Upsized QTS, downsized Viking deals price; overall market plunges; funds fall by $1.68 billion

By Paul Deckelman and Paul A. Harris

New York, July 17 – The day of reckoning that many in Junkbondland have worried about may finally be here.

Whether it was moving downward in tandem with a stock market spooked by the apparently deliberate shoot-down of a Malaysian Airlines jet in the troubled Ukraine region with the loss of all aboard and the widening of fighting in Gaza between Israel and the Palestinians, or if it was reacting to recent comments from Federal Reserve chief Janet Yellen warning about “stretched” valuations among lower-rated corporate issues, the high-yield market saw perhaps its steepest daily downturn so far this year.

Traders were left wondering whether the downturn was just a one-off blip on the radar screen or the beginning of a new retrenchment.

Among specific credits, even recently robust new-deal names like American Energy-Permian Basin, LLC and Rex Energy Corp. were seen down by multiple points. American Energy-Permian Basin’s three tranches all zoomed straight to the top of the junk market’s most actives list.

Other recent issues also seen lower included Light Tower Rentals, Inc., Triangle USA Petroleum Corp. and Bonanza Creek Energy, Inc.

Two issuers raised nearly $600 million of proceeds. They were QTS Realty Trust, Inc. with an upsized $300 million of eight-year notes and Viking Cruises Ltd. with a downsized $275 million add-on to its existing 2022 notes.

Away from the new deals, Radiation Therapy Services Inc.’s bonds swooned on brisk volume, while the M&A-driven climb in Rockwood Specialties Group, Inc.’s bonds appeared to have run out of gas.

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

And another indicator – the flow of cash into or out of high-yield mutual funds and exchange-traded funds, considered a good barometer of overall junk market liquidity trends – saw its biggest loss in almost a year and its first after three consecutive weeks on the upside.

Junk funds bleed $1.68 billion

Market sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said late Thursday that $1.68 billion more left those funds during the week ended Wednesday than had come into them.

It was the first outflow seen by the funds in a month, since the $239 million cash loss recorded during the week ended June 18.

In between those two downturns, Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., had seen three successive weekly inflows. It reported a $107 million cash injection last week for the seven-day period ended July 9, on top of cash additions of $90 million in the week ended July 2 and $619.2 million during the week ended June 25.

The latest week’s massive outflow completely eclipsed the previous biggest cash drain for the year, $972 million during the week ended Feb. 5, and in fact was the largest since the $2.33 billion hemorrhage seen during the week ended Aug. 21, 2013, according to a Prospect News analysis of the data.

Even with the latest week’s mega-downturn, inflows to the weekly-only reporting funds have still now been seen in 21 of the 28 weeks since the start of the year, according to the analysis, against just seven outflows.

However, the latest week’s cash bleed dropped the year-to-date cumulative net inflow number to an estimated $5.01 billion from the previous week’s $6.68 billion, the peak inflow level for the year.

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.

In 2013 – which had 53 reporting weeks due to a statistical quirk– 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.

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime also saw what one market source called “the biggest outflow in over a year.”

It had meanwhile reported a puny inflow of under $1 million last week.

EPFR’s methodology differs from AMG/Lipper’s, as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper’s strictly domestic orientation. Accordingly, the two services’ weekly numbers are also generally quite different. While their respective weekly results usually point pretty much in the same direction, that has not always been the case; in some weeks in which AMG/Lipper showed outflows, EPFR saw overall inflows. It thus has recorded inflows in 24 out of the 28 weeks since the start of the year, against only four weekly outflows during that time.

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming into or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable, more so than those of other, larger cash sources, and thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk have been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years and which has mostly continued on into this year as well.

However, the big outflows reported by AMG/Lipper and EPFR Global in the latest week did not come as much of a shock to traders and other junk market participants, who had noted several consecutive days of steady outflows from the funds, with the ETFs in particular hit by waves of redemptions.

QTS Realty upsizes

The dollar-denominated high-yield primary market saw two issuers raise $599 million with single-tranche issues on Thursday.

One of the two deals came as a drive-by.

One of the two was upsized.

One came at the rich end of price talk, and the other priced on top of talk.

Having completed an investor roadshow, QTS Realty Trust priced an upsized $300 million issue of 5 7/8% eight-year senior notes (B2/B+/) at 99.211 to yield 6%.

The debt refinancing deal was upsized from $250 million.

The yield printed on top of yield talk.

Deutsche Bank Securities Inc. was the left bookrunner. BofA Merrill Lynch, KeyBank Capital Markets, Goldman Sachs & Co., Jefferies LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC were the joint bookrunners

Viking Cruises drives by

In a quick-to-market transaction, Viking Cruises priced a $275 million add-on to its 8½% senior notes due Oct. 15, 2022 (B3/B+) at 109.5 to yield 6.398%.

The reoffer price came at the rich end of the 109.25 to 109.5 price talk.

Wells Fargo Securities LLC was the left bookrunner. BofA Merrill Lynch and Credit Suisse Securities (USA) LLC were the joint bookrunners.

The Woodland Hills, Calif.-based river cruising company plans to use the proceeds to finance an investment of about $115 million in a Jones Act-compliant entity and to finance a dividend of about $175 million that will be used by MISA Investments Ltd., the holding company of Viking Cruises, to fund the redemption of all of the outstanding Viking/MISA 8 5/8%/9 3/8% senior PIK toggle notes due 2018.

Rooster Energy starts roadshow

Rooster Energy Ltd. began a roadshow on Thursday for a $100 million offering of five-year senior secured notes.

An investor lunch is scheduled to take place on Tuesday.

Imperial Capital LLC is the bookrunner.

The Houston-based oil and gas exploration and production company plans to use the proceeds to refinance debt, to fund the cash portion of an acquisition and to fund other general corporate purposes.

Ocean Rig scraps offer

Ocean Rig UDW Inc. pulled its $500 million offering of eight-year senior secured notes (B2/B+) from the market, electing to raise those proceeds by upsizing its term loan by $500 million.

The loan increased to $1.3 billion from $800 million.

Deutsche Bank, Credit Suisse and ABN Amro had been the leads on the notes offer.

Europcar prices tight

In the euro-denominated primary market, Europcar Group SA priced a €350 million issue of seven-year senior secured notes (B3/B) at par to yield 5 1/8% in a deal that had been marketed by means of a Wednesday investor call.

The yield printed at the tight end of yield talk in the 5¼% area.

Joint global coordinator JPMorgan will bill and deliver for the debt refinancing deal. Deutsche Bank was also a joint global coordinator. BNP Paribas, CM-CIC, Credit Agricole CIB, Goldman Sachs International and SG CIB were bookrunners.

Meanwhile, two roadshows for euro-denominated deals were scheduled to wrap up on Thursday.

France-based equipment rental company Loxam SAS has been roadshowing a €660 million two-part offering: a €400 million tranche of seven-year senior secured notes and a €260 million tranche of eight-year senior subordinated notes.

Joint bookrunner Deutsche Bank will bill and deliver. BNP Paribas, Credit Suisse, Credit Agricole CIB, Natixis and SG CIB are also joint bookrunners.

And Winoa Group, a French steel abrasive products manufacturer, has been on the road with a €260 million offering of six-year senior secured notes (B2/B-) via Deutsche Bank and KKR.

Both deals are expected to price before the weekend, sources say.

However, there was no price talk on either deal well after Thursday's close in London, according to a debt capital markets banker who works there.

News weighs on market

In the secondary realm, a trader opined that “it looks like with all of the world news” – he cited the shooting down of a Malaysian Airlines jet over the Ukraine and the widening of the Middle East conflict – “this [previously robust] market may be turning around.”

He noted that the Markit CDX index was down by about three-quarters of a point in the late afternoon, adding that “it seems to be a pretty big move. I don’t remember it moving that much any time in the recent memory. It’s usually up 1/8 or ¼ [point] or down 1/8 or ¼.”

A second trader declared that “things were hit pretty hard today.”

“The market was definitely off a bit,” yet another trader opined.

“Did it take every bit of bad news in the world to crack this market,” the first trader continued, “or was this just a one-day blip?”

American Energy issue slides

Among specific issues, traders saw widespread carnage among American Energy-Permian Basin’s three new tranches of bonds that had priced on Wednesday

Those issues “were bouncing all around” at lower levels, one trader said, after the Oklahoma City-based oil and natural gas operator’s new notes came off the strong gains they had notched in Wednesday’s aftermarket.

He finally saw its floating-rate notes due 2019 down ¾ point on Thursday at around 98 5/8 bid, on volume of about $42 million. The company had priced $350 million of the notes at 99 to yield 650 basis points above Euribor.

He also saw its 7 1/8% notes due November 2020 down 1 7/8 points to 99 bid, on volume of almost $90 million, and saw its 7 3/8% notes due November 2021 down 1¼ points to 99 5/8 bid, with almost $100 million of the bonds changing hands.

The company had priced $650 million of the 7 1/8% notes and $600 million of the 7 3/8% notes on Wednesday.

A second trader saw the 7 3/8% notes in a 99 to 99¼ context – well down from the highs of 101 to 101 3/8 seen late Wednesday when they were freed to trade.

The 7 1/8% notes were at 98¾ bid, 99 offered – down from the 101-to-101¼ context in which they had traded in Wednesday’s aftermarket.

Other issues in retreat

Among the other recent new deals, a market source saw Light Tower Rentals’ 8 18% senior secured notes due 2019 at 102 bid – down by ½ point from where they had been trading late Wednesday after the Odessa, Texas-based provider of oilfield equipment and services had priced its $330 million issue – upsized from $300 million originally –at par. Volume was a brisk $19 million.

Triangle USA Petroleum’s 6¾% notes due 2022 lost ¼ point to end at 100½ bid, with $14 million changing hands.

The Denver-based exploration and production company priced $450 million of the notes at par on Tuesday after upsizing the issue from an original $350 million. The bonds had traded as high as 101 to 101½ in Tuesday’s and Wednesday’s aftermarket.

Bonanza Creek’s 5¾% notes due January 2023 were trading at 100 bid, 100¼ offered, down about ¼ point from the aftermarket levels at which the Denver-based energy operator’s $300 million of notes had traded after pricing at par on Tuesday in a quick-to-market transaction.

A trader saw Rex Energy’s 6¼% notes due 2022 at 98½ bid, 99½ offered – down 1½ points from where he had seen them trading on Wednesday. And that level, in turn, had been off by at least a point from the gains the bonds had notched in initial aftermarket dealings Monday. The State College, Pa.-based exploration and production company had brought $325 million of the notes to market at par after upsizing the drive-by deal from $250 million originally.

Radiation Therapy routed

Away from the new deals, Radiation Therapy’s 9 7/8% notes due 2017 took it on the chin Thursday as investors continue to be concerned about how Medicare and Medicaid will pay cancer treatment providers going forward.

A trader deemed the issue down 10 points from earlier in the week, placing the debt at 68¾. Another market source saw the issue at 68¾ bid, 69 offered, down from 79½ bid, 80 offered on Tuesday.

Its 8 7/8% notes due 2017 lost 3 points on the day, closing at 95¼ bid.

Earlier this month, the Department of Health and Human Services said that it could cut the amount Medicare and Medicaid pay to radiation therapy providers for equipment costs. Investor are already concerned with the company’s cash burn and the fact that it pulled an $88 million initial public offering earlier this year.

On Monday, Standard & Poor’s dropped its outlook on the Fort Myers, Fla.-based company, which is now known as 21st Century Oncology Holdings, citing the Medicare and Medicaid proposals and noting that the company receives about 45% of its patient services revenues from those programs.

Market indicators turn lower

Statistical indicators of junk market performance turned decisively lower on Thursday after having been mixed on Wednesday. It was the second session in the past three in which those signposts were all pointing to the downside.

The KDP High Yield Daily index plunged by 17 bps on Thursday to end at 74.27, its third consecutive loss, having also slipped by 6 bps on Wednesday and 12 bps on Tuesday. The index has now been down in 10 sessions over the last 11.

Its yield ballooned upward by 10 bps to 5.18%, its second straight widening. It had risen by 2 bps on Wednesday.

The Markit CDX Series 22 index fell by 23/32 point to finish at 107 7/8 bid, 107 15/16 offered – its first finish under 108 since May 26, when it had closed at 107 15/16 bid, 108 offered. It had edged up by 1/32 point on Wednesday.

The widely followed Merrill Lynch High Yield Master II index suffered its third straight loss, ending off by 0.183%. It had been down by 0.092% on Wednesday, on top of Tuesday’s 0.113% retreat, which had broken a two-session winning streak before that.

Thursday’s setback dropped its year-to-date return to 5.153% from 5.346% on Wednesday. It also remained well down from the 5.751% return recorded last Monday, the peak level for 2014.

Stephanie N. Rotondo contributed to this review

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