RadioShack high yield bonds plumb record lows on 4Q report; CDS gaps wider

RadioShack logoBonds and shares of RadioShack traded lower, with bonds hitting all-time lows just as default protection on the credit gapped out to record wides after the struggling retailer posted fourth-quarter financials. Net revenue in the quarter was roughly 16% below consensus estimates, at $935 million, according to S&P Capital IQ.

The RadioShack 6.75% non-call notes due 2019 plunged to record low quotes, at 55.5/57, according to sources. Low trades were reported earlier today at 55, though the paper has since changed hands at 56, according to trade reporting.

Five-year CDS in the name gapped out 23% this morning, at a record wide of 44.6/47.6 points upfront, according to Markit. With that move, the cost of protecting $10 million of RadioShack bonds is essentially $925,000 more costly upfront, with roughly a $4.7 million payment at the midpoint, in addition to the $500,000 annual fee.

Shares were off as much as 26% earlier in the session, but recovered to a 17% decline, at $2.26. The recent low was $2.04 in mid-January, while the all-time low was around $1.90 in late-November 2012, trade data show.

Total net sales were $935.4 million, which is up from $805 million sequentially but down from $1.17 billion in the important holiday-influenced year-ago fourth quarter, according to company filings. Comparable store sales were down 19% on account of “traffic declines” and “soft performance” in the mobility segment, the filings show.

SG&A expenses expanded to 41.6% of net sales, compared with 32.7% of net sales last year, the company reported.

While the company continues to push forward with it’s “five pillars” transformation plan, management today also told investors that the company expects to close up to 1,100 stores. An investor call is underway.

As reported last year, a Bloomberg News report flagged AlixPartners and investment banking firm Peter J. Solomon as refinancing advisors. – Matt Fuller

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


HCA drives by with $3B, two-part offering to refinance notes

HCA has announced a $3 billion, two-part secured offering with pricing expected today via lead bookrunners J.P. Morgan, and a huge joint bookrunner group that includes Barclays, Bank of America, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, RBC, SunTrust, UBS and Wells Fargo, according to sources.

An investor call is scheduled for today at noon EST, with pricing to follow.

The deal will be split between five- and 10-year bullet tranches, with proceeds being used to redeem the 8.5% secured notes due 2019 and the 7.875% secured notes due 2020. These notes are initially callable on April 15 and Aug. 15, respectively, with regular-way first call premiums, at par plus 50% coupon.

The 8.5% notes traded at 105 on Friday, yielding 2.55% and the 7.5% notes due 2020 were quoted at 108.75, yielding around 2.13%, according to trade data. Those notes traded up to 109 this morning, to yield 1.86%.

The new two-part offering is SEC registered, with leads guiding investors toward BB/Ba3 ratings.

HCA last tapped the market in December 2012 with $1 billion of eight-year bullet notes that were used to fund a dividend to common shareholders. That deal was helmed by Citi and priced at 6.25% at par and most recently traded at 109, yielding 4.72%. Before that, the company issued a $2.5 billion, two-part offering in October 2012, also to fund a shareholder payment.

Nashville, Tenn.-based HCA provides healthcare services in the U.S. and England. The company trades on the NYSE under the symbol HCA with an approximate market capitalization of $22.6 billion. – Joy Ferguson


Grifols Worldwide plans $1B offering of 8-year high yield bonds for refi

Grifols Worldwide Operations has announced a $1 billion offering of eight-year (non-call three) senior notes through Nomura, Morgan Stanley, BBVA, Deutsche Bank, and HSBC, according to sources.

A New York lunch and global investor call is scheduled for tomorrow, March 4 at noon EST, with timing for the pricing of the deal not yet disclosed. Proceeds from the notes will be used to refinance existing debt.

As reported, the Spanish healthcare company will also host a lender meeting today in New York to present a $4.8 billion, cross-border senior loan financing via MLAs and bookrunners Nomura (global coordinator), Morgan Stanley, BBVA, Deutsche Bank, and HSBC.

The facility is split between pro-rata, dollar, and euro tranches. In terms of roles BBVA (lead left) and Nomura are JLAs and physical bookrunners on the pro-rata facilities; Morgan Stanley (lead left) and Nomura are JLAs and physical books on the dollar TLB; and Nomura (lead left) and Morgan Stanley are JLAs and joint books on the euro TLB.

Grifols signed a $1.5 billion bridge loan back in November to support the acquisition of Novartis’ diagnostics business for $1.675 billion, via global coordinator Nomura alongside fellow joint bookrunners BBVA and Morgan Stanley.

Prior to this the firm signed a $4.5 billion debt financing to support its acquisition of U.S. biotherapeutics firm Talecris in 2010, in a deal that included both dollar and euro institutional term loans, along with high-yield bonds. The loan element of this financing was recut in 2012 via a retranching and repricing that left the firm with TLBs of $1.7 billion and €220 million, paying L/E+350.

Grifols’ senior secured and corporate ratings are Ba1/BB+ and Ba2/BB respectively, and it is listed in Spain on the Ibex-35. The firm published its 2013 full-year results last week, reporting revenue of €2.741 billion and adjusted EBITDA of €917.4 million, for respective increases of 4.6% and 9.7% on the prior year. At the end of 2013, Grifols’ net financial debt stood at €2.087 billion, or 2.28x adjusted EBITDA. – Staff reports


Taylor Morrison high yield bonds (BB-/B2) price at par to yield 5.625%

Taylor Morrison Communities today completed an offering of senior notes via joint bookrunners J.P. Morgan, Citi, Credit Suisse, and Deutsche Bank, according to sources. Terms for the 10-year bullet issue were finalized at the tight end of talk with a $50 million upsizing, to $350 million. Proceeds from the 144A-for-life offering will be used for general corporate purposes. Taylor Morrison builds and sells single-family homes, townhomes, and high-rise condominiums in the U.S. and Canada. Terms:

Issuer Taylor Morrison
Ratings BB-/B2
Amount $350 million
Issue senior notes (144A-life)
Coupon 5.625%
Price 100
Yield 5.625%
Spread T+295
Maturity March 1, 2024
Call nc-life
Trade Feb. 28, 2014
Settle March 5, 2014 (T+3)
Lead Books JPM/Citi/CS/DB
Jt. Books
Px talk 5.75% area
Notes Carries T+50 make-whole call; callable at par three months prior to maturity; upsized by $50 million.

Cloud Peak Energy places $200M of 10-year high yield bonds (BB-/B1) at 6.375%

Cloud Peak Energy has placed a $200 million offering of 10-year (non-call five) senior notes at the tight end of talk, according to sources. The SEC-registered deal comes via bookrunners Goldman Sachs, Credit Suisse, RBC, Deutsche Bank, Wells Fargo, J.P. Morgan, and Credit Agricole, the sources said. The company plans to use the capital to fund a tender offer for its existing senior notes due 2017. Cloud Peak Energy last tapped the market more than four years ago, pricing $300 million of 8.25% senior notes due 2017, along with another $300 million of 8.5% notes due 2019. The 2019 notes are currently quoted at 108.25, yielding 3.26%, according to Capital IQ. Headquartered in Gillette, Wyo., Cloud Peak Energy is a producer of subbituminous coal. Terms:

Issuer Cloud Peak Energy
Ratings BB-/B1
Amount $200 million
Issue senior notes (SEC Reg.)
Coupon 6.375%
Price 100
Yield 6.375%
Spread T+373
Maturity March 15, 2024
Call nc5
Trade Feb. 27, 2014
Settle March 11, 2014 (T+8)
Co’s. BB&T/Comerica/PNC/Stifel
Px talk 6.5% area

JC Penney debt pops, CDS tightens on 4Q profit, sales forecast; shares rally

Debt backing J.C. Penney is trading higher this morning alongside the company’s shares after the retailer late yesterday reported a small fourth-quarter profit and said it expects same-store sales to increase by mid-single digits in the full year 2014.

J.C. Penney’s 7.4% notes due 2037 are among the most active issues this morning, trading up two points to 70. The 5.75% notes due 2018 are quoted at 80/81 versus some odd lots trades yesterday at 72.50. The 6.375% notes due 2036 are up five points at 70/70.5.

Five-year CDS referencing the retailer also snapped about 7.5 points tighter on the day, quoted at 23.5/24.5 points upfront, sources said.

In the loan market, the company’s covenant-lite term loan due 2018 (L+500, 1% LIBOR floor) popped up more than two points on the news, to bracket 99, up from 96.5/97 ahead of the results yesterday, sources said. For reference, the $2.25 billion loan was issued at 99.5 in May 2013.

For the fourth quarter, J.C. Penney reported a $35 million profit, versus a net loss of $552 million during the year-ago quarter. Excluding a one-time tax benefit and other items, the company posted a $206 million adjusted net loss. The S&P Capital IQ average analysts’ estimate was for a $262 million net loss.

Same-store sales increased by 2% during the quarter, which was the first quarterly comparable sales gain since the second quarter of 2011. The company reported revenue of about $3.78 billion. That total was slightly below the S&P Capital IQ average analysts’ estimate of $3.85 billion and compares to $3.88 billion during the year-ago quarter, though the company noted that the 2012 quarter included an additional 53rd week.

The company also said it ended 2013 with total available liquidity in excess of $2 billion.

Looking forward, J.C. Penney said it expects an increase in same-store sales for the first quarter of 2014 of 3-5%, and forecast a mid-single digits increase for the full year 2014.

“With the most challenging and expensive parts of the turnaround behind us, we will focus on improving gross margin, managing expense and steadily growing our sales in 2014,” said CEO Myron E. Ullman.

The company’s shares are also rallying on the news, up about 22% to $7.30. The stock trades on the New York Stock Exchange under the ticker JCP. The company is rated CCC+/Caa2. – Kerry Kantin/Joy Ferguson


Bankruptcy: Classic Party Rentals unsecured creditors’ committee appointed, full list

The U.S. Trustee overseeing the Chapter 11 proceedings of Classic Party Rentals has appointed an official committee of unsecured creditors in the case. Current membership and contact information is as follows:

  • Herb Stone (415-559-3133)
  • Signature Systems Group (Wen-Kang Chang, 212-953-1116)
  • Stan White (901-331-0564)
  • Jomar Table Linens (Joel Nevins, 909-390-1444)
  • Ryder Truck Rental (Kevin Sauntry, 770-569-6511)
  • Designer 8 Event Furniture Rental (Samantha Sackler, 310-873-3118)
  • Aztec Tent (Chuck Miller, 310-347-3010)

Classic Party Rentals filed for Chapter 11 protection on Feb. 13 with plans for a sale of its operations. The company supplies china, glassware, lounge furniture, and catering equipment for events around the U.S. – John Bringardner


Greektown Casino high yield bonds price at par to yield 8.875%

Greektown Holdings today placed $425 million of five-year (non-call two) secured notes at the tight end of talk, via bookrunners Jefferies, Credit Suisse, Goldman Sachs, UBS, and Wells Fargo, according to sources. Proceeds will be used to refinance existing debt and for general corporate purposes. The Detroit, Mich.-based casino emerged from Chapter 11 in 2010, issuing two series of 13% second-lien notes totaling roughly $385 million to refinance pre-petition debt. The company last tapped the leveraged markets with a $425 million first- and second-lien loan refinancing in December 2012 via Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, and Jefferies. Terms:

Issuer Greektown Holdings
Ratings B-/B3
Amount $425 million
Issue 2nd-priority secured (144A-life)
Coupon 8.875%
Price 100
Yield 8.875%
Spread T+740
Maturity March 15, 2019
Call nc2
Trade Feb. 26, 2014
Settle March 14, 2014 (T+12)
Lead Books Jeff/CS/GS/UBS/WF
Px talk 9% area



Momentive 11.50% subordinated high yield bonds plummet on default concerns

momentive logoMomentive Performance Materials 11.50% subordinated notes due 2016 plummeted another 13 points today to 31.50, according to sources and trade data. The notes were in the 70s earlier this month, but have declined precipitously in the past few weeks on default concerns.

In a report yesterday, Debtwire revealed that Momentive’s sponsor, Apollo, met with holders of Momentive Performance Materials $1.16 billion 9% second-lien notes due 2021 last week in an initial attempt to gauge support for a potential pre-arranged restructuring plan that would revolve around eliminating the $380 million 11.5% senior subordinated notes due 2016 and making the seconds the fulcrum, the Debtwire report said.

Sources told Debwire that Apollo, which is a crossholder in the second-lien and sub notes, may be willing to write-off its junior position in order to maximize its second-lien return prospects through equitization.

Debtwire also reported holders of the issuer’s 9% second-lien notes have gone restricted in an effort to begin restructuring negotiations with management. Those notes traded in an 89/90.25 context today, up from the 86-88 range a week ago.

Earlier this month S&P lowered Momentive’s corporate rating to CCC-, from CCC; the first-lien notes to CCC, from CCC+; and the intermediate-lien debt to C, from CC. S&P said the silicone and quartz producer’s EBITDA is not recovering as much as anticipated, and therefore it expects the company to continue to generate negative free operating cash flow, causing liquidity to dwindle.

Holders of the second-lien notes formed a group at the behest of Oaktree, and the group has engaged Houlihan Lokey as financial advisor and Milbank Tweed as legal advisor, according to a report by Debtwire earlier this month. Those moves come after Momentive Performance retained financial advisor Moelis and legal advisor Willkie Farr, according to the Debtwire report.

Waterford, N.Y.-based Momentive Performance was created from the sale of GE Advanced Materials to Apollo in December 2006. A related entity, Momentive Specialty Chemicals, the other Apollo-controlled entity still referred to under its former name of Hexion, carries no cross-default provisions with Momentive Performance. – Staff reports


Fridson: Purifying the CCC high yield bond segment (the least overvalued, btw)

Synopsis: Adopting a stricter measure of the CCC sector does not alter our conclusion that for the past few months, the lowest credit-quality tier has represented the least overvalued segment of the high-yield market. The high-yield asset class as a whole is extremely overvalued at present. On the positive side, the covenant quality of new issues has been improving since the fall.

Purifying the CCC segment to determine relative value

In conjunction with this update of our rating-specific fair-value analysis, we address a concern raised by some readers about measurement of the CCC spread. As detailed in “Valuation and short-run performance” (Feb. 19, 2013), our model explains historical variance in the option-adjusted spreads of the BofA Merrill Lynch U.S. High Yield Master II Index rating subdivisions as a function of economic conditions, credit availability, the speculative-grade default rate, and Treasury yields.

The bottom-tier index (BAML Ticker: H0A3) consists primarily of CCCs, but also includes CCs and Cs. Both in the latest month and in the historical period used to create the multiple regression formula by which we estimate fair value, the H0A3 spread exceeds the pure CCC spread. This difference could conceivably lead to a false comparison of relative value between CCCs and the other rating categories.

To address this concern, we created a new time series for the pure CCC spread, consisting of 68 quarterly observations (December 1996 to December 2013). In each quarter we calculated a market-value-weighted OAS for the CCCs only. We then applied the above-described FridsonVision Fair Value Model to the quarterly data. The resulting model (see note 1) explains 76% of the variance in the pure CCC spread. This level of explanatory power (R-squared) compares favorably with the corresponding figures of 78%, 80%, and 74% for H0A1 (BB), H0A2 (B), and H0A3 (CCC/CCC/C), respectively.

Fair-valuation output for Jan. 31 appears in the chart below. The bottom line is that whether defined as H0A3 or our newly created Pure CCC index, the bottom tier of the speculative-grade asset class continues – as in recent months – to be the least overvalued.

This is true even in absolute terms for the CCC/CC/C group. Its actual-versus-fair-value gap is less than that of the B category (145 versus 182 bps). On the other hand, our Pure CCC group’s gap versus fair value is five basis points greater the B group’s (187 versus 182). These gaps must be normalized, however, for the differences in scale of fair-value OAS for the various rating categories.

To understand why, suppose that on a given date, the fair-value spread for AA corporates is 100 bps. If the actual spread on that date is 200 bps, AA corporates are surely cheaper than CCCs, with a fair-value spread of 1,000 bps on the same date and an actual spread also greater by 100 bps, i.e., 1,100. Surely, the AAs are cheaper, at a spread 100% greater than fair value, than CCCs, which are a mere 10% wider than fair value.

Following that logic, we show in the column labeled “Difference as a % of fair value” that the CCC/CC/C group is the least overvalued (-15.8%) and the B group is the most overvalued (-31.1%). Pure CCCs, at -22.1%, are more overvalued than the CCC/CC/C category, but still less overvalued than either BBs or Bs. An alternative approach to normalizing the actual-minus-fair-value gaps, measuring the number of standard deviations of overvaluation, produces the same result – namely, the bottom tier is the cheapest portion of the high-yield market at present.

As a caveat, short-term relative returns tend to be a function of changes in investors’ market tolerance, rather than valuation. If risk premiums increase sharply, CCCs will almost certainly underperform BBs and Bs, even if they are relatively undervalued at the outset. Valuation is not a tool for short-term traders, but rather a guide for value investors who aim to benefit over the long run by perennially holding intrinsically underpriced assets.

Going forward, our monthly valuation update will include fair value and actual spreads for the Pure CCC index as well as BAML’s H0A3 index.

High-yield is extremely rich

The chart below updates the fair-value analysis of the high-yield asset class, initially described in “Determining fair value for the high-yield market” (Nov. 13, 2012). Taking into account total risk (not just default risk, as primitive “breakeven” models do), fair value for the High Yield Master II is 557 bps at present.

The current fair-value spread is down from 568 bps one month earlier. An improvement in credit availability offset unexpected, substantial drops in Industrial Production and Capacity Utilization. (Unusually harsh winter weather probably contributed to those declines.) The default rate declined slightly, while the five-year Treasury yield, which is inversely correlated with the spread, dropped by 16 bps.

On Feb. 14 the actual high-yield OAS was 403 bps, or 1.2 standard deviations less than fair value. We define a shortfall of one standard deviation or more as an extreme overvaluation. High-yield has historically underperformed Treasuries in 12-month periods following extreme overvaluations. For the record, the Jan. 31 actual OAS was 421 bps, representing a divergence of 1.0 standard deviations.

Covenant quality improved in January

Covenant quality on new high-yield issues improved in January, continuing an upward trend from the recent low point in the fall of 2013. The chart below updates analysis introduced in “Covenant quality decline reexamined” (Oct. 1, 2013). The Moody’s version of the covenant-quality trend is shown by the dotted line, while the solid line depicts the FridsonVision version. Both are based on Moody’s scores for the individual high-yield issues that come to market each month.

The methodological difference is that we filter out the impact of month-to-month changes in the ratings mix of new high-yield issues. CCC issues on average have stronger covenants than Bs, which on average have stronger covenants than BBs. If, in a given month, the balance of negotiating power between issuers and investors does not shift, but CCCs happen to represent a greater share of issuance than in the preceding month, the Moody’s series will show an improvement in covenant quality, but ours will (correctly) show no such change.

Our series indicates an improvement in the CQ trend to 3.89 in January, from 4.03 in December and from a worst point of 4.19 in September 2013. The Moody’s series shows a worst point of 4.26 in October 2013 and a latest-month improvement to 3.84, from 4.00 in December. By either measure, the rockier conditions in the high-yield market of late have weakened the hand of issuers, enabling investors to obtain somewhat stronger covenants than in the fall.

Martin Fridson, CFA

CEO, FridsonVision LLC

Research assistance by Yinqiao Yin and Ruili Liu



1. The multiple regression formula is: