Primary awaits GameStop, deal demand grows; new HCA stays busy; funds add record $4.97 billion

By Paul Deckelman and Paul A. Harris

New York, March 3 – Activity in the recently busy high-yield primary sphere was put on hold for a second consecutive session on Thursday, as syndicate sources reported that no new deals had priced, nor were any even announced or seen showing up on the radar screens.

The one deal being actively marketed – video game retailer GameStop Corp.’s $400 million offering of five-year notes, which first surfaced on Wednesday – seemed to be coming together and could price during Friday’s session.

The sources meantime said that pent-up demand for new deals was growing, aided by strong technical factors, including big flows of cash into Junkbondland on the part of investors who seem to have traded their recent skittishness for an increased appetite for risk assets.

Just how much cash was coming in was amply demonstrated by the news that high-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – posted their biggest net inflow on record, with some $4.967 billion more seen having come into those junk funds than having left them in the reporting week ended Wednesday, their third consecutive cash gain.

In the secondary market, the HCA Inc. 10.25-year note offering that priced on Tuesday remained one of the busiest names on the session, although the big hospital operator’s bonds eased slightly from the strong levels they had posted over the past two sessions.

The week’s other new deal, from auto insurance claims software provider Solera, LLC, were also active, continuing to firm after pricing at a hefty discount to par on Monday.

Away from the new deals, the market generally was seen to have caught a bid, with buying fueled by the fresh cash coming in. Among the big gainers were energy names such as Oasis Petroleum, Inc., Whiting Petroleum Corp. and California Resources Corp.

Statistical market performance measures were higher across the board for a sixth straight session on Thursday, which was also the seventh higher session in the last nine trading days.

Big technical rally

Although the primary market produced no news on Thursday, the tide may be about to turn, buyside and sell-side sources say.

The high-yield market is in the throes of a big technical rally, a portfolio manager said, and others agreed.

For openers, the index is persuasive.

The JP Morgan high yield index, which hit its wides with a 10.44% yield to worst on Feb. 11, was yielding 9¼% heading into Thursday’s session.

Perhaps even more persuasive are the fund flows, sources said late Thursday, as the market awaited the weekly report of the cash flows of the dedicated high-yield funds from Lipper-AMG.

The market was expecting a big positive number, in part because recent daily flows have been positive and big.

The biggest of the reporting period came Wednesday, as high yield ETFs saw $828 million of daily inflows, while actively managed funds saw a massive $1.05 billion of inflows on the day.

As noted above, those expectations were not disappointed.

Where’s the calendar?

Intensifying the pent-up demand for bonds is a buyside that has been sitting on bigger than normal cash positions, partly due to the lack of a new issue calendar, sources say.

So with cash on the sidelines, continuing positive cash flows and a secondary market that has generally been improving over the past two weeks, investors want to know “Where’s the calendar?”

“People are probably calling the banks to ask by now,” one investor said on Thursday.

When there is an excess of cash to be put to work, the banks can generally be relied upon to come with the cure, the source conceded.

However even though there is a substantial pipeline of deals to be done, none of it was visible at Wednesday’s close, sources said.

GameStop for Friday

There is just one deal is on the active calendar heading into Friday.

GameStop is marketing a $400 million offering of five-year senior notes (Ba1) via sole bookrunner BofA Merrill Lynch.

The deal appears to be coming together in the mid-6% range and should clear before the weekend, a source said.

Some were expecting to hear formal price talk before the Thursday close.

However one debt capital markets banker was not particularly surprised by the absence of formal talk on GameStop, heading into Friday, remarking that the market is obviously moving the issuer’s way.

HCA active, but easier

In the secondary arena, a trader said that the new HCA 5¼% senior secured notes due June 2026 continued to “trade pretty well,” seeing the bonds in a 101½ to 101¾ bid context, although he acknowledged that the paper was “off a little bit” from Wednesday’s closing levels a little above 102 bid.

However, they were still well above the par level at which HCA Holdings, Inc. a Nashville-based hospital operator, had priced its $1.5 billion of the notes on Tuesday in a quickly shopped transaction via its wholly owned HCA Inc. subsidiary.

The bond priced at par after the issue was upsized from the originally announced $1 billion.

At another desk, a trader also quoted the notes in that same 101½ to 101¾ bid range Wednesday, calling them off by ¼ point on the session.

And yet another market source called the bonds down ½ point on the session at 101 5/8 bid.

The first trader said that with more than $35 million of the notes changing hands on Thursday the new bonds were “still very active,” finishing in the “top five” among the volume leaders.

Still that turnover was dwarfed by the more than $400 million of HCA paper which traded on Wednesday, when the bonds had shot up to, or even a little beyond, the 102 bid level, a gain of more than 1 point on the session.

HCA’s established 5 7/8% notes due 2026 were also easier in busy trading on Thursday; a market source pegged the bonds at 102¾ bid, down 3/16 point, on volume of over $21 million.

Solera gains continue

Elsewhere among the recently priced issues, a market source said that new Solera 10½% notes due 2024 “traded a little bit today,” seeing the bonds at the 97½ bid level, which he said was a gain of about ½ point.

A trader at another shop meantime saw the bonds going home at 97¾ bid, which he called a gain of ¾ point on the day.

More than $16 million of the notes changed hands.

Solara, a Westlake, Texas-based automobile insurance claims software provider, and its Solera Finance Inc. subsidiary, priced the $1.73 billion of those new notes on Monday at a seriously discounted 95, yielding 11.47%.

The roadshow for the deal had actually wrapped early last week, but the offering did not finally appear until Monday. When the deal finally got done, the bonds had been re-sized from the $2.03 billion originally announced, first down to $1.28 billion and then back up to $1.73 billion, and the issue had been restructured, with a proposed tranche of euro-denominated notes having been dropped, leaving only the dollar bonds.

Investors had also forced the issuer to make some covenant changes and to price the bonds at a big discount to fatten the yield in order to get the deal done.

When the new bonds began trading on Tuesday, they were seen to have begun to move up from their deeply discounted issue price, pushing above the 96 mark, and they had reached the 97 level by the close on Wednesday, in brisk trading activity each of those days.

Energy names improve

Away from the new deals, traders said that the junk market was generally firm; the investor pessimism that was in evidence at this time around a month ago seemed to have faded and had given way to an increased investor tolerance for risk.

This was apparent in the gains seen by bonds from the energy sector, which was getting knocked around a couple of weeks ago but which has recently been rebounding, helped by strong gains in world crude oil prices.

A trader saw Chesapeake Energy Corp.’s 8% notes due 2022, for instance, gain nearly 5 points on the day to 49 bid, on volume of more than $35 million.

Oasis Petroleum’s 6 7/8% notes due 2022 were seen up nearly 3 points on the day at 72¾ bid, with more than $25 million traded.

Whiting Petroleum’s 6¼% notes due 2023 were 3 point gainers on the day, ending at 52¼ bid, also on around $25 million of turnover.

California Resources’ 8% notes due 2022 moved up by more than 3 points to 39½ bid, with over $22 million changing hands. Its 6% notes due 2024 were meantime up 1½ points, a trader quoting the issue in an 18½ to 20½ bid context.

The bonds advanced despite a slight downturn in the U.S. benchmark West Texas Intermediate crude for April delivery, which settled down 9 cents on Thursday on the New York Mercantile Exchange, at $34.57 per barrel.

However, global benchmark Brent crude for May delivery gained 14 cents on the London ICE Futures Exchange, settling at $37.07 per barrel.

Funds set a record

A trader declared that “the market had a bid to it today,” and noted the heavy recent flows of cash into the market on the part of investors.

Just how powerful a force that was illustrated by the news that high-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – posted their biggest net inflow on record, with some $4.967 billion more seen having come into those junk funds than having left them in the reporting week ended Wednesday, their third consecutive weekly cash gain. (see related story elsewhere in this issue).

Indicators’ rise continues

Other statistical market performance measures were higher across the board for a sixth consecutive session on Thursday and for a seventh session in the last nine trading days. That winning streak started a week ago – last Thursday – after the indicators had been lower last Wednesday.

The KDP High Yield Daily Index was up by 26 basis points on the session on Thursday, finishing at 64.81, its sixth straight gain and seventh in the last nine sessions. It had also jumped by 51bps on Wednesday.

Its yield came in by 6 bps, ending at 6.84% – its sixth successive tightening, which followed four straight sessions before that in which the yield had widened out. It had tightened by 15 bps on Wednesday, when the yield had narrowed to a level below 7% for the first time this year.

The Markit Series 25 CDX North American High Yield Index gained 5/16 point on Thursday to finish at 100 7/16 bid, 100½ offered, its sixth consecutive gain and seventh in the last nine sessions. It had also improved by 3/16 point on Wednesday, after having zoomed by 29/32 point on Tuesday. The six straight gains followed two consecutive losses.

And the Merrill Lynch North American High Yield Master II Index was on the plus side for a sixth consecutive session on Thursday, also its eighth gain in the last nine sessions, as it advanced by 0.323%, on top of Wednesday’s 0.62% rise.

The upturn Thursday pushed the index’s year-to-date return to 0.647%, its second consecutive new peak level for the year, up from the previous high point of 0.323% on Wednesday.

Wednesday, meanwhile had marked the first time in 2016 that the index’s year-to-date return figure was actually in the black and actually its first time it had closed in positive territory since Nov. 5, 2015, when it had ended at 0.166%.

The index – which had finished out 2015 with a 4.643% loss for the year, its first annual downturn since closing out 2008 with a loss above the 30% mark – started the new year down 0.325% and remained in negative cumulative territory right up through Tuesday, hitting a low point for the year of down 5.142% on Feb. 11. On Tuesday, it was still showing a 0.296% year-to-date loss.

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