Junk surges broadly, but mortgage-insurers fall; market awaits re-worked Chesapeake, Kinetic

By Paul Deckelman and Paul A. Harris

New York, Oct. 24 - The high-yield market continued its winning ways on Monday, as prices for most junk issues were seen higher pretty much across the board, with some credits seen up by multiple points.

In that, Junkbondland was seen continuing to ride the momentum generated last week, which the market finished on a strong note.

Statistical measures of market performance were higher for a third straight session.

Traders said that among the sectors seen notably better was gaming - from bellwether names like Caesars Entertainment Corp., the old Harrah's Entertainment, to smaller competitors like Boyd Gaming Corp., which reports third-quarter results on Tuesday.

Other gainers included such familiar names as hospitals powerhouse Community Health Systems Inc.

While most bonds were up, mortgage insurers like MGIC Investment Corp., Radian Group Inc. and PMI Group Inc. were getting crunched after Arizona regulators seized the latter company's main business unit.

J.M. Huber Corp.'s newly priced notes were seen trading around the better levels, which those eight-year bonds reached after pricing on Friday.

Also in the new-deal arena, price talk emerged on pending new deals for Chesapeake Oil Operating LLC and Kinetic Concepts Inc. The latter offering, already downsized, was restructured again to cut the tenor and turned into an all-dollar deal. Market participants awaited possible pricings on Tuesday.

Kinetic restructures

No new issues were priced during the Monday primary market session.

Kinetic Concepts restructured its $1.65 billion offering of second-lien senior secured notes (B3/B) and set price talk.

The notes are talked with a 10¾% to 11% all-in yield, which factors in an original issue discount.

The maturity of the notes was decreased to seven years from 7.5 years.

Call protection was increased to four years from three years.

The entire $1.65 billion amount of notes will be dollar-denominated. A planned euro-denominated tranche was withdrawn, although the deal was shopped on a European roadshow earlier in the month.

The order books for the notes closed at 5 p.m. ET on Monday.

The deal is expected to price on Tuesday, market sources say.

Morgan Stanley, Bank of America Merrill Lynch, Credit Suisse and RBC are the joint bookrunners. UBS is the co-manager.

By the middle of Monday afternoon, orders for the Kinetic Concepts $1.65 billion offering of second-lien notes came to $2.25 billion, provided the yield is 11%, according to a buyside source who is in the deal.

A covenant concerning asset sales was also tightened, the buysider said.

Chesapeake Oilfield talk

Also on Monday, Chesapeake Oilfield talked its $500 million offering of eight-year senior notes (Ba3/BB+/) with a yield in the 6¾%.

The books closed on Monday for all investors who saw management through Friday. For all others, the books close at 11 a.m. ET on Tuesday.

The deal is set to price thereafter.

Bank of America Merrill Lynch, Credit Agricole, Credit Suisse, Citigroup and Goldman Sachs are the joint bookrunners for the intra-company debt refinancing.

The deal is going well, market sources say.

12 straight days of inflows

Vast amounts of cash continue to flow into junk-bond funds, according to a high-yield mutual fund manager who said that EPFR Global reported a $708 million daily inflow on Friday - the 12th consecutive positive flow EPFR saw.

The manager's fund, however, has seen 13 consecutive days of inflows, and they have been massive, the source said.

Late last week, EPFR reported that global high-yield funds saw their biggest-ever weekly inflow of cash: $3.2 billion for the week to Oct. 19 close.

Meanwhile, the high-yield mutual funds saw $2.275 billion of inflows for the week to Wednesday, according to a debt capital markets banker who was citing a weekly report by Lipper-AMG.

Against this backdrop of strong inflows, the forward calendar is thin, market sources say.

As a result, investors are chasing bonds in the secondary market, according to the mutual-fund manager.

Reynolds Group Issuer Entities' 7 7/8% senior secured notes due April 2019 were 103 bid on Monday, up from 93 bid two weeks ago, the buysider recounted. That deal priced a year ago at par in a $1.5 billion tranche.

"Everything is gapping up," said the buysider, who is not looking for a big buildup to the forward calendar in the near term, strong inflows notwithstanding.

Some relief is likely on the way in the form of as much of $2 billion of bonds from Sprint Nextel Corp., the investor said, adding that a deal could materialize during the next two weeks.

Sprint has $2.7 billion of debt coming due in 2012, $1.5 billion due in 2013 and $1.2 billion in 2014, the buysider recounted. Also it has $10 billion of network build-out planned during 2012 and 2013.

"They need to come," said the investor.

Also, Pharmaceutical Product Development, Inc. is expected to bring $700 million of senior notes during the present quarter, via Credit Suisse, J.P. Morgan, Goldman Sachs and UBS.

And, although the exact structure remains to be announced, Kinder Morgan Inc.'s $21.1 billion acquisition of El Paso Corp. is expected to result in a healthy chunk of high-yield issuance, according to buyside sources.

One of those sources expects to see dealers undertake the syndication of at least some of the bridge financing well before Thanksgiving.

J.M. Huber higher

A trader said that J.M. Huber's new 9 7/8% notes due 2019 were at 101 bid, 102 offered.

He called that about the level at which those bonds had traded late Friday, after the Edison, N.J.-based supplier of engineered materials priced its $225 million issue earlier that session at 99.323 to yield 10%.

"They held their Friday gains," he said, "but they didn't go up anymore."

A second trader pegged the new bonds at 101 bid, 101½ offered.

Overall market in overdrive

Away from the new-deal arena, traders saw the junk market stronger across the board, building on the solid momentum generated at the end of last week.

"It's definitely another food fight," one opined. "People are starving for paper again."

He noted that EPFR Global, the Cambridge, Mass.-based service that tracks flows of money in to and out of high-yield mutual funds, "came out with a massive inflow" when it released its weekly flow numbers on Thursday: $3.16 billion, the highest that it has ever seen.

At the same time, rival fund-tracker AMG Data Services of Arcata, Cal., whose methodology differs somewhat from EPFR, also reported a huge infusion of cash to the junk funds: $2.275 billion, the most since August of 2003.

"So you continue to see a lot of money shifting into high yield," the trader said. "People are grabbing for paper, no question about it."

"It was like people couldn't buy enough bonds at any given point in time," another trader said.

"With the bid lists that came in, the dealers were jumping in front of customers to buy bonds. In many cases, dealers were the most aggressive buyers. That's what it seemed like."

He characterized Monday's market as one-directional, explaining that "everything that could have a bid had a bid and traded up."

Sometimes, he said, if there was more than one seller of a given bond, "those things didn't trade unless somebody stepped in and said 'I could use some of those, it's not that bad.' "

After that, he said, "It traded up and then there would be five guys trying to buy it right after that."

With so much money coming into the funds, he said, "Guys are like 'I've got to get invested.' So if they can't get invested, they'll buy the [CDS] contract for the bonds, and hope that whatever they have in cash trades higher tomorrow."

Indicators continue firming

Statistical performance indicators, which had firmed solidly on Friday, did so again on Monday.

A trader said that the CDX North American series 17 High Yield index pushed upward by 1¼ points on Monday to end at 99½ bid, 99¾ offered after having gained three-quarters of a point on Friday.

The KDP High Yield Daily index tacked on 30 basis points on Monday, ending at 72.52. On Friday, it had risen by 58 bps. Its yield came in by 4 bps to 7.74% on top of the massive 20 bps tightening recorded Friday.

And the Merrill Lynch U.S. High Yield Master II index was on the upside for a lucky seventh consecutive session on Monday, rising by 0.528% on the session, which followed Friday's 0.613% advance.

That lifted the index's year-to-date gain to 2.425% from Friday's 1.886%.

It was the first time the 2011 cumulative return finished above the psychologically potent 2% mark since Sept. 5 - and its highest reading since Aug. 17 - when the index showed a 2.483% return for the year.

However, while the index continued to show considerable progress in bouncing back from its recent low point - the year's worst 3.998% deficit recorded Oct. 4 - it still is well down from the peak gain for the year of 6.362%, which was set on July 26.

Junk bonds got a boost from stocks, which were on their own three-day winning streak, fueled by news of several large corporate takeovers.

The streak also was fueled by reports that the bailout fund European finance ministers are working on to aid the continent's battered banks will be larger than initially expected.

Equities ended at their highest levels since the downgrade triggered by the U.S. debt crisis.

The bellwether Dow Jones industrial average, which on Friday shot up by 267 points, had added another 104.83 on Monday, or 0.89%, to 11,913.62.

The Standard & Poor's 500 index and the Nasdaq Composite index did even better, finishing up 1.29% and 2.35%, respectively.

Gaming a big gainer

A trader said that the Caesars/Harrah's 10% notes due 2018 got all the way up to the 75 level, which he called up "another couple of points."

He also saw other names in the casino segment better, such as Boyd Gaming's 9⅛% notes due 2018 firmed to 92 bid; the Las Vegas-based gaming operator "reports numbers [Tuesday], so they kind of rallied into numbers," he said.

The trader also said that sector peer MGM Resorts International was up again by several points and that would apply to "the entire casino space."

Another market source called the Harrah's 10s up 2 points on the day at 75 bid, on volume of more than $16 million, making it one of the most active purely junk issues trading on Monday. A week ago, the bonds were about 68 bid.

The Las Vegas casino giant's 11¼% notes due 2017 were likewise several points firmer on the day, at 107½ bid, on about $10 million traded, the source said.

MGM's 6 5/8% notes due 2015 gained 2 points to end at 93½ bid.

Broad advance seen

One of the traders said that a wide variety of bonds were higher.

"Airline paper was just ripping," he said, ahead of quarterly numbers that major carriers are expected to report this week.

The trader said he saw high-quality paper also trading up, including BB-rated aircraft interior components company B/E Aerospace Corp.'s paper trading inside of 5% yield.

Back on solid ground, Community Health Systems' 8 7/8% notes due 2015 were being quoted up five-eighths of a point at 102 5/8; bid, 103 1/8; offered.

Mortgage insurers move down

However, a secondary trader said that while most everything was up across the board, the exceptions were MGIC and Radian paper on the back of the PMI news.

"That stuff got hit today," the secondary trader said. "Other than that, there's not a lot that you can point to on the downside."

And he said the bonds of the mortgage-insurance companies don't really trade that often. "So there's not a ton of stuff to point to," he said. "They were down fairly substantially, but not on heavy volume."

He said he saw Radian's 5 5/8% notes due 2013 trading as low as 71 bid during the session, which he called down about 10 points. MGIC's 5 3/8% notes due 2015 were down 5 or 6 points to about the 66 level, he said.

But there was not heavy volume, the trader said.

Another market source saw the Radian 13s bottom at 70 before ending at 74. This was still well down from last week's levels between 82½ and 831/2.

The MGIC 15s finish of 66 was down from 72½ last week.

PMI and Radian were the "big losers of the day," according to another trader.

The losses came as PMI's main unit was seized by regulators and Radian's top executive said in a news interview that the housing arena remained in a very fragile situation.

The trader saw PMI's 6 5/8% notes due 2036 falling to 231/2, down from last round-lot levels of 431/2. In the meantime, Radian's 5 5/8% notes due 2013 plunged more than 12 points to 70, he said.

He noted that trading in both credits was thin.

Yet another trader said PMI paper was quoted down 4 to 5 points, the 6 5/8% notes and 6% notes due 2016 trading about "25-ish, mostly attached to the CDS unwind."

PMI's PMI Mortgage Insurance Co. subsidiary was seized by Arizona regulators before the weekend, pending a hearing regarding whether the unit should be placed into a receivership. The unit was placed under regulator supervision in August.

On Friday, PMI Reinsurance Co., PMI Mortgage Guaranty Co. and Residential Insurance Co. also were placed under supervision.

If the PMI Mortgage unit is placed into a receivership, the 4.5% convertible notes due 2020 will be accelerated, which could lead to the acceleration of other debt. PMI has said it does not have the resources to pay off the debt and is therefore exploring its options.

The Walnut Creek, Calif.-based company has hired Evercore Partners Inc. and law firms Sullivan & Cromwell LLP and Young Conaway Stargatt & Taylor LLP to evaluate its restructuring options.

Taking a look at the sector generally, a trader at another shop said holding bonds of mortgage insurers at this point "is such a dangerous trade right now because the government is tinkering around with mortgages."

If a plan to help harried homeowners is implemented and if the government forgives defaulted or under-water mortgages, the insurers "would have to make up the difference," he said.

This is a development that he said "could bury these guys."

What shape any new election-year federal plan to help beleaguered borrowers may take "is a major unknown" that throws a cloud over the entire mortgage insurance sector.

Stephanie N. Rotondo contributed to this report

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