Primary hiatus continues, secondary calm but easier; recent Iron Mountain paper, Toll off

By Paul Deckelman and Paul A. Harris

New York, Aug. 21 - The junk bond market continued to sleepwalk though yet another late-summer session on Wednesday, with traders seeing few if any distinctive features.

The primary sphere continued its summertime siesta, going a third consecutive session with no new bonds having been priced, or even announced.

New-deal denizens meanwhile spent the day handicapping what the post-Labor Day pricing pipeline might look like - particularly in terms of whether companies doing refinancings might limit themselves to just taking out their nearest-term existing paper.

Among recently priced deals, traders saw Foresight Energy LLC's eight-year deal from last week a little lower on the session.

They also saw Iron Mountain Inc.'s 10-year notes that priced earlier in the month trading off on decent volume for such a quiet session, although there was no real news out on the information technology and document-storage company.

Away from the new deals, Toll Brothers Inc.'s 2022 bonds eased, again on decent volume, as the homebuilder reported quarterly results including a decline in earnings - although management remained upbeat about the company's prospects, even with interest rates having recently risen.

The overall junk market was easier, though on not much activity, the traders said.

Statistical market-performance indicators were lower across the board after having been mixed on Tuesday; the indicators have now all been pointing south in four sessions out of the last five.

Possible deal pipeline

The mid-week session found the primary becalmed, as it has been throughout the week, and as it is expected to be through the rest of the run-up to Labor Day.

No deals priced and none were announced.

There is a pipeline of merger and acquisition activity that will play out during the remainder of 2013 and early 2014, but specifics are not at hand, sources say.

There is also a potential refinancing pipeline, a portfolio manager said on Wednesday.

However, whereas the easy rates of early 2013 motivated some issuers to look farther out along their ladders of maturities, in some cases addressing maturities that were near-to-intermediate term, higher rates may keep all but the near-term debt refinancing deals out of the market in September, the portfolio manager said.

"We're hearing that a lot of issuers are going to be rate sensitive," the buysider said.

Higher rates, steep curve

Long duration, low coupon bonds sold during the spring 2013 high-yield bull market continue to languish in an environment of higher Treasury rates, a portfolio manager said on Wednesday.

The Seagate HDD Cayman 4¾% senior notes due June 2023 (Ba1/BB+/BBB-) were at 93 1/8 bid on Wednesday morning, representing a 5.68% yield to worst, the investor said.

That deal came at par in a $1 billion issue on May 13.

By contrast, Seagates's 7% notes due November 2021 were trading with a 5% yield to worst on Wednesday.

"That tells you that the curve is pretty steep in high yield, and that there is a lot of price volatility in long duration," the investor said.

"It's a good company. There has been no negative news. There have been no credit events. And defaults are low.

"It's simply the sensitivity to higher rates, along with a little spread widening," the investor said.

All quiet in the primary

Meanwhile the new issue market remained dormant on Wednesday, with just one issue known to be in the market.

Australia-based Orionstone Pty Ltd. ran a roadshow for its $200 million offering of seven-year senior secured notes earlier in the month.

The deal remains in the market, and is most likely to resurface as post-Labor Day business, according to an informed source.

Fed flummoxes market

In the secondary world, a trader declared that Wednesday's market "is dead. There was not much going on today."

That jibed with what another trader had said earlier, opining that Junkbondland was "ridiculously quiet" as market participants awaited the 2 p.m. ET release of the minutes from the Federal Open Market Committee's July meeting, hoping for some visibility as to when the central bank will start with its long-feared winding down of the expansive quantitative easing monetary stimulus policy that has kept interest rates near historic lows.

But if anyone was hoping for a clear declaration from the policy makers, or even concrete indications as to their thinking, they were disappointed; the minutes showed the Fed governors as a group uncertain as to when the "tapering-off" process might begin and wanting to see more data in the upcoming weeks before pulling the trigger.

Several other traders also noted the market's quietude as well.

Deterred by duration

The first trader meantime said it looked to him like some of his accounts have not been adding duration in their buying - while others had actively been decreasing their durations, looking to shed longer-dated assets over uncertainty about where interest rates were headed.

"I think across the board, most of the guys are not adding to duration," he remarked. But that having been said, he added that here and there accounts were looking to go a little longer, particularly among the ranks of insurance companies, who are a little less sensitive to the daily zigs and zags of the markets than investors taking a shorter-term view such as mutual funds.

For instance, he said, "about two weeks ago, I had a guy who was looking to do some long-dated stuff." While he did not know if the account ever did go through with a transaction, he said that "it seemed that "he was not that sensitive [to duration risk]."

But he said even among the insurers, there were some who were definitely not looking to add duration.

"So it all depends, on what your balance sheet [of holdings] looks like," he concluded.

Foresight fades a little

Among specific issues, a trader said that Foresight Energy's 7 7/8% notes due 2021 were down 3/8 point on the session Wednesday, going home at 99¼ bid, 99¾ offered.

The St. Louis-based thermal coal producer and its Foresight Energy Finance Corp. subsidiary came to market on Friday with its $600 million issue of the notes, pricing them at 99.276 to yield 8% after upsizing the deal from the originally planned $500 million.

Since then, the bonds have followed a choppy course, in line with the overall market's ebbs and flows.

They initially traded up to par when they were freed for aftermarket dealings on Friday but eased on Monday. On Tuesday, they gained 3/8 point - only to give it all back on Wednesday.

The trader meantime saw little or no change in some of the other issues which priced last week, including Windstream Corp.'s 7¾% notes due 2021. He pegged those bonds at 101½ bid, 102¼ offered.

The Little Rock, Ark.-based telecommunications services provider had priced a quickly shopped $500 million add-on to its existing 2021 paper last Monday at 103.5 to yield 7.171%.

The bonds initially continued to trade around that level, at one point having gotten as good as 104 bid - but they fell back by nearly a point last Thursday to the mid-102s, the trader said, and continued to gradually lose ground on Friday and again on Monday, when they reached their present levels.

Iron Mountain off

Going back a little further, a market source saw Iron Mountain's 6% notes due 2023 trading at 98¾ bid on Wednesday, calling that down ¾ point.

He saw round-lot volume of over $9 million on the issue, a level he called "decent," considering the day's overall slowness.

Boston-based Iron Mountain, which provides document storage and information technology services, priced its $600 million issue of those bonds at par on Aug. 8 as part of a larger two-part drive-by deal that also included a tranche of eight-year Canadian dollar-denominated paper. The U.S. dollar notes priced after having been upsized from an originally announced $450 million, while the Canadian dollar piece was accordingly downsized to C$200 million from the initially planned C$300 million.

The U.S. dollar bonds initially held around their par issue price but did not advance beyond there despite the fact that Iron Mountain is a familiar and generally well-regarded issuer. In subsequent days, the bonds came down from that par level, and have been trading below their issue price pretty much since then.

Earnings taking their Toll?

Away from the new or recently priced deals, a market source saw Toll Brothers' 5 7/8% notes due 2022 down around ¾ point on the session at 101½ bid, on volume of over $7 million, considered fairly active for a relatively slow session.

There was not too much movement in the Horsham, Pa.-based homebuilder's other issues; its 6¾% notes due 2019 traded around 110¾ bid, slightly higher than their closing levels on Monday, the last time there had been any kind of trading, but there have been no recent round-lot trades to compare Wednesday's transactions to.

The bonds were trading in the wake of the company's release of numbers, which included a 24% downturn in earnings to $46.6 million, or 26 cents per share, in the fiscal third quarter ended July 31, versus $61.6 million, or 36 cents per share a year ago.

The latest results were about in line with analysts' forecasts.

The company attributed the change to a tax payment it had to make this year versus a one-time tax benefit it got a year ago.

Company executives on its conference call were meantime upbeat about housing market conditions, seeing signs of improvement.

Its chief executive officer, Douglas C. Yearley Jr., asserted that "it doesn't appear as though rising interest rates have hurt our business," noting that "sales volumes and pricing power both increased this quarter from one year ago, a pattern consistent with recent quarters."

He added that "we believe the recovery is real and we are in the early stages of the rebound."

Market indicators head south

Statistical junk market performance indicators turned lower across the board on Wednesday after having been mixed on Tuesday; those signposts have now all been lower in four sessions out of the last five.

The Markit Series 20 CDX North American High Yield index lost 11/32 point on Wednesday to close at 103½ bid, 103 11/16 offered, in contrast with Tuesday's 21/32 point rise, which had snapped a string of three consecutive losses before that.

The KDP High Yield Daily index meanwhile remained in its recent funk, losing 11 basis points on Wednesday to finish at 73.02, its seventh straight loss. On Tuesday, it had slid by 15 bps.

Its yield was at the same time higher for a fifth straight session, widening by 5 bps to end at 6.32%, after having moved up by 4 bps on Tuesday.

And the widely followed Merrill Lynch High Yield Master II index posted its fifth downturn in a row on Wednesday, retreating by 0.073%, on top of Tuesday's 0.126% loss.

The latest loss dropped the index's year-to-date return to 2.455%, down from Tuesday's 2.53% close. The return was well down from its peak level for the year so far of 5.835%, recorded on May 9, though still up solidly from its 2013 low point of 0.384%, set on June 25.

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