Primary falls silent ahead of holiday; Frontier's new issue jumps; funds gain $34.1 million

By Paul Deckelman and Paul A. Harris

New York, March 28 - The high-yield market saw a quiet early end to a not-so-busy week on Thursday - at least not so busy when compared to last week's frantic new-issue pace.

No new dollar-denominated, purely junk-rated deals from domestic or developed country issuers were heard by syndicate sources to have priced in the abbreviated pre-holiday session, with the debt markets scheduled to close Friday in observance of the Good Friday/Easter holiday.

That shutout left the week's issuance total at $5.09 billion in nine tranches, according to data compiled by Prospect News - well short of the staggering $16.95 billion in 26 tranches reported to have priced last week, ended March 22, the busiest new-deal week seen in Junkbondland so far this year.

It also left year-to-date issuance at $88.82 billion in 189 tranches, running about 1.7% ahead of the year-ago pace.

Two prospective deals that were seen as possible pricings for Thursday's session never made it out of the gate: clothing manufacturer American Apparel Inc.'s $200 million of seven-year notes and Scottish oil and gas services company KCA Deutag Finance plc's $860 million of seven-year senior secured notes, which are now expected to price early in the coming week.

Among the junk issues that have recently priced, traders saw Frontier Communications Inc.'s new offering as clearly the strongest aftermarket performer; the telecommunications company's quick-to-market 11-year deal jumped more than 3 points when it was freed for secondary dealings.

Another Thursday deal, Navistar International Corp.'s fungible add-on to its existing 2021 notes, was also seen having done well with investors, as were deals that priced earlier in the week from First Data Corp. and Graphic Packaging International, Inc.

Statistical measures of market performance were seen mixed on both the day and compared to where they had ended the previous week.

Meanwhile, the flow of new investor cash into and out of high-yield mutual funds and exchange-traded funds - seen as a key indicator of overall junk market liquidity trends - was on the positive side for a second straight week, a major fund-tracking service said.

AMG sees $34.1 million inflow

Long after Thursday's market activity had wound down - due to the pre-holiday early close recommended by the Securities Industry and Financial Markets Association - junk market participants familiar with the fund-flow statistics generated by AMG Data Services, Inc. reported that in the week ended Wednesday, $34.1 million more came into those funds than left them.

It was the second consecutive inflow posted by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp.; in the previous week, ended March 20, a $200.9 million inflow had been seen.

The $235 million of fresh cash from investors represented just a partial comeback from the $418.1 million outflow seen the week before that, ended March 13, by Lipper.

In advance of the weekly figure, a junk trader had opined that "anecdotally, I think we're probably going to be flat - I didn't see anything to indicate huge flows in either direction," especially given the relatively quiet activity pace in the junk market over the previous several sessions with no really decisive trend, either positive or negative, having been seen.

Thirteen weeks into the new year, 2013 net inflows as reported by Lipper so far have amounted to about $851 million, according to a Prospect News analysis of the figures.

There have now been eight inflows and five outflows reported by Lipper so far this year.

In 2012, when cumulative net inflows for the year totaled an estimated $32 billion, according to the analysis, inflows to the funds had been recorded in 39 weeks of the year and outflows in the remaining 13 weeks.

As of press time, fund-flow figures for the latest week from the other major fund-tracking service, Cambridge, Mass.-based EPFR Global, had not been seen.

In the prior week, ended March 20, EPFR, which uses a different methodology from Lipper that includes some foreign-domiciled funds as well as domestic funds in its tally, saw an overall inflow to the funds of $897 million, its 10th reported inflow in the first 12 weeks of the year. It saw a $562 million cash injection to the strictly U.S.-only funds it tracks, the sixth such inflow this year against six outflows. Year-to-date overall junk net inflows totaled around $7.2 billion, with an estimated $1.4 billion cumulative inflow to the U.S. funds, according to a Prospect News analysis of EPFR's figures.

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

The continued flow of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the junk market - has been seen by analysts as a key element behind the high-yield secondary sphere's strong performance last year versus other fixed-income asset classes and its record active new-deal pace, which easily topped the $350 billion mark - patterns of primary activity and secondary strength that have mostly continued into 2013 so far.

American Apparel a no-show

A quiet pre-holiday Thursday saw no deals price, nor were there any new deal announcements.

American Apparel Inc.'s $200 million offering of seven-year senior secured notes (Caa1/B-) had been expected to price by the end of the session, according to an investor who looked at the deal.

However, no terms were available at press time, according to market sources.

Price talk is in the 13% area, and there is potential for an increase in coupon if the company does not hit a certain leverage threshold in 2013, the investor added.

Also, covenants have been tightened up, said the buysider, who added that the order book is believed to be well north of $200 million.

Cowen & Co. and Seaport Group are the bookrunners.

The Los Angeles-base vertically integrated clothing manufacturer plans to use the proceeds to repay debt.

KCA restructuring

The only other Rule 144A high-yield deal on the active forward calendar, KCA Deutag Finance plc's $860 million offering of senior secured notes (expected ratings B3/B), is being restructured, the investor said.

The deal was expected to price before the end of the pre-Easter week, but it has now been pushed into the week ahead, the source said. It kicked off as a seven-year bond non-callable for three years and then callable in year three at par plus 75% of the coupon.

The debt refinancing deal is being led by J.P. Morgan Securities LLC, BofA Merrill Lynch, HSBC, Lloyds TSB and Morgan Stanley & Co. LLC.

An early end

With the recommended 2 p.m. ET close ahead of Friday's holiday, many desks in the secondary market were short staffed, and people were rushing to finish up and go home for a long weekend by early afternoon.

A trader said he saw "a lot of month-end clean-ups and quarter-end clean-ups."

Away from trading in specific recent deals, he called the junk market "kinda sideways, with not much activity. There were a lot of odd-lots, clean-ups and stuff like that."

"It was light," a second trader remarked. "Light and listless."

After last week's big pricing barrage of more than two dozen tranches of new junk paper totaling almost $17 billion, "everyone is 'new-issued out.'"

He also said that "everybody has their eyes on Cyprus," wondering whether the continued financial troubles of the Mediterranean island nation would lead to contagion among the weaker members of the European Union and, in turn, in the broader global financial markets.

Frontier firms up

But all of those macroeconomic concerns were the furthest thing from the minds of investors buying into Frontier Communications' new 7 5/8% notes due 2024, which priced at par on Wednesday after upsizing to $750 million from an originally announced $500 million. They came too late in the session for any kind of aftermarket at that time.

But on Thursday, a trader said, the Stamford, Conn.-based telecommunications company's new bonds "opened hot, hot and hotter," quickly zooming to bid levels around 103-to-1031/4. "We traded it [at those levels] all day here," he said.

"That was the big one," he continued. "It did better than I expected."

"It's doing really well," said another trader who saw the new bonds in that same 103ish area.

"Of course," he added, "it was priced cheap to the BB index, the single-B index. If you put a coupon on something with non-call for life [as the Frontier deal is] and [SEC] registered, everybody and their brother piles into it - not only the institutions but individuals.

"That seemed to attract a fair amount of attention."

A market source at another desk said that almost $25 million of the new bonds had changed hands by mid-afternoon, tops among the purely junk names. He quoted the notes as having gotten as good as the 105 bid area on some of those transactions, but other traders said that might be a bad print and said that they saw the bonds pretty much sticking around and just above the 103 bid mark.

Other new deals do well

Some of the other recently priced deals were also seen doing pretty well in the secondary realm.

A trader said that Navistar International's fungible add-on to its 8¼% notes due 2021 were trading at 101¾ bid, 102 offered, while yet another one saw the bid level get as good as 102.

The Lisle, Ill.-based maker of school busses, heavy trucks and engines for such large vehicles priced its $300 million drive-by add-on at 101.25 on Wednesday to yield 7.916%.

Having apparently resolved its problems with federal environmental regulators last year over the emissions standards for the engines it produces for its vehicles, Navistar, the trader said, is now considered to be "a decent credit. People like it, and it has a nice coupon."

Another gainer was Atlanta-based credit card transaction processor First Data's 10 5/8% notes due 2021. That $815 million drive-by deal priced at par on Tuesday, after having upsized from $500 million originally.

In the aftermarket, a trader said, "It did very well, with a coupon like that." He pegged the new deal trading above the 101 bid level.

And Graphic Packaging "was hanging right in," the trader said, seeing the Marietta, Ga.-based packaging manufacturer's 4¾% notes due 2021 at 101 bid, 101¾ offered. That quick-to-market deal had priced on Monday at par.

A frustrating time

A trader said that away from the crisp performance of most of the new deals, "the secondary markets are a real strain to get anything done. You work on stuff day after day, and one finds it very frustrating. The accounts are frustrated. Obviously, sales people and traders are frustrated."

He held out the hope that "it gets a little better - but I don't know where the supply is going to come from, just looking out over the next couple of weeks."

He predicted that "it looks like it's going to be predominantly re-fi activity" - with the holders of issuing companies' existing debt that is being refinanced rolling into the new bonds, leaving precious little for would-be investors not currently holding those companies' bonds or loans.

Market indicators mixed

Overall, statistical junk performance indicators were mixed on Thursday and were mixed as well versus where they had finished the previous week.

The Markit Series 20 CDX North American High Yield index rose by 5/32 point on Thursday, ending at 102 31/32 bid, 103 3/32 offered.

It was down from 104 1/8 bid, 104 9/16 offered at the close of the previous week, on Friday, March 22 - although it should be noted that the two readings are not directly comparable since at mid-week, Markit did its semiannual "roll," switching over to the new series 20 index from series 19 previously. (The two series track CDS contracts linked to different rosters of bonds.)

The KDP High Yield Daily index, meanwhile, saw its third consecutive loss on Thursday, dropping by 1 basis point to 75.59. It was also down from its week-earlier level of 75.67.

Its yield was unchanged at 5.51% after having risen the previous two sessions. It was also higher than 5.48% at the end of the previous week.

And the widely followed Merrill Lynch High Yield Master II index bounced back from a loss Wednesday to rise by 0.03% on Thursday. That lifted its year-to-date return to 2.851%, a new peak level for the year so far, from Wednesday's 2.82%.

For the week, it was up by 0.10%, its seventh straight weekly gain. At the end of the prior week on March 22, the index had a one-week gain of 0.083% and a year-to-date reading of 2.746%.

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