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Jack Cooper sets talk on $150M of 5-year PIK toggle notes; 12th PIK toggle deal of 2014

Jack Cooper has emerged with talk of a 9.75-10% coupon at a new issue discount of 99 on its $150 million offering of five-year (non-call two) senior PIK toggle notes, according to sources. This equates to a yield of roughly 10-10.25%. Joint bookrunners are Wells Fargo and Barclays, sources said.

Books close at the end of business today, with pricing expected tomorrow morning.

Issuance is technically at JCH Parent, and under Rule 144A for life. As with all the other PIK toggle deals this year, structure is the new classic for PIK toggle, with a short tenor and minimal call protection, with the first call premium at 102, although some investor-friendly revisions have been made. The call period has been revised from non-call one to non-call two. Covenants now also include an equity clawback option for up to 100% of the issue at 105 until 2015, then at 103 until 2016. This has been revised from an equity clawback of 100% at 102 during the first year, according to sources.

JCH lines up as potentially the twelfth PIK toggle deal so far in 2014, for a pro forma $3.12 billion in supply, with Interface’s $115 million contingent cash-pay last week the most recent. During 2013, there were 30 PIK toggle deals completed, for a net $11.6 billion in supply, according to LCD.

Ratings on the automobile-transport company’s debut at the holding company level are CCC-/Caa2, with a 6 recovery rating from S&P. Yesterday, S&P lowered the corporate rating to CCC+ from B- on the back of increased leverage due to the debt-financed dividend. It also lowered the 9.25% senior secured notes due 2020 to CCC+ from B- and revised that issue’s recovery rating to 3 from 4.

The company’s most recent visit to market was a $150 million add-on to the $200 million outstanding in 9.25% secured notes due 2020 last fall. Pricing was at 105.25, yielding about 8.06% to worst, with a first call in 2016 at par plus 75% coupon, and recent valuation is 109.25, yielding about 7%, according to S&P Capital IQ. The original issuance dates to June 2013, at par. Proceeds from the October add-on offering were used to fund an acquisition of rival Allied Systems Holdings out of bankruptcy. Wells Fargo was bookrunner and Barclays was a co-manager.

Privately held Jack Cooper Transport, based in Kansas City, Mo., transports new and pre-owned passenger vehicles, light trucks, and sport-utility vehicles. – Staff reports

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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

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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

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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
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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

 

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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

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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.

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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

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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
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Fridson: High-yield bonds go from way overvalued to way, way overvalued

Extreme overvaluation of the U.S. high-yield market has given way to very extreme overvaluation. Our updated fair-value estimate of the option-adjusted spread (OAS) of the BofA Merrill Lynch US High Yield Index (formerly known as the High Yield Master II) is 570 bps. The actual spread on April 30, 2014 was 371 bps, for a difference of -199 bps, or -1.53 standard deviations. We define a disparity of one standard deviation (130 bps) in either direction as an extreme. One month earlier, the fair-value estimate was 514 bps, and the actual spread was 377 bps, resulting in an extreme overvaluation of “only” 1.06 standard deviations.

High-yield has now been extremely overvalued for seven consecutive months, the longest streak in history. (Option-adjusted spreads are available from Dec. 31, 1996 onward.) Moreover, the actual spread has been less than fair value (although not always at an extreme) for 23 consecutive months (see the chart below). That is not a record, but it is ominous that the longest such streak on record, 27 months, came to an end in September 2008, the month in which Lehman Brothers collapsed, plunging global financial markets into chaos.

As in the 27-month streak, monetary policy is the key to the present, extended period of overvaluation. The Fed’s explicit objective is to push investors into risky assets by artificially depressing interest rates. In response, investors are accepting excessively small compensation for credit risk, so desperate are they to boost their yields. High-yield portfolio managers are not unaware of the inadequacy of spreads, but are willing to skate on thin ice on the assumption that the Fed is committed to rescuing them if anything goes wrong.

Why did high-yield get a lot richer during April, even though the index’s OAS contracted by a mere four basis points? As detailed in “Determining fair value for the high-yield market” (Nov. 13, 2012), five independent variables explain 82% of the historical variance in the option-adjusted spread of the BofA Merrill Lynch US High Yield Index. Comparing the updated numbers with month-earlier figures, we find that Industrial Production dipped from 0.7% to 0.6% and Capacity Utilization receded from 79.2% to 78.6%, with both changes pointing to a wider fair-value spread. Also calling for an increase in OAS was the latest (April) quarterly credit-availability number, derived from the Federal Reserve’s survey of senior loan officers. The percentage of banks tightening credit for large and medium-size companies minus the percentage easing worsened slightly, from -13.7% to -11.1% In addition, the yield on the BofA Merrill Lynch Current 5-Year US Treasury Index, which is inversely correlated with the high-yield spread, declined from 1.73% to 1.68%. The speculative-grade default rate, a backward-looking number that has little impact on fair value, rose from 1.5% to 1.7%, as reported by Standard & Poor’s.

In summary, the actual spread was little changed, but overall risk increased substantially. The determinants of fair value (other than the credit-availability measure, which is reported only once a quarter) may improve in May. In that case, the spread could once again finish the month close to where it began, but this time the divergence from fair value would shrink rather than expand. Absent an offsetting trend in underlying Treasury rates, high-yield could then post a strong one-month total return. For value-oriented investors with a somewhat longer horizon, however, the present, very extreme overvaluation calls for underweighting high-yield until the market begins to provide better compensation for the full risk of owning the asset class.

Single-Bs lead the league in overvaluation
Applying our fair-value methodology to the BAML High Yield Index’s rating subdivisions, as shown in the following table, we find that the single-B segment is the most overvalued. At -240 bps, its gap is -1.87 standard deviations tight to fair value. The lowest-rated bonds are the least overpriced, whether measured by the BofA Merrill Lynch CCC & Lower US High Yield Index, at -0.80 standard deviations, or the pure CCC subindex that we generate from the BAML data, at -1.21 standard deviations.

Covenant quality dips in April
Covenant quality of new high-yield issues declined in April, as illustrated in the chart below. On its scale of 1 (strongest) to 5 (weakest), Moody’s reported a mild drop from 4.13 to 4.19. We find a bigger decline, from 4.04 to 4.32. This is somewhat out of character, as our series tends to be less volatile than that of Moody’s. That aberration can be written off to statistical noise.

As described in “Covenant quality decline reexamined” (Oct. 1, 2013), our methodology filters out the impact of month-to-month changes in ratings mix of new issues. Those changes contaminate the analysis, because higher-rated speculative-grade issues tend to have weaker covenants than lower-rated ones. (Indeed, Ba issues had an average score of 5.00 – generally indicating covenant-lite status – in April.)

 

To put this all in perspective, we do not advise portfolio managers to base major investment decisions on monthly covenant-quality data. The quarterly series shown below removes additional statistical noise. Our version of this series presents a smoother (and we believe, truer) trend than that of Moody’s, but both show little change since the third quarter of 2013. In absolute terms, the latest quarter’s numbers show no meaningful difference between our series (4.07) and that of Moody’s (4.10).

 

Martin Fridson, CFA
Chief Investment Officer
Lehmann, Livian, Fridson LLC

Research assistance by Kai Chen