L Brands, Toll drive by, new bonds rise; Rite Aid jumps on Walgreens news; Valeant turns mixed

By Paul Deckelman and Paul A. Harris

New York, Oct. 27 – After several sessions during which the well-publicized troubles of Valeant Pharmaceuticals International, Inc. were the major focus in the high-yield market, things seemed to be getting back to a more normalized footing on Tuesday.

There was still busy trading in the embattled Canadian drug manufacturer’s bonds, but no fresh news was out on the company, and traders reported the paper mixed on the day – some up, others down, as opposed to the recent blood-letting in those bonds.

The primary arena saw a big deal get done. Retailer L Brands, Inc. priced a quickly shopped and massively upsized $1 billion issue of 20-year notes – a rarely seen tenor in Junkbondland. The new notes moved up in initial aftermarket dealings.

Homebuilder Toll Brothers, Inc.’s pricing of a quick-to-market $350 million issue of 10-year notes during the session via a financing subsidiary also generated some interest, although participants noted that the split-rated issue came off the investment-grade desks. Junk traders were quoting them above their issue price late in the day.

Away from the new deals, traders noted a surge in Rite Aid Corp.’s bonds propelled by the news that Walgreens Boots Alliance Inc., the biggest drugstore operator in the United States, has agreed to buy No. 3 druggist Rite Aid in a $17.2 billion transaction, including debt.

On the earnings front, T-Mobile USA Inc.’s paper fell after the wireless carrier’s third-quarter results failed to live up to analysts’ estimates.

Statistical measures of junk market performance were lower across the board for a second consecutive session on Tuesday; they had fallen on Monday after having been higher all around on Friday and mixed for three straight sessions before that.

L Brands massively upsizes

The high-yield primary market burst to life on Tuesday.

Two drive-by issuers priced bullet deals. Executions appeared solid. One of the two deals was upsized. One priced at the tight end of talk while the other came on top of talk.

L Brands priced a massively upsized $1 billion issue of 20-year senior bullet notes (Ba1/BB+) at par to yield 6 7/8%.

The quick-to-market deal was increased in size from $400 million.

The yield printed on top of yield talk and at the tight end of early guidance in the high 6% to low 7% yield range, according to market sources.

It played to a $3 billion book, according to a bond trader who heard from accounts that were dramatically cut back on allocations.

BofA Merrill Lynch was the left bookrunner. Citigroup Global Markets Inc. and J.P. Morgan Securities LLC were the joint bookrunners.

L Brands’ 20-year bullet is the longest tenor junk bond to clear the dollar-denominated market since Sept. 24, 2013, when General Motors Co. priced $1.5 billion of 6¼% notes due Oct. 2, 2043. The GM 30-year paper priced at par, according to Prospect News data.

Toll Brothers prices tight

Toll Brothers Finance Corp. launched and priced a $350 million issue of 10-year senior bullet notes (Ba1/BB+/BBB-) at par to yield 4 7/8%.

The yield printed at the tight end of the 4 7/8% to 5% yield talk and well below initial guidance in the low 5% context.

The quick-to-market deal was transacted on the investment-grade desk, sources said.

Citigroup, Deutsche Bank Securities Inc., Mizuho Securities and SunTrust Robinson Humphrey were joint bookrunners for the general corporate purposes deal.

Inflows on Monday

The dedicated high-yield funds saw big cash inflows on Monday, the most recent session for which data was available at press time, according to an investor.

Actively managed funds saw $725 million of inflows on the day.

Exchange-traded funds saw $367 million of inflows on Monday.

ETFs were nevertheless relatively inactive heading into the Tuesday mid-morning period, according to a New York-based trader who tracks them closely.

Meanwhile, the cash flows of the dedicated bank loan accounts were negative on Monday at $60 million of outflows.

Day’s deals seen firmer

In the secondary market, traders saw both of the new deals that priced during the session having moved higher in initial dealings after their respective pricings.

A trader saw the new L Brands 6 7/8% notes due 2035 “trading up on the break,” locating the bonds in a 101-to-102 bid context.

A trader at another desk noted that the Columbus, Ohio-based retailer’s issue’s 6 7/8% coupon is “a nice yield – for a change” in a junk bond environment that has seen a number of recent deals priced to yield below 6% or in some cases even below 5%.

“You would think that with a Ba1/BB+ rating, shouldn’t they be commanding a 5% handle?” he wondered rhetorically.

The day’s other deal – Horsham, Pa.-based homebuilder Toll Brothers’4 7/8% 10-year notes – generated some interest, with over $39 million having changed hands, a trader said, quoting the notes at 100 5/8 bid, although he said that a lot of that might be from high-grade investors looking to gain a little yield by crossing over into split-rated territory.

A second trader said the bonds initially traded between 100 5/8 and 101 bid but “are trading down now” into a 100 5/8 bid.

A third trader saw them between 100¼ and 100½ bid.

Recent deals hold gains

Recently priced junk offerings were meantime seen mostly hanging onto the gains they notched in aftermarket dealings following their respective pricings.

Probably the most active was AerCap Holdings, NV’s 4 5/8% notes due 2020, with over $11 million traded. A market source saw the Amsterdam-based aircraft-leasing company’s deal about unchanged on the day at 103¼ bid – well up from the par level at which the $1 billion quick-to-market issue had priced on Oct. 16 after having been upsized from $400 million originally.

A second trader saw them unchanged in a 103-to-103½ bid context after having moved up nearly 7/8 point on Monday.

Jarden Corp.’s 5% notes due 2023 were seen steady around 102½ bid, 103 offered. That was well up from the par level at which the Boca Raton, Fla.-based consumer products company had priced its $300 million offering last Wednesday after a short roadshow.

A trader saw Asbury Automotive Group, Inc.’s 6% senior subordinated notes due 2024 at 105¼ bid, 106 offered. He called them off ¼ point on the day but still well up from the 104.25 level at which the Duluth, Ga.-based chain of automotive dealerships and collision-repair shops had priced the unscheduled $200 million deal on Friday, yielding 5.276%.

Valeant turns mixed

For the first time in several sessions, Valeant Pharmaceuticals was not the major focus of activity, although its bonds remained actively traded.

The Laval, Quebec-based drug manufacturer’s most widely traded issue, its 6 1/8% notes due 2025, were “off another point or so,” one trader said, seeing that issue go home at 84½ bid.

Another trader said that the 2025s were the busiest junk credit of the day, with more than $87 million traded, calling them 1 point lower at 84½ bid.

Those bonds had been trading in the high 90s last week until they were hammered down as low as 80 bid last Wednesday, only getting back up to around the 88 level, after short-selling firm Citron Research put out a report warning that Valeant might be engaging in fraudulent transactions by using a chain of specialty pharmacies as one of the sales channels for its various drugs. It even likened the situation to that of failed corrupt energy company Enron Corp.

Valeant hotly denied the accusations, attacking the data in the report as “false” and “misleading.” On Monday, Valeant held a conference call on which its senior executives sought to address the issues raised last week in Citron’s report. They explained Valeant’s relationship with the specialty pharmacy company, Philidor RX Services LLC, and contended that no inappropriate treatment of revenues had occurred. Valeant further said that whatever sales had been generated through this channel were not material to the company’s overall operations. It also likened Citron to someone shouting “fire” in a crowded theater and announced that it had requested that securities regulators investigate whether Citron profited from last week’s fall in its securities.

However, the aggressive information counter-attack failed to sway investors, who took the 2025 bonds several points lower on Monday to around the mid-80s.

But while the 10-year bonds were again heading lower, other issues were not automatically following suit.

A trader saw Valeant’s 6¾% notes due 2018 notes up 1½ points, ending at 95 bid, on volume of more than $29 million. And its 5 3/8% notes due 2020 rose by ¼ point to 86¾ bid, with over $29 million changing hands.

Rite Aid rises

Elsewhere, Rite Aid’s 6 1/8% notes due 2023 zoomed by 5 points on the day to 108 3/8 bid, with over $37 million traded. Its 9¼% notes due 2020 rose by ½ point to 102¼ bid.

The bonds got their boost on the news that drugstore industry giant Walgreens has agreed to acquire Camp Hill, Pa.-based Rite Aid for $9.4 billion in cash. Walgreen values the planned transaction at $17.2 billion, including assumption or repayment of all of Rite Aid’s debt. The deal would combine the No. 1 and No. 3 U.S. pharmacy companies.

T-Mobile trades off

On the downside, T-Mobile USA’s paper fell after the Bellevue, Wash.-based wireless carrier reported earnings results that fell short of expectations.

Its 6 3/8% notes due 2025 lost 1 point to close at par, with over $34 million traded. Its 6 5/8% notes due 2023 finished at 102 bid, down nearly 4 points on the day.

T-Mobile reported second-quarter net income of $138 million, or 15 cents per share, versus its year-ago loss of $94 million, or 12 cents per share, but the latest per-share earnings were about half of the roughly 30 cents per share of profit analysts had expected.

While revenue rose 6.8% to $7.85 billion year-over-year, that was well below the $8.3 billion Wall Street had been anticipating.

Indicators down again

Statistical measures of junk market performance were lower across the board for a second consecutive session on Tuesday; they had fallen on Monday after having been higher all around on Friday and mixed for three straight sessions before that

Monday’s downturn had been the indicators’ first universally lower session in nearly two weeks, since Oct. 14.

The KDP High Yield Daily index plunged by 17 basis points on Tuesday to end at 67.22, on top of Monday’s 7-bps decline. In contrast, it had risen by 11 bps on Friday.

Tuesday’s second straight loss was the index’s third in the last four sessions and its fifth such downturn in the last 10 trading days.

Its yield rose by 4 bps to 6.55% Tuesday after having increased by 7 bps on Monday. Before that, the yield had come in by 5 bps on Friday and was unchanged on Thursday.

Tuesday’s rise in the yield was its third widening in the last five sessions and its fourth in the last nine trading days.

The Markit Series 25 CDX North American High Yield index eased by 3/32 point on Tuesday after having lost 3/16 point on Monday. It closed on Tuesday at 102 7/8 bid, 102 15/16 offered. Monday’s loss had been its first downturn after two consecutive gains, including Friday’s 7/16 point rise.

Tuesday meanwhile marked the index’s fourth loss in the last six sessions and its sixth loss in the last 11 trading days.

The Merrill Lynch North American Master II High Yield index retreated by 0.158 % on Tuesday, its second straight decline. It had fallen by 0.011% on Monday after having risen by 0.281% on Friday.

Tuesday’s downturn was its third in the last four sessions and its sixth downturn in the last 11 trading days.

The loss dropped the index’s year-to-date return to 0.048% from 0.207% on Monday. However, those increasingly modest levels still remained well above the index’s worst 2015 year-to-date deficit, the 3.069% of red ink recorded on Oct. 2 – the index’s lowest level since Oct. 5, 2011, when that market measure had shown a 3.834% year-to-date deficit.

© 2015 Prospect News.
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