Primary stays quiet, recent deals active; Cliffs up on equity issue; funds lose $1.8 billion

By Paul Deckelman and Paul A. Harris

New York, June 16 – The high-yield primary market continued to cool down on Thursday after its recent bursts of intense activity, seeing its second consecutive session in which no U.S. dollar-denominated and fully junk-rated paper had priced.

That was in stark contrast to several recent billion-dollar-plus sessions, including Monday’s massive $4.91 billion day.

The only pricing seen involved an eight-year offering of euro-denominated paper from Canadian soft-drink bottler Cott Corp.

Market sources said the Cott deal had been the only real imminent business on the Junkbondland forward calendar.

They said that the junk world, like a number of other financial markets, was cautious and wary ahead of next Thursday’s scheduled vote in the United Kingdom on whether Britain should leave the European Union, with participants trying to handicap what impact the various outcome scenarios might have on their investments.

Recently priced issues such as Dell, Inc., DISH Network Corp. and Reynolds Group Holdings Ltd. continued to trade actively.

Away from the new issues, Cliffs Natural Resources Inc.’s bonds – particularly its 2018 notes – jumped on the news that the iron-ore producer plans to raise $300 million via an equity offering and use the proceeds for debt repayment.

Statistical market performance measures were mixed for a second straight session on Thursday, after having been lower for three consecutive sessions before that. Thursday was the third mixed session in the last six trading days.

Another numerical indicator – flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – suffered its first outflow after two straight weeks of inflows before that, as $1.802 billion more left those weekly-reporting-only domestic funds in the form of investor redemptions than came into them during the week ended Wednesday. That cash loss was in stark contrast to the two straight weeks of inflows – totaling $893.153 million – that had preceded it, including the $748.153 million inflow reported last Thursday for the week ended June 8 (see related story elsewhere in this issue).

Cott prices tight

In an otherwise dead quiet primary market, Cott Corp. priced a €450 million issue of eight-year senior notes (B3/B-) at par to yield 5½% on Thursday.

The yield printed at the tight end of the 5½% to 5¾% yield talk.

Joint bookrunner Deutsche Bank will bill and deliver for the acquisition financing. JP Morgan, Wells Fargo, BofA Merrill Lynch and SunTrust Robinson Humphrey were also joint bookrunners.

Quiet ahead

Cott cleared the active high-yield forward calendar.

The market will likely remain sidelined in the run-up to the June 23 Brexit ballot when voters in the United Kingdom are due to decide whether or not to remain in the European Union.

The distinct possibility that they will vote to leave the Union is eroding the appetite for risk assets, according to a debt capital markets banker in the United States.

Although stock prices on the major U.S. indexes improved on Thursday, junk bonds were softer again, the banker said.

As recently as a week ago, the market seemed to have a view that the United Kingdom would ultimately choose to stay, the source recounted.

However recent polls indicate that an “exit” vote actually could materialize.

“There’s an oncoming truck, and people are blinking,” said the source.

Ultimately the markets will adapt to whatever British voters decide, but for right now there is nothing happening in the new issue market, the banker remarked.

Recent issues active

In the secondary market, a trader said “we did see weakness throughout the morning – then as the equity market turned around and felt positive, we saw cash bonds kind of do the same thing.”

For instance, he said that the that the new Dell issues were “pretty active.”

The Round Rock, Texas-based computer giant’s new 5 7/8% notes due 2021, he continued, were ending around the par level, which he called about unchanged.

“They were lower on the day earlier, down about ¾ point, so they were about unchanged.”

More than $25 million of the notes traded, putting the issue high on the Most Actives list.

A market source at another desk saw the Dell 7 1/8% notes due 2024 at around 101¼ bid, which he called down 1/8 point on the day, on volume of over $19 million.

Dell had priced $1.625 billion of each series of notes at par on June 8 as a regularly scheduled forward calendar issue.

Among other recently priced bonds, DISH Network’s 7¾% notes due 2026 were seen off ¼ point at 101 bid on turnover of $15 million.

The Englewood, Colo.-based satellite television broadcasting company priced $2 billion of those notes at par, also on June 8, after the unscheduled offering was upsized from $750 million originally.

A trader meantime saw the Reynolds Group 5 1/8% notes due 2023 up ¼ point on the day, trading at 100 5/8 bid, with about $13 million having changed hands.

The Auckland, New Zealand-based producer of the popular “Reynolds Wrap” aluminum foil, came to market on Monday with $1.35 billion of those notes at par, as part of a quickly shopped $2.9 billion three-part transaction that also included a $750 million tranche of senior secured five-year floating-rate notes and $800 million of 7% senior unsecured notes due 2024. The floaters priced at 99, while the unsecured fixed-rate bonds priced at par.

Cliffs’ climbs higher

Cliffs Natural Resources’ debt got a boost Thursday after the Cleveland-based company registered up to $300 million in new equity.

In its registration statement, the company said proceeds from the offering would be used to take out the 5.95% notes due 2018.

One trader said that the issue immediately jumped to 99 on the news, up from Wednesday’s closing levels around 87½. By the end of the day, they had settled in around 96, he said.

Another trader called the issue up “about 8 points” in a 96 to 97 context. Over $17 million of the bonds traded.

As for the rest of the capital structure, the first trader saw the 8¼% notes due 2020 ticking up 1 to 1½ points to 101¼. The 5.9% notes due 2020 were called nearly 3 points better at 70.

A trader did note that the issue is not callable and that therefore the paper “should still trade with a little bit of uncertainty.” He speculated that the company planned to take out the debt via a tender offer.

“In the end, it’s probably a money-good piece of paper,” he said.

Brexit takes its toll

Overall, a trader opined that the junk bond market “is a little skittish right now.”

He blamed the wariness and lack of commitment “on Brexit and all of that stuff” – the financial market worries of what may happen if Britons going to the polls next Thursday decide to pull the United Kingdom out of the European Union, considered a distinct possibility. Most of the polls show public opinion more or less evenly split behind the “Leave” camp that wants out and the “Remain” supporters, who don’t want such a drastic step taken.

“Because of that, you don’t see new issues,” he lamented, “and secondary trading has also been restrained.”

Indicators stay mixed

Statistical market performance measures were mixed for a second straight session on Thursday after having been lower for three consecutive sessions before that. Thursday was the third mixed session in the last six trading days.

The KDP High Yield Daily Index fell by 13 basis points on Thursday to end at 67.44, its fifth straight loss and eighth in the last 13 sessions. On Wednesday, it had eased by 4 bps.

Its yield widened by 6 bps Thursday, to end at 6.21%, after having been unchanged Wednesday following three straight widenings.

However, the Markit Series 26 CDX North American High Yield Index managed to eke out a small gain of just under 3/32 point on Thursday to end at 102 bid, 102 1/32 offered. On Wednesday, it had been down by 3/32 point, its fifth successive losing session.

The Merrill Lynch North American High Yield Master II Index – after having broken out of a recent rut on Wednesday with its first gain after four straight losing sessions – was back on the losing track Thursday, ending off 0.433%. On Wednesday, it had gained 0.16%

Thursday’s loss dropped its year-to-date return to 8.021% from Wednesday’s 8.491%, which in turn was well down from its peak level for the year so far of 9.433%, set last Wednesday.

-Stephanie N. Rotondo contributed to this review

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