AOT Bedding seen planning deal; ATP Oil & Gas is again junk volume leader, moves higher

By Paul Deckelman and Paul A. Harris

New York, Aug. 29 - The junk market continued to wind down its pace ahead of the upcoming holiday weekend on Wednesday, with traders seeing little in the way of real activity, although they said that the overall market retained its recent mostly firm tone.

In the primary arena, syndicate sources heard that mattress-maker AOT Bedding Super Holdings is soon likely to bring a $725 million junk issue to market, as part of the financing for the leveraged buyout of the company, whose products include the well-known Simmons brand name. Timing will be linked to that of the bank debt portion of the LBO financing.

Traders did not see much in the way of activity in recently priced issues, although some trading was seen in the megadeal that health care operator DaVita Inc. did earlier this month.

Away from the new-issue realm, ATP Oil & Gas Corp. was once more the biggest-trading purely junk issue, its eighth consecutive session in that lofty perch. However, unlike the last several sessions, which have seen the recently bankrupt Houston-based energy company's bonds more or less stabilizing at their lowest levels after gyrating around following its Chapter 11 filing, Wednesday's brisk activity saw those bonds solidly higher.

Statistical measures of junk market performance turned higher across the board after several mixed sessions.

The primary market remained quiet on Wednesday as market players in the United States began to look toward the extended Labor Day holiday weekend, which begins Friday.

And they continued to forecast a burst of early September new-issue activity.

However, specific issuer names for the immediate post-Labor Day period remained elusive.

A Boston-based portfolio manager, pressed for issuer names, turned out empty pockets, but said that things will likely be busy, and merger and acquisition financing will be a prominent theme in the coming autumn.

"People have cash," the manager said, noting that cash inflows have been strong and coupon payments continue to come in.

Early September could be an issuer's window of preference for obvious reasons, the source added, noting that the big summer technical rally in the high-yield market has driven junk bond rates to rock bottom.

"It doesn't seem like they could go much lower," the buysider remarked.

The joker in the deck is macroeconomics and headline news beyond the financial page, the manager said.

August nonfarm payroll numbers, due to be released on Sept. 7, will be closely watched, the investor said. He added that the market is not likely to react positively should job growth come in lower than 100,000 new jobs.

Also, it's the political season, the investor stated, noting that any negative that might emerge on the employment front will be duly amplified for political purposes.

"Europe has been quiet," the buysider said, referring to the ongoing travails of sovereign credit and economic malaise in significant portions of the euro zone.

"But will it stay that way?" the investor demanded to know.

All in all, this investor will not be surprised to see a burst of drive-by business surface in the Sept. 4-6 timeframe, ahead of the nonfarm payroll report.

Big week expected in Europe

A big week is also taking shape in the euro-denominated primary market, which could generate as much as €5 billion in the week ahead. That figure marks €5 billion of an anticipated €10 billion to €15 billion for the remainder of 2012, sellside sources say.

Again, as with the market in the United States, issuers are keen to hit the market sooner than later and for mostly the same reasons as mentioned above.

Headline news, especially negative news regarding the precarious credit situation in the euro zone, can swamp momentum in the primary market, a debt capital markets banker said on Wednesday.

Unlike the U.S. primary market, there actually are a couple of issuer names being tossed around for the week ahead in Europe.

One is France's TDF Group SA, formerly known as Telediffusion de France, which is expected to bring a euro-denominated debt refinancing deal to market as early as the week ahead, sources say.

The size and structure of the deal have not yet been disclosed, the source said.

BNP Paribas is expected to be involved, according to a London-based debt capital markets banker.

Another name circulating is Europcar, the banker added.

In any case, when trading resumes during the first week in September, the new issue markets on both sides of the Atlantic stand to see dramatic upticks in activity, sources say.

A junk secondary trader, looking at the sudden fall-off in new-deal activity since the start of last week, opined, "The scramble was on to get all of that stuff done the first two weeks in August because they weren't going to do it in the last two weeks."

He went on to project: "The first week after Labor Day isn't going to bring you any deals right away either."

He said that deals could be seen "maybe the week after because there's probably some pent-up stuff going on out there."

However, he added, "After Labor Day, it's all about preparing for the fourth quarter."

DaVita doing well

Among recently priced bonds, a market source said that DaVita Inc.'s 5¾% notes due 2022 were moving up, having gone home at 104 3/8 bid - a gain of nearly a point from the 103½ bid level at which the issue had ended on Tuesday.

The Denver-based provider of kidney health products and services priced its $1.25 billion drive-by offering at par on Aug. 14, after upsizing it from the originally announced $1 billion size.

The bonds quickly moved above 101 bid when they began trading later that same session, then moved above 102 bid in the days that followed and continued to move up to their current levels.

AMD a puzzle

Among other deals that have recently priced, Advanced Micro Devices Inc.'s' new 7½% notes due 2022 were seen by a market source having fallen completely silent on Wednesday, as opposed to Tuesday, when the Sunnyvale, Calif.-based semiconductor manufacturer's $500 million offering was seen trading around at nearly 1-point higher levels, although almost all of the trading took place in odd-lots.

The company's issue priced at par in a quick-to-market deal on Aug. 6, after upsizing from an originally announced $300 million.

Activity in the company's established 7¾% notes due 2020, which has been busy over the past few sessions, fell off on Wednesday, although the bonds were seen up, gaining a point end at 102 bid. On Tuesday, they fell on the session, dropping by 7/8 point to end at 101 bid, after having traded for a while as high as 103.

A trader said that AMD "has been very active, but nobody knows why." It was less active on Wednesday, though - volume dropped to around $13 million overall from $17 million on Tuesday - but really fell off in terms of round-lot trading, dwindling down to about $4 million on Wednesday from $15 million on Tuesday, but with considerable odd-lot activity.

The trader was at a loss to explain the sudden popularity of that issue. He noted the lack of any recent market-moving news and theorized that the Tuesday announcement by the company that it had hired a key high-tech expert away from rival Intel Corp. would likely not be enough to move the bonds.

"That seems more like a stock story to me," he said.

John Gustafson, who will become chief product architect for AMD's graphics chip business unit, is the latest high-profile hire by AMD, which has recently lured some top-flight executive and engineering talent away from such high-tech competitors as Intel, Apple Corp., IBM and Free scale Semiconductor.

Other recent deals quiet

Other recently priced bond deals were likewise quiet on Wednesday.

VWR Funding Inc.'s 7¼% notes due 2017 that priced last Monday - the last dollar-denominated junk deal to price before the onset of the current lull - was seen by a trader down a quarter-point from Tuesday's levels, at 101 3/8 bid, 101¾ offered, although volume was very light.

Radnor, Pa.-based VWR - a laboratory supply company - brought a quickly shopped $750 million deal to market at par on Aug. 20. Those bonds had gradually moved above the 101 bid level in the days that followed and have stayed there.

ATP again tops actives list

Away from the new deals, ATP Oil's 11 7/8% second-lien senior secured notes due 2015 topped the Junkbondland volume leader- board for an eighth consecutive session on Wednesday, with overall turnover of more than $24 million and round-lot trading of over $20 million, a market source said.

However, that was off a little from the $25 million to $30 million that was seen having traded around on Tuesday.

ATP has been the most actively traded purely junk issue (i.e., not split rated) ever since Aug. 20, the first trading session after its Chapter 11 filing with the federal bankruptcy court in Houston after the market close on Friday, Aug. 17.

The bonds gyrated after that filing, first shooting up into the lower 30s from pre-filing levels in the upper 20s, but within a session or two had begun sliding back down, finally bottoming around the 26½ mark by last Friday and staying there at the beginning of this week.

But on Wednesday, the bonds jumped, pushing as high as 29¼ in intra-day trading before finally going home at 28½ bid, up 1 5/8 points on the day.

There was no fresh news out about the company. A trader, however, suggested that the move could have been a "relief rally" as Hurricane Isaac passed over the Gulf of Mexico, leaving the Houston-based offshore oil exploration company's rigs alone.

Other established names quiet

Apart from the unusual name like ATP, a trader said that Wednesday saw "a ridiculous lack of activity."

Everybody, he declared, "was on vacation."

A second trader said: "You've got the usual cluster of '5B' paper" - split-rated issues from the likes of education financing company SLM Corp., steelmaker ArcelorMittal Luxembourg SA and auto finance giant Ford Motor Credit Co. attracting crossover interest from high-grade accounts as well as high-yield investors.

He also said, "Other than ATPG, nothing really sticks out as a situational name."

Such an environment can be frustrating, he said, for any shop trying to make money selling bonds to investors.

"Everybody seems very unmotivated when we call up. If it's not right on exactly what they want to do, they'll say they'll take it under advisement - and then not respond" to further efforts to get them interested in a deal.

"If you're not right in the heart of what they were trying to do - or are trying to do - they'll just wait for it to come to them, or wait for the market to get more active again."

With some understatement he said that this was "not very exciting - and I would imagine that it's only going to get worse over the next couple of days."

Despite the paucity of real trading activity, though, the first trader said that the junk market retained its firm tone on Wednesday.

Indicators firm up

Statistical indicators of junk market performance firmed across the board on Wednesday, after having been mixed the previous two sessions and for the fifth time in the previous six sessions.

The Markit Group CDX North American Series 18 High Yield Index rose by 1/16 of a point on Wednesday to end at 9 8 1/16 bid, 98 5/16 offered, after having fallen back by 3/16 of a point on Tuesday.

The KDP High Yield Daily Index rose by 6 basis points to end at 73.90, its first gain after two sessions on the downside. On Tuesday, it had dipped by 2 bps for a second consecutive session. Its yield came in by 4 bps, to 6.18%, after having been unchanged for a second straight session on Tuesday.

And the widely followed Merrill Lynch U.S. High Yield Master II Index notched its ninth consecutive gain on Wednesday, rising by 0.059% after having edged upward by 0.03% on Tuesday.

That lifted its year-to-date return to 10.354%, a seventh consecutive new high for the year, eclipsing the old peak level of 10.289%, which had just been set on Tuesday. The index is now at its highest level since the last session of 2010, when it closed that year with a 15.19% return.

The yield to worst meanwhile stood at 6.687%, versus 6.712% on Tuesday. Wednesday's yield marked a new low for the year, coming down from the old low of 6.71%, recorded on Monday.

Stephanie N. Rotondo contributed to this report

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