Rite Aid, Brookfield, Atwood drive by, Rite Aid below issue; market awaits Fed information

By Paul Deckelman and Paul A. Harris

New York, June 18 - The high-yield primary arena saw its busiest day in nearly a month on Tuesday as three issuers drove by the market with opportunistically timed deals.

The day's signature issue came from Rite Aid Corp., as the Number-Three U.S. drugstore chain operator did an upsized $810 million of new eight-year notes.

Canadian land developer and homebuilder Brookfield Residential Properties Inc. turned the key on an upsized $500 million of nine-year notes, while offshore drilling contractor Atwood Oceanics, Inc. priced a $200 million add-on to its existing 2020 notes.

All told, some $1.52 billion of new U.S.-dollar-denominated, fully junk-rated debt from domestic or industrialized-nation issuers had priced - the most new paper seen in Junkbondland since May 23, when $1.82 billion got done in three tranches.

Traders said that Rite Aid's new bonds moved below their issue price when the deal was freed for aftermarket activity.

They quoted the Atwood and Brookfield deals trading around their respective issue prices.

The traders meantime saw continued strength in Monday's new offering from deathcare giant Service Corp. International.

Away from the new deals, traders said the market was firm, with statistical performance indicators up across the board for a second consecutive session.

However, they said activity was muted, with many accounts sitting on their hands as they awaited Wednesday's scheduled announcement by the Federal Reserve, which may disclose whether the central bank will begin soon tapering off its expansive monetary policy that has kept interest rates low and provided ample liquidity to the credit markets.

Rite Aid doubles deal size

The primary market appeared to regain its legs on Tuesday, as a trio of quick-to-market issuers each priced single upsized tranches, raising a combined total of $1.52 billion.

Executions were crisp.

One deal priced on top of downwardly revised talk, one priced at the tight end of talk, and the biggest of the three - Rite Aid's, which more than doubled in size - priced on top of upwardly revised talk.

In a transaction that was in the market overnight, Rite Aid priced an upsized $810 million issue of eight-year senior notes (Caa2/CCC) at par to yield 6¾%.

The deal was increased from $400 million.

The yield printed on top of final yield talk. Earlier talk was 6½% to 6¾%.

Citigroup, BofA Merrill Lynch, Wells Fargo, Goldman Sachs and Morgan Stanley were the joint bookrunners.

The Camp Hill, Pa.-based drugstore chain plans to use the proceeds, including those resulting from the upsizing, to repay its 9½% notes due June 15, 2017 in full.

Brookfield atop tightened talk

Brookfield Residential Properties Inc. and Brookfield Residential U.S. Corp. priced an upsized $500 million issue of nine-year senior notes (B2/BB-) at par to yield 6 1/8%.

The deal was raised from $400 million originally.

The yield printed on top of yield talk that was tightened from earlier talk in the 6¼% area. Initial guidance was in the low 6% range, according to a trader.

Credit Suisse, Citigroup, Deutsche Bank and Wells Fargo were the joint bookrunners.

The Calgary, Alta.-based land developer and homebuilder plans to use the proceeds to refinance debt and add cash to its balance sheet.

Atwood taps 6½% notes

Atwood Oceanics also doubled the size of its deal.

The Houston-based company priced an upsized $200 million add-on to its 6½% senior notes due Feb. 1, 2020 (Ba3/BB) at 104.25 to yield 5.444%.

The deal was expanded from an initial $100 million.

The reoffer price came rich to the 104 price talk.

Barclays, Wells Fargo, Credit Suisse, DNB and Goldman Sachs were the joint bookrunners.

The offshore drilling, exploration and development company plans to use the proceeds for general corporate purposes, including funding its new building program, and to pay down its revolver.

National Financial sets talk

Looking ahead to Wednesday's session, National Financial Partners Corp. talked its $337 million offering of eight-year senior notes (Caa2/CCC+) to yield 8¾% to 9%.

Books closed late Tuesday and the deal is set to price on Wednesday morning.

Deutsche Bank, Morgan Stanley, UBS, Credit Suisse, MCS and RBC are the joint bookrunners for the acquisition financing.

Apart from National Financial, the active calendar has four deals expected to price before the end of the week, although none had official price talk as of Tuesday's close, sources said.

Among them are European issuers bringing transactions in a variety of currencies.

Greece-based Intralot Finance Luxembourg SA is market €300 million of five-year senior notes (B1/B+/BB-) via Citigroup and HSBC.

Conversations on the deal have taken place in a yield range of 8¼% to 8¾%, a trader said.

Netherlands-based Interxion Holding NV is marketing a €300 million offering of seven-year senior secured notes (B2/B+) via Barclays, Citigroup, Credit Suisse and BofA Merrill Lynch.

Guidance is in the high 5% to low 6% yield context, the trader said.

France's Technicolor is in the market with a $330 million offering of seven-year senior secured notes (expected ratings B3/B) via J.P. Morgan, Goldman Sachs and Morgan Stanley.

The deal, which is expected to price late this week or early in the week ahead, is guided in the 7% area, the trader said.

And in a transaction that is expected to remain in the market until the week ahead, AA Bond Co. Ltd., a financing unit the United Kingdom's largest provider of roadside assistance services, is marketing £655 million of class B secured notes via physical bookrunners Deutsche Bank and Royal Bank of Scotland.

The deal is guided in the mid-8% range, the trader said.

American Equity starts roadshow

Back among U.S. deals, American Equity Investment Life Holding Co. began a roadshow on Tuesday for a $250 million public offering of eight-year senior notes (BB+/expected BB).

The roadshow wraps up on Thursday, and the deal is expected to price on Thursday or Friday.

J.P. Morgan has the books.

Proceeds will be used to repay debt and for general corporate purposes.

Rite Aid steps back

In the secondary market, traders said the new Rite Aid bonds were not exactly what the doctor ordered, noting the drugstore company's anemic aftermarket performance.

One trader said that one of his shop's accounts had seen those 6¾% notes due 2021 at 99¼ bid, down from their par issue price earlier in the day.

He said that besides that bid, "there was no offer, no nothing, after it broke. I was kind of surprised because it's a large deal, and bigger dealers brought the deal."

Going back to do a late-afternoon check on the new credit, he declared that "there's still nothing alive or quoted in Rite Aid," calling that very strange.

At another desk, a trader did see a two-sided market for Rite Aid's new bonds, but he said they were down from their issue price, at 99 1/8 bid, 99 3/8 offered.

Other deals stay at issue

Among the day's other transactions, a trader saw Brookfield Residential Properties' 6 1/8% notes at par bid, 101 offered.

A second trader pegged the new bonds going home at par bid, 100¼ offered.

The first trader saw Atwood Oceanics' add-on to its 6½% notes due 2020 trading at 104¼ bid, 104½ offered, versus the 104.25 level at which the offering had priced.

Service Corp. seen better

A trader said that Service Corp. International's 5 3/8% notes due 2022 were at 101 bid, 101¾ offered.

He said that was up from the 100¾ to 101 bid context where he had seen the Houston-based deathcare company's $425 million issue trading on Monday after that quick-to-market deal had priced at par.

Service Corp. - whose far-flung nationwide empire of funeral homes and cemeteries is so extensive that that famed stock guru Peter Lynch once compared it to another ubiquitous giant company when he jokingly referred to SCI as "McBurial" - plans to use the proceeds from its bond deal to help fund its acquisition of somewhat smaller industry rival Stewart Enterprises Inc.

At the Gimme Credit independent investment advisory service, senior analyst Kim Noland noted that "despite the prospect of improving business trends and deal synergies, the debt incurred to finance the acquisition is causing negative rating action for both companies and the likelihood that leverage will remain elevated for over two years."

Noland estimates that with total debt near $2 billion and $620 million of EBITDA, Service Corp.'s total and net leverage is about 3.1 times and 2.8 times, respectively - which she believes will rise to over 4 times pro-forma for the Stewart acquisitions.

However, the analyst said in a research note that while Service Corp. will use its credit facility and the bond deal proceeds to fund the Stewart deal, the company's liquidity is "adequate" and its maturities "manageable," and rates the new deal an "outperform with limited upside at the current y.t.w. of 5.3%."

Quicksilver still struggles

Also among recently priced issues, a trader saw Quicksilver Resources Inc.'s 11% notes due 2021 at 94 bid, 95 offered, while its second-lien senior secured floating rate notes due 2019 were at 96½ bid, 97 offered, "so they were still down from their respective issue prices."

The Fort Worth, Texas-based owner acquirer of oil and natural gas properties had priced its $325 million of the 11% notes last Wednesday at a heavily discounted 94.928 to yield 12%, after having radically downsized the offering from an originally announced $675 million, and also doing some tinkering around with the covenants as well as extending the call protection to six years from four.

That downsizing cut the overall size of the company's two-part deal to $525 million from $875 million, including the other half of the deal, the $200 million of floaters that had priced at 97 to yield 575 basis points over Libor.

Both tranches of notes have consistently traded below their respective issue prices.

Market indicators stay firm

Away from the new deals, statistical junk market performance indicators were better across the board for a second consecutive session on Tuesday, after having been mixed over the three sessions before Tuesday and Monday.

The Markit Series 20 CDX North American High Yield index gained 1/16 point on Tuesday to end at 104 7/32 bid, 104 9/32 offered, after having been up by 13/32 point on Monday.

The KDP High Yield Daily Index made it three sessions in a row on the upside on Tuesday, gaining 3 basis points to finish at 74.30, on top of Monday's 16-bps jump.

Its yield meantime came in for a third consecutive session, easing by 1 bp to close at 5.87% after having declined by 9 bps on Monday.

And the widely followed Merrill Lynch High Yield Master II Index also scored a hat trick with its third straight gain, rising 0.023%, on top of Monday's 0.222% advance.

The latest gain raised its year-to-date return to 3.3.172%, up from 3.148% at the close Monday.

Waiting for the Fed

A trader said that activity way from the new deals seemed fairly dull.

One reason, another trader suggested, is that junk marketeers may be hugging the sidelines ahead of Wednesday's conclusion of the Federal Reserve's policy-setting committee, when the central bank's chairman, Ben Bernanke, is expected to outline what the Fed plans to do with its current qualitative easing program of buying Treasury bonds and mortgage-backed securities in order to supply liquidity to the financial system and keep interest rates at or near historic low levels.

"I talked to a couple of accounts and basically they're waiting to see what he has to say.

"A lot of people are still sitting on a load of cash - we had a couple of buyers for some paper today and we went to some of the holders, and they were not selling - they were sitting on cash, waiting to see what Mr. Bernanke has to say [Wednesday] before they do anything.

"That seems to be the stage that everybody's been telling us."

At Deutsche Bank, Tom Joyce, a managing director and capital markets strategist with its Capital Markets and Treasury Solutions group, told financial reporters at a Tuesday briefing about the state of the U.S. junk bond, leveraged loan and investment grade markets that "we think that Bernanke is going to probably give a slight revision downward in some economic forecasts, but we are not expecting any kind of sharp revisions downward" that might give the Fed the impetus to continue to QE3 bond-buying program on a long-term basis.

"It is our opinion that he will indicate to the market plans to taper reasonably soon. Our translation on that is September. Our opinion right now -and this may be revised after hearing him [Wednesday] - is that the tapering will occur in three stages."

Joyce said that in the first stage likely to begin after the September Federal Open Market Committee meeting, the Fed will cut its rate of bond buying to $60 billion per month from the current $85 billion, although it will first analyze the June, July and August unemployment figures and other economic statistics before deciding whether to go ahead with tapering off.

After that, he said, "stage two will be the FOMC meeting in October, another $30 billion cut, and stage number-three would be in December, with the remaining $30 billion, at which point in the first half of 2014, they're only purchasing to keep the balance sheet constant in size."

Joyce said that "there's going to be a tremendous amount of emphasis to the market on something we should know already, which is slowing down the rate of purchases is not tightening per se, and a lot of emphasis on the fact that the actual raising of rates is still a 2015 event and still very data-driven. It will be made very clear that tapering decisions will also be data-driven."

He said that Deutsche Bank "is not expecting Bernanke to retreat from this notion that tapering is going to begin somewhat soon. If anything, there is an argument to be made that the strong volatility in recent weeks might only encourage the Fed to act sooner rather than later. That remains to be seen - but certainly the frothiness in our markets and the volatility recently shows us that QE3 does have a massive impact and there could be some concern about letting that continue."

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