Post-holiday primary silent; Modular Space deal slates; takeover news boosts Forest Labs

By Paul Deckelman and Paul A. Harris

New York, Feb. 18 - It was back to work in the high-yield market on Tuesday after the Presidents Day three-day holiday weekend, but traders said you would never know it by looking at the volume figures, which they described as extremely light.

The primary sphere was particularly quiet, with no pricings seen and just one new-deal announcement having surfaced - from Berwyn, Pa.-based modular space structures and storage container company Modular Space Corp., which is expected to do a $365 million five-year secured notes deal later in the week.

Traders meantime saw very little aftermarket activity in last week's new issues, with the exception of New York-based commercial lender and banking operator CIT Group Inc.'s new five-year megadeal, which was one of the busier Junkbondland names.

Away from new or recent deals, Forest Laboratories Inc.'s bonds were seen to have gotten a boost on the news that generic drugmaker Actavis plc will acquire Forest in a $25 billion cash-and-stock transaction.

Charter Communications Inc. remained busy in the aftermath of last week's news that would-be Charter acquisition target Time Warner Cable Inc. had instead opted to be acquired by larger rival Comcast Corp.

Statistical market-performance measures turned mixed after eight straight sessions in which they had been higher.

Primary comes up empty

No deals priced as the U.S. high-yield primary market reconvened following the three-day Presidents Day holiday weekend.

A couple of deal announcements are expected on Wednesday, however, according to a syndicate source who added that the preponderance of primary market business ahead will probably emerge in the form of drive-by activity.

The refinancing pipeline is currently not very big, the syndicate official remarked, because a lot of the refinancing pipeline has already come through the market.

There are bonds that will become callable in the second quarter of 2014, however, and those call options should serve to rekindle refinancing in the high-yield primary.

Meanwhile there has been an uptick of headlines in the mergers and acquisitions space, sources said on Tuesday, adding that M&A activity should also produce meaningful new-issue volume in the weeks and months ahead.

If you stick some yield on it...

There was only one dollar-denominated deal on the active forward calendar at Tuesday's close.

Modular Space plans to price a $365 million offering of five-year senior secured second-lien notes (B3/B-) during the middle part of this week.

Official price talk has yet to emerge, but the deal is whispered in the mid-10% context, an investor said.

And in that context it is attracting a crowd, the source added.

"We heard that the order book is already oversubscribed," the investor remarked.

"If you stick some yield on it, people will come."

BofA Merrill Lynch, JP Morgan and Wells Fargo are joint bookrunners for the debt refinancing deal.

Recent deals elusive

In the secondary realm, a trader declared that he "never saw Playa, didn't see CEC and didn't see Diamond" - referring to three of the deals that had priced late last week.

Fairfax, Va.-based Mexico and Caribbean resort hotel operator Playa Resorts Holding BV priced a $75 million add-on to its 8% notes due 2020 in a quick-to-market transaction on Friday, with the bonds coming at 105½ to yield 6.779%.

CEC Entertainment, Inc., the Irving, Texas-based operator and franchisor of the popular Chuck E. Cheese family dining and entertainment restaurants, priced $255 million of 8% notes due 2022 at par on Friday off the forward calendar, after downsizing the deal from $305 million originally. Those bonds had jumped to around the 101½ to 101¾ bid area in initial post-pricing aftermarket activity but were not seen trading around on Tuesday.

Diamond Foods, Inc., a San Francisco-based maker of packaged snack foods including nuts, potato chips and popcorn, priced $230 million of 7% notes due 2019 at par on Thursday. Those bonds jumped to above the 102 bid level in Thursday and Friday dealings but were unseen on Tuesday.

The trader did see Griffon Corp.'s 5¼% notes due 2022 at 99¾ bid, par offered. The New York-based diversified management and holding company had priced a quickly shopped $600 million of the notes at par last Wednesday after upsizing the deal from $550 million. Those bonds had traded near, or somewhat below, par on Thursday and Friday.

CIT stays busy

The trader also saw CIT Group's 3 7/8% notes due 2019 trading between 100½ bid and 100¾ offered.

At another shop, a market source saw the notes unchanged at 100 5/8 bid, on respectably robust volume of over $12 million.

CIT priced $1 billion of the notes at par last Wednesday in a drive-by transaction. The notes gradually crept up to their current levels in very active trading each session last week.

Forest Labs firmer

Apart from those new or recent deals, one of the traders noted a jump in Forest Laboratories' 4 3/8% notes due 2019 on the news that Actavis plc has agreed to acquire Forest in a $25 billion cash-and-stock deal that values Forest at $89.498 per share.

He saw the notes having climbed to around 105¼ bid, 106¼ offered from prior levels around 103¼ bid, 104 offered.

He said that the company's 5% notes due 2021 had been around 104½ bid, 106½ offered initially, "but then they disappeared, because there's a feeling that the 5s could be tendered for - if they have to take them out, they would have to tender for them at a price of about 116. So nobody really traded much in that.

In announcing the deal, the two companies said they expect to harvest $1 billion in operating and tax synergies, generate more than $4 billion in free cash flow by 2015 and use that to de-lever the balance sheet and bring the combined company's ratio of debt as a multiple of pro-forma adjusted EBITDA down to under 3.5 times.

Forest's New York Stock Exchange-traded shares meanwhile zoomed by $19.65, or 27.52%, to end at $91.04. Volume of over 36.9 million shares was more than 13 times the norm.

Charter bonds keep churning

One of the most active names of the day, if not the most active, was Charter Communications, whose bonds were continuing to trade around as investors digested last week's announcement that larger rival Time Warner Cable - which had spurned Charter's hostile $38 billion takeover bid - will instead unite with larger rival Comcast Corp. in a deal valued at $45 billion.

Charter's CCO Holdings LLC bonds had initially firmed on Thursday on apparent investor relief that Charter will not be doing such a huge debt-funded acquisition, but then slipped back on Friday, giving up most of those gains, but in continued active trading.

On Tuesday, CCO's 5 1/8% notes due 2023 had regained 1 point, ending at 96¾ bid, on volume of more than $18 million.

Its 5¼% notes due 2022 improved by 1¼ points, a market source said. He pegged the bonds at 98½ bid, with over $14 million having changed hands.

Momentive moves lower

A trader saw Momentive Performance Materials Inc.' bonds continuing to slide in the wake of last week's warning from Standard & Poor's that the Albany, N.Y.-based company will likely have to restructure its debt this year or else face a possible default.

A market source saw Momentive's 9% notes due 2021 down a deuce at 88 bid on volume of more than $11 million - one of the day's relatively busiest bonds. Its 11½% notes due 2016 ended off by 2¾ points at 65 with over $5 million of the bonds having changed hands by mid-afternoon, the source said.

At another desk, a trader noted that at 65 the latter bonds "were down a couple of points - they were right around 68 at the end of last week."

"At the end of the day, 65 was the trade - definitely lower."

But he said that "there wasn't a lot of volume - just four or five trades."

He meantime saw the 9s down 3 points.

The bonds have been falling since last Tuesday, when S&P dropped Momentive's credit rating to CCC- and gave it a negative outlook. The agency noted that free cash flow has been negative for nine quarters. In the third quarter alone, the company burned through $80 million.

With some $3.3 billion of outstanding debt on Momentive's balance sheet, S&P analysts Cynthia Werneth and Paul Kurias cautioned that "prospects for sufficient improvement to stave off a payment default or debt restructuring within the first three quarters of 2014 are dim."

They added that "we expect the company to continue to generate negative free operating cash flow, causing liquidity to dwindle."

Before that negative news came out, the 11½% notes had been trading around 76 bid, and the 9s were around 93.

Overall market quiet

Overall, a trader said, "it was a quiet day," with some people having taken an extra day after the three-day Presidents Day holiday weekend, and still others deciding to stay out for the whole holiday-shortened week, taking vacation time to coincide with mid-winter recess breaks on the calendars of school systems in many areas.

Another trader was more blunt, opining that "volume was negligible - in fact, it was abysmal."

Market indicators turn mixed

Statistical junk-market performance indicators turned mixed after eight consecutive sessions of having been higher.

The Markit Series 21 CDX North American High Yield index eased by 1/32 point to end at 107 13/16 bid, 107 7/8 offered. Although the market was officially closed on Monday due to Presidents Day, Markit published its index, showing it about unchanged on Monday, after having gained 7/32 point on Friday, its second consecutive gain.

The KDP High Yield Daily index - which was not published on Monday - posted its eighth consecutive gain, pushing up by 6 basis points to 74.82 after having edged up by 1 bp on Friday.

Its yield meanwhile came in for an eighth consecutive session on Tuesday, declining by 2 bps to 5.42% after having moved down by 1 bp on Friday.

And the widely followed Merrill Lynch High Yield Master II index notched its 10th straight advance on Tuesday, rising by 0.154%. Merrill Lynch published the index on Monday, showing it up by 0.057%, which followed a 0.071% gain on Friday.

The latest advance raised its year-to-date return to 1.756%, its sixth consecutive new high level for 2014. That was up from 1.6% on Monday and from 1.542% on Friday.

The index's yield to worst declined to 5.409% from 5.467% on Monday and 5.47% on Friday. Those levels were down from 5.735% on Feb. 4, its peak level for the year so far, while also remaining well above the low yield for the year, 5.386% on Jan.22.

Its spread to worst tightened to 414 bps over comparable Treasuries from 416 bps on both Monday and Friday. Those spreads remained in from Feb. 4th's 444 bps, the wide point for the year so far, although they also were well above the tight spread for the year, 398 bps, recorded on Jan. 22.

For the week, the index rose by 0.547%, its second consecutive weekly advance after two straight weekly losses before that. It had also been up by 0.248% the previous week, when its year-to-date return closed at 0.989%.

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