McDermott launches; Freedom Mortgage, American Greeting on tap; Tesla rebounds; Charter drops

By Paul A. Harris and Abigail W. Adams

Portland, Me., April 3 – There was low news volume from the primary market on Tuesday with no high-yield deals pricing on the day.

While expected to price on Tuesday, new deals from McDermott International Inc. and American Greetings Corp. were delayed.

Freedom Mortgage Corp. started a one-day roadshow for a $500 million offering, which is expected to price on Wednesday.

While new paper has not yet entered into Junkbondland this week, Ply Gem Holdings Inc.’s 8% senior notes due 2026, which priced on March 29, continued to perform well in active trading.

Tesla Inc.’s 5.3% senior unsecured notes due 2025 (Caa1/B-) were again the major volume movers of the secondary space on Tuesday, this time with the notes rebounding more than 2 points.

While Tesla rebounded, Charter Communications Inc.’s junk bonds dropped 1 to 2 points with the telecommunications company pricing $2.5 billion in new investment grade notes and negative headlines piling up.

Daily cash outflows of high-yield bond funds were negative on Monday with cash being put to work in high-yields slowing, a market source said.

McDermott launches

McDermott launched its downsized $1.3 billion offering of six-year senior notes (B2/B-) with a 10 5/8% coupon in the 94.75 area to yield approximately 11 7/8%.

The closely watched deal widened dramatically from price talk in the 10½% area, which circulated the market on March 28.

Initial chatter had the six-year notes coming in the mid-to-high 8% context, a trader recounted.

Along with news of Tuesday's launch came changes to the offering document, some of them bearing upon how the company may disburse cash and incur additional debt.

Books were scheduled to close late Tuesday for the deal, which was downsized from $1.5 billion; a proposed tranche of eight-year notes was eliminated prior to the release of official price talk.

Pricing is set for Wednesday.

The proposed 10 5/8% coupon matches the bridge cap, according to market sources who add that the discount will come at the expense of the dealers.

The bridge loan backing the deal was partially syndicated.

Bridge participants are expected to shoulder a portion of the discount, a trader said.

The deal is in the market in connection with the merger of McDermott and Chicago Bridge and Iron. Proceeds will be used to repay debt at both entities and for general corporate purposes.

The $200 million amount by which the bond offer was downsized will be made up by increasing the concurrent term loan by the same amount, moving the loan size to $2.26 billion from a revised amount of $2.06 billion. The loan had previously been downsized from $2.15 billion.

As talk widened on the McDermott bonds, pricing on the upsized loan also moved in investors' favor on Tuesday, with the original issue discount increasing to 98 from revised talk of 99 and initial talk of 99.5.

American Greetings. widens

Elsewhere, guidance was heard to have widened dramatically on American Greetings' $325 million offering of eight-year senior notes (Caa1/CCC+).

Whisper backed up to the 10½% to 11% area, according to a trader who added that the deal could remain in the market into the Thursday session.

Earlier talk and timing had the deal whispered at 8¼% to 8½%, and pricing as early as Tuesday.

Emanating from the battered retail sector, American Greetings greeting cards business is not universally liked among high-yield investors, as the company must compete in an age of e-greetings and emoji-festooned instant messages, a buyside source said on Tuesday.

Freedom Mortgage brings $500 million

Freedom Mortgage Corp. started a one-day roadshow on Tuesday for a $500 million offering of seven-year senior notes (expected ratings B2/B).

The debt refinancing deal is talked to yield 8¼% to 8½%, an investor said, and added that the Mount Laurel, N.J.-based residential mortgage company was drawn into the market by $500 million of reverse inquiry.

The bond offer, which is being managed by JP Morgan Securities LLC, is set to price on Wednesday.

Ply Gem active

While no new paper has entered Junkbondland thus far this week, Ply Gem Holdings Inc.’s 8% senior notes due 2026 (expected Caa1/confirmed CCC+) remained active in the secondary space.

The notes were relatively unchanged at par ½ bid, 101¼ offered on Tuesday.

They continued to see active trading and were wrapped around 101 with more than $17 million bonds in play during Tuesday’s session.

Ply Gem priced $645 million of the 8% senior notes at par on March 29.

Tesla rebounds

While Ply Gem was active, Tesla’s 5.3% senior unsecured notes due 2025 (Caa1/B-) continued to be a major volume mover during Tuesday’s session with the notes up more than 2 points.

The notes were seen at 89 3/8 bid after reaching a low of 85 bid, a market source said. They were seen trading at 89.375 with more than $38 million bonds in play during Tuesday’s session.

Tesla’s notes dominated trading in Junkbondland on March 28 after an onslaught of negativity publicity which included an ongoing investigation into a fatal accident involving a Tesla Model X, a credit downgrade, speculation that the company is on the verge of bankruptcy, rumors the Model S sedans will again miss their production goals, and an investors’ lawsuit over Tesla’s acquisition of Solar City Corp. moving to the next stage.

However, Tesla’s stocks and bonds were on the rebound on Tuesday after the company released its Model 3 sedan production numbers. The electric car manufacturer announced it had produced 2,020 Model 3 sedans in the last week of March.

The production number still missed the target of 2,500 Model 3 sedans per week by the end of March. However, Tesla said it expects to ramp up production rapidly, staving off any need for additional financing.

While Tesla has stated there will be no need for an additional capital raise, Bloomberg reported the company will run out of funds before the end of the year without more financing.

Charter drops

Charter Communications junk bonds were down 1 to 2 points on Tuesday, a low volume session that saw most issuances relatively unchanged.

Charter’s 5.375% senior secured notes due 2047 (Ba1/BBB-) were down 1.15 point to trade at 95.94, according to a market source.

Charter’s 6.484% senior secured notes due 2045 (Ba1/BBB-) were down 2 points to trade at 109.

Charter’s 5% senior secured notes due 2028 (B1/BB) were relatively unchanged at 93¾. The 5% notes were active during Tuesday’s session with $16 million bonds in play.

Charter’s 4.2% senior secured notes due 2028 (Ba1/BBB-) were down about ¼-point on Tuesday. The notes were seen at 95 5/8 in active trading with more than $15 million bonds in play.

Charter priced $2.5 billion in investment-grade senior secured notes in a two tranche offering on Tuesday.

Charter has also recently occupied the headlines. Charter executives took their turn in the spotlight to testify against the AT&T-Time Warner merger at the antitrust trial on Tuesday.

Charter risks losing 9% of current and potential subscribers if it loses the Turner network channels, according to evidence produced at the trial, Variety reported.

Charter is also facing a $1 million fine from the New York State Public Service Commission for failing to meet its broadband buildout requirements.

The lawsuit charter filed against workers union IBEW Local Union No. 3 in New York, which alleged union leadership vandalized cables resulting in outages for subscribers, was also dismissed on Monday.

Charter will report its first quarter earnings on April 27.

Moderate Monday outflow

The daily cash flows of the dedicated high-yield bond funds were moderately negative on Monday, the most recent session for which data was available at press time, according to a bond investor.

High-yield ETFs sustained $107 million of outflows on the day.

Asset managers saw $165 of outflows on Monday.

Given the dramatic downward Monday move in stocks, with the S&P 500 shedding more that 2.2% of its value on Monday, the market may have been anticipating more substantial outflows, the investor said.

With volatility in the global capital markets, high-yield has widened, the investor conceded, but added that the yield of the JP Morgan high yield index, 6.57% on Tuesday, is not signaling any kind of emergency in the asset class.

The index started the year at 6.1%, the investor said, and added that it hit its low for 2018 to date, 5.87%, on Jan. 8.

Cash being put to work in high-yield bonds is believed to have slowed recently, the investor said.

Indexes

The KDP High Yield index was up 1 point to 70.12 on Tuesday with the yield unchanged at 5.93%. The index dropped 9 points to 70.11 on Monday.

The Merrill Lynch High Yield index gained 3.1 bps on Tuesday with the negative year-to-date return improving to 0.983 after dropping to 1.014 on Monday.

The CDX high yield 30 index was up 11 bps on Tuesday after dropping 53.7 bps on Monday.

Sara Rosenberg contributed to this market comment

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