Nokia bonds zoom on $7 billion Microsoft deal; Activision to hit road with $2.5 billion deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 3 - Junk market participants got back to work on Tuesday after the three-day Labor Day holiday and a roughly two-week sojourn prior to the break during which the primaryside seemed to be sleepwalking.

Just as syndicate sources and traders alike had predicted, there was no immediate rush to jump into any new deals on the first U.S. trading session for the month of September, at least in terms of dollar-denominated paper. The day's sole pricing came out of Europe, where Dutch sports equipment and apparel manufacturer Head NV announced that it had done a €45 million issue of five-year fixed rate bonds via its HTM Sport GmbH subsidiary.

But the sources did hear of a very big dollar deal hitting the forward calendar, as entertainment publishing firm Activision Blizzard, Inc. prepared to begin a roadshow on Wednesday for a $2.5 billion, three-part bond deal, which will include senior secured notes expected to carry a high-grade rating and two tranches of junk-rated unsecured paper, including $1 billion of eight-year notes and $500 million of 10-years.

In the secondary realm, one name completely dominated trading activity. Nokia Corp.'s two series of bonds soared in very heavy dealings on the news that the underperforming Finland-based telecommunications equipment company has agreed to sell its cellular phone unit to deep-pocketed alliance partner Microsoft Corp. for more than $7 billion.

Nokia, once the leading cellphone manufacturer, has struggled in recent years to protect its shrinking market share in an industry increasingly dominated by better-funded and more focused rivals like Apple Inc., Google Inc. and Samsung Group.

That giant-sized deal - and the intense activity in Nokia's bonds that went along with it - easily overshadowed another big announcement on the merger-and-acquisition front: consumer products company Jarden Corp.'s expected purchase of Yankee Candle Group LLC for $1.75 billion. Jarden expects to fund the deal via a mixture of cash on hand and the proceeds from anticipated new debt financing.

Jarden's bonds were seen unchanged to a little softer in light trading, while Yankee Candle's bonds, which are to be taken out as part of the transaction, were slightly higher, again on light trading.

Statistical market performance indicators were higher across the board, after having been mixed on Friday.

Primary still quiet

September began quietly in the high-yield primary market, as expected, sources said on Tuesday.

No dollar-denominated deals were priced. One megadeal, however, was announced.

Activision Blizzard plans to begin a roadshow on Wednesday for a $2.5 billion three-part offering of notes.

The deal includes a $1 billion tranche of seven-year senior secured notes (expected ratings Baa3/BBB), $1 billion of eight-year senior notes and $500 million of 10-year senior notes.

Pricing is set for the middle part of the Sept. 9 week.

J.P. Morgan and BofA Merrill Lynch are the joint bookrunners for the buyout deal.

Primary market activity is expected to pick up gradually for the remainder of the week, including a couple of announcements of euro-denominated deals, according to a trader.

Watch for a more purposeful pickup in the week ahead, the trader added.

Nokia notes star

In the secondary arena, a trader said that "Nokia dominated everything" in terms of both volume and price movements, its bonds and shares given a giant boost on the news that the underperforming telecom company will sell its wireless phone business - the company's major asset - to alliance partner Microsoft for €5.44 billion, or roughly about $7.18 billion.

Nokia's most widely traded bonds, its 5 3/8% notes due 2019, climbed some 10 points in early dealings, getting as high as 105¼ bid, a market source said, before coming off that peak level to eventually finish around 102 7/8 bid - still up more than 7 5/8 points on the day from the 95ish area at which those bonds had traded late last week.

Round-lot activity alone racked up over $65 million of trades by the close, the source said. And smaller odd-lot trading was even heavier, helping to boost total volume over $122 million by mid-afternoon, easily the busiest credit in Junkbondland.

That total was "probably considerably higher by the close," the source added.

Nokia's 6 5/8% bonds due 2039 zoomed some 15 points, to early peak levels as good as 100¾ bid, versus the mid-80s last week. By day's end, those bonds had also come down from their highs to close at 96¾ bid - still a gain of more than 11 points on the day.

Volume on the 2039 bonds is almost always less than the activity in the 2019s, and Tuesday was no exception. But it had jumped to at least $35 million by mid-afternoon, second only to the 2019s, and had also greatly increased by the end of the day, with the source estimating round-lot trades alone totaling as much as $32 million.

Nokia's New York Stock Exchange-traded shares likewise leaped by as much as 43% from their $3.90 close on Friday in the early going and were still up by $1.22, or 31.28% by the closing bell, finishing up $5.12 on the day. Volume of 589 million shares was over 24 times the norm.

Under the terms announced jointly by Espoo, Finland-based Nokia and Redmond, Wash.-based Microsoft - Nokia's partner since February of 2011 in developing the Windows Phone operating system that powers Nokia's phones such as its popular Lumia line - Microsoft will acquire substantially all of Nokia's devices and services business, including the mobile phones and smart devices business units, associated production facilities and sales and marketing operations and related support functions. It will also have access to various Nokia patents.

A total of 32,000 current Nokia employees will transfer over Microsoft, among them Stephen Elop, the former Microsoft executive who became Nokia's chief executive officer in 2010 and oversaw the alliance with his former employer. Elop will now return to Microsft as an executive vice president in charge of the newly acquired division.

Nokia financing available

Microsoft will pay cash for the acquired operations, dipping into its mountainous $77 billion stash - much of it generated outside the United States and held at overseas subsidiaries. Acquiring a non-U.S.-domiciled asset, such as the Nokia operation, is considered a more profitable use for the overseas-generated cash than bringing it back to the States, where it would be subject to a stiff tax penalty.

According to Nokia's own separate company announcement, Microsoft has agreed to immediately make available to Nokia €1.5 billion of financing in the form of three €500 million tranches of convertible bonds to be issued by Nokia, maturing in five, six and seven years.

Nokia will have the sole discretion of choosing to draw down some or even all of these tranches, or not. The financing is not conditional on the transaction closing. If the transaction closes, any outstanding bonds will be redeemed and netted against the deal proceeds by the amount of principal and accrued interest.

Nokia said that the first tranche matures in five years and has a 1.125% coupon payable semiannually with an initial conversion price of €3.9338.

The second tranche matures in six years and has a 2.5% coupon payable semiannually with an initial conversion price of €4.0851.

The third tranche matures in seven years and has a 3.625% coupon payable semiannually with an initial conversion price of €4.2364.

Nokia's board of directors will separately assess whether to draw down some or all of this financing. If Nokia would decide to use this financing option, the earliest that Microsoft could convert any of these bonds to shares is two years from drawdown.

The unit being sold accounted for about half of Nokia's total revenues, but Nokia, which dominated the cellphone business back in the middle 1990s, has since been eclipsed by such formidable rivals as Apple, whose popular iPhone series uses that company's proprietary iOS operating system, and Google, which licenses its Android operating system to various phone manufacturers, including - and especially - Nokia rival Samsung.

Nokia teamed up with Microsoft in 2011 to try and get back in the game, and its Lumia phones running the Windows Phone operating system have proven to be popular. But Lumia still trails iPhone and the Android-powered devices badly, causing executives from both Nokia and Microsoft to realize that it would probably make more sense for Nokia to sell its phone business to Microsoft, which has considerably more financial resources than Nokia and would be able to mount a stiffer challenge to Apple, Google and Samsung, which collectively hold around 90% of the market.

Following the transaction, Nokia plans to focus on its three remaining established businesses. The company calls each of them "a leader in enabling mobility in its respective market segment." These include Nokia Solutions Networks, a multinational data networking and telecommunications equipment provider that was formerly a joint venture between Nokia and German electronics giant Siemens AG until Nokia bought out its partner and took full ownership in a deal that closed just last month.

Nokia will also now concentrate on its HERE division, which provides mapping and location services, and Advanced Technologies, active in technology development and licensing.

Jarden, Yankee Candle quieter

The sheer size of the Nokia deal and the spectacular surge in its bonds and its shares overshadowed what would otherwise be considered a pretty big deal in its own right - the proposed $1.75 billion acquisition of scented candle manufacturer Yankee Candle by consumer products company Jarden. Bonds of both traded considerably more quietly than Nokia's paper did.

Rye, N.Y.-based Jarden, which owns such well-known brands as the Mr. Coffee coffee makers line, Oster blenders, Hoyle and Bicycle playing cards and Rawlings sporting goods, indicated on Tuesday that it plans to use a combination of new bank debt and bonds, as well as cash on hand, to help fund its acquisition of Yankee Candle.

Even though the addition of such debt will likely push Jarden's leverage ratio into the mid 5 times range from the mid 4 times area currently, Jarden's bonds "were not downgraded and they hung right in there," a trader said.

He said that its 7½% notes due 2017 were going out in a 111 3/8 to 111¾ context, little changed from 111 3/8 before the Yankee Candle deal was announced, "so they just hung right in there."

Another trader said that the Jarden bonds actually firmed to as high as 111 7/8 bid, pegging them up a little from their close on Friday at 1113/4. But he said they came off that zenith to go out closer to 111½ bid, or down ¼ point, on large-block volume of over $3 million. However, there was considerable activity in smaller odd-lot transactions.

Jarden's 7½% notes due 2020 were quoted going out at around the 106 bid level - down from 107 3/8 bid at the end of last week. Volume was over $3 million, but with only a handful of smaller trades in addition to the round lots.

And its 6 1/8% notes due 2022 were seen ending down around 1½ points, at around 1021/2, with over $4 million traded.

The market source also saw Yankee Candle's YCC Holdings, LLC 10¼%/11% PIK toggle notes due 2016 up by perhaps ¼ point at about the 103 bid mark, on volume of about $2 million.

The YCC Holdings 9¾% senior subordinated notes due 2017, which had last traded just under the 104 bid mark last week, were not seen trading around on Tuesday.

South Deerfield, Mass.-based Yankee Candle issued redemption notices for both of those series of bonds, with the redemption conditioned upon the closing of Jarden's acquisition of Yankee Candle.

Senior analyst Kim Noland of the Gimme Credit independent research agency said in a note on Tuesday that Jarden's debt load, currently near $4 billion, is likely to expand to over $5 billion on a pro forma basis as a result of the deal.

Noland said that with the leverage of the combined company approaching the mid-5 times range, pro forma, that would represent "a deterioration of Jarden's current credit measures which are mid 4x.

"We had most recently rated JAH notes underperform in part for the company's predilection to grow by debt-financed acquisitions," Noland added.

Market indicators turn higher

Statistical junk market performance indicators turned higher across the board on Tuesday, after having been mixed on Friday. This followed Thursday's session during which they were up all around and, before that, three straight mixed days.

The Markit Series 20 CDX North American High Yield index gained 3/16 of a point on Tuesday to close at 103 3/132 bid, 104 5/32 offered. On Friday, it had lost ¼ point. Although Monday saw the U.S. debt markets closed, Markit said that the index was unchanged from Friday's reading.

The KDP High Yield Daily index was up by 4 basis points on Tuesday to finish at 73.19, its third straight gain. It had advanced by 3 bps on Friday. KDP did not publish its index on Monday.

The yield meanwhile came in by 1 bp on Tuesday to 6.29%, its third consecutive decline. The yield had gone down by 1 bp on Friday.

And the widely followed Merrill Lynch High Yield Master II index rose by 0.094% on Tuesday, its fourth consecutive gain. On Friday, it had improved by 0.085% on Friday and had inched up another 0.04% on Monday.

The latest gain raised the index's year-to-date return to 2.906%, from 2.768% on Friday and 2.809% on Monday. Those returns remained well down from the index's peak level for the year so far of 5.835%, recorded on May 9, though they were still up solidly from its 2013 low point of 0.384% set on June 25.

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