content

Coal credits slide amid bleak prospects; shares fall; Arch, Alpha, Walter, Patriot

A rising tide lifted all boats this week except coal credits as the sector was hit fairly hard and continues to trade lower. While there’s no specific news to point to, market participants relay ongoing negative bias toward the sector as well as bearish Street research that’s circulating, most notably a report this week from UBS on bankruptcy risks within the group.

Arch Coal unsecured 7% notes due 2019 were pegged 74/75 this morning, and traded at 74.5, representing a 1.5-point decline today and 4.5-point decline on the week, according to sources and trade reports. ACI shares, meanwhile, traded off roughly 6% this week, to $3.57. Higher up in the capital structure, the second-lien 8% notes due 2019 shed one point this morning, to 98/99, for nearly a four-point decline on the week, sources noted.

Alpha Natural Resources 6% unsecured notes due 2019 traded at 70.5 this morning, versus 73 yesterday, and 77/79 market quotes going out last week, according to sources and trade data. The benchmark 6.25% notes due 2021 slipped nearly seven points this week, to 68/70, an all-time low, while ANR shares traded down approximately 9% this week, to $3.52.

It was worse for Walter Energy, with WLT shares off 13% this week, at $5.03. In bonds, the Walter Energy second-lien 11% notes due 2020 shed 10 points over the week, to 77/79, while unsecured 8.5% notes due 2021 moved lower by eight points, to bracket 55, according to sources.

In assessing bankruptcy risks for these credits, following Patriot Coal and James River Coal‘s Chapter 11 filings in recent years, there is clearly “mounting financial distress” in the sector, according to the UBS report, which was published on May 27. Arch and Alpha Natural have more than three years of cash reserves, but Walter could run out of cash by the end of next year, according to the report.

Due to their high levels of debt, there may be “limited ability to shed other liabilities through a restructuring process,” according to UBS analyst Kuni Chen, who suggested that it could behoove unsecured bondholders to opt for exchange offers or “other concessions” out of bankruptcy.

Recall that S&P downgraded Arch Coal in March to B, from B+, on weaker-than-expected sales and EBITDA targets in 2014 and 2015. That followed a downgrade by Moody’s to B3, from B2, in October for the same reasons.

The Arch Coal corporate rating of B/B3 has stable and negative outlooks, respectively. Unsecured notes are CCC+/Caa1.

Alpha Natural is also B/B3, though with a stable outlook on both sides. Unsecured notes are also CCC+/Caa1.

Walter Energy is rated B-/Caa1, with negative and stable outlooks, respectively. Unsecured notes are CCC/Caa2. – Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, and trading news

content

JBS USA postpones $750M of 10-year notes after Tyson announcement

JBS USA has postponed its $750 million offering of 10-year (non-call five) senior notes, according to sources. The deal, which was launched late yesterday, was earmarked to redeem a pair of existing issues, including the 10.25% notes due 2016 and the 10.5% notes due 2016. Morgan Stanley and Wells Fargo were joint bookrunners on the issue.

The postponement comes after Tyson Foods this morning announced a $6.8 billion bid for Hillshire Brands, trumping the $6.4 billion offer that JBS-owned Pilgrim’s Pride made on Tuesday.

The Pilgrim’s Pride proposal for Hillshire includes roughly $550 million of rollover debt and a $163 million termination fee payable toPinnacle Foods. Hillshire had agreed to acquire Pinnacle earlier this month for $6.6 billion in cash, stock and assumed debt.

Today, Moody’s commented that the proposed acquisition of Hillshire by Pilgrim’s Pride would be a short-term credit negative for its Brazilian parent company JBS S.A. Moody’s estimated that pro forma leverage at JBS would reach 5.9x, as compared to 4.6x in the 12 months ended March 2014, considering a $6 billion increase in debt. JBS S.A. is rated BB/Ba3.

On Tuesday, Moody’s also put Pilgrim’s Pride’s B1 rating on review for downgrade on the Hillshire bid, citing the anticipation of much higher leverage that would result from the transaction. S&P said ratings on Pilgrim’s Pride were not yet affected by the company’s unsolicited bid for Hillshire, noting that the likelihood of an agreement between the two parties was uncertain due to the existing merger agreement in place between Hillshire and Pinnacle Foods.

Morgan Stanley, which was acting as left lead on the postponed JBS transaction, provided a fully committed bridge facility to Tyson Foods (via Morgan Stanley Senior Funding), according to a Tyson statement. J.P. Morgan is also expected to join the deal, the company said.

This is the second sidelined transaction of 2014, following Trinidad Cement last week, for a combined $1.1 billion of postponed supply. Last year, there were 15 postponements or withdrawals, for a combined $4.9 billion, according to LCD. – Joy Ferguson

content

Solera/Audatex add-on high yield bonds (BB-/Ba2) price at 106.5 to yield 4.897%

Solera, via Audatex North America, this afternoon completed an add-on to its 6% notes due 2021 via Goldman Sachs. Terms were finalized at the midpoint of talk, along with a $50 million upsizing. Proceeds will be used for working capital and other general corporate purposes. This may include financing the I&S acquisition, and funding potential put and call options on strategic initiatives. Terms:

Issuer Solera/Audatex North America
Ratings BB-/Ba2
Amount $150 million
Issue senior add-on (144A-life)
Coupon 6%
Price 106.5
Yield 4.897%
Spread T+282
Maturity June 15, 2021
Call nc3.1
Trade May 28, 2014
Settle June 2, 2014 (T+3)
Lead Books Goldman Sachs
Px talk 106.5
Notes Upsized by $50 million
content

Interface toggle notes price to yield 13.15%

Interface Security Systems this afternoon completed an offering of senior contingent cash-pay bonds via sole bookrunner Imperial Capital. Terms were finalized at the midpoint of talk, along with a $15 million upsizing. Note that coupon steps up by 200 bps, to 14.5%, when paying in kind. That’s a rare diversion from the typical 75 bps, and it is the first ever toggle step-up of more than 100 bps, according to LCD. The bonds are rated CCC, with a 6 recovery rating from S&P. Proceeds will be used for general corporate purposes and to fund a debt-service-reserve account. Terms: 

Issuer Interface Master Holdings
Ratings CCC/NR
Amount $115 million
Issue senior contingent cash-pay (144A-life)
Coupon 12.5%/14.5%
Price 98
Yield 13.152%
Spread T+1167
Maturity Aug. 1, 2018
Call nc1.25
Trade May 27, 2014
Settle May 30, 2014 (T+3)
Lead Books Imperial Capital
Px talk 12.5% at 98 to yield 13.2%
Notes Upsized by $15 million

 

content

Interface Security Systems sets talk on $115M of PIK-toggle bonds

Interface Security Systems is guiding its upsized $115 million offering of senior contingent cash-pay bonds at a 12.5% coupon, at 98, to yield 12.3%, according to sources. Sole bookrunner is Imperial Capital. The deal was increased by $15 million and is expected to come with several structural and covenant modifications, sources added.

Books close today at 3:30 p.m. EDT, with pricing later this afternoon. Proceeds will be used for general corporate purposes and to fund a debt-service-reserve account.

The notes are due in 2018 and are non-callable prior to Aug. 1, 2015, then callable at 105% declining ratably every six months to par.

The issuing entity is Interface Master Holdings. The operating company is rated B3/B-. The new 144A-for-life issue is not rated.

Interface Security last tapped the market in January 2013 with $230 million of 9.25% notes due 2019. Proceeds were used to refinance existing debt and fund general corporate purposes. The issue is currently trading at 101, yielding 8.87%, according to S&P Capital IQ.

Privately held Earth City, Mo.-based Interface Security designs, installs, and monitors electronic security, and IP integration and managed broadband systems. – Joy Ferguson

content

Relative value: If high yield bond mart is rich, loans are cheap in comparison

In a May 20 report, our colleague Marty Fridson noted that the high-yield market has gone from overvalued to extremely overvalued in recent months. Loan managers note that in addition to being rich relative to the historical range, high-yield is also rich now versus the loan market, which has cooled in recent months as a result of slowing retail inflows.

As of May 22, the gap between the average yield to maturity of the S&P/LSTA Performing Loan Index versus that of the BAML US High Yield Index has narrowed to 130 bps – 4.66% to 5.96% – from 131 bps at the end of April and 145 bps at the end of 2013. And, as this chart shows, the yield premium investors get for moving from loans to bonds is now at the low end of the historical range.

content

European high yield bond funds see $70M outflow for week ended May 21

J.P. Morgan’s weekly analysis of European high-yield funds shows a €70 million outflow for the week ended May 21. This includes a €58 million net outflow for ETFs, and a €1 million net inflow for short duration funds. The latest reading breaks a 36-week winning streak. The reading for the week ended May 14 is revised from a €353 million inflow to a €381 million inflow.

The provisional reading for April is an €1.17 billion inflow, versus a €555 million inflow in April 2013. The provisional 2014 reading is a €6.82 billion inflow, while the 2013 inflow data closed at €8.3 billion.

The outflow was not expected, especially as the inflow the week prior was the second largest of the year, with a host of sizeable inflows having preceded it. Note, the outflow was dominated by outflows to ETFs, providing hope it is not linked to a pullback from long-term investors. Moreover, there is no clear catalyst for an outflow. Secondary prices softened during the first half of last week but this felt more like some of the froth being taken out of prices than a substantial correction, according to sources. Furthermore, the market pared its losses in the second half of the week.

Primary issuance is carrying on regardless – with new deals launched today from CABB Group and Officine Maccaferri – and demand is unlikely to be dampened for upcoming new issues as strong market technicals remain in place.

In the U.S., retail-cash flows for high-yield funds were positive $744 million in the week ended May 21, following a $472 million inflow last week and a $368 million infusion the week prior, according to Lipper. Unlike recent weeks, however, the inflow was dominated by exchange-traded funds, at 59% of the sum. The full-year reading shows inflows of $4.9 billion, and it’s roughly 12% related to the ETF segment.

Cash flows to bank loan funds were deep in negative territory, at $636 million, in the week ended May 21, according to Lipper. Both mutual funds met withdrawals, at $587 million, and the exchange-traded fund segment, at $49 million. This is the fifth week of outflows in six weeks, for a combined $1.8 billion in outflows over the period. Year-to-date inflows total $5.2 billion, of which $1 billion, or 19% of the sum, is ETF-related.

As reported, J.P. Morgan only calculates flows for funds that publish daily or weekly updates of their net asset value and total fund assets. As a result, J.P. Morgan’s weekly analysis looks at around 50 funds, with total assets under management of €10 billion. Its monthly analysis takes in a larger universe of 90 funds, with €27 billion of assets under management. For a full analysis, please see “Europe receives HY fund flow calculation.” – Luke Millar

content

Retail Cash Inflows To High Yield Bond Mutual Funds Continue For 3rd Consecutive Week

Retail-cash flows for high-yield funds were positive $744 million in the week ended May 21, following a $472 million inflow last week and a $368 million infusion the week prior, according to Lipper. Unlike recent weeks, however, the inflow was dominated by exchange-traded funds, at 59% of the sum.

The trailing-four-week reading rises to positive $238 million per week in the latest reading, from positive $115 million last week and negative $59 million the week prior.

The full-year reading now shows inflows of $4.9 billion, and it’s roughly 12% related to the ETF segment. In contrast, one year ago at this time, the inflow total stood at approximately $2.5 billion, with a breakdown of $2.7 billion of mutual fund inflows and $204 million of ETF outflows.

The change due to market conditions was negative $44 million this past week, or barely a measurable decrease of total assets, at $187.9 billion, of which 20% is tied to ETFs, or $37.5 billion. Total assets are up $7.1 billion in the year to date, reflecting a gain of roughly 4% this year. – Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, and trading news

content

Energy Transfer Equity places tack-on high yield bonds to yield 5.602%

Energy Transfer Equity this afternoon completed an upsized tack-on to its 5.875% senior notes due 2024 via Credit Suisse, Deutsche Bank, Morgan Stanley, and RBC. Terms were finalized at the midpoint of talk, along with a $200 million upsize. Proceeds will be used to refinance bank debt. Terms:

Issuer Energy Transfer Equity
Ratings BB/Ba2
Amount $700 million
Issue senior add-on (144A)
Coupon 5.875%
Price 102
Yield 5.602%
Spread T+311
Maturity Jan. 15, 2024
Call nc-life
Trade May 22, 2014
Settle May 28, 2014 (T+3)
Lead Books CS/MS/DB/RBC
Px talk 102
Notes Upsized by $200 million
content

High Yield Bond Primer/Almanac updated on www.highyieldbond.com/primer

LCD’s online High Yield Bond Primer has been updated with charts detailing U.S. market activity through April 2014, as well as historical numbers, and includes a new section on accrued interest.

The Primer is available to all on www.highyield bond.com, a free site powered by LCD to promote the high yield asset class. As well as the Primer, www.highyieldbond.com features select LCD News stories, leveraged finance job postings and HY market stats and data that are updated weekly, including issuance, yield and secondary prices.

Again, the High Yield Primer and HighYieldBond.com exist to help promote the asset class, so please share them with any and all that might be interested in learning about or keeping up with the market space.

Charts/Tables in the High Yield Primer

  • Ratings breakdown: Investment grade vs. Junk
  • U.S. High Yield Bond Issuance (historical)
  • Large High Yield Offerings
  • High Yield Issuance, by Purpose (2014)
  • High Yield Issuance, backing LBOs (since 2005)
  • Bond Fund Inflows/Outflows (2014)
  • PIK-Toggle Issuance (historical)
  • HY Bond Yield to Maturity (historical)

You can also check out www.leveragedloan.com, of course. And if you don’t already, follow @lcdnews on Twitter for real-time market updates, charts, and curated content covering the global leveraged finance markets.