PetSmart megadeal prices amid brisk demand; new Oshkosh, USG strong; Intelsat off on guidance

By Paul A. Harris and Paul Deckelman

New York, Feb. 18 – PetSmart, Inc. was the big dog in Junkbondland on Wednesday, as the $1.9 billion eight-year offering financing the leveraged buyout of the Phoenix-based pet food, supplies and accessories retailer priced amid intense investor demand for a piece of the deal, being at least five times oversubscribed.

Traders said that the new bonds firmed smartly when they were freed for aftermarket activity.

Traders also reported brisk dealings in both of the drive-by issues that had priced during Tuesday’s session, from building supply manufacturer USG Corp. and truckmaker Oshkosh Corp. Each of those deals was trading well above its par issue price on active volume.

With the holiday-shortened week thus off to a flying start, despite the current earnings blackout, primaryside players expressed optimism, feeling that strong market technicals, including continued flows of investor cash into junk bond mutual funds and exchange-traded funds, could pave the way for some opportunistically timed new issues.

In the secondary market, besides the new deals from Tuesday and Wednesday, there was continued solid activity in recently priced issues such as Wynn Las Vegas LLC, Gtech SpA, and Dollar Tree, Inc.

Away from the new and recent deals, California Resources Corp.’s bonds traded strongly, despite a fall in crude oil prices.

But Intelsat SA’s bonds all lost altitude, even though the communications satellite company reported better-than-expected fourth-quarter earnings and revenue, as it also issued reduced 2015 revenue guidance.

Statistical indicators of junk market performance were mixed for a third straight day on Wednesday.

PetSmart’s $1.9 billion

PetSmart did Wednesday's sole deal, a $1.9 billion issue of 7 1/8% eight-year senior notes (B3/B-), which priced at par to yield 7.124%.

The yield printed slightly inside of yield talk in the 7¼% area.

Books closed early, and timing on the LBO deal was moved ahead; when it was announced, timing had the roadshow carrying into the Thursday session.

Joint bookrunner Barclays will bill and deliver. Citigroup, Deutsche Bank, Nomura, Jefferies, RBC and Natixis were also joint bookrunners.

$10 billion book

The PetSmart deal played to massive demand, market sources said.

A portfolio manager – who did not participate in the syndication of the bridge loan, and therefore did not expect a hefty allocation of bonds – heard that the books contained $10 billion of orders when they closed.

Pricing plummeted from early discussions that took place in the low-to-mid 8% yield context, sources say.

By late last week, a great deal of juice had been squeezed out of that initial pricing, and conversations were taking place at 7½%.

Then came official price talk in the 7¼% area on Tuesday.

Prior to ultimately pricing a hair below 7 1/8%, the deal looked good to a trader, who said that the recently priced, comparably rated Altice Finco SA 7 5/8% senior notes due February 2025 (B3/B-) (a 10-year bond, versus PetSmart, which is eight-year paper, the source pointed out) was trading at 101 3/8 bid, 101½ offered, for a yield of 7 3/8%.

PetSmart might command as much as a 12.5 basis points premium to the Altice 7 5/8% notes by virtue of the fact that PetSmart is shorter-maturity paper, the trader explained.

As it happens, PetSmart ultimately came at a 25 bps premium to the level at which the Altice paper was trading on Wednesday.

ThyssenKrupp places 1-handle paper

In Europe, Germany's ThyssenKrupp AG priced €1.35 billion of non-callable senior notes (Ba1/BB/BB+) in two tranches.

The deal included a €750 million tranche of 1¾% notes due Nov. 25, 2020, which priced at a 150 bps spread to mid-swaps, on top of spread talk. The 1¾% notes were sold at a reoffer price of 99.328 to yield 1 7/8%.

A €600 million tranche of 2½% 10-year notes priced at mid-swaps plus 190 bps, also on top of spread talk. The 2½% notes were sold at a reoffer price of 98.818 to yield 2.636%.

The general corporate purposes deal played to substantial demand, according to a source who added that the book for the short-maturity notes was heard to contain €3 billion-plus of orders from 350 accounts, while orders for the long-dated notes came to €2 billion-plus from 250 accounts.

Joint bookrunner Citigroup will bill and deliver. BayernLB, Commerzbank and UniCredit Bank AG are also joint bookrunners.

Hot market, no calendar

Even though crude oil prices remain more than $50 per barrel below last summer's highs, the junk bond market appears to have navigated beyond the doldrums where it had been moored since the late 2014 crude crash, sources say.

The Merrill Lynch US High Yield Master II index posted a 6.11% yield to worst on Wednesday morning, down from 6.53% at the beginning of the month, according to a portfolio manager.

“The market feels rich again,” the manager said, adding that if you remove the energy component, the yield to worst of the Merrill index falls to 5.6%.

Market technicals are robust, and then some, sources say.

High-yield ETFs saw their last negative daily flow on Jan. 22, around the time the European Central Bank announced plans to undertake asset purchases, a source said.

In the same time frame, actively managed funds saw just one negative daily flow, which occurred on Feb. 12 and was chalked up to “a one-off account,” the source added.

Flows for Tuesday, the most recent session for which data was available at press time, saw high-yield ETFs taking in $222 million, while actively managed funds saw $230 million of inflows on Tuesday.

“People are flush with cash,” a buysider said, adding that there is no calendar on which to put that cash to work.

The lean calendar is attributable to the present earnings blackout, a syndicate banker asserted on Wednesday, professing certainty that at least some potential issuers are sidelined ahead of reporting fresh numbers.

The rest of this week could remain slow, as could the week ahead, sellsiders say.

However given the strong technicals, primary market activity should pick up in March, they add.

In any case, watch for at least a modicum of new-issue activity for the remainder of the present week, sources said Wednesday.

Stand by for a potential jumbo drive-by deal on Thursday, one debt capital markets banker added.

PetSmart pops in secondary

Although the PetSmart deal priced fairly late in the session, with terms not circulating in the market until well after 4 p.m. ET, the new 7 1/8% notes due 2023 still managed to see some aftermarket activity.

One trader reported that “lots of them” were trading in a 101½-to-102½ bid context, well up from their par issue price.

The interest in the late-breaking deal was not surprising; another trader said that “people were focused all day”on the coming PetSmart paper, which is technically being issued though special-purpose financing vehicle Argos Merger Sub Inc.

Argos will be merged with and into PetSmart upon completion of the buyout transaction, which will see a consortium led by BC Partners, Inc. acquire the specialty retailer for $83 per share in cash, a deal valued at some $8.7 billion. It is expected to close some time in the first half of the year.

Oshkosh, USG do well

In the deals that came to market on Tuesday, a trader said that Oshkosh’s new 5 3/8% notes due 2025 “held in pretty good,” quoting the issue at 101½ bid. That was well up from the par level at which the Oshkosh, Wis.-based manufacturer of trucks, military vehicles, fire engines and ambulances priced its quick-to-market $250 million issue. It was also up from the 100¼ level at which those bonds had initially been quoted Tuesday after pricing.

At another desk, a market source pegged the bonds even higher, at 101 7/8 bid, calling that a gain of 1 1/8 points on the day. He said that the new Oshkosh paper was among the most actively traded junk issues, with over $20 million trading hands.

Tuesday’s other deal – the 5½% notes due 2025 from Chicago-based drywall building products manufacturer USG – was also seen doing well in Wednesday’s market.

A source located the bonds at 101 5/8 bid, up 1/8 point on the day, on volume of over $15 million.

USG’s quickly shopped $350 million offering had priced at par on Tuesday; the bonds were seen having shot up to around the 100½ bid mark in robust initial trading of over $22 million.

Recent deals busily traded

Other recently priced issues were also seen trading actively.

Dollar Tree’s 5¾% notes due 2023 were up by 3/8 point on Wednesday, finishing the day at 103 5/8 bid on volume of more than $13 million.

The Chesapeake, Va.-based discount retail chain operator priced $2.5 billion of those bonds at par on Feb. 6 as part of the financing for its acquisition of sector peer Family Dollar Stores, Inc. The bonds immediately jumped to around a 102¼-to-103 bid context and have continued to firm ever since then.

The issue was part of a $3.25 billion two-part regularly scheduled forward-calendar offering that also included $750 million of 5¼% notes due 2020, which also priced at par and then moved up to a 102½-to-103 context.

Elsewhere, Italian gaming technology provider Gtech’s recently priced 6¼% senior secured notes were seen up 1/8 point at 100 1/8 bid on volume of over $11 million.

Rome-based Gtech priced $1.5 billion of the 2022 notes last Monday via its Georgia Worldwide plc unit as part of the financing for its acquisition of International Game Technology, along with $600 million of 5 5/8% senior secured notes due 2020 and $1.1 billion of 6½% senior secured notes due 2025, all at par. It also priced two sizable tranches of euro-denominated secured paper.

Also in the gaming world, Wynn Las Vegas’ new 5½% notes due 2025 were high up on the day’s Most Actives list, seen finishing the session at par bid, off 1/8 point on the day, on turnover of more than $20 million.

The company, a unit of Las Vegas and Macau casino giant Wynn Resorts Ltd., priced $1.8 billion of those notes at par last Wednesday after the scheduled forward calendar offering was slightly upsized from $1.75 billion.

Although the issue was officially split-rated (Ba2/BBB-/BB), traders said that it has continued to attract some junk investor interest.

Intelsat slips on guidance

Away from the recently priced issues, a trader said that Intelsat’s bonds “were down a couple of points” pretty much across the board after the Luxembourg-based provider of satellite communications services to governments, media companies and other businesses reported its fourth-quarter numbers.

Intelsat showed earnings of $16.2 million, or 14 cents per share – 79 cents per share on an adjusted basis, excluding debt extinguishment costs and other one-time items, topping Wall Street’s expectations of around 44 or 45 cents per share. Its revenues of $619.1 million for the quarter also beat expectations in the $605 million to $606 million range.

But the company warned that “the continuation of the trends we experienced in 2014, such as pricing pressures in certain regions and applications, reduced U.S. government spending and rising geopolitical challenges, compounded with services nearing the end of lifecycle, is creating ongoing headwinds for our business in 2015 and into 2016,” and it projected full-year revenues of $2.33 billion to $2.38 billion – well under the $2.45 billion that analysts had predicted.

On that negative note, the trader said, the company’s Intelsat Jackson Holdings SA 5½% notes due 2023 dropped to 98 3/8 bid versus Tuesday’s levels “north of 99” in active dealings.

He also saw its 7¾% notes due 2021 fall to a 98¼-to-98 3/8 context from 100½ previously.

At another desk, a market source saw the 5½% notes down about 1 full point on the day at 98¼ bid on volume of more than $33 million, while the 7¾s, issued by the company’s Intelsat (Luxembourg) SA unit, sank by 2 points, also to 98¼, with over $11 million traded.

Company executives said on their conference call following the earnings release that Intelsat had cut its net debt by $475 million last year, but they said that further sizable debt-cutting this year is not in the cards (see related story elsewhere in this issue).

CalRes climbs despite oil slide

A trader said that “the only name more active than Intelsat” was California Resources’ 6% notes due 2024, adding “they popped late in the afternoon” after the release of the minutes from last month’s Federal Reserve policy meeting, indicating that the central bank’s governors will go slowly on raising interest rates.

He saw the Los Angeles-based oil and natural gas exploration and production company’s bonds get as good as 89 7/8 bid before settling in an 89-to-89 3/8 context late in the session, which he called “still up 1 or 2 points on the day.”

More than $51 million of the notes traded.

He said that even though oil prices were off – the benchmark crude fell by $1.81 per barrel, or 3.38%, to end at $51.72 – “the oil and gas bonds generally rallied on better buyers.”

Indicators stay mixed

Statistical indicators of junk market performance were mixed for a third straight day on Wednesday.

The KDP High Yield Daily index lost 1 bp on Wednesday to finish at 71.68, snapping a three-session winning streak that had included Tuesday’s 6 bps advance.

Its yield, however, behaved atypically by coming in by 1 bp to 5.24%, even though the yield customarily rises as the index reading declines. It was the second straight decline in the yield, following Tuesday’s 3 bps narrowing.

The Markit Series 23 CDX North American High Yield index broke out of a two-session rut on Wednesday, gaining 1/32 point to end at 106 17/32 bid, 106 9/16 offered. That was in contrast to Tuesday’s 1/8 point downturn, its second consecutive setback.

The Merrill Lynch U.S. High Yield Master II index showed no sign of weakening on Wednesday, rising by 0.135% – its 23rd straight daily gain, going back a month to Monday, Jan. 19. It had advanced by 0.075% on Tuesday.

The latest improvement lifted its year-to-date return to 2.178%, its19th straight new peak level for 2015.That was up from 2.045% on Tuesday – the first time the index had moved above the psychologically important 2% mark this year.

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