Junk market quiet; Verso off; Community Health trades on tender news; funds gain $779 million

By Paul Deckelman and Paul A. Harris

New York, July 5 - With the July 4th holiday break now history, it was back to work in Junkbondland on Thursday - at least in theory.

In reality, Thursday was not too different from Tuesday, with many desks lightly staffed, people hitting the exits early and very little in the way of anything concrete going on, traders said.

The primary market completely quieted down. There was no news of any kind seen - in contrast, actually, to Tuesday, when at least there had been news that precious metals concern Coeur d'Alene Mines Corp. had decided to scrub its planned $350 million issue of eight-year notes.

Things were not much more lively in the secondary arena. Verso Paper Corp. and NewPage Corp., whose bonds had risen on Tuesday after Verso offered to acquire its bankrupt rival, were each seen having come down a little from their respective Tuesday closes and on considerably reduced volume, although they remained above where they had been before news of that offer, which was subsequently rejected by NewPage.

There was some activity in Community Health Systems Inc.'s bonds - though no real price movement - in response to the hospital operator's announcement that it will tender for all of its remaining 8 7/8% notes due 2015, which have been trading at the expected takeout level for some weeks now.

The overall market was seen having a generally firm tone, albeit on very light volume, but statistical indicators of junk market performance turned mixed on Thursday after several days on the upside.

There meantime was no stopping the flood of money coming into high yield. Junk mutual funds and exchange-traded funds - seen as a reliable proxy for overall liquidity trends in the larger market - showed their fourth consecutive sizable cash inflow during the week ended Wednesday.

AMG up by $779 million

As what little activity there was wound down on Thursday, market participants familiar with the weekly AMG high-yield mutual fund flow statistics said that in the week ended Wednesday, about $779 million more came into those funds than left them.

It was the fourth consecutive strong showing by the junk mutual funds and ETFs in as many weeks and came on the heels of the $960 million inflow seen the previous week, which ended June 27.

That, in turn, had followed cash injections of $1.2 billion in the week ended June 20 and the $568 million cash addition the week before that, which ended June 13.

Those four inflows, collectively worth $3.51 billion, have represented a solid turnaround from the pattern of weakness seen in the four weeks before that, dating back to the week ended May 16, when a total of $6.43 billion of outflows were recorded from those funds, according to a Prospect News analysis of the figures. That included two huge cash hemorrhages: $2.9 billion in the week ended June 6 - the third-largest cash loss on record since Arcata, Calif.-based AMG, a unit of Thomson Reuters' Lipper/FMI division, began tracking fund flows some years ago - and $2.46 billion seen in the week ended May 23.

On a year-to-date basis, the latest inflow pulled the cumulative net inflow figure up to around the $20.7 billion mark, Lipper said. The year-to-date figure counts monthly reporting funds as well as the weekly reporters, the company said.

However, the cumulative inflow remains well below its peak level for 2012 of an estimated $24 billion seen in the week ended May 9, according to the analysis.

Including an outflow seen earlier in the year - the $1.29 billion recorded in the week ended April 11 - there have been just five outflows so far this year, and inflows have now been seen in 22 out of the 27 weeks since the start of the year.

EPFR: Funds up $1.7 billion

A rival fund-tracking service, Cambridge, Mass.-based EPFR Global, reported that in the week ended Wednesday, about $1.7 billion more came into the funds it follows than left them, confirming the recent turnaround in the fund-flow trajectories.

As was the case with the AMG Lipper numbers, EPFR - which uses a different methodology but whose numbers usually point in the same direction as AMG - reported that this was the fourth consecutive large inflow number. It followed the previous week's $1.8 billion cash injection.

That, in turn had followed inflows of $1.58 billion in the week ended June 20 and $391 million the week before that.

Those four inflows followed four straight weeks of sizable outflows, including the $3.6 billion that left the funds in the week ended June 6.

The latest inflow lifted EPFR's year-to-date total return to about $34.6 billion, according to an analysis of the figures.

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

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new-deal borrowing binges seen in both 2009 and then in 2010, as well as the robust secondary market seen both years, and continued to be the driver behind 2011's near-record issuance.

Those fund flows are also seen as the key element behind the high-yield secondary market's strong performance during the first half of this year versus other fixed-income asset classes and its relatively active new-deal pace, with issuance volume not running too far behind last year's totals.

Great Canadian sets roadshow

The post-Independence Day session produced no news in the United States.

In Canada, Great Canadian Gaming Corp. (Ba3//) announced plans to hold a roadshow for its C$400 million offering of 10-year senior notes.

The roadshow is scheduled for Vancouver on July 11, New York and Boston on July 12-July 13 and Toronto on July 16-July 17.

The deal will be offered in Canada via a private placement and in the United States by Rule 144A.

Scotia Capital Inc. and HSBC Capital (Canada) Inc. are the bookrunners for the debt refinancing and general corporate purposes deal.

European calendar could form

Meanwhile in Europe, there is a possibility that a new deal calendar could start to take shape soon, sources said on Thursday.

Germany's Klockner Pentaplast could announce the roadshow for its euro-denominated junk bond deal as early as Friday, market sources said.

The recapitalization deal, which is coming to the market via Jefferies & Co., is expected to be comprised of around €255 million of second-lien notes.

"We hear the deal is prepped and ready to go, awaiting people in the U.S. to return from holiday," a senior debt capital markets banker in London said.

The dealers understandably would prefer to launch the transaction without facing a lot of headwinds generated by negative economic and financial headlines out of Europe, the banker remarked.

On that front, it was "good news/bad news" on Thursday.

The European Central Bank cut its main refinancing rate by 25 basis points to 0.75%, as it had been expected to, the source explained.

At the same time, ECB president Mario Draghi may have disappointed the credit markets by saying that novel liquidity-stimulating measures such as the long-term refinancing operations are not currently on the agenda, the banker said.

Nevertheless, there is a European high-yield pipeline, market conditions permitting.

Fresenius SE & Co. KGaA could be coming soon with €2.1 billion equivalent of bonds, according to a buyside source.

As reported, the deal, via Deutsche Bank, JPMorgan, Societe Generale, Credit Suisse and UniCredit, is expected to come in denominations of €1.5 billion and $750 million.

The bridged acquisition deal was expected to hit the market in June. However, the European primary market was largely sidelined by the intensifying credit crisis in the euro zone, sources said.

Lately, a slight let-up in the negative headlines, and more importantly the need of European high-yield accounts to put cash to work, may be turning the market in favor of the issuers.

On Monday, France's Lafarge SA priced a €500 million issue of 5 7/8% seven-year senior notes (Ba1/BB+) at 99.302 to yield 6%.

The yield printed 12.5 bps inside of price talk set in the 6¼% area.

European accounts, banks conspicuous among them, came ready to buy, which allowed the company to get its deal done inside of price talk, sources said.

The order book contained north of €2.5 billion, according to an informed source.

With no euro-denominated calendar and extremely low second-quarter euro-denominated issuance volume, 300 accounts piled into the Lafarge book, according to a market source.

Little activity in recent deals

Traders saw little or no activity even in recently priced issues.

One, for instance, saw Oasis Petroleum Inc.'s 6 7/8% notes due 2023 at 100½ bid but said that this was about where the Houston-based energy exploration and production company's quick-to-market $400 million deal had been trading on Tuesday. He saw no offerings in the bonds on Thursday.

The Oasis issue, upsized from an originally announced $300 million, priced at par on June 27 and stayed anchored around that level during initial aftermarket dealings and beyond.

Also on the energy front, he saw "nothing" going on in Halcon Resources Corp.'s 9¾% notes due 2020.

The Houston-based oil and natural gas exploration and production company's $750 million issue - upsized from an originally announced $500 million - priced at 98.646 last Friday to yield 10%. Those bonds immediately moved up to the 1001/2-to-101 bid level and were trading in that context earlier this week.

The trader also said that there was "not much cookin'" in Ashtead Group Inc.'s 6½% second-priority senior secured notes due 2022, quoting an odd-lot of those bonds offered at 1021/2, versus 101½ bid earlier in the week.

The British equipment-rental company's $500 million deal priced at par on Friday, moved up to 101¼ bid, 101¾ offered and were seen having gotten as good as the 102 bid level earlier this week before finishing off that peak on Tuesday.

A dull, dull day

"It looks like they decided not to open the market today," the trader said. "Obviously, there were some trading levels, but not a lot."

He said that a lot of what activity there was came in junk-rated emerging markets credits such as Venezuela's state-run oil monopoly, Petroleos de Venezuela SA, whose 9% notes due 2021 were little changed at 76½ bid, 77½ offered.

Overall, though, it was "not that exciting."

A second trader said things were "a little quiet, to say the least. I didn't see much trading at all."

He went on to characterize the session as "just a blah, quiet type of day."

Yet another trader opined that "it's as dead as can be."

He said that the junk market "definitely had a firm tone again despite equities moving around." Stocks ended mostly lower on investor caution ahead of Friday morning's scheduled release of U.S. job-creation numbers and unemployment data for June. The bellwether Dow Jones industrial average dropped 47.15 points, or 0.36%, to end at 12,896.67.

Back in the junk arena, he continued that "there are just so many key players out of the market right now, it's just hard to do anything. It's a one-sided market." He said that only 2% of his accounts were in and taking care of business.

Trades were "few and far between," he said.

He predicted that Friday "is not going to be an event," with the same lack of market participants expected as had been seen on Thursday. "I'm working half a day - if I even come in," he quipped.

Cash is still king

The trader continued that "there's still cash on the sideline" waiting to be put to work, "and the bias is still to the buy side. But I think this market is totally overbought, which is what happens when you have cash and more buyers than sellers."

However, he cautioned that "the market shouldn't go up for the wrong reasons. But we shall see. Hopefully, bonds [will follow equities] and will fall by the wayside a little bit and give us some dislocation. But time will tell."

Market indicators turn mixed

Statistical market performance measures turned mixed on Thursday after having been up across the board for a third straight session on Tuesday.

A trader saw the Markit Group CDX North American Series 18 High Yield index down by 3/8 of a point to close at 96 5/8 bid, 96 7/8 offered. That broke a string of three consecutive gains, including Tuesday's 5/16 point rise.

However, the KDP High Yield Daily index recorded its sixth straight gain on Thursday, firming by 10 bps to close at 73.58, on top of Tuesday's gain of 11 bps. Its yield came in by 4 bps on Thursday to 6.53% after having narrowed by 3 bps on Tuesday.

And the widely followed Merrill Lynch U.S. High Yield Master II index was up for an eighth consecutive session Thursday, rising by 0.086%. That followed gains of 0.136% on Tuesday and 0.022% on Wednesday, the latter on extremely light volume.

Thursday's gain lifted its year-to-date return to 7.573%, up from 7.457% on Tuesday and 7.48% on Wednesday.

Thursday's finish set a new 2012 high for the index, eclipsing the old mark, set just on Wednesday. The index is thus at its highest point since the end of 2010, when it returned 15.19%.

Tender offer spurs trading in Community Health notes

Among specific credits, a trader saw "some activity" in the 8% notes due 2019 of Community Health Systems in response to the announcement, released well after the market had closed on Tuesday, that the Franklin, Tenn.-based hospital operator plans to tender for all of the $934 million of its 8 7/8% notes due 2015 that currently remain outstanding out of the original $3 billion that the company sold in June 2007.

There were a few small odd-lot trades into those 8 7/8% bonds around a 102 5/8-to-102¾ context, which was unchanged from recent levels. There was no size trading in that issue.

The company said that holders tendering their notes and delivering consents to proposed indenture changes by the consent deadline, 5 p.m. ET on July 17, will receive $1,026 per $1,000 principal amount of bonds tendered, including a $20 consent fee. Holders tendering their bonds after that consent deadline but before the offer expiration deadline on Aug. 1 will receive $1,006 per $1,000 principal amount tendered and no consent fee.

The trader meantime saw the 8s "all over the lot today," trading as low as 106¾ bid and as high as 107½ bid, versus 107½ during Tuesday's abbreviated pre-holiday session.

He said that "they're probably unchanged, but there was one trade down a little bit."

Verso, NewPage ease from highs

A trader said Verso Paper's 8¾% second-lien senior secured notes due 2019 "came off the top," dropping 1½ points to 461/2.

Another trader echoed that level and also pegged NewPage's 11 3/8% first-lien notes due 2014 at 67 bid, 68 offered, down from 69 bid, 70 offered on Tuesday.

However, those two bond issues remained well up from where they had been before zooming multiple points on Tuesday on the news that Memphis-based Verso said it had been in discussion with certain NewPage first-lien noteholders "to achieve a potential business combination involving Verso and NewPage."

That boosted the Verso 2019 bonds about eight points on the session to 48 bid, 49 offered, while the NewPage notes had risen by 8 points on Tuesday to 69 bid, 70 offered.

Traders said that activity in the two coated-paper manufacturers dropped off sharply on Thursday from the brisk pace seen on Tuesday, when $25 million of the NewPage notes had changed hands and $16 million of the Verso bonds.

In its statement Tuesday, Verso said that the proposed merger would be done while NewPage was in bankruptcy. Under the terms of the proposal, NewPage's first-lien noteholders would receive $1.08 billion of Verso first-lien notes, $150 million of Verso stock and $150 million of cash.

Verso would also pay NewPage's debtor-in-possession facility in full.

"Verso believes that a combination with NewPage would create a stronger business in the global coated and supercalendered paper industry because of the material cost savings that would be achieved," Verso said in the statement. "Verso also believes that a combination with NewPage would provide a compelling option for a restructuring in that it would afford NewPage's first-lien noteholders a very attractive recovery, while at the same time treating fairly the other NewPage constituencies, including its employees, other creditor classes and customers."

Verso did note, however, that the discussions had not gone as well as it hoped.

Miamisburg, Ohio-based NewPage responded negatively to the statement on Tuesday.

"After thoroughly evaluating this proposal, NewPage determined that the combination posed significant downside risks to its stakeholders, employees and business," NewPage said in a statement.

"NewPage has also been advised that the first-lien noteholder group did not support the proposal. Accordingly, NewPage does not anticipate further discussions regarding this proposal."

Stephanie N. Rotondo contributed to this report

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