Darling prices, delayed Global Ship Lease next; market firms on Fed; Toys tumbles on numbers

By Paul Deckelman and Paul A. Harris

New York, Dec. 18 - The high-yield primary market - which had seen no deals get done on Tuesday - priced what is expected to be one of its last new issues for the year on Wednesday, as Darling International Inc. did a $500 million offering of eight-year notes.

The Irving, Texas-based food industry recycling company's deal, said to be well-received, firmed by about a point when it hit the aftermarket, traders said.

That pricing leaves just two deals on the year-end forward calendar: a $400 million seven-year secured issue from London-based containership operator Global Ship Lease Inc., which had been expected to price on Wednesday but which has now been floated off till Thursday after some covenant changes, and a $110 million tranche of five-year secured notes from Houston-based energy operator Sierra Hamilton.

Assuming those deals go off as planned, that would leave 2013's junk new-issuance total in a virtual photo-finish tie with 2012's record new-deal pace, according to data compiled by Prospect News. Year-to-date issuance currently stands just a shade under the $327.055 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country borrowers that came to market in 691 tranches last year.

Among recently priced deals other than Darling International, traders said that MGM Resorts International's new 6.25-year deal's volume came down considerably from Tuesday, when it was one of Junkbondland's most active names. It remained below its issue price, at least on a round-lot basis. The traders meantime saw Monday's other drive-by deals - from Michaels Stores Inc., Halcon Resources Corp. and First Data Corp. - all trading at modest premiums to their respective issue prices, at least during the early going.

Among specific non-new-deal names, Toys "R" Us Inc.'s bonds came under pressure due to the disappointing quarterly numbers the retailer had released on Tuesday afternoon.

Activity slackened off in the early afternoon as participants awaited the release of a statement from the Fed that would put an end to the months-long uncertainty as to when the U.S. central bank would begin its long-feared "tapering" of the expansive economic stimulus program it has been running for the past few years. They were not disappointed this time, as the Fed announced plans to begin the tapering next month with a small reduction in the amount of Treasury and mortgage-based securities that it buys every month to keep the financial system liquid and interest rates low. That clarity - and the fact that the tapering wasn't larger - gave the junk market an afternoon boost.

Statistical market-performance indicators tuned mixed on Wednesday after having been lower across the board on Tuesday.

Darling prices tight

The 2013 primary market continued its slog to year-end on Wednesday, with one deal being concluded.

Darling International priced a $500 million issue of eight-year senior notes (B1/BB+/) at par to yield 5 3/8%, at the tight end of yield talk in the 5½% area.

Goldman Sachs, J.P. Morgan and BMO were the joint bookrunners for the acquisition-funding and general corporate purposes deal.

Global Ship timing, covenants

Global Ship Lease moved back timing on its $400 million offering of seven-year first-priority secured notes (expected B3/confirmed B) and reaffirmed the 9½% area yield talk.

Changes were also introduced to the debt incurrence covenants and restricted payments covenants, as well as to the excess cash flow offer covenant.

Recommitments are due by 10 a.m. ET on Thursday, and the deal is set to price thereafter. The deal had previously been expected to price on Wednesday.

Citigroup is the bookrunner.

Lone deal from Sierra Hamilton

Aside from Darling International, which priced on Wednesday, and Global Ship Lease, which is pushed into the Thursday session, only one deal is left on the active forward calendar as business expected to clear before the end of the year, sources say.

Sierra Hamilton is expected to price its $110 million offering of five-year senior secured notes (B3/B-) by the end of the week, an informed source said on Wednesday.

The deal is talked at 12% to 12½%.

Lazard Capital has the books.

Darling deal moves up

In the secondary market, a pair of traders said that that they had not seen any dealings in Darling International's new 5 3/8% notes due in January of 2022, which had priced at par earlier in the afternoon.

However, at yet another shop, a trader was quoting the new issue at 100 7/8 bid, 101 3/8 offered late in the day.

New MGM issue eases

Among the drive-by offerings that priced earlier in the week, a trader said that MGM Resorts International's 5¼% notes due 2020 were down slightly, pegging those bonds off 1/8 point at 99 5/8 bid, on volume of over $11 million.

A second trader said that round-lots had accounted for about $8 million of that total, with the rest in smaller odd-lot pieces. He saw the bonds easing marginally to about the 99 11/16 level.

Those volume totals were well down from Tuesday, when over $90 million of the Las Vegas-based gaming and lodging giant's new paper had changed hands, making it one of the day's busiest junk issues.

The quick-to-market $500 million issue had begun trading around on Tuesday after having priced at par on Monday too late for any initial secondary dealings, and as had been the case on Tuesday, the trading levels on Wednesday were split. The big round-lot transactions of at least $1 million and up all took place slightly below par, while most of the smaller odd-lot pieces were moving around at levels above par, in some cases topping the 102 bid mark.

Traders explained that accounts were buying large pieces at those lower levels - and then turning around and parceling out smaller pieces to retail investors willing to pay up to get a piece of the deal.

MGM's established 6 5/8% notes due 2015 meantime were seen ending up 1½ points at 107¼ bid.

Other Monday deals firm

The other deals that had come to market on Monday as quickly shopped transactions were all seen trading a bit above their respective issue prices during morning dealings, although activity slackened off later on, traders said.

Michaels Stores' 5 7/8% senior subordinated notes due 2020 were quoted at 100¼ bid, 100 5/8 offered. The Irving, Texas-based arts and crafts retailer's $260 million deal had priced at par and had traded at par bid, 100¼ offered on Tuesday.

Halcon Resources' add-on to its existing 9¾% senior notes due 2020 was at 103 5/8 bid on Wednesday - off slightly from the 103¾ to 104 bid context at which the bonds were trading on Tuesday, but still well up from the 102¾ level at which the Houston-based oil and gas exploration and production company had priced its $400 million deal on Monday to yield 8.999%.

And First Data's add-on to its 11¾% senior subordinated notes due 2021was seen at 104 bid on Wednesday, which a trader called up by ½ point. The Atlanta-based credit card transaction processing company's $725 million deal had come to market on Monday at 103½ to yield 10.863%, after having been upsized from an originally announced $500 million. The bonds had not been seen trading around either late Monday or on Tuesday.

Fed feeds the market

A major event during the afternoon was the Federal Reserve's announcement about its plans for tapering its quantitative easing stimulus program, following the end of its policy-setting Federal Open Market Committee's December meeting.

A trader said that "it seemed like after the Fed made its announcement," at around 2:15 p.m. ET, "a lot of folks were checking offerings, which seemed to get a lot more interest."

He suggested that the overall junk market moved up 1/8 to ¼ point after the announcement, "with certain names maybe a little bit higher."

A second trader said that "everybody was watching the Fed" to see what the central bank planned for its long-running easing program.

"Even though activity was light, it definitely started to pick up on the buyside after that. People were a little more confident."

He suggested that "they were more confident, even though the Fed is scaling back its easing program. I think everybody was relieved that they didn't scale back more."

The Fed - which has been buying some $45 billion of Treasury bonds and $40 billion of mortgage-backed securities every month, or $85 billion total, since October 2012 - said that starting in January, it will buy $40 billion of the Treasuries and $35 billion of the mortgage-backed securities, or $75 billion total, hoping to wind down that bond-buying program over a period of months after that.

Fed officials said they would likely continue to trim the purchases "in further measured steps at future meetings," but added that those bond buybacks "are not on a preset course." They further said that they could adjust the pace based on the labor market outlook, inflation and the program's risks.

"The market obviously was a lot stronger after the Fed tapering announcement," a third trader said, noting that the Markit CDX high yield index closed about ½ point improved on the day.

Toys 'R' Us takes a tumble

A trader said that "the big theme of the day" was Toys 'R' Us, which reported disappointing third-quarter earnings on Tuesday afternoon, causing its bonds to fall Tuesday and to continue retreating when trading picked up again on Wednesday morning.

A market source said that the biggest loser among the Wayne, N.J.-based specialty retailer's bonds was its 10 3/8% notes due 2017. Those bonds had actually gained 1 point in late Tuesday dealings to close at 93 bid - but then gave that all back, and then some, on Wednesday, when they sank by a full 7 points to go home at 86 bid, down 6 points over the two-day period. However, volume totaled only about $2 million.

Far busier was the company's Toys 'R' Us Property Co. II LLC's 8½% notes due 2017, with more than $35 million of the notes having changed hands. They closed at 103 3/8 bid, which the market source said was up 1/8 point on the day, though still down 9/16 point from where they were before the earnings data came out on Wednesday.

The company's 7 3/8% notes due 2018 lost 1¼ point on the day to end at 73¾ bid, on top of the initial 4-point loss seen on Tuesday right after the numbers came out. Over $12 million of those notes traded.

Toys 'R' Us said that its net loss for the three months ended Nov. 2 totaled $605 million, versus its year-earlier $105 million of red ink. A key driver in the larger loss was a $379 million income tax expense increase, related to a change in valuation allowance for some assets.

Revenues meanwhile fell 5% to $2.49 billion from $2.61 billion a year ago. Revenue in the company's U.S. stores open at least one year, a key retailing industry performance metric, fell by 5.2%.

Market signs turn mixed

A trader called the market "fairly firm" following the Fed announcement.

"People looked like they were trying to sell shorter, to go a little longer" in duration.

But he also called the market very quiet.

Overall, statistical junk-market performance indicators turned mixed on Wednesday, after having been lower across the board on Tuesday.

The Markit Series 21 CDX North American High Yield index bounced back after having suffered a loss on Tuesday, its first setback after two straight gains before that. It was up by ½ point to 107½ bid, 107 9/16 offered. On Tuesday, it had declined by 1/8 point.

The KDP High Yield Daily index broke out of a four-session rut, edging up by 1 basis point to close at 74.23 after having lost 5 bps for a second consecutive session on Tuesday.

However, its yield - which typically moves inversely to the index reading - rose by 1 bp on Wednesday to close at 5.67%, its second straight rise. It was up by 2 bps on Tuesday.

And the widely followed Merrill Lynch High Yield Master II index lost 0.009%, its second straight retreat, on the heels of Tuesday's 0.018% loss.

Wednesday's loss dropped its year-to-date return to 7.015%, down from 7.024% on Tuesday and down as well from last Wednesday's 7.091% reading, its 2013 peak level.

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