Market firmer again; ArcelorMittal prices euro deal; NCI on tap; junk funds lose $922 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 8 – The high-yield market made it two in a row on Thursday, mounting a second consecutive stronger session.

Junkbondland was helped by a surge in equities, which also rose solidly for a second straight session, a rise driven by expectations the United States economy will continue to show improvement and investor hopes of easing action from European central bankers.

Oil prices again rose, though modestly, continuing to give a boost to many recently battered names in that sector, among them SandRidge Energy Inc., Halcon Resources Corp. and Midstates Petroleum Co. Inc.

Cliffs Natural Resources Inc. was another gainer.

And non-energy names like Sprint Corp. were also seen higher.

The high-yield primary market saw its first deal of the new year – although that euro-denominated pricing from steelmaker ArcelorMittal came off the investment-grade desks and had a typical execution.

But a more traditionally styled dollar-denominated deal could be on tap for Friday, when NCI Building Systems, Inc. is expected to bring a $250 million eight-year offering to market.

Statistical market-performance measures were higher across the board for a second consecutive session on Thursday.

However, another statistical measure – flows of money into and out of high-yield mutual funds and exchange-traded funds, which is considered a reliable barometer of overall junk market liquidity trends – were solidly negative for a sixth successive week.

ArcelorMittal prices

The first straight-out junk issuance of 2015 came in a euro-denominated deal that priced in a Thursday drive-by.

ArcelorMittal launched and priced a €750 million issue of 3 1/8% seven-year senior notes (Ba1/BB+/BB+) at mid-swaps plus 265 basis points.

The spread came at the tight end of the 265 bps to 270 bps final spread talk. Earlier guidance was mid-swaps plus 275 bps to 280 bps.

The deal, which priced on the investment-grade desk, played to €2.2 billion of demand, sources said.

Joint active bookrunner BNP Paribas will bill and deliver. Deutsche Bank, Santander and SG CIB were also joint active bookrunners.

NCI Building Systems talks

The ArcelorMittal deal, although it came with three speculative-grade ratings, was only “technically” the first junk deal of 2015, a market source asserted.

Like General Motors Financial Co., Inc.’s split-rated $2.25 billion three-part senior notes deal (expected ratings Ba1/BBB-/BB+), which priced Wednesday, ArcelorMittal received a high grade-style execution: It was talked at a spread and priced on the investment-grade desk.

NCI Building Systems figures to receive a more customary high-yield execution on Friday, the source added.

On Thursday, the Pittsburgh-based insulated metal panel producer's $250 million of eight-year senior notes (/B+/) were talked to yield 8¼% to 8½%.

That talk came well wide of earlier yield discussions in the 8% context, according to market sources.

Thursday's big rally in the junk market notwithstanding, the backdrop for the NCI Building Systems deal has been anything but outstanding, an investor recounted on Thursday.

“People are still nervous,” said the source, who added that heading into Thursday dedicated high-yield funds were continuing to see outflows.

Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., RBC Capital Markets and UBS Investment Bank are the joint bookrunners for the NCI Building Systems deal.

Possible pickup ahead

Although the junk market began the New Year at a slow pace, that could change in the week ahead, sources say.

Altice International and Altice SA are expected to bring $6 billion equivalent of junk bonds to market on Tuesday following a shareholder vote set for Monday, according to a portfolio manager. (See related story in this issue.)

Also, Angus Chemical Co. is expected to sell $225 million of high-yield notes in a Morgan Stanley-led deal that could show up as early as the week ahead.

In addition to those, look for a $4 billion deal to emerge next week from the packaging sector, a buyside source said Thursday.

Also watch for drive-by activity in the Jan. 12 week, sources say.

All of that is pending market conditions, an investor warned on Thursday.

The European and U.S. rallies in stocks and bonds seen Thursday came on the heels of an announcement from the European Central Bank that more economic stimulus – in the form of asset purchases – is on tap for the euro zone, sources said.

Will that rally be sustained in the face of continuing deterioration in the price of crude oil?, the investor asked.

This buysider, who keeps a practiced eye on the oil patch, said that crude, which was going out at $49.50 per barrel of West Texas Intermediate at Thursday's close, is likely to fall further before bottoming out.

Although producers are announcing 20% cuts in production, they acknowledge that year-over-year production for 2015 will be up by around 15%.

It will be 2016 before the cuts being introduced now impact supply on a year-over-year basis, the buysider said.

Meanwhile, demand is the real problem, the source added.

Demand is slated to grow by 1% during 2015, the investor recounted.

“That seems generous to me when you have ongoing economic stimulus activity from the central banks in Asia and Europe,” said the buysider.

ArcelorMittal dollar notes up

In the secondary realm, traders did not see the new ArcelorMittal 2022 notes, pointing out that there wasn’t much junk account interest in euro-denominated paper on this side of the Atlantic.

However, a market source said that the Luxembourg-based steel manufacturer’s dollar-denominated 6% notes due 2021 were up ¾ point on the session, finishing at 104 bid.

GM notes firmer

A trader said that the new General Motors Financial paper that priced on Wednesday “looked like it had a lot of volume.”

He saw the 3.15% notes due 2020 and the 4% notes due 2025 both in a par-to-100½ bid context.

The Fort Worth, Texas-based financial arm of the Detroit auto giant had priced $1 billion of each tranche on Wednesday as part of a $2.25 billion three-part split-rated drive-by deal that also included $250 million of floating-rate notes due 2020.

The 3.15% notes priced at 170 bps over Treasuries, or at 99.88, yielding 3.176%, while the 4% notes priced at 210 bps over Treasuries, or 99.478, yielding 4.064%.

Those Ba1/BBB-/BB+ notes priced off the high-grade desks, and that was who accounted for the bulk of Thursday’s aftermarket activity; the trader said that “it didn’t seem like high-yield [investors] were really involved or cared.”

Energy issues gain

For a second straight session, crude oil shook off its recent weakness to close better, although Thursday’s gain in benchmark West Texas Intermediate was a modest 14 cents, or 0.3%, as the February contract settled at $48.79 a barrel on the New York Mercantile Exchange.

However, that did not stop many recently weak energy names from continuing their new-found rebound. Among the gainers in that sector were Houston-based exploration and production operator Halcon Resources, whose 9¾% notes due 2020 gained more than 3½ points on Thursday to go home at 77 bid.

Oklahoma City-based oiler SandRidge Energy’s 8 1/8% notes due 2022 were up more than 4¼ points to finish at 64¾ bid, while its 7½% notes due 2021 were 4-point winners, closing at 65½ bid.

Houston-based Midstates Petroleum’s 9¼% notes due 2021 were up by 2¾ points, closing at 50¼ bid.

A trader said, however, that in contrast to recent sessions, “you didn’t get a huge rally out of oil, since it wasn’t up by that much.”

Also in energy, Cleveland-based coal and iron ore producer Cliffs Natural Resources’ 3.95% notes due 2018 pushed up to 75 bid after having closed around 72 on Wednesday.

A market source noted that “while their whole capital structure was better, this one has been pretty active.”

He added that the ’18s “are the shortest-date paper they have. Some people are looking to that one as possibly being money good” when the time comes.

Overall market better

A trader said that overall, “there definitely was a bid to the market,” although he qualified that, adding “it wasn’t a ‘lift-a-thon’ [for bids] or anything like that.”

Still, he said, “we saw a pop in the markets. Generically, things were up ¼ to ½ point.”

The high-beta names, he said, “might be up 1 point or even more.”

He saw Overland Park, Kan.-based wireless provider Sprint’s 7 1/8% notes due 2024 rise to 96¾ bid versus 94 on Wednesday.

Indicators up again

Statistical indicators of junk market performance turned in their second solidly higher showing in a row on Thursday; they had also risen across the board on Wednesday, in contrast to Monday and Tuesday, when they had been lower all around.

The KDP High Yield Daily index jumped by 34 bps to close at 70.73; its second straight advance. On Wednesday, it had gained 8 bps to break a three-session losing streak, including plunges of 29 bps on Tuesday and 22 bps on Monday.

Its yield tightened by 11 bps to 5.61%, its second straight narrowing after two straight widenings. On Wednesday, it had come in by 3 bps.

The Markit Series 23 CDX North American High Yield index also saw its second win in a row Thursday, improving by 17/32 point to finish at 105 11/16 bid, 105 23/32 offered. On Wednesday, it had been up by 7/32 point, its first gain after having suffered three retreats in a row.

The Merrill Lynch U.S. High Yield Master II index put up its second straight gain Thursday, advancing by 0.407% on top of Wednesday’s 0.294% gain. Those successes had followed two straight losses on Monday and Tuesday.

Thursday’s rally put the index back in the black for the year with a 0.108% return; it had been in the red for the year on Tuesday and Wednesday, down 0.297% in the latter case. On Tuesday, the index had been down by 0.590% -- the most cumulative red ink the index had seen since it was down by 0.768% on Oct.12, 2011.

The Finra/Bloomberg U.S .High Yield index volume rose to $4.75 billion from $4.14 billion at the close on Wednesday.

Junk funds lose again

But while those statistical indicators were all up, another measure, high-yield mutual funds and ETFs, posted a net outflow in the latest reporting week, market sources said Thursday – the funds’ sixth consecutive weekly downturn and the first of the new 2015 calendar year.

Some $922.2 million more left those weekly-reporting-only funds than came into them during the week ended Wednesday, almost equal to the $960 million outflow reported last week.by Arcata, Calif.-based AMG Data Services, a unit of the Lipper analytics division of Thomson Reuters Corp.

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