Charter sells giant split-rated deal; natural resources names rebound; funds gain $45 million

By Paul Deckelman

New York, July 9 – Charter Communications Inc. came to market on Thursday with one of the biggest-ever bond deals – an upsized six-part $15.5 billion behemoth, part of a $31 billion bond-and-loan financing package backing its acquisition of bigger rival Time Warner Cable Inc. and smaller sector peer Bright House Networks LLC.

But while Charter has been a familiar and prolific issuer of junk bonds, Thursday’s split-rated offering of senior secured notes – signaling the start of its planned transition to an investment-grade credit – actually priced off the high-grade desks and was quoted and traded on a spread-versus-comparable Treasuries basis.

There was no other news heard emanating from the primary market during the session.

In the secondary arena, natural-resources credits, such as the bond of iron-ore miner Fortescue Metals Group Ltd. and oil and gas exploration and production operator California Resources Corp. were firmer on the day, following the overall trajectory of the junk market as a whole, but finished off from higher levels hit earlier on.

Statistical market-performance measures turned higher across the board on Thursday after having been lower all around on Wednesday for the second time in three sessions.

Another numerical gauge – flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall market liquidity trends – were modestly higher during the trading week ended Wednesday, its $45 million cash gain contrasted with the nearly $3 billion outflow posted last week – the biggest downturn of the year.

Charter comes to market

Charter Communications launched its long-awaited bond issue, backing its acquisition of Time Warner Cable and Bright House Networks.

Brisk demand among potential investors for the solidly oversubscribed issue caused the Stamford, Conn.-based provider of cable, internet and phone service to upsize its bond deal to $15.5 billion from what was expected to be around $13 billion, as part of the $31 billion of financing it will do to fund the acquisitions.

While the company – a long-time high-yield market fixture – had previously indicated that the bonds would be a mix of secured paper expected to gain an investment grade rating and unsecured paper, Thursday’s six-tranche deal of five-, seven-, 10- 20- 30- and 40-year notes was entirely senior secured.

The split-rated (Ba1/BBB-/BBB-) offering was priced off the investment-grade desks at spreads to comparable-maturity Treasuries, and traded on spread after their pricing, attracting mostly high-grade investors.

The various tranches of the bonds launched 5 to 10 basis points tighter than initial price talk.

Charter is also expected to get about half of the needed financing for the acquisitions from the bank debt market, and will additionally get a $5 billion equity infusion from its largest current shareholder, billionaire telecom tycoon John Malone’s Liberty Broadband Corp.

Charter is merging with New York-based Time Warner Cable in a cash-and-stock transaction that values the latter at $78.7 billion, including $23.3 billion of assumed Time Warner Cable debt, and will acquire Syracuse, N.Y.-based Bright House for $10.4 billion in cash and common and convertible preferred units in a partnership that Charter is forming with Bright House’s current owner, Advance/Newhouse Partnership. The three companies envision the formation of a combined broadband services and technology provider serving 23.9 million customers in 41 states.

Another split-rated deal

Charter’s Rule 144A/Regulation S offering – which came to market via Goldman Sachs & Co., Bank of America Merrill Lynch, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and UBS Securities LLC. – was the second big split-rated offering in as many days.

On Wednesday, General Motors Financial Co. Inc. priced $2.3 billion of senior notes (Ba1/BBB-/BBB-) in a two-tranche transaction.

The Fort Worth, Texas-based captive finance arm of Detroit auto giant GM priced $1.5 billion of 3.2% five-year notes with a spread of Treasuries plus 170 basis points. Pricing was at 99.972 to yield 3.206%.

It also priced 800 million of 4.3% 10-year notes at 99.863 to yield 4.317%, or Treasuries plus 210 bps.

Both tranches sold at the tight end of guidance.

Plans for a five-year floating-rate tranche were dropped prior to the deal’s launch.

As was the case with the Charter deal, most of the post-pricing activity in the new paper came from high-grade investors reaching for yield in the split-rated space.

Resources names rebound

No other fresh news emerged in the primary market on Thursday.

In the secondary realm, traders said the overall market tone was better – in line with a rise in equities seen as investor fears over the Greek debt crisis and China’s stock market downturn subsided.

Natural resources names, such as iron-ore producers and oil and gas companies, were seen strengthening after having been knocked around over the past few sessions

“Things were better bid this morning,” a trader said, noting that “some of the resource names that we really underperforming this week kind of bounced back by 1 or 2 points or so.”

He said that the bonds “were off their highs of the day – but they were the outperformers today, which was not surprising,” in view of the bloodletting which had preceded the comeback.

For instance, he said that Australian iron-ore miner Fortescue’s FMG Resources bonds “came out of the gate really hot,” with its 9¾% notes due 2022 moving up to around 97 bid after having finished at around 95 on Wednesday.

He saw the bonds come back in off those highs to close around 95½, “so they’ve kind of been all over the place.”

Another trader saw those notes – which had plunged by some 3¾ points on Wednesday – coming back up by ¼ to ½ point on Thursday to 95 on volume of more than $28 million.

FMG’s 8¼% notes due 2019 – which had nosedived by some 5 ½ points on Wednesday – were ¼ point better on Thursday at 75 ¼ bid, with over $17 million having changed hands.

Domestic iron ore producer Cliffs Natural Resources Inc.’s were up around 2 points on Thursday.

A trader saw the Cleveland-based mining company’s 5.90% notes due 2020 move up to 43 bid from 41 on Wednesday.

Its 7¾% notes due 2020 jumped by 2¼ points on the day to end at 53 bid, with over $16 million traded.

Benchmark oil and gas name California Resources’ 6% notes due 2024 – which had dropped by 1 point in heavy trading on Wednesday – got about 5/8 of that point back on Thursday, ending at 82 5/8 bid, on volume of over $72 million, tops in Junkbondland.

Its 5½% notes due 2021, which on Wednesday had bucked the mostly negative trend to gain nearly 2 points, kept the ball rolling on Thursday, taking on another ½ point to end at 84½ bid, with $18 million traded.

But overall, a trader said, “things were really strong out of the gate, but then they pulled back and ended off their highs.

“It was quiet, as a lot of accounts were sitting around all day waiting for Charter.”

Indicators turn higher

Statistical market-performance measures turned higher across the board on Thursday after having been lower all around on Wednesday for the second time in three sessions, and before that, having been mixed on Tuesday.

The KDP High Yield Daily Index broke out of a three session slump on Thursday, moving up by 5 basis points to end at 69.87. It had fallen by 9 bps on Wednesday, on top of plunges of 19 bps on Monday and 16 bps on Tuesday.

Its yield meanwhile came in by 1 bp to end at 5.80%, after having moved up by 3 bps on Wednesday, its third straight rise.

The Markit Series 24 CDX North American High Yield Index rose by 5/32 point on Thursday, after having lost 9/16 point on Wednesday. Thursday’s gain was its second in three sessions.

The Merrill Lynch North American Master II High Yield Index moved up 0.087% to snap a three-session losing streak that included Wednesday’s 0.133% downturn.

The gain lifted its year-to-date return to 2.265% from Wednesday’s 2.176%, although it remained well down from the 4.062% reading recorded on May 29, the index’s peak level for the year so.

Funds see inflow

High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – turned mildly higher this week, after having posted their biggest outflow of the year so far the week before.

Some $45.079 million more came into those weekly-reporting-only funds than had left them during the week ended Wednesday.

This week’s inflow represented a small improvement from the $2.977 billion outflow reported last week for the seven-day period ended July 1 (see related story elsewhere in this issue).

-Aleesia Forni contributed to this review

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