Hercules finds strong demand, new GEO bonds firm smartly; Tronox jumps; funds add $484 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 8 - Hercules Offshore, Inc. successfully priced a $300 million issue of eight-year senior secured notes on Thursday, high yield syndicate sources said. The Houston-based offshore energy drilling services provider's new issue was heavily oversubscribed and then moved up moderately when it was freed for secondary trading.

Another issue doing even better in the aftermarket was Wednesday's deal from GEO Group Inc., which had priced an eight-year offering that gained more than 2 points when it began trading, moving above the par mark.

Also on the new deal front, price talk emerged on Deluxe Entertainment Services Group Inc.'s upcoming issue of first-lien senior secured notes, which is expected to price after the books close at mid-morning on Friday.

Talk also emerged on NOVA Chemicals Corp.'s half-billion-dollar offering of seven-year and 10-year notes, which is expected to price early in the coming week.

Away from the primary sphere, bankrupt chemical manufacturer Tronox Worldwide LLC's bonds were seen by a trader as the busiest junk issue of the day, and the one with the biggest gain on the day - some 10 points, although there seemed to be no fresh news out that might explain the sudden surge.

Meanwhile, a trader said that "a boatload" of Energy Future Holdings Corp. bonds, and those of its Texas Competitive Electric Holdings Co. subsidiary traded on Thursday.

Junk funds up by $484 million

And as trading was finishing up for the session, market participants familiar with the high yield mutual fund-flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday, some $484 million more came into the weekly-reporting funds than left them.

It was the seventh consecutive gain, and followed the $122.6 million cash inflow seen in the previous week, ended Wednesday, Sept. 30, and was the 14th week in the last 15 in which inflows were seen, dating back to mid-June. A total of $5.653 billion of net inflows have been seen during that stretch, according to a Prospect News analysis of the AMG figures, interrupted only by a lonely $89.9 million outflow recorded in the week ended Aug. 19.

Counting the latest week's number, the year-to-date net inflow for the weekly-reporting funds rose to $17.207 billion, according to the analysis - a new peak level for the year so far, eclipsing the old mark of $16.723 billion recorded in the Sept. 30 week.

With 2009 now more than three-quarters over, inflows, including the latest weekly gain, have been seen in 35 weeks out of the 40 since the start of the year, according to the analysis, against just five outflows - the Aug. 19 retreat, a $110 million outflow in the week ended June 24, and three weeks of outflows in late February and early March, totaling $969 million. The inflows, on the other hand, include an incredible 14-week run of consecutive gains, dating from mid-March through mid-June, during which time the funds grew by a record $9.1 billion.

Such sustained inflows have helped the junk market come roaring back from last year's staggering 25%-plus loss and sharply reduced primary activity. Total returns so far this year totaled an eye-popping 48.6% as of Wednesday's close, according to the authoritative Merrill Lynch High Yield Master II index, handily beating virtually every other major investment asset class. Meanwhile, the $105.81 billion of new high yield debt issued so far this year globally, as of Wednesday's close -- $90.604 billion of it domestic - is running almost 53% ahead of the anemic pace of last year's global primary tally. Domestic new issuance is some 60% ahead of its year-ago levels.

EPFR sees inflows continuing

Meanwhile, another fund-tracking service, Cambridge, Mass.-based EPFR Global, which uses a different methodology, calculated a $579.2 million inflow for the week, following the $443 million gain seen the week before. The latest inflow was the 15th week in a row, its analysts said, and also was the 29th such cash infusion into the junk funds in the last 30 weeks.

The inflow brought the year-to-date total up to $19.5 billion, EPFR said, from $18.495 billion the week before.

While the EPFR junk figures most weeks point essentially in the same direction as AMG's, the precise weekly and year-to-date numbers almost always differ somewhat due to EPFR's inclusion of some non-U.S. funds in its universe. All cumulative fund-flow totals, whether for AMG or EPFR, can include revisions and adjustments to figures from prior weeks.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise part of the total monies floating around the high yield universe.

Hercules three-times oversubscribed

In the primary market one deal priced, and the stage was set for a reasonably busy Friday session.

Hercules Offshore priced Thursday's sole issue - $300 million of 10½% eight-year senior secured notes (B2/B), which came at 97.383 to yield 11%.

The yield printed on top of yield talk, while the discount came in line with the 2 to 3 points discount talk.

UBS Investment Bank was the left lead bookrunner for the debt refinancing. Bank of America Merrill Lynch, Deutsche Bank Securities Inc. and Morgan Stanley & Co. Inc. were joint bookrunners.

The deal was three-times oversubscribed, according to an informed source, who added that it played to high-quality buy-and-hold accounts.

Deluxe price, covenant talk

Apart from the Hercules print, the stage was set for what should be a fairly active Friday session.

Deluxe Entertainment Services talked its $600 million offering of eight-year senior secured first-lien notes (B1/B) to yield 12%, and to price with 2 to 3 points of original issue discount, according to a source familiar with the deal.

Meanwhile the Hollywood, Calif.-based digital cinema services company introduced further covenant changes.

The annual offer to repurchase bonds in each year beginning in 2010 was increased to $30 million from $25 million.

Debt incurrence is now set at 2:1 interest coverage; formerly it was the more favorable of 2:1 interest coverage or 2.5 times leverage.

The credit facility carve-out is now set at $225 million. Formerly it had been set at the greater of $225 million and the borrowing base.

Also the liens test covenant was decreased to 3.0 times from 3.5 times.

The order book is set to close at 10 a.m. ET on Friday.

Credit Suisse Securities and J.P. Morgan Securities Inc. are joint bookrunners for the debt refinancing deal from the Hollywood, Calif.-based digital cinema services company.

NOVA Chemicals price talk

Elsewhere NOVA Chemicals set price talk for its $500 million two-part offering of senior notes (expected ratings B1/B-) on Thursday.

The seven-year notes, which come with four years of call protection, are talked at 8½% to 8¾%, and the 10-year notes, which come with five years of call protection, are talked at 8¾% to 9%.

Tranche sizes remain to be determined.

Pricing is expected mid-morning on Friday.

Barclays Capital Inc., HSBC Securities (USA) Inc., RBC Capital Markets Corp., Scotia Capital (USA) Inc. and TD Securities (USA) LLC are leading the debt refinancing and general corporate purposes deal from the Pittsburgh-based chemical company.

In addition to Deluxe Entertainment and NOVA Chemicals, St. Louis-based Solutia Inc. is expected to price $300 million of eight-year senior notes (B2/B) on Friday. Price talk was set at 8¾% to 9%, with about 1.5 points of original issue discount, on Wednesday.

New Hercules Offshore trades up

When the new Hercules Offshore 10½% senior secured notes due 2017 were freed for secondary activity, a trader saw those bonds as having moved up to 98 bid, 98½ offered, though on "very little trading."

GEO gains solidly

A trader called GEO Group's 7¾% notes due 2017 "a really good deal." He saw the Boca Raton, Fla.-based private corrections and mental health facilities operator's 7¾% notes due 2017 as good as 101 bid, 102 offered.

That was well up from the 98.547 level at which the company priced its $250 million of the notes on Wednesday to yield 8%.

"They tightened right down on top of Corrections Corp. [of America, GEO's main competitor]."

Comstock quiets down

A trader saw Comstock Resources Inc.'s recently priced 8 3/8% notes due 2011 quoted at 98¼ bid, 99¼ offered, although he characterized that level as "just generic - I didn't see anything really trade."

The Frisco, Tex.-based independent energy exploration and production company priced $300 million of the bonds on Tuesday, upsized from the original $200 million, at 98.571, to yield 8 5/8%.

Looking more generally, a trader commented that "this market still remains confused. I think a lot of guys are relatively comfortable with their cash positions right now, so they're not pursuing deals as aggressively, and the deals are starting to trade a little less frantically."

Market indicators gain

Back among the existing bonds not connected with the new-deal market, a trader saw the CDX Series 13 index down up ½ point Thursday at 93½ bid, 94 offered, after having been down ¼ point on Wednesday.

The KDP High Yield Daily Index rose 26 basis points on Thursday to finish at 69.09, after having lost 7 bps the session before.

However, in the broader market, while advancing issues led decliners for a fifth consecutive session on Thursday, their margin remained at only a relative handful of issues out of nearly 1,400 tracked, as was the case on Wednesday.

Overall market activity, as measured by dollar-volume levels, rose by 4% on Thursday from Wednesday's pace.

A trader opined that "for a market that's as illiquid as this, we're getting a fair amount of stuff done, which is good." He suggested that it might be a good thing "to see some more volatility in the high-yield market, instead of this continued one-directional trend."

Tronox trades sharply higher

A trader saw "a lot of trading" in Tronox Worldwide LLC's 9½% notes due 2012, with nearly $40 million having changed hands by late in the session.

"They're up a lot," he said, ending around a 46-47 context, which he called better by 10 points on the day.

He noted that the company had released some financial projections late Wednesday, including guidance of $1.041 billion in revenues for 2009, $1.148 billion for 2010, $1.203 billion for 2011, $1.241 billion for 2012 and $1.279 billion for 2013. The bankrupt Oklahoma City-based producer of chemical pigments announced its projected financial results through 2013 in an 8-K report filed late Wednesday with the Securities and Exchange Commission.

Apart from the anticipated revenue numbers, Tronox said it expects to have $126 million of EBITDAR for 2009, $130 million for 2010, $162 million for 2011, $168 million for 2012 and $179 million for 2013.

The trader sniffed that "that was last night's news. I don't see any news for today" that might have explained the jump, he said.

Another trader said the company's bonds "just kept getting bid up," getting as good as 47 1/8 bid late in the day - well up from the levels around 36 level at which those bonds had gone home on Wednesday. They were "marching up."

There was no fresh news seen out, other than the earnings projections. Queries to the attorneys representing the company and its creditors' committee as to whether there was some dramatic new development in the company's bankruptcy case did not elicit any response. However, the second trader said, "somebody had a reason for bidding them up like that."

TXU bonds are active issues

A trader said that "a boatload" of bonds from Energy Future Holdings Corp. - the former TXU Corp. - traded on Thursday, particularly the 10¼% notes due 2015 issued by its Texas Competitive Electric Holdings Co. unit.

"An awful lot of Texas Utility paper traded," he declared.

The 10 1/4s firmed modestly - about ½ point - to a 69-70 context. "That's where a lot of the heavy volume was," he said.

He also saw the parent's 10½% notes due 2016 at 641/4-65 bid, which he pronounced unchanged to a little higher - but added that the credit "had some volume."

The 10 7/8% notes due 2017 "also traded pretty heavily" around 73-74, and "those look like they're up a point, on a lot of volume."

CIT Group quiets down

A trader said the short CIT Group Inc. paper "seemed a little quiet," with the 6 7/8% notes coming due on Nov. 1 quoted at 67-68. He said that it was "not as active today" as it had been earlier in the week.

The shorter notes in general were trading in a 67-69 range.

Longer CIT paper, like the 7.625% notes due 2012, was in the low 60s, right around 611/2-621/2. He saw "decent sized trading" in those bonds, which finished pretty much unchanged.

The troubled New York-based commercial lender's bonds had been on the slide over the previous several sessions, on market disappointment with CIT's plan to cut debt and improve its finances via a debt-for-debt exchange offer.

Also among the financial credits, a trader said that iStar Financial Corp.'s bonds "keep moving up, and I saw that a little better today." He pegged the 5.15% notes due 2012 quoted in the 60s, on "not much activity

A trader saw the recently busy Nortel Networks Corp.'s 10¾% notes due 2016 remaining right around a 591/2-60½ trading range, calling the bonds up a point. "There's always volume in that name."

A trader saw Clear Channel Communications Inc.'s 10¾% notes at 55-56, with "decent activity". The bonds last traded Thursday at 551/2, up a point on the session, he said.

Its 11% notes due 2016 "seemed like it was up a point as well," at 36 bid, 37 offered, "with a decent amount of trading in that."

The San Antonio-based broadcasting and outdoor advertising giant's bonds had been roiled earlier in the week by market speculation that its private equity owners, Bain Capital and THL Partners, had approached some big banks to help them keep Clear Channel from defaulting on its loans - a story which the two private equity firms later denied and blasted as "a blatant misrepresentation of events."

Quiet, shorter Friday expected

Friday's session is expected to be dishwater dull, market participants said. Although the Securities Industry and Financial Markets Association earlier this year announced that it would not be recommending the traditional abbreviated session leading into the three-day Columbus Day holiday break, which will shutter the U.S. fixed-income markets on Monday, participants scoffed at the notion that Friday will be a routine session.

"I think a lot of people are going to take a longer weekend, so [Friday] will be an interesting day. Anything that doesn't get done in the morning probably will not get done."

He expects that despite the non-announcement this year from Sifma about an abbreviated session, "the talk is the bond market is closing at 2 [p.m. ET], so a lot of guys will disappear. Since the bond markets are closed on Monday, you know that people are going to find some reason to leave early."

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