry, was one of the biggest losers, its 8% notes due 2018 plummeting more than 5 points to end at 67 bid, on volume of more than $17 million.

The price slide comes against a backdrop of renewed oil price weakness, especially after a bearish energy demand forecast Friday from the International Energy Agency.

The benchmark U.S. crude grade, West Texas Intermediate, finished down $2.14, or 3.6%, at $57.81, after touching intraday lows of $57.34, its lowest since May 2009.

European Brent crude settled down $1.83, or almost 3%, at $61.85 per barrel, with a session low of $61.35, its lowest since July 2009.

Indicators off on day, week

Statistical indicators of junk market performance were off for a third consecutive session on Friday, and were down all around for the fifth session in the last six, a bearish pattern only interrupted by Tuesday’s mixed session.

They were also seen down from where they had closed out the previous week, the second consecutive week on the downside following two straight mixed weeks before that.

The KDP High Yield Daily Index suffered its sixth consecutive loss on Friday, plunging by 41 basis points to go out at 69.90 – its first time this year under the psychologically significant 70.00 mark and lowest finish since Oct. 11, 2011, when it closed at 69.84. On Thursday, the index had been down by 25 bps.

Its yield rose by 10 bps to 6.20%, its sixth straight widening; on Thursday, it had increased by 7 bps.

Those levels compared unfavorably with the 71.21 index reading and 5.66% yield seen at the close last Friday, Dec. 5.

The Markit CDX North American High Yield Series 23 index saw its third consecutive loss on Friday and sixth downturn in the last seven sessions, retreating by 5/8 point to 104 15/32 bid, 104½ offered. On Thursday, it had lost 7/16 point.

The index also ended down from last Friday’s levels at 106 13/16 bid, 106 27/32 offered.

The Merrill Lynch U.S. High Yield Master II Index posted its sixth successive downturn on Friday, declining by 0.611%, on top of Thursday’s 0.245% retreat.

The latest loss dropped its year-to-date return to 0.847% from Thursday’s 1.466% finish.

Friday’s close was its lowest since Feb. 8, when it ended at 0.810%.

The year-to-date return also remained well below its peak level for the year of 5.847%, recorded on Sept. 1.

Several other index components notched new marks for the year. Its yield to worst rose to a fifth consecutive new high for the year at 7.006% from the previous high of 6.839% on Thursday.

Its spread to worst rose to 554 bps over comparable Treasuries, its fifth consecutive new wide point of the year. On Thursday, it had risen to 533 bps.

And its average price fell to 97.63583, its sixth straight new low for the year, from 98.26579 on Thursday.

For the week, the index declined by 2.094%, its second straight weekly loss and fifth weekly loss in six weeks. It was the biggest weekly plunge the index has seen this year, easily surpassing the 1.419% nosedive recorded during the week ended Aug. 1.

The week before, it had fallen by 0.957%, leaving the year-to-date return at 3.003%. So in 2014, the index has risen in 33 weeks out of the 50 since the beginning of the year, versus 17 weekly downturns.

© 2015 Prospect News.
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