PetSmart paper again punished, Mattel mauled on downgrade; CenturyLink, CalRes climb

By Paul Deckelman

New York, Dec. 12 – Even as renewed new-deal activity was the main area of focus in the broader high-yield bond market on Tuesday, traders in distressed debt and in the notes and bonds of otherwise underperforming companies and sectors saw a few names standing out in active trading in their sphere.

PetSmart Inc.’s paper was getting pounded down for a second consecutive session Tuesday, on news reports that the company’s closely held EBITDA numbers were weak – this on top of investor fears about a possible spinoff of the specialty retailer’s lucrative online sales business to benefit its equity sponsors and leave its bondholders holding the bag.

Toymaker Mattel Inc.’s bonds were battered around in the wake of Monday’s ratings downgrades by all three major agencies, completing its fall from investment grade grace into the treacherous waters of Junkbondland – just as the company hopes to price a new $1 billion bond deal this week.

For a second straight session, wireline telecommunications operator CenturyLink, Inc.’s issues firmed smartly, helped by the he news that it had signed a big data services contract with the state of Pennsylvania.

Energy sector bellwether issue California Resources Corp. was up solidly on good volume – even though crude prices surrendered their early gains and ended Tuesday’s session lower after three straight advances.

PetSmart pummeled again

A trader said that PetSmart paper “was pretty active” and “was getting whacked,” adding to the losses that the Phoenix-based pet food and pet supplies retailer had racked up on Monday.

A second trader characterized PetSmart as “taking it on the chin,” while a third said the credit “was getting murdered.”

The first trader saw its 5 7/8% notes due 2025 dropping some 5½ points, down to 79 bid from a mid-80s context at the close Monday. More than $35 million of those notes changed hands.

Its 8 7/8% notes due 2025 did even worse, plummeting by a full 8 points on the day to 66½ bid, on volume of more than $17 million.

The company’s 7 1/8% notes due 2023 fell to 65 bid, down 6 points on the session, on more than $26 million of turnover.

Two separate traders cited headlines indicating that the troubled retailer might be expecting a decline in EBITDA.

On Monday, the notes fell on news reports indicating that the company – empowered by a lax covenant package – could choose to spin off its lucrative Chewy.com online pet supplies business to its private equity sponsors, thus removing the unit’s revenues and earnings from the overall company, which would still be stuck with the $2 billion of junk bonds it issued in May to fund that major acquisition.

Mattel drops after downgrade

A trader noted that Mattel Inc. “got downgraded to junk yesterday [Monday]. They were trading off a little” on Monday, but on Tuesday “they were off precipitously,” even as the El Segundo, Calif.-based toy manufacturer began shopping around a proposed $1 billion of new senior guaranteed eight-year notes in a debt refinancing deal.

He said he heard that the new notes, expected to price this week, might price to yield somewhere in the 6% to 7% area, and the company’s existing bonds “were trading way tight to that.”

He saw “lots of trades” in its 4.35% notes due 2020, but these were mostly smallish odd-lot pieces adding up to around $10 million or so, with the final trades around par, down 1¾ points on the day.

He said that total volume levels in the company’s other notes dropped off quite a bit after that, but were still “very active,” with the Mattel 2.35% notes due 2019 finishing at 98¼ bid, down ¼ point on the day “because it’s so short, I guess ” in duration.

Its 2.35% notes due 2021 lost 1 point, to 91 3/8 bid, while among its longer-dated issues, its 6.20% bonds due 2040 fell by a full 5 points, to 94 bid, while its 5.45% long bonds due 2041 nosedived by almost 10 points, closing at 84½ bid.

All three major ratings services now consider the formerly investment grade name to be junk.

On Monday, Fitch Ratings sliced Mattel’s long-term issuer default rating to BB from BBB- previously and cut its short-term issuer default rating and commercial paper program rating to B from F3; while dropping its senior unsecured nonguaranteed notes to BB-/RR5 from BBB-. The agency also assigned a BBB-/RR1 rating to Mattel's proposed $1.6 billion ABL revolving credit facility and gave the proposed $1 billion note issue a BB/RR4 rating. The outlook is negative.

Moody’s Investors Service meantime cut Mattel’s existing senior unsecured bond ratings on Monday to Ba3 from Baa3, lowered its rating for short-term issuance to Not Prime from Prime-3, assigned a Ba2 rating to the upcoming new bond deal, pegged its corporate family rating at Ba2 and its speculative grade liquidity rating at SGL-1. Moody’s called the outlook stable.

Those agencies joined Standard & Poor’s, which had first chopped Mattel’s ratings down to junk back on Oct. 27, when it pushed Mattel’s corporate credit rating down to BB from BBB- and lowered the issue-level rating on the company's senior unsecured debt to BB from BBB- previously.

S&P again cut the ratings on Monday, reducing its corporate credit rating to BB- from BB, with a negative outlook, and assigned the upcoming bond deal a BB- issue-level rating.

CenturyLink surge continues

On the upside, CenturyLink’s bonds were seen better for a second straight session.

A trader saw the Monroe, La.-based wireline telecom operator’s 6.45% notes due 2021 gained ¾ point, ending at 100 3/8 bid, with over $11 million having traded.

Its 7½% notes due 2024 gained 1½ points to finish at 99 bid, on top of the 1-point gain in those notes seen on Monday. Tuesday volume was around $10 million.

The bonds improved against the backdrop of CenturyLink’s Monday announcement that it had signed a big five-year contract with the Commonwealth of Pennsylvania to provide data networking products to the state’s agencies, commissions, councils, bureaus, authorities and boards. As part of the terms of the contract, CenturyLink is collaborating with Comcast Business to provide high-performance network services and last-mile connectivity to end users.

CenturyLink said that “this is another phase in service delivery associated with the contract award announced in September.”

Cal Res sizzles as crude fizzles

A trader saw California Resources Corp.’s 8% notes due 2022 up ½ point at 77¾ bid, “on really good volume” of over $16 million.

The Los Angeles-based oil and natural gas exploration and production company’s issue – widely considered a representative sector bellwether credit – firmed even as crude oil prices were retreating for the first time after three straight days of gains.

January-delivery West Texas Intermediate crude, the key domestic grade, fell by 85 cents per barrel in New York Mercantile Exchange dealings Tuesday, settling at $57.14.

February-delivery North Sea Brent crude, the main international grade, gave up early gains that had pushed it above $65 for the first time in many months, to finish London futures trading at $63.34, a loss of $1.35 per barrel on the day.

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