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Amid Yesterday’s Market Rout, JW Aluminum Scraps $300M High Yield Deal

JW Aluminum has postponed its $300 million offering of eight-year secured notes, citing “adverse market conditions.” The decision comes amid the brutal equity sell-off, with the DJIA losing 7.9% yesterday and opening another 2% in the red this morning, before rebounding sharply.

As reported, the company roadshowed the deal all of last week via bookrunners Goldman Sachs (B&D), and Deutsche Bank. Whispers for the debt were in the 8% area, sources said.

According to sources, proceeds were earmarked to refurbish and expand the company’s capabilities at its manufacturing operations. Funds raised would also have been used to repay a $151.4 million secured term loan, as part of a refinancing effort that was expected to include an amendment to the company’s existing asset-based revolving credit facility to extend the maturity of that facility to 2023.

The borrower was also expected to fund the transaction with $35 million of shareholder equity.

S&P Global Ratings assigned a B– rating to the borrower’s proposed bond offering, with a 3 recovery rating. S&P Global analysts “expect adjusted debt to EBITDA of about 6x and adjusted EBITDA margins of about 10% over the next 12 months,” the Jan. 25 report notes.

The borrower is a wholly owned subsidiary of Goose Creek, S.C.–based JW Aluminum Holding Corp., which manufactures specialty flat-rolled aluminum products. — Luke Millar/Jakema Lewis

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NRG Energy Scraps $870M High Yield Bond Deal

Electric power concern NRG Energy has pulled an offering for $870 million of 10.25-year (non-call five) notes, according to a company statement. The cancellation was “in response to broader market conditions.”

Citi, Credit Agricole CIB, and Deutsche Bank were bookrunners on the deal, which sources say saw initial price talk at 5.75%. Proceeds would have been used to finance a tender offer for its $869 million of 6.625% notes due 2023, which has also been withdrawn.

Risk-on sentiments have waned in the high-yield market as of late, with U.S. high yield funds recording an outflow of $622 million for the week ended Nov. 8, following last week’s $1.2 billion withdrawal. Another sign of weakening was reflected in the Nov. 9 reading of LCD’s flow-name high-yield bonds, which showed the average bid for the 15-name sample dipping 114 bps, to 97% of par, for a new year-to-date low.

NRG’s would-be bond sale is the first to be pulled since Charter Communications scrapped its offering in June. — Jakema Lewis

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Charter Communications Scraps Plans for $1.5B High Yield Bond Offering

Charter Communications has withdrawn a proposed offering for $1.5 billion of senior notes due to market conditions, the would-be borrower said in a statement.

The cable operator pitched the Credit Suisse–led transaction at the start of Wednesday’s session. Structured as 10.5-year (non-call five) bonds, guidance for the deal was set at the 4.75% area. Proceeds were earmarked to back general corporate purposes, including a potential buyback of stock.

“Today’s debt capital market conditions did not allow this segment of investor expectations and those of Charter to align,” said Christopher Winfrey, CFO of Charter Communications, in a June 21 statement. “We will continue to be highly disciplined in our approach to financings, and will return to the broader credit markets when market conditions meet our expectations.”

On Wednesday, crude oil prices touched lows not seen since August 2016, causing volatility to spill over into broader markets. The iShares fund HYG ended the session at $87.60 versus $88.11 at Tuesday’s close. Similarly, the SPDR fund JNK also dipped, to close yesterday at $36.87, from $37.10 one day prior.

Both funds were working to retrace losses early on in Thursday’s session, with the HYG up 0.08% at $87.67, and the JNK up 0.09% at $36.90. Also, West Texas Intermediate Crude was trading at $42.84 this morning, for a 0.73% gain.

Charter’s last unsecured print had been in March, when it completed a $1.25 billion add-on to existing 5.125% notes due 2027, priced at 100.5, for a 5.057% yield. Concurrently, the company placed $1.25 billion of crossover 5.375% secured notes due 2047, priced at 99.968 for a 5.377% yield. — Jakema Lewis

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Tutor Perini Scraps $500M High Yield Bond Offering

Tutor Perini has postponed its planned $500 million bond sale due to “adverse market conditions,” according to a company statement.

Earlier this week, the construction company set price talk for the eight-year (non-call three) paper at 7–7.25%. Proceeds from the Goldman Sachs–led deal were to be combined with drawings from a new revolving credit facility to redeem Tutor Perini’s 7.625% notes due 2018, and repay an existing revolver and term loan debt.

“The company will evaluate the timing for the proposed offering as market conditions develop, and at this time does not intend to redeem its outstanding 7.625% senior notes due 2018 or enter into a new credit facility,” Tutor Perini said Nov. 2.

The company issued $300 million of the 7.625% notes in an October 2014 debut offering. As of Sept. 30, the company’s long-term debt also included a $160.5 million revolver, and an $80 million term loan, according to an SEC filing.

Tutor Perini is the latest would-be high-yield bond issuer. Last month, homebuilder UCP canceled a proposed offering for $200 million of notes due 2021 “in light of challenged market conditions.” Whispers for the deal were at 8.25–8.50%. — Jakema Lewis

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Fridson: The Incredible Expanding High-Yield Overvaluation

Only on the brink of the massive price collapse of the Great Recession in 2008 has the high-yield market ever been as overvalued as it currently is, according to our Fair Value Model.

As of Sept. 30, the option-adjusted spread (OAS) on the BofA Merrill Lynch US High Yield Index was 497 bps. That amounted to a gap of negative 265 bps versus our fair value estimate of 762 bps, a difference of –2.1 standard deviations, where one standard deviation equals 126.3 bps. (Grantham, Mayo, Van Otterloo has proposed a general definition of a bubble in financial markets as a divergence of –2 standard deviations from intrinsic value.)

By Oct. 14, the OAS on the BAML High Yield Index was down to 472 bps, a gap of –290 bps or –2.3 standard deviations.
fridson spread

As detailed above, the present shortfall from fair value was greater only in April 2008 (–300 bps or –2.4 standard deviations) and May 2008 (–321 bps or –2.5 standard deviations).

Following the record overvaluation of the spring of 2008, the high-yield market did not return to fair value until October 2008, when the BAML High Yield Index’s OAS widened by an astounding 521 bps in a single month. Ominously, from April 30 to Oct. 31, 2008, the BAML High Yield Index returned –25.94% while the BofA Merrill Lynch US Treasury Index returned 1.79%. We do not foresee conditions comparable to those of 2008 any time soon, but high-yield’s currently extreme overvaluation nevertheless sounds a loud cautionary note.

By way of background, our basis for determining whether the U.S. high-yield market is fairly valued is the methodology introduced in “Determining fair value for the high-yield market.” We are now using an updated analysis to reflect revisions to originally reported economic data, based on a historical observation period of December 1996 to December 2012. – Martin Fridson

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This story is part of Marty’s weekly high yield analysis, available to subscribers at www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.

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Gogo Unwinds $525M High Yield Deal After Striking Airline Deal

Airplane wi-fi provider Gogo today announced that it will be unwinding the sale of a $525 million issue of 12% secured notes due 2022 from earlier this week ahead of settlement today because it “received a proposal from a major airline customer under which Gogo would provide connectivity service on a meaningful portion of the airline’s domestic fleet,” according to a company statement.

All trades will have to be unwound for the paper, including 101.5 and 101.75 most recently and that context generally all week, from quotes of 101/101.5 on the break late on Monday, versus par issuance. As reported, joint bookrunners on the B–/B2 transaction were Morgan Stanley, J.P. Morgan, and Bank of America, with co-managers Evercore and UBS.

This is a rare pre-settlement move by an issuer not seen since Legends Gaming backed out of its placement in late 2007 andCablevision iced an offering after cancelling a dividend back in 2005. Of course, there were unwinds more recently, but related to failed M&A, like Charter and Dish in recent years.

Proceeds from the 144A-for-life deal from Gogo were to be used to pay down all of the company’s term debt, which was roughly $288 million at the end of the first quarter, and additional proceeds will be used to support working capital and for general corporate purposes, including the roll-out of next-generation product and technology.

Details of the airline-deal arrangement remain subject to negotiation, but the bonds will nonetheless not close for settlement today, the company said.

Gogo is Nasdaq-listed, but recall that TCP Capital expanded its investment in the company a year ago through the addition of a $15 million senior secured loan in the first quarter. See “TCP Capital adds more first-lien debt to Gogo in Q1,” LCD News, May 26, 2015. TCP Capital is a BDC that invests in middle market companies.

Chicago-based Gogo provides communications services to commercial and business aviation through strategic alliances with satellite operators, and it’s currently carrying an approximate $820 million market capitalization. Trailing 12-month net revenues of around $527 million boiled down to roughly $49 million in EBITDA, according to S&P Global Market Intelligence. — Matt Fuller

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Mortgage co. PennyMac Scraps $300M High Yield Bond Issue

PennyMac Financial Services yesterday announced that it decided to postpone its senior notes offering on account of “current market conditions,” according to a company statement. This is a third sidelined deal so far this year, although one,LeasePlan, successfully re-launched to market and got placed.

PennyMac was planning a $300 million five-year (non-call life) senior notes offering via bookrunners J.P. Morgan, Barclays, Bank of America, Credit Suisse, and Goldman Sachs. Marketing wrapped last week, and it had been held over the weekend. Issuance was to be under Rule 144A for life with B+/B2 ratings, and proceeds were to repay approximately $50 million of revolver drawings, and to support general corporate purposes, according to a company filing.

PennyMac Financial Services is a mortgage specialist operating in three segments: loan production, loan services, and investment management. It trades on the NYSE under PFSI and has a market cap of roughly $300 million. Trailing-12-month net revenues of approximately $921 million turned out roughly $339 million of EBT excluding unusual items, according to S&P Global Market Intelligence. — Luke Millar/Matt Fuller

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Inaugural Paddle Battle Tournament charity event to be held on Nov 5

RBC Capital Markets is partnering with the private equity community to host an inaugural charity ping pong tournament to support NYC Youth, which will be held on Nov. 5, 2015.

The money raised by the event will be split evenly among four charity partners: Harlem RBI, The Opportunity Network, The TEAK Fellowship, and Youth INC. The winning two-person team of the tournament will receive a $25,000 grant in their name to a youth-oriented charity of their choice.

The Paddle Battle Tournament will be held at SPiN NYC on 23rd Street, beginning at 6 p.m. EDT. There will be a full bar and heavy hors d’oeuvres served.

Registration is open and teams should be finalized by Oct. 22. For more information and to register or donate, go to RBC Paddle Battle. — Staff reports

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Concordia Sets Final Financing Plan; Notes Might Not Be Syndicated

Concordia Healthcare announced today a finalized structure for its financing of the acquisition of Amdipharm Mercury. According to a filing, the debt financing consists of term loans of roughly $1.865 billion, including U.S. dollar and sterling tranches, and senior unsecured notes/loans of up to $790 million, with maturities of six and seven years respectively. The balance of the financing will consist of an unsecured bridge loan of up to $180 million, which under the terms of the amended commitment letter, will have a maturity date of two years.

However, several sources indicate that the $790 million of unsecured notes/loans may not be syndicated in the high-yield market at this time, and may be placed with the bridge loan holders or potentially funded as leads work through options. Sources pointed to a 9% or 9.5% cap on the bridge loan, and currently the existing 7% notes due 2023 are trading with a 10% yield, at 94, trade data show. Note the bond offering had not been announced in the market, although S&P and Moody’s assigned CCC+ and Caa2 ratings to an originally proposed $950 million eight-year bond offering.

As reported yesterday, arrangers Goldman Sachs, Credit Suisse, Jefferies, and RBC Capital Markets trimmed by one year the proposed maturities of Concordia Healthcare’s cross-border institutional term loans.

Arrangers didn’t provide any update yesterday to price talk on the term debt. The $1.1 billion U.S. dollar B term loan, now six years, is officially talked at L+400–425, with a 1% LIBOR floor and offered at 99. The £500 million (roughly $759 million) sterling-denominated, six-year tranche is talked at L+450–475, also with a 1% floor and a 99 OID. Lenders to both the dollar and the sterling tranches are offered six months of 101 soft call protection. Unofficially, the loans appear to be in price discovery.

Arrangers held a follow-up call with investors yesterday to discuss both companies’ results and forecasts. Sources noted that the deal has been negatively impacted by both broad market conditions, as well as concerns around pharmaceutical credits, which have traded off in recent sessions amid scrutiny over rising drug prices.

Following the closing of the acquisition, Concordia’s total debt, including both new debt and existing senior notes of $735 million, with have a maximum blended interest rate of roughly 7.25% as announced on Oct. 9, 2015, according to filings. —Staff reports

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LCD’s High Yield Market Primer/Almanac Updated with 3Q Charts

LCD’s online High Yield Bond Market Primer has been updated to include third-quarter 2015 and historical volume and trend charts.

The Primer can be found at HighYieldBond.com, LCD’s free website promoting the asset class. HighYieldBond.com features select stories from LCD news, weekly trends, stats, and analysis, along with recent job postings.

 

We’ll update the U.S. Primer charts regularly, and add more as the market dictates (new this time around: an historical look at Fallen Angels, courtesy S&P).

Charts included with this release of the Primer:

  • US High Yield Issuance – Historical
  • 2015 High Yield Issuance, by Purpose
  • High Yield LBO Issuance
  • Fallen Angels – Historical
  • Cash Flows to High Yield Funds, ETFs
  • PIK Toggle Issuance (or lack thereof)
  • Yield to Maturity: Historical, Recent

LCD’s Loan Market Primer and High Yield Bond Market Primer are some of the most popular pieces LCD has published. Updated annually (print) and quarterly (online) to include emerging trends, they are widely used by originating banks, institutional investors, private equity shops, law firms and business schools worldwide.

Check them out, and please share them with anyone wanting an excellent round-up of or introduction to the leveraged finance market.