Societe Generale deal breaks primary ice; AMR quiet despite DOJ news; funds gain $55 million

By Paul Deckelman and Paul A. Harris

New York, Aug. 29 - The high-yield primary arena saw its first dollar-denominated, junk-rated deal in nearly two weeks on Friday, and even if it was not exactly your typical junk market deal, it was a pretty big one - a $1.25 billion issue of perpetual subordinated hybrid tier 1 notes from French banking concern Societe Generale.

That deal, which saw no aftermarket, was the first such dollar-market junk deal since Aug. 16, when coal producer Foresight Energy LLC priced an eight-year deal.

Traders meantime saw a little bit of trading activity in those Foresight notes and in several other recently priced issues, including Windstream Corp., Iron Mountain, Inc. and Venoco Inc.

Away from the new deals, traders saw brisk activity in the bonds of HCA Inc. and Caesars Entertainment Corp.

There was little price movement in AMR Corp.'s bonds despite the late-Wednesday news that the Justice Department, AMR and would-be merger partner US Airways Group Inc. said they would be open to settling their legal dispute over whether the two companies should be allowed to merge - and a federal bankruptcy judge's statement Thursday that he was leaning toward confirming AMR's plan of reorganization.

US Airways' bonds were meantime seen better, but only on a bunch of smallish odd-lot trades.

Statistical indicators of market performance were higher across the board on Thursday after having been mixed over the previous three sessions.

Flows of money into and out of high-yield mutual funds and exchange-traded funds - a key indicator of overall junk market liquidity trends - also turned positive in the latest week after a two-week negative trend.

Lipper funds gain $55 million

As Thursday's market activity was winding down, junk market participants familiar with the fund-flow statistics generated by AMG Data Services said that during the week ended Wednesday, $55 million more came into those funds than left them.

That snapped a two-week losing streak during which Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp, saw about $2.72 billion of total outflows, according to a Prospect News analysis of the fund-flow numbers, including the massive $2.33 billion cash hemorrhage recorded last week, ended Aug. 21. It had also reported a $388.2 million cash loss from the funds the week before that, ended Aug. 14.

Those two downturns had been part of a mostly negative four-week stretch dating back to the end of July during which cumulative net outflows totaled an estimated $3.26 billion.

That mostly negative recent stretch, in turn, followed four consecutive weeks beginning in early July and running through the week ended July 24 that saw cumulative net inflows during of about $6.4 billion, according to the Prospect News analysis.

For the year so far, inflows have now been seen in 20 weeks against 15 weeks of outflows, but cumulative flows for the year as a whole remain negative due to a sizable losing streak seen during May and June, which was prompted by investor worries over whether the Federal Reserve would end its accommodative monetary policy.

The latest inflow cut that year-to-date net outflow figure to about $5.92 billion, according to the analysis, from the previous week's $5.98 billion deficit.

Cumulative fund-flow estimates may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

The sustained flows of fresh cash into junk - and the mutual funds and ETFs represent but a small, though very observable and quantifiable percentage of the total amount of investor money coming into or leaving the roughly $1 trillion junk market - have been seen by analysts as a key element behind the high-yield secondary sphere's strong performance last year versus other fixed-income asset classes and its record active new-deal pace, which ultimately produced about $327 billion of new dollar-denominated, junk-rated paper from domestic or industrialized-country issuers, according to data compiled by Prospect News.

It was also seen as one of the major drivers behind the robust patterns of primary activity and secondary strength that had continued for much of this year's first half before turning choppy over the past several months.

Inflow was expected

Before the fund-flow numbers came out, a trader said that "it would not shock me" to see an inflow for the latest week, although he seemed to be looking for a larger cash infusion than the one that was eventually announced.

He explained that "the ETFs are in buying." He said that from this quarter there was "pretty significant buy activity - almost 3-to-1 buyers versus sellers.

"There are obviously no new issues - but the ETFs are in, putting money to work."

Societe Generale prices

On an otherwise quiet Thursday in the new issue market, a major European investment bank announced the completion of a benchmark dollar-denominated, speculative-grade, tier 1 capital deal.

Societe Generale priced $1.25 billion of 8¼% perpetual subordinated hybrid tier 1 notes (Ba3/BB+/BB) at par, according to a press release.

The order book topped $4 billion for the deal, which held particular appeal for institutional investors, especially in Europe, the release stated.

Citigroup, Credit Suisse, Deutsche Bank, HSBC and SG CIB managed the sale.

Proceeds will be used to reinforce Societe Generale's financial solidity by adding to its Basel 3 tier 1 and total capital ratios.

Apart from that deal, there was no news on the high-yield new issue front.

Sources manning the syndicate desks expressed doubts that the Friday session, ahead of the three-day Labor Day weekend in the United States, would generate any news of new issues.

"Even if you plan to launch a deal next week, it wouldn't make sense to announce it before the weekend because of the headline risk associated with the situation in Syria," a syndicate banker remarked.

And as has been the case throughout the pre-Labor Day week, syndicate bankers said on Thursday that a big start to the holiday-abbreviated week ahead is unlikely.

Aside from the Monday holiday, Rosh Hashanah begins on Wednesday, and that will thin the ranks of market participants, they say.

And, as has been the case throughout the week, tips on September deals were scarce as hens' teeth during Thursday conversations with syndicate bankers.

There is a well-known list of deals awaiting execution, they say.

It includes Activision Blizzard Inc., Dole Food Co. Inc., Hudson's Bay Co., Rue 21 Inc. and Tenet Healthcare Corp., among others.

Some of those deals could come in September, one syndicate banker guardedly remarked.

However, exact timing is to be determined.

Recent deals trade around

Among recently priced issues, a trader saw Foresight Energy's 7 7/8% notes due 2021 off by 1/8 point on the day at 99 3/8 bid, 99 7/8 offered, partially reversing the ¼ point gain the bonds saw on Wednesday.

The St. Louis-based thermal producer, along with its Foresight Energy Finance Corp. funding subsidiary, priced $600 million of the bonds at 99.276 on Aug. 16 to yield 8%. The deal was upsized from $500 million originally.

The trader saw Windstream's 7¾% notes due 2021 gain ¼ point to close at 101½ bid, 102½ offered, offsetting Wednesday's ¼ point loss in the Little Rock, Ark.-based telecommunications company's bonds.

That quickly shopped $500 million add-on to its existing notes priced at 103.5 on Aug. 12 to yield 7.171%.

Another deal that priced that same day, tw telecom holdings inc.'s quick-to-market 6 3/8% notes due 2023, was up ¼ point on Thursday to 99 bid, 99½ offered after having been off by 3/8 point on Wednesday.

The Littleton, Colo.-based network services provider priced that $350 million offering at par as part of its $800 million two-part transaction.

The other half of that deal - its $450 million 5 3/8% notes due 2022, which was structured as a mirror tranche to the company's existing bonds - was unchanged on the session at 94¾ bid, 95½ offered after having eased by ¼ point on Wednesday. The bonds had priced at 96.25 to yield 5.913%.

A trader at another desk saw Iron Mountain's 6% notes due 2023 retreat by ½ point on Thursday to end at 99 bid on volume of over $2 million. That followed the issue's 1/8 point downturn on Wednesday.

The Boston-based information technology and document storage company priced its $600 million of the bonds - upsized from the originally announced $450 million - at par on Aug. 8 as part of a two-part drive-by offering that also included a Canadian dollar-denominated tranche of eight-year notes.

A trader meanwhile said that "a lot of people are taking a look at VQ" - Venoco's 12¼%/13% senior PIK toggle notes due 2018.

The Denver-based energy company brought its $255 million issue to market on Aug. 9 via Denver Parent Co. at 97.304 to yield 13%.

Not much trading was seen right after the pricing, but now, said the trader - who works at one of the banks that was a part of the underwriting syndicate - "we've been active in it. We've been trading them."

He quoted the bonds as having firmed smartly from their issue price to a 99 to par bid context.

Caesars, HCA active

Away from recently priced names, traders saw considerable activity in Caesars Entertainment's 10% notes due 2018, which were "pretty active again today," one said, on "a decent amount of size for a day like today, it seems like," estimating turnover in the Las Vegas-based casino giant's issue at $17 million. He saw the bonds trading at bid levels between 58½ and 591/2.

A market source at another desk said the bonds ended at 591/2, which he called up 1½ points on the day, with over $17 million of the notes having changed hands.

Another big trader on Thursday was the big hospital operator HCA, whose 7¾% notes due 2021 gained ¼ point to go out at 106¾ bid. Volume in the Nashville-based hospital operator's credit was over $11 million.

Airline bonds ignore DOJ news

Holders of AMR and US Airways Group bonds reacted warily Thursday to the late-Wednesday news that the Justice Department and the airline companies said that they would be open to settling their legal dispute over whether the two companies should be allowed to merge.

A trader said that AMR's 6¼% convertible notes due 2014 were trading in a par to 100¼ bid context, "about where they've been over the last couple of days," estimating the volume at around $15 million.

A second market source said that AMR paper had initially softened a bit, hitting a morning low of 99½ bid, versus Wednesday's close at 1001/4, but had moved back up to end Thursday unchanged on volume of more than $14 million.

US Airways' 6 1/8% notes due 2018 jumped to 93½ bid at the close, a gain of 2¼ points, but only on a bunch of smallish odd-lot trades, according to a market source.

Shareholders of the two companies seemed a little more enthusiastic at the prospect of a settlement - and about a federal bankruptcy judge's statement Thursday that he was leaning toward confirming Fort Worth-based AMR's plan of reorganization, although he has not done so just yet.

AMR's over-the-counter-traded shares were up 34 cents, or 11.15%, at $3.39 on volume of 17.1 million shares, almost twice the norm. Tempe, Ariz.-based US Airways' New York Stock Exchange-traded shares gained 62 cents, or 4.04%, to move up to $15.96 on volume of 7.5 million shares, about 12% more than the usual turnover.

In a document filed jointly by the Justice Department and the two companies with the federal district court in Washington on Wednesday, the government said it was "open to a settlement that addresses the anticompetitive harms posed by the merger but [had] not yet received any such proposal from the defendants."

Soap opera-like saga

AMR, the parent company of American Airlines, crash-landed in the bankruptcy courts in November 2011, seeking to become more competitive by shedding debt, unprofitable existing air routes and burdensome labor and aircraft leasing contracts - the last of the major old-line United States-based air carriers to do so.

Its plan of reorganization, filed earlier this year with the U.S. Bankruptcy Court for the Southern District of New York, relies heavily on the proposed merger with US Airways Group. The combination of American and US Airways Group's eponymous air carrier - currently the fourth- and fifth-largest airlines in the United States, respectively, in terms of the number of passengers carried - would create a flying behemoth, vaulting into the top spot ahead of their currently larger rivals Delta Air Lines, United Airlines and Southwest Airlines. The combined entity would also jump ahead of those three carriers to become the largest airline in the world on a passengers-carried basis.

However, on Aug. 13 - just two days before the reorganization plan was scheduled to have been confirmed - the DOJ, joined by the attorneys general of six states plus the District of Columbia, filed a civil suit in the Washington federal court seeking to block the merger on anti-trust grounds, claiming that it would reduce competition within the airline industry and lead to higher prices and reduced service for the flying public.

The surprise move by the government hammered AMR's notes and shares over the next several days. AMR's 6¼% notes, which had been serenely cruising above the 116 mark prior to the Justice Department's move in expectation of a routine confirmation for its reorganization plan, fell to around 107 bid the day of the filing and then cascaded down into the lower 90s before edging their way back up to current levels around par. Its shares plunged from a close of $5.81 the day before the filing to $3.17 that day, ultimately continuing to lose altitude and bottoming at $2.57 on Aug. 15 before coming back a little to current levels.

US Airways' bonds and shares were also hurt by the DOJ suit, though to a lesser degree. The 6 1/8% notes had been trading above 96 the day before the filing. They fell to about 95¼ the day of the filing and then gyrated around at lower levels, ultimately bottoming at 91¼ on Wednesday. Its shares had closed at $18.82 the day before the filing. They initially fell to $16.36 on the news and also continued to move in a choppy up-and-down pattern before hitting a post-news low of $5.34 on Wednesday.

The two airlines denied the allegations made in the federal anti-trust suit and said they will vigorously defend against it; meanwhile, AMR's emergence from bankruptcy has, for the moment, been delayed by the legal tangle.

At a hearing on Thursday in Manhattan, U.S. Bankruptcy Judge Sean H. Lane heard arguments from attorneys for the airlines and other interested parties and said from the bench that "I'm finding the arguments in favor of confirmation fairly persuasive," although he put off issuing an actual ruling until the next scheduled hearing in the bankruptcy case on Sept. 12.

Should Lane ultimately confirm AMR's plan of reorganization, it still would not override the DOJ's lawsuit against the merger, which would have to be resolved separately in order for the plan to become effective.

AMR, US Airways and the Justice Department are due back in court in Washington on Friday to argue over when the government's suit should be heard. The airlines want the matter resolved quickly and are pushing for a 10-day trial that would start no later than mid-November.

But the government - arguing that the size and complexity of the more than $11 billion merger require the fullest amount of time for both parties to assemble relevant evidence, wants to put that trial off until next March at the earliest. The two airlines say that such a delay would be disastrous in terms of the effects it would have on their business plan, as well as heightened uncertainty for investors and AMR's creditors.

Penney paper trends upward

Elsewhere, J.C. Penney Co. Inc.'s 5.65% notes due 2020 were rising in light trading on Thursday as investors continued to react positively to controversial activist investor Bill Ackman's sale of his stake in the Plano, Texas-based retailer.

One market source placed the issue at 76½ bid, while another saw the notes in a 76 to 76 3/8 context.

On Monday, J.C. Penney said that Ackman's Pershing Square Capital Management fund was divesting its 18% stake - the largest holding of any single Penney investor - just a few weeks after Ackman had exited the company's board over a dispute in the search for a new chief executive officer.

In a regulatory filing on Wednesday, the fund disclosed that it had sold its 39.1 million shares for $12.60 each - taking a giant haircut in doing so.

Ackman had paid an average of $25.00 per share when he took his position in J.C. Penney in 2010.

Market indicators get better

Overall, a trader characterized Thursday's junk bond market as "a little quiet, to say the least."

Traders were saying Friday would see even more of the same. Many market participants are expected to make an early exit ahead of the Labor Day holiday break - even though Friday is "officially" scheduled to be a regular full-length session.

Statistical junk market performance indicators turned higher across the board on Thursday after three consecutive sessions in which they had been mixed.

The Markit Series 20 CDX North American High Yield index rose by 7/32 point to close at 104 1/16 bid, 104 3/16 offered, its second straight advance. It had previously gained 5/32 point on Wednesday.

The KDP High Yield Daily index meanwhile was up by 8 basis points on Thursday to finish at 73.12. It had fallen by 2 bps Wednesday to break a three-session winning streak.

Its yield declined by 2 bps to 6.31% on Thursday after having moved up by 1 bp on Wednesday.

The widely followed Merrill Lynch High Yield Master II index rose by 0.086% on Thursday after having finished lower by 0.009% on Wednesday.

The gain raised the index's year-to-date return to 2.68%, up from 2.592% on Wednesday. That return remained well down from its peak level for the year so far of 5.835%, recorded on May 9, though still up solidly from its 2013 low point of 0.384%, set on June 25.

Stephanie N. Rotondo contributed to this review

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