Oil rebound boosts energy bonds; junk deals elusive, but GM unit brings giant split-rated deal

By Paul Deckelman and Paul A. Harris

New York, Jan. 7 – The high-yield market turned firmer on Wednesday, with its recently embattled oil and natural gas exploration and production segment leading the way, in line with a rebound in equally battered world crude oil prices.

Junkbondland energy space names such as Halcon Resources Corp. and Linn Energy LLC were among the notable gainers.

However, one prominent energy credit was missing from the list of better finishers: California Resources Corp., whose bonds started out smartly but had given back all of the day’s gains, and then some, by the time things wrapped up.

While the energy sector was in the forefront, the day’s stronger tone also helped non-energy credits such as J.C. Penney Co. Inc., SuperValu Inc. and iHeart Media Inc. Department store operator J.C. Penney was out with strong holiday sales numbers, while supermarket company SuperValu released positive quarterly results.

Primaryside players meantime reported another day without any actual junk bonds having been priced – although the split-rated General Motors Financial Co. Inc. did come to market with a $2.25-billion three-part quick-to-market offering.

Those new notes were seen having firmed a little in preliminary aftermarket activity.

Statistical measures of market performance moved higher across the board on Wednesday after having dropped all around in each of the previous two sessions.

GM Financial split-rated

At Wednesday's close, the 2015 high-yield primary had yet to see the year's first junk deal clear the market.

However, a familiar name came with a big, split-rated, drive-by deal.

General Motors Financial priced $2.25 billion of senior notes (expected ratings Ba1/BBB-/BB+) in three tranches.

The deal included a $1 billion tranche of 3.15% five-year fixed-rate notes, which priced at a 170 basis points spread to Treasuries. The spread came at the tight end of spread talk in the Treasuries plus 175 bps area; initial guidance was 190 bps. The reoffer price was 99.88, and the notes yield 3.176%.

In addition, the company priced a $250 million tranche of three-month Libor plus 156 bps five-year floating-rate notes at par to yield three-month Libor plus 156 bps. The Libor spread came inside of spread talk in the Libor plus 175 bps area.

The $1 billion long tranche came in the form of 4% 10-year fixed-rate notes, which priced at a 210 bps spread to Treasuries, at the tight end of spread talk in the Treasuries plus 215 bps area; initial guidance was 220 bps. The 10-year notes came at a reoffer price of 99.478 and yield 4.064%.

The company was targeting an overall transaction size of $1.5 billion to $2 billion, according to a market source.

Citigroup, Barclays, Credit Agricole, Credit Suisse and RBS were the lead bookrunners for the deal, which priced on the investment-grade desk.

Two on the road

There is a January pipeline, sources say, that is partially comprised of time-sensitive deals that companies hope to conclude prior to entering their earnings blackout periods.

And the dealers are winding up to start bringing them.

Two junk deals are presently roadshowing.

NCI Building Systems, Inc. is guiding its $250 million offering of eight-year senior notes (B3//) at 7¾% to 8¼%.

The acquisition deal, via Credit Suisse, Citigroup, RBC and UBS, is expected to price by the end of the week.

And Open Text Corp. aims to get its $600 million offering of 10-year senior notes (Ba2/BB) done in the mid-5% yield context.

Joint bookrunner Barclays will bill and deliver for that deal, which is set to price Monday. Morgan Stanley, RBC and Citigroup are also joint bookrunners.

GM unit’s new paper seen firmer

In the secondary market, the General Motors Financial deal priced pretty late in the session – but some of those new bonds did see some preliminary aftermarket activity.

A market source quoted its 4% notes due 2025 having moved up slightly to 99.681 bid, versus the 99.478 level at which that $1 billion drive-by issue had come to market. More than $14 million of the notes had changed hands, putting the issue among the day’s more active credits.

The giant carmaker’s Fort Worth-based financial arm’s existing 3¼% notes due 2018 were even busier, with over $17 million having traded. That paper was up by 11/16 point, at 101 3/16 bid.

A trader at another shop said that the 2018s were going home at 101 bid, after having traded between a 100½-to-101 bid context all day.

Energy names power up

That trader said that as had been the case over the recent sessions, oil and natural gas exploration and production company bonds were in the spotlight, playing off changes in the price of crude oil.

But unlike recent days, when the black gold was on the slide, Wednesday saw those prices firm from the 5.5-year bottom they had hit on Tuesday.

At one point, he said, crude had gained as much as 88 cents per barrel. The benchmark West Texas Intermediate grade finally went out up 43 cents on the day at $48.36, after having plunged below the $48 mark on Tuesday.

With that kind of a tailwind, “the market itself caught a bid, kind of a reversal” from the past few sessions, the trader noted. “Energy caught a bid.”

For instance, Halcon Resources’ 9¾% notes due 2020 were up 2½ points on the day, going home at 73½ bid, versus Tuesday’s closing price around 71 bid. The bonds had fallen by 1½ points on Tuesday.

The Houston-based E&P company’s paper saw more than $19 million having changed hands, putting it high up on the Most Actives list.

Houston-based Linn Energy’s 7¾% notes due 2021 jumped 1½ points on Wednesday to end at 85½ bid, with more than $14 million of turnover.

Another trader said that Midland, Texas-based Concho Resources Inc. “was one of the busiest bonds of the day,” with volume of more than $17 million on its 5½% notes due 2023. Those bonds gained ¾ point to end at 99½ bid.

Cal Res bonds give up gains

But the exception to the rule in the energy space was California Resources, whose bonds initially firmed solidly – but then gave up all of those early gains, and then some, by the end of the day.

A trader saw its benchmark 6% notes due 2024 “bid up 1 or 2 points in the early going, but then they sold off this afternoon.”

He noted that the Los Angeles-based E&P company made a presentation at a Goldman Sachs energy conference, “and the bonds sold off after that presentation.”

“They ended up wrapped around 80 on their 6s and their 5½s – they gave it all back and then some.”

The 6% notes closed down nearly ½ point, trading at 80 3/16 on very heavy volume of $66 million – easily the busiest issue in the junk space – while the 5% notes due 2020 lost ¾ point to finish at 82½ bid, with more than $14 million traded.

Another trader agreed that the 6s had moved as high as an 81¾-to-82 bid context during the morning trading, after having gone out on Tuesday at 80½ bid, 81 offered – “but they gave it back” and closed at 79¾ bid, 90½ offered.

Overall market stronger

But Cal Res seemed to be an outlier, with far more credits seen ending the day higher than not.

“The higher-beta go-go names were generally better by between 1 and 3 points,” with the oil market helping to push most bonds higher, one of the traders said. “Even the non-energy names gained.”

For instance, he said, Overland Park, Kan.-based wireless provider Sprint Corp.’s bonds were solidly on the upside; its 7 7/8% notes due 2023 gained 1 7/8 points to finish at 99 7/8 bid on over $15 million of volume.

“J.C. Penney had a good day,” another trader said, noting that “its stock jumped, and its bonds were active” after the recently struggling Plano, Texas-based department store operator reported a robust 3.7% sales gain versus a year earlier during the all-important November-December holiday selling season. Its 5.65% notes due 2020 zoomed by 5¾ points to end at 83¼ bid.

The trader said that Eden Prairie, Minn.-based supermarket operator and wholesale grocery distributor SuperValu’s paper “was on the upside on better-than-expected results,” seeing its 7¾% notes due 2022 having moved up to a par-to-100¼ context from levels around 99 previously, on $12 million of volume.

During the company’s conference call, executives noted that all three of its operating divisions posted sales gains during the latest quarter, the first time in seven years that has happened. And they said the company was in good shape in terms of its closest maturity – its 8% notes due in May of 2016 – having cut its refinancing risk by taking out more than half of the outstanding amount late last year (see related story elsewhere in this issue).

San Antonio-based broadcaster and outdoor advertising company iHeart Media’s bonds gained for a second straight session, a market source said, pegging its 14% notes due 2021 up ¾ point at 81½ bid on volume of over $16 million.

Indicators on the rebound

Statistical indicators of junk market performance turned higher across the board on Wednesday, in contrast to Monday and Tuesday, when they had been lower all around.

The KDP High Yield Daily index rose by 8 basis points to end the session at 70.39, breaking a three-session losing streak. It had plunged by 29 bps on Tuesday and by 22 bps on Monday.

Its yield came in by 3 bps to close at 5.72%, its first narrowing after two straight widenings. The yield had risen by 10 bps on Tuesday and by 9 bps on Monday.

The Markit Series 23 CDX North American High Yield index also saw its first gain after having suffered three retreats in a row.

It advanced by 7/32 point to go out at 105 5/32 bid, 105 7/32 offered, in contrast to Tuesday’s 7/16-point loss and Monday’s 21/32 point slide.

The Merrill Lynch U.S. High Yield Master II index was also on the comeback trail on Wednesday, up 0.294%; that followed two successive losses, including Tuesday’s 0.345% setback.

Wednesday’s rally cut the index’s year-to-date loss to 0.297% from Tuesday’s 0.590%, which had been the most cumulative red ink the index had seen since it was down by 0.768% on Oct.12, 2011.

The Finra/Bloomberg U.S .High Yield index volume, though, eased to $4.136 billion on Wednesday from $4.306 billion at the close on Tuesday.

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