US HY market springs back to life as 19 deals launch

Thu Nov 8, 2012 4:13pm EST

NEW YORK, Nov 8 (IFR) - The US high-yield primary market quickly got back to business post-hurricane Sandy with 19 deals launched this week through Thursday, most of which are drive-by offerings.

Despite lingering transit difficulties, market participants were mostly back at their desks. With Election Day over, focus has shifted back to the US fiscal cliff and Europe, with the high-yield cash market lower on both Wednesday and Thursday, although still outperforming equities.

Despite the pullback in the secondary market, the high-yield primary market remains robust, with plenty of buyside cash needing to be put to work and issuers busily working to price deals before the Thanksgiving holiday.

"We are certainly going to be sprinting hard to Thanksgiving with a good backlog of deals," said one syndicate manager.

A few large deals have led issuance this week. Offerings from Clear Channel Worldwide, E*TRADE and an upcoming deal for Sprint Nextel have filled up the calendar, along with a number of smaller drive-by and roadshow offerings.

Launched last week, Clear Channel Worldwide Holdings, the subsidiary of Clear Channel Outdoor, priced a large US$2.725bn series A and series B senior notes issue on Tuesday via Goldman Sachs, Citigroup, Morgan Stanley, Credit Suisse, Deutsche Bank and Wells Fargo joint books.

The 10-year non-call five deal was split into US$735.75m series A notes that priced at 6.50% at 99 to yield 6.639%, and another US$1.99bn in series B notes that priced at 6.50% at par. This was on the wide end of talk for both series of notes.

Clear Channel is a marquee name in the high-yield market, and Clear Channel Outdoor is considered to be one of the strongest parts of its business.

The deal was heard to have been well-oversubscribed, but aftermarket performance was disappointing. Initially the series A notes dropped half a point, while the B notes were seen down one eighth of a point. As markets slumped following Election Day, the issue was still under pressure, off a quarter of a point.

E*TRADE Financial Corp was another large issuer on Tuesday, pricing a B2/B- rated US$1.305bn two-part deal, split between five-year non-call two and seven-year non-call three senior notes. BofA Merrill, Goldman Sachs and Morgan Stanley were joint books.

E*TRADE was motivated to come to market to address its high coupon 12.50% springing lien notes due 2017, which are callable in a couple of weeks. It also tackled the 7.875% senior notes due 2015. Through this exercise, the company saves close to US$50m in annual interest expense.

The new US$505m senior notes tranche due 2017 priced at 6% at par, in line with talk. The remaining US$800m in senior notes due 2019 priced at 6.375% at par, on the wide end of talk. In the aftermarket, the deal was quoted around par on Wednesday while the broader market sold off roughly half a point.

Financial names do not make up a big part of the high-yield universe, but several entered as fallen angels following the financial crisis.

Post-crisis, however, these financial credits, which include CIT, ILFC and Ford Motor Credit, have shown marked improvement. FMCC this year was upgraded to investment-grade by Moody's and Fitch (S&P rates it BB+). ILFC, meanwhile, is split rated -- Ba3 at Moody's and BBB- at S&P. S&P revised its outlook on ILFC to stable earlier this year from negative.

E*TRADE, rated Ba3/B+, is also viewed as starting to turn a corner as it shrinks its balance sheet and loan book and improves capital ratios and free cash flow, which can be used to pay down debt.

With positive momentum backing the name, demand for the new notes was good. The book included a major roll-over factor from existing holders, as well as new money from high quality accounts.

E*TRADE's five-year tranche also appealed to a certain pocket of investors, as the short maturity was viewed as a way to have less interest rate risk while capturing yield on a short-term basis. At the same time, investors are betting that the notes will be called in two years.

The five-year note trend appears to be gaining momentum. Other issuers to price five-year bonds recently include Avis Budget Car Rental, which priced on Monday a US$300m 4.875% five-year non-call 2.5 senior notes offering.

iStar Financial raised US$300m in a 5.25-year bullet note on Wednesday at 7.125% at par. Last week, Checkers Drive-In Restaurants priced a US$160m five-year non-call 2.5 senior secured issue at 11% at par via Jefferies.

This afternoon, Epicor launched a US$340m five-year non-call one senior discount note through BofA Merrill and RBC that is expected to price tomorrow.

"There is an influx of short duration capital, with some investors looking for five-year paper," said the syndicate manager. "Investors have identified this yield to call paper as being increasingly in their investment management style. We tend to find some of these investors betting that the debt will be called out, given the state of the market."

Elsewhere in the market, Sprint Nextel is expected to price a US dollar benchmark sized 10-year bullet issue later today through BofA Merrill, Barclays, Citigroup, Deutsche Bank, Goldman Sachs and JP Morgan joint books. Proceeds will be used to repay debt. The deal is talked at 5.875% area.

Sprint Nextel was last in the market in August with a US$1.5bn eight-year bullet note via JP Morgan left lead. That deal priced at 7% at par and was trading at 109.50-110.50 earlier today.

In the broader market, default rates declined in October. Moody's reported that the 12-month trailing global speculative-grade default rate came in at 2.9% for the month, down from 3.1% in September. In the US, the default rate edged lower to 3.4%, compared to 3.5% in September.

Similarly, S&P estimates that the 12-month trailing speculative grade corporate default rate in the US decreased to 2.8% in October from 3% in September. The rating agency said the slight decline last month is a result of a large number of defaults in October 2011 falling out from the pool of defaulters.

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