Junk market seen mostly easier; no deals price; busy Friday expected; funds gain $423 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 23 - The high-yield market was trading easier pretty much across the board Thursday, participants said, in line with a selloff in stocks sparked by fears of a slowing Chinese economy.

But while Wall Street slid markedly, traders said junk's retreat was more orderly, in the area of ¼ to ½ point.

They saw lower levels for many of the recently priced issues, including Ally Financial Inc., the day's Junkbondland volume leader, and the other two deals that came to market on Wednesday: the split-rated megadeal from Icahn Enterprises LP and the purely junk offering from JLL/Delta Dutch Newco BV.

Thursday saw no primary arena pricings, but syndicate sources heard price talk on several deals expected to come to market on Friday, including offerings from Nesco, LLC, Northern Blizzard Resources Inc. and Waterjet Holdings Inc.

Back in the secondary realm, statistical market performance indicators fell across the board on Thursday after having been mixed over the prior five sessions.

But another indicator - the flow of cash in to and out of high-yield mutual funds and exchange-traded funds, considered a key barometer of junk market liquidity trends - stayed in positive territory for a third consecutive week.

Funds gain $423 million

As Thursday's market activity was winding down, market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $423 million more had come into high-yield mutual funds and ETFs than had left them in the week ended Wednesday.

It was the third consecutive weekly flow of fresh money into those funds, coming on the heels of the $65 million net cash injection recorded by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., during the week ended Jan. 15.

There have been three weeks of inflows to the funds since the start of the year, totaling about $1.13 billion, versus no outflows so far, according to a Prospect News analysis of those numbers. The year started off with a $642 million inflow recorded the week ended Jan. 8.

Inflows have also been seen now in four out of the last five weeks, for a cumulative net inflow during that time of about $59 million, according to the analysis. That period was marred by the lone recent outflow of $643 million in the week ended Jan. 1.

On a longer-term basis, the latest inflow was the 16th in the last 20 weeks, going back to the week ended Sept. 11. Net gains have accumulated to the tune of about $9.39 billion in that time, according to the analysis.

In 2013, inflows were seen in 33 weeks, versus 20 weeks of outflows, with total net inflows for the year tallying up to about $1.27 billion, according to the analysis.

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

Analysts said that 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 more than $1 trillion junk market - has been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past two years and which has continued so far this year.

Another fund-tracking service - Cambridge, Mass.-based EPFR Global - said Thursday that in the latest week, it had seen inflows of over $1 billion to the funds that it tracks. EPFR's methodology differs from AMG/Lipper's in that the latter is strictly domestic-oriented, while EPFR's fund universe includes a number of funds that are domiciled outside of the United States.

Talking the deals

No new dollar-denominated junk deals priced on Thursday.

However, the news flow in the primary market remained steady, as dealers set the table for what is expected to be an active Friday session.

Nesco talked its $500 million offering of seven-year senior secured second-lien notes (Caa1/B-) to yield in the 6 7/8% area.

The leveraged buyout deal, via Morgan Stanley & Co. LLC and Barclays, is set to price Friday.

Northern Blizzard Resources talked its $425 million offering of eight-year senior notes (B3/B-//DBRS: B (low)) to yield 7% to 7¼%, lower than earlier guidance of 7¼% to 7½%.

The timing of the deal was moved ahead. Books close at 1 p.m. ET on Friday, and the deal is set to price Friday afternoon. Previously, it was scheduled to price Monday.

J.P. Morgan Securities (USA) LLC, TD Securities, CIBC World Markets Corp., RBC Capital Markets, Scotia Capital and Wells Fargo Securities LLC are the joint bookrunners for the debt refinancing deal.

Waterjet Holdings upsized its offering of six-year senior secured notes (B2/B) to $225 million from $200 million and talked the deal to price with a yield in the 7¾% area.

Goldman Sachs & Co. and Morgan Stanley are the joint bookrunners for the bonds, which will be used to fund a merger and repay debt.

Meanwhile, although there is no official talk on the Harland Clarke Holdings Corp. $865 million two-part offer, unofficial guidance is circulating in the market, according to a trader.

The $275 million tranche of six-year senior secured notes (B1/B+) is guided in the low-to-mid 7% context, the source said. And the $590 million tranche of seven-year senior unsecured notes (Caa1/B-) is guided in the mid 9% context.

Timing remains to be determined.

Westmoreland to tap 10¾% notes

There were also deal announcements in the dollar-denominated market.

Westmoreland Coal Co. plans to price a $400 million add-on to its 10¾% senior secured notes due Feb. 1, 2018 (existing ratings Caa2/B-) during the week ahead via joint bookrunners BMO Securities and Deutsche Bank Securities Inc.

The Englewood, Colo.-based independent coal company plans to use the proceeds to fund the acquisition of coal mining operations of Sherritt International Corp. and to prepay the outstanding senior notes issued by subsidiary Westmoreland Mining, LLC.

Norshore starts Monday

Norwegian drilling contractor Norshore Atlantic BV plans to start a global roadshow on Monday for a $150 million offering of five-year senior secured bonds.

Arctic Securities ASA and ABG Sundal Collier are the joint lead managers.

Proceeds will be used to repay financing related to the vessel Norshore Atlantic.

Autodistribution inside talk

The European high-yield primary market was active Thursday.

France-based Autodistribution Group priced a €240 million issue of five-year senior secured notes (B3/B+) at par to yield 6½%, 12.5 basis points below the tight end of yield talk in the 6¾% area.

JPMorgan ran the books for the debt refinancing and acquisition funding deal.

Initial guidance was 6¾% to 7%, according to a London-based investment banker, who was taken somewhat by surprise that the bonds printed inside of final talk.

The company pre-marketed the deal late last year, the banker recounted, adding that since that pre-marketing took place, the company managed to reduce leverage to 3.5 times from 4 times.

Play talks three-part deal

Warsaw-based mobile telecom Play set price talk for its €870 million equivalent three-part offering of notes on Thursday.

Play Finance 2 SA is offering €630 million equivalent of five-year senior secured notes. A euro-denominated tranche of fixed-rate notes is talked to yield 5¼% to 5½%. A €100 equivalent maximum Polish zloty-denominated tranche of floating-rate notes is talked at a 325 bps spread to Wibor.

Meanwhile, Play Finance 1 SA is offering €240 million of 5.5-year senior unsecured notes that are talked to yield 6½% to 6¾%.

Although emerging markets accounts have taken a modicum of interest in the Play offer, high-yield accounts comprise about 90% of the audience for the euro-denominated tranches, a sellside source said.

The zloty-denominated floating-rate tranche is largely playing to local investors in Warsaw, the sources added.

The Play deal is set to price Friday via joint physical bookrunners BofA Merrill Lynch and JPMorgan and joint bookrunner Credit Suisse.

'A nervous market'

In the secondary sphere, a trader called the overall junk market "nervous, with what was going on in stocks."

Equities were broadly in retreat on Thursday as assets perceived to be risky were sold off in the wake of disappointing manufacturing data from China, which raised fears of a slowdown in that nation's economy - the world's second-largest behind the United States - making it less likely to be a customer for various kinds of natural resources.

The bellwether Dow Jones industrial average fell 175.99 points, or 1.07%, to close at 16,197.35, while the broader S&P 500 lost 16.4 points, or 0.89%, to end at 1,828.46. The still broader Nasdaq Composite index dropped by 24.126 points, or 0.57%, going home at 4,218.875.

But against that somber backdrop, the trader said that junk was down by perhaps ¼ to ½ point, but that "there certainly was no panic."

Instead, he said, "the market was non-venturesome. Everybody is just keeping an eye on stocks and on China."

Paper for sale

Another trader meantime said that over the past few sessions, "we've been seeing a lot of paper for sale" - in sharp contrast to recent weeks, when investors lamented the fact that there really wasn't much established junk paper being put up for grabs, forcing them to look elsewhere to put money to work, such as the burgeoning leveraged loan market.

But now, he said, "there are lists of paper that people want to sell."

He said that the prices "have not come in dramatically. It's not a parking lot sale, where you just blow stuff out, but the stuff is starting to show up."

Icahn below issue

Among specific names, a trader said that "there was a lot of activity first thing this morning" in the new 5 7/8% notes due 2022 from Icahn Enterprises, "but then it died out."

He said that the New York-based diversified holding company's issue, which priced at par on Wednesday after having been upsized to $1.35 billion from an originally announced $1 billion, "struggled to stay near par."

A second trader said the new bonds "settled in" a little under their issue price, first trading at 99 7/8 bid but later on easing to 99 5/8.

At another desk, a trader pegged those bonds at 99 5/8 bid, 99 7/8 offered, which he called down ¼ point.

Traders noted that some investors expressed disappointment that the bonds did not do as well as the three-year and five-year paper that the company and its Icahn Enterprises Finance Corp. subsidiary had priced two weeks earlier and which "traded great," one of them said, with both of those tranches seen still trading well above their respective par issue prices.

Ally, the volume leader

Ally Financial's 3½% senior guaranteed notes due 2019 were seen by a trader at 99 bid, 99 1/8 offered, which he said was "right on top of where it was issued." The Detroit-based automotive lender and online banking company brought its quickly shopped $750 million offering of those bonds to market on Wednesday at 99.095 to yield 3.7%.

A market source noted that the issue was the clear volume leader on Thursday among the purely junk-rated issues, with over $27 million having changed hands, nearly double the next busiest bonds. He said that the notes came in about 3/16 on the day to close around 99 1/8 bid.

Yet another trader called the credit down ¼ point on the day at 98 7/8 bid, 99 1/8 offered.

Patheon a little lower

Wednesday's other deal, the $450 million of 7½% notes due 2022 from JLL/Delta Dutch Newco, was seen by a trader at 100¾ bid, 101 1/8 offered, while a second trader saw the issue at 100¾ bid, 101¼ offered, calling that down ¼ point on the day.

Those levels were below the roughly 101 bid area at which those bonds traded when they were freed for aftermarket action on Wednesday, but they were still well up from the par level at which the bonds priced after that deal was downsized from an original $500 million size.

The bonds are being issued through a financing arm of New York-based private equity firm JLL Partners and Netherlands-based vitamin maker Royal DSM NV, who are teaming up to acquire Durham, N.C.-based pharmaceuticals company Patheon Inc. in a transaction valued at $1.95 billion.

Market indicators head south

Statistical junk-market performance indicators were lower across the board on Thursday after having been mixed over the five previous sessions.

The Markit Series 21 CDX North American High Yield index lost 15/32 point to close at 107 11/32 bid, 107 13/32 offered. It was the index's sixth consecutive loss. It had been down 1/16 on Wednesday.

The KDP High Yield Daily index suffered its first loss after two straight gains, easing by 3 bps to finish at 74.98. On Wednesday, it had gained 4 bps.

Its yield rose by 1 bp to 5.40%; on Wednesday, it had come in by 2 bps, its second straight session on the decline.

And even the widely followed Merrill Lynch High Yield Master II index's amazing 23-session winning streak, dating back to Dec. 19, finally came to an end on Thursday, falling by 0.072%, versus Wednesday's 0.028% gain.

The loss snapped a string of 14 straight sessions of new cumulative highs for the year. It ended Thursday returning 1.11% on a year-to-date basis, down from Wednesday's 1.185%.

The index's yield to worst rose to 5.43%, snapping a nine-session run of new low yields for the year so far. On Wednesday, it had come in to 5.386%.

Its spread to worst widened out to 409 bps over comparable Treasuries versus 398 bps over on Wednesday, its tightest level of the year so far.

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