United Rentals plans big note sale for RSC acquisition, bonds fall; Physio-Control slates

By Paul Deckelman and Paul A. Harris

New York, Dec. 16 - United Rentals, Inc. said it is planning to bring a $2.2 billion junk bond issue to market early next year as part of the financing for its planned acquisition of sector peer RSC Holdings, Inc., which was announced on Friday.

The prospect that the equipment-rental company will do such a massive bond deal helped to hammer down its existing bonds in heavy trading on Friday, even though the company does not expect any deterioration in its leverage profile and its shares rose on news of the planned combination.

News of the acquisition - which has a total enterprise value of $4.2 billion - had little impact on RSC's existing bonds, although the company's equity rose handsomely.

Junk traders said that the United Rentals/RSC story was clearly the dominant factor in the market on Friday, which marked the end of the final full trading week of 2011 - the next two weeks will be holiday-abbreviated.

As expected, there were no deals priced, as the week finished with about $500 million of new issuance from three deals that came to market earlier in the week. The only other news from a rapidly fading primary was that emergency medical response technology provider Physio-Control plans a $315 million secured notes deal, also early in the new year.

Wednesday's new issue from 99 Cents Only Stores Inc. was seen by traders having moved up to around its issue price, or maybe even slightly above it, after having struggled in the aftermarket that last two days.

Things were otherwise dull in the secondary, as the year-end wind-down continues. Statistical measure of junk market performance were mixed on the day, but down on a week-to-week basis.

$502 million week

The high-yield primary market continued its slow crawl toward 2012 on Friday, with no issues pricing.

The front-loaded Dec. 12 week saw a ghostly $502 million of issuance, with three issuers each bringing a single tranche.

All three deals, one apiece from 99 Cents Only Stores Inc., Nationstar Mortgage LLC and A. M. Castle & Co., priced during the period between Monday's open and Wednesday's close.

It was the lowest amount of weekly issuance since the week of Oct. 17, which saw just $223 million in a single tranche (JM Huber Corp.), and it increases total dollar-denominated high-yield issuance to $255.68 billion in 549 tranches for the year to Friday's close.

Crawl to continue

Although no one was quite willing to nail the "Closed for the holidays" sign to the door during Friday's ultra-quiet session, the chances of any new issue business in the week ahead are extremely slim, sources say.

If there is any action it is most likely to occur on Monday or Tuesday.

Recent conversations have turned up an extreme shortage of market players who are sorry to see 2011 end.

"People are tired of trying to push deals through a window that opens at 9 a.m. but is closed again by four," remarked a senior syndicate official who reports spending the past few weeks having opportunistic deals prepped and ready to go, with rate-sensitive issuers ultimately electing to stay on the sidelines.

Datatel bridge in syndication

Although the high-yield bond market is quiet, bridge loan syndication activity remains apace, according to a portfolio manager.

Dealers are busy attempting to syndicate the bridge backing Datatel Inc.'s $530 million of senior notes (Caa1/CCC+). The bond offering is expected to hit the market in early January.

Dealers seem keen to have the Datatel bridge risk off their books by the end of the quarter, said the buy-sider who declined to furnish the range of bridge participation fees under discussion.

J.P. Morgan, Bank of America Merrill Lynch, Barclays, Citigroup Global Markets Inc. and Credit Suisse will lead the bond deal.

Proceeds, in addition to a $1.2 billion credit facility, will be used to help fund the acquisition of SunGard Higher Education by Hellman & Friedman, and the concurrent merger with Datatel.

United Rentals drives trading

As could be expected, with not much else really going on in Junkbondland, "the thing that dominated here was URI," a trader said, referring to Greenwich, Conn.-based construction and industrial equipment rental firm United Rentals by its stock ticker symbol.

He said that on the heels of the Friday morning announcement that United Rentals will acquire Scottsdale, Ariz.-based sector peer RSC holdings in a $1.9 billion deal that also includes $2.3 billion of debt repayment and assumption, United Rentals' 10 7/8% notes due 2016 were trading in a 110-110¼ context, down from pre-news levels around 112 bid, while its 9¼% notes due 2019 were trading around 105 bid, versus 107¾ to 108 on Thursday.

And the company's 8 3/8% notes due 2020 "traded a lot," he said - in fact, it was the most actively traded bond in the United Rentals structure on Friday - and like the other two issues, it too was lower, at 95¾ bid, versus around 98 or 99 on Friday.

A market source at another desk said that volume in the latter issue was nearly $40 million, making it easily the busiest junk issue of the day. The bonds were quoted going home at 96½ bid, versus recent round-lot levels above 101 bid.

The source said the 9¼ were ending at 105¼ bid, versus 109 earlier in the week, with over $16 million of the bonds traded.

The 10 7/8s closed at 110, down from 112 previously, on volume of more than $5 million.

The first trader blamed the decline in the bonds on the company's plans for financing the massive acquisition - even though company executives on the conference call said that United Rentals' overall leverage statistics would not change much.

They said that they plan to pay for RSC with the proceeds from a roughly $2.2 billion bond issue, split between secured and unsecured bonds, as well as about $100 million of borrowings under the company's existing asset-backed revolving credit facility.

They said that United Rentals will repay RSC's existing senior secured credit facility borrowings and senior secured notes due 2017 and will assume all of RSC's existing unsecured bonds.

One executive said on the call that it's "fair to say we won't be dramatically different in the [size of the upcoming] secured issue from what we're going to retire in the secured notes."

They said that the company's leverage will be around 4.5 times total debt to 2011 EBITDA, in line with its previously stated comfort range of 3.5 times to 4.5 times.

The executives added that "the pro forma balance is anticipated to be strong," with liquidity of around $600 million to $700 million at the time of closing, expected to take place in the 2012 first half.

They also said that United Rentals expects to retain its current corporate credit ratings, which include bond ratings of B3/B/B+ and Caa1/CCC+/B.

Meantime, RSC's bonds "should be up a little bit, I would think," one of the traders said, "but not much happened to them at all."

The company's 8¼% notes due 2021 were seen off by 1½ points at 98 bid, on volume of about $2 million, while its 9½% notes due 2014 were up ¼ point at 102¾ bid, on just $1 million traded.

Over on the equities side, though, RSC's New York Stock Exchange-traded shares zoomed by $6.58, or 57.87%, to end at $17.95, just below the $18 per share value of United Rentals' cash-and-stock offer. Volume of 63.6 million was an astounding 53 times the norm.

While its bonds were taking a drubbing on investor fears of greater leverage, United Rentals' NYSE-traded shares gained $1.85, or 7.10%, to finish at $27.89. Volume of 17.2 million shares was more than seven times the usual activity level

New 99 Cents bonds better

Away from United Rentals and RSC, a trader said that the new issue of 11% notes due 2019 from 99 Cents Only Stores "was hanging in there okay" - he quoted the bonds having firmed to 100¾ bid, 101 offered, well above the levels at which they have recently been trading.

"They just caught on," he said.

Another trader saw the bonds bid in a range of par to 1001/4.

On Thursday, a trader was quoting the paper at 99 3/8 bid, 99¾ offered.

Those bonds priced on Wednesday at par as part of the financing for the pending buyout of City of Commerce, Calf.-based extreme value retailer 99 Cents Only Stores. The issuer of record was Number Merger Sub, Inc., which is merging with 99 Cents Only as part of the buyout transaction.

After pricing, traders saw the $250 million forward calendar deal trading below issue, going as low as 99 bid before finally firming on Friday.

Not much happening

A trader said that overall, "it's just a very listless day here."

He said that volume levels "really were ridiculous today."

He said that "accounts are closing their books, and there was very little done on Trace."

The trader also held out the promise that "maybe next week you'll get some people re-shuffling their holdings prior to the year-end - last minute adjustments."

He added that "there is a little bit of caution in this market right now - just a little bit."

A second trader agreed that "for the most part, we're in that time of year that the volume is fairly skewed to the downside, so any kind of moves are exaggerated, up or down."

That having been said, he added that "the market still has a very good tone to it - I'm not saying that things traded up a whole lot, but maybe were up one-quarter [point] to a half."

He added that "what's still compelling is that a lot of accounts are re-shuffling.

"Any kind of CCC paper, some junior subordinated paper, seems to be coming out."

Accounts, he said, "are just sitting on the sidelines, with cash."

"Everyone is still looking for senior paper and enjoying the ride up on the high yield side," he said

Indicators seen mixed

Statistical measures of junk market performance - which turned mixed on Thursday - stayed that way on Friday.

A trader saw the CDX North American series 17 High Yield index unchanged on Friday at 90½ bid, 90¾ offered, after having been off by ½ point on Thursday.

But it was down from 92 3/16 bid, 92 7/16 offered at the close of trading the previous Friday, Dec. 9.

The KDP High Yield Daily index lost 5 basis points on Friday to end at 71.61, after having firmed by 7 bps on Thursday.

Its yield, however, rose by 3 bps, to 7.73%, after having dropped by 6 bps on Thursday.

Those levels contrast with a reading of 71.81 and a yield of 7.68% seen in the market in the week ended last Friday.

The widely followed Merrill Lynch High Yield Master II Index posted a second straight gain, though it was down from a week earlier.

Its 0.081% gain on Friday followed Thursday's 0.003% rise.

The gain lifted the index's year-to-date return to 3.259%, better than 3.176% at the close Thursday.

But on the week, the index was down 0.038% - the first weekly loss after two straight weeks on the upside.

Year-to-date returns meanwhile remain below the recent peak level of 4.28%, recorded on Oct. 28, and are well below the index's high-water mark for the year of 6.362%, which was set on July 26.

However, they are still well up from its 2011 low-point, a 3.998% deficit recorded Oct. 4.

Sara Rosenberg contributed to this report

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