EP Energy upsizes, prices; new Tenet trades up; Constellation climbs; funds fall $2.284 billion

By Paul Deckelman and Paul A. Harris

New York, Nov. 17 – The high-yield primary saw a quieting-down of activity on Thursday, syndicate sources said, reporting just one deal worth $500 million as pricing during the session – oil and natural gas operator EP Energy LLC’s upsized and somewhat restructured eight-year senior secured notes.

That was a falloff from the $2.7 billion of new U.S. dollar-denominated and fully junk-rated paper from domestic or industrialized-country issuers which got done in three tranches on Wednesday and the $1.7 billion of such paper which came to market in four tranches on Tuesday.

One of those Wednesday deals, from hospital operator Tenet Healthcare Corp., was heavily traded on Thursday, adding to the sizable gains that five-year secured issue had racked up in initial aftermarket dealings following its pricing.

Wednesday’s big new offer of five-year unsecured paper from Canadian transportation equipment manufacturer Bombardier, Inc. was also busy, but stayed right around its below-par issue price.

There was also considerable activity in oilfield services company Weatherford International plc’s new 7.25-year paper, which had priced on Tuesday after upsizing.

Away from the new issues that have already come to market, primaryside players were anticipating likely Friday pricings on a trio of new deals collectively worth $1.75 billion, from Hilton Grand Vacations Inc., Conduent Inc. and Genesys Telecommunications Laboratories.

Apart from the new or recently priced deals, Constellation Brands, Inc.’s paper firmed in very busy trading across the alcoholic beverage maker and marketer’s capital structure, helped by a Fitch Ratings upgrade to BBB-.

High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – recorded their sixth consecutive weekly net outflow, as $2.284 billion more left those weekly-reporting-only domestic funds in the form of investor redemptions than came into them during the week ended Wednesday.

The outflow followed a previous five straight weeks of cash declines, including the $669 million cash loss

reported last Thursday (see related story elsewhere in this issue).

EP upsized, restructured

EP Energy priced Thursday’s sole deal, an upsized, restructured $500 million issue of eight-year senior secured notes (B3/BB-) that came at par to yield 8%.

The issue size was increased from $350 million.

The maturity was extended to eight years from seven years. Although the length of call protection remained unchanged at three years, the call premiums increased. The first call premium is par plus 75% of the coupon, increased from 50% of the coupon.

The yield printed at the tight end of the 8% to 8¼% yield talk.

Goldman Sachs was the left bookrunner. Credit Suisse, JP Morgan, Citigroup and RBC were the joint bookrunners.

The Houston-based oil and natural gas exploration and production company plans to use the proceeds, including those additional proceeds resulting from the $150 million upsizing of the deal, to repay its RBL facility and/or for general corporate purposes.

Three deals for Friday

The active forward calendar features three deals set to clear the market before Friday’s close.

On Thursday Hilton Grand Vacations talked its $300 million offering of eight-year senior notes (Ba3/BB) to yield 6¼% to 6½%.

Official talk comes tight to initial price guidance is in the mid 6% area, a trader said.

Books close at 10:30 a.m. ET Friday and the deal, in the market via joint bookrunners Goldman Sachs, BofA Merrill Lynch, Deutsche Bank, Barclays, J.P. Morgan, SunTrust and Wells Fargo, is set to price subsequently.

Elsewhere talk gapped higher on Conduent’s $750 million offering of eight-year notes (expected ratings B2/B+), the deal backing Xerox Corp.’s spinoff of its business process services division, a trader said.

Conduent is presently eyeing a 9%-plus print after coming with early guidance of 7¾% to 8%.

The market’s attention has been elsewhere, the trader said, adding that dealers were hoping to get investors focused on the offering on Thursday.

And Genesys Telecommunications Laboratories’ $700 million offering of eight-year senior (Caa2/CCC) is also expected to clear before the weekend. No updates to the 9% to 9¼% early guidance have emerged, the trader said.

New EP Energy deal unseen

In the secondary market, traders did not immediately report any initial aftermarket activity in EP Energy’s new 8% senior secured notes due 2024, noting the relative lateness of the hour at which the oil and natural gas company’s upsized and restructured deal had priced.

One trader did report seeing the company’s existing 6 3/8% notes due 2023 losing about 1¼ points on the day, finishing at 66 11/16 bid.

Tenet on top

“The market’s standout performer,” according to one trader, was Tenet Healthcare’s 7½% senior secured second-lien notes due January 2022, a quickly shopped deal that priced on Wednesday.

Those bonds shot up to around the 103 bid mark in initial aftermarket action once the $750 million offering had priced at par after upsizing from $500 million.

The paper stayed at or above such lofty levels in heavy trading on Thursday.

During the morning, the bonds were seen to have pulled back a little, to the 103 bid mark, from 103½ late Wednesday a trader said – but by the afternoon, they were adding to their gains.

Late in the day a trader pegged the issue in a 103½ to 103¾ bid context, while a second trader saw the bonds going home at 103 15/16 – a gain of nearly ¾ point on the day – on heavy trading of over $82 million, putting them high up on the day’s Most Actives list.

The Dallas-based hospital operator’s existing unsecured bonds – which on Wednesday had initially retreated on the news that the company was bringing a sizable secured offering that ranks ahead of the existing paper in the capital structure – recovered some of that lost ground on Thursday, with the 8 1/8% notes due 2022 moving up 1 3/8 points to 95 1/8 bid on over $16 million of volume, while its 6¾% notes due 2023 gained 15/16 point on the day to finish at 88 7/8, with over $11 million having changed hands.

Bombardier bonds busy

There was also active trading in Wednesday’s deal from Bombardier, with a trader seeing the Montreal-based aircraft and railroad equipment maker’s new 8¾% notes due 2021 “right around their issue price” at 99.

A second market source also located the bonds at that level, calling them up 3/16 point on the day on more than $66 million traded.

Bombardier priced $1.4 billion of the notes at 99.001 to yield 9% and they had traded initially right around that issue price.

Weatherford holds up

A trader said that Weatherford International’s 9 7/8% notes due February 2024 “were active – but not the busiest bond,” as they had been on Wednesday, when more than $198 million traded.

On Thursday, volume had come back down to a more normalized $19 million.

But the bonds continued to trade well above the par level at which the quickly shopped $540 million had traded after pricing at par. The deal was upsized from $500 million.

One trader saw the paper at 102 bid on Thursday, calling it up ¼ point on the day.

Another still saw it around 101½ bid.

Constellation adds on upgrade

Away from the new deals, Constellation Brands’ notes were higher after Fitch Ratings bumped the Victor, N.Y.-based beer, wine and spirits maker and importer’s ratings up to investment-grade level.

Its 4¾% notes due 2025 were up 7 1/6 point at just over 107 bid, with over $86 million traded.

Constellation’s 4¼% notes due 2023 were up ½ point at 104¼ bid, as over $80 million traded, while its 6% notes due 2022 likewise firmed above the 113 bid mark, with around $30 million traded.

A trader said the paper “was trading tight to investment-grade spread levels.”

Fitch late Wednesday said it upgraded the ratings, including the company’s issuer default rating to BBB- from BB+, calling the outlook “stable.”

Fitch said that the upgrade “reflects the expected continuation of strong operating momentum and an expectation that leverage will be managed to Constellation’s net debt-to-EBITDA of 3.5x versus previous target of 3x to 4x.”

Constellation’s cash priorities “are focused on growth investments, a dividend pay-out ratio in the 25% to 30% range, opportunistic mergers and acquisitions and share repurchase strategy within the context of operating within its leverage target,” the agency said.

It further said that Constellation has “substantial financial flexibility to manage capital-allocation priorities due to its increased scale, above-average revenue prospects, EBITDA growth in the low double-digit range and expected strong free cash flow generation.”

Indicators turn better

Statistical market performance measures were trending higher on Thursday after turning mixed on Wednesday. It was the second stronger session out of the past three.

The KDP High Yield Index rose by 7 basis points, ending at 69.96, its third straight gain after three straight losses. On Wednesday, it had edged up by 1 bp.

The index’s yield came in by 3 bps to 5.89% its second narrowing in the last three sessions. On Wednesday, it had atypically risen by 1 bp, even though the yield usually moves inversely to the index reading, falling as the index rises and vice versa.

The Markit Series 27 CDX Index bounded by 1/8 point on Thursday to finish at 103 23/32 bid, 103 25/32 offered, after having retreated by 7/32 point on Wednesday. It was the second advance in the last three sessions.

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