Engility slates deal but no pricings; talk out on Zayo; Puget up; Navistar, ATP still struggle

By Paul Deckelman

New York, June 13 - The high-yield primary sphere was again shut out on Wednesday, with no deals having priced - but that could change as soon as Thursday, when telecommunications company Zayo Group LLC is expected to come to market with a $1.25 billion two-part offering of senior secured and unsecured notes.

Bond market denizens will be watching the mega-deal's pricing execution and the aftermarket behavior of its new bonds for clues as to whether the junk market can still accept sizable new deals - Zayo will be the first $1 billion-plus purely junk issue to price in almost a month.

Price talk emerged on both halves of the deal during Wednesday's session, and syndicate sources said that the final hours of the marketing campaign were going well.

Also in the new-deal arena, Engility Corp. was heard to be ready to kick off a roadshow for its planned $250 million offering of seven-year notes, a deal being done in connection with the pending spin-off of Engility by big defense contractor L-3 Communications Holdings, Inc.

Secondary market participants saw Puget Sound Energy Inc.'s new 10-year notes being quoted solidly higher than the level where the Washington state electric utility company priced its quickly-shopped new deal on Tuesday.

Away from the new deals, it was another day on the downside, in active trading, for Junkbondland's two favorite punching bags of late, ATP Oil & Gas Corp. and Navistar International Corp., although the latter managed to stay above the lows to which its bonds swooned on Tuesday.

Statistical measures of market performance were mixed for a third consecutive session.

Market awaits giant Zayo deal

Back in the primary realm, price talk emerged on Wednesday on Zayo Group's planned $1.25 billion two-part offering of senior secured and unsecured notes, which is expected to price on Thursday.

Syndicate sources heard talk out on the company's $750 million senior secured notes (B1/B) maturing in January 2020, envisioning a yield in the 8¼% area, while the other half of the mega-deal - its $500 million unsecured senior notes (Caa1/CCC+) due in July 2020 - is expected to yield around 10¼%.

Order books for most accounts closed at 5 p.m. ET on Wednesday, although the books will close at 11 a.m. ET on Thursday for those West Coast accounts still having meetings with the company. Pricing is expected to take place after that.

The secured notes will be brought to market by joint book-running managers Morgan Stanley & Co. Inc., Barclays Capital Inc. and UBS Securities LLC.

The unsecured notes will come to market via bookrunners Morgan Stanley, Barclays and SunTrust Robinson Humphrey.

Zayo, a Louisville, Colo.-based provider of fiber-based bandwidth infrastructure and network-neutral collocation and interconnection services, is doing its bond deal though its Zayo Escrow Corp. unit as part of the funding for its pending $2.2 billion acquisition of AboveNet, Inc., a White Plains, N.Y.-based provider of high-bandwidth connectivity solutions for businesses and carriers.

The company is also lining up $1.75 billion of financing in the bank loan market, and will get $290 million in equity help from two sponsors.

It's been a while

Assuming that all goes according to plan and Zayo prices as expected sometime on Thursday, it will be the biggest junk deal in almost a month.

How crisp the execution is at pricing and how the new bonds do when they hit the aftermarket should serve as something of a litmus test measuring the ability of the previously rollicking, but now cautiously limping, high-yield market to accept a really big offering under the current less-than-ideal market conditions. Junk has been retreating from the highs it hit in early May, amid high volatility growing out of investor angst over the continued serious debt problems in Europe and the sluggish U.S. economy.

The last time such a large issue was seen in junk territory was on May 15, back before things started to really go south. That was when Inmet Mining Corp., a Toronto-based global metals mining concern, priced an upsized $1.5 billion of 8¾% notes due 2020 - the same tenor as the Zayo deal has.

Inmet's big deal priced at 98.584 to yield 9%, generating proceeds of $1.478 billion. The deal was upsized from an originally announced $1 billion.

The biggest deal since then has been Molycorp Inc.'s $650 million of 10% notes due 2020. The Greenwood Village, Colo.-based miner of rare-earth oxides priced its deal at par on May 18.

'Doing very well'

With nothing much else going on in the new-deal nexus, junk market participants were keeping their collective ear to the ground for soundings on the Zayo deal.

One secondary trader said that he heard from market sources that the deal going well, and suggested that it was doing so well that the company and the underwriters might be thinking of closing the books early.

That did not appear to have happened - several syndicate sources contacted by Prospect News said that marketing of the deal in the run-up to the anticipated pricing was indeed "doing very well," as one put it, but they all said that there would be no changes to the schedule - books closed Wednesday afternoon for non-West Coast accounts, Thursday morning at 11 a.m. ET for those final West Coast buyers, and then pricing expected soon afterward.

Kingman D. Penniman, the founder and president of KDP Investment Advisors Inc. in Montpelier, Vt., said that the Zayo deal "may be interesting - because that's going to the opposite end of the credit curve" from some of the recent notable deals seen on the upper fringes of the junk space.

Such deals look like they were specifically tailor-made more for the kind of high-grade "crossover" investors reaching down into the junk precincts to pick up some yield - for instance, Tuesday's split-rated (Ba1/BBB-BBB-) transaction from education financing company SLM Corp., or Tuesday's Puget Sound Energy offering, nominally junk-rated (Ba1/BB+) but like SLM priced off the high-grade desks. The same holds true for last week's $1.5 billion split-rated (Baa3/BB+/BBB-) behemoth from Ford Motor Credit Co. LLC - another high-grade desk deal that was snapped up by the crossover high-grade investors, with junk bonders not interested in its 3.008% yield and 230 basis point- spread over comparable Treasury paper.

But in contrast, with the unsecured Zayo tranche in CCC territory and even the secured piece no better than a single-B, standard junk investors rather than crossover types would be the likely focus.

Penniman said that "the market has a way - this is going to have to be priced to sell."

However, he added that this "is probably why people are looking at it with interest."

Engility joins calendar

Away from the Zayo deal, high-yield syndicate sources heard that Engility plans to sell $250 million of seven-year senior notes, with pricing seen likely around the middle of next week.

Marketing of the bond deal starts with an investor call around midday Thursday and then a roadshow in New York and Boston for what's left of this week.

Chantilly, Va.-based Engility is currently in the process of being spun off by major defense contractor L-3 Communications Holdings, Inc. Proceeds from the deal and from a an accompanying new credit facility will be used to pay a special cash dividend to parent L-3, a New York-based provider of communications, information technology and other services to the U.S. Defense Department, the Department of Homeland Security and other federal agencies.

The bonds are expected to receive a B2 rating from Moody's Investors Service and a BB- rating from Standard & Poor's.

The Rule 144A deal will be brought to market by joint book-running managers Bank of America Merrill Lynch, Barclays Capital Inc., Credit Agricole Securities (USA) Inc. and SunTrust Robinson Humphrey, Inc.

L-3 announced last year that it planned to spin off some of its businesses into a new, independent, publicly traded government services company. The spin-off, which is intended to be tax-free to L-3 and its shareholders, is expected to occur somewhere around the mid-year timeframe.

Upon completion of the spin-off, L-3 shareholders will own 100% of the shares of both L-3 and Engility.

Puget pops up

Among the deals that priced on Tuesday, a trader saw Puget Sound Energy's new 5 5/8% senior holdco notes due 2022 trading in a 101 to 101¼ context on Wednesday.

Another quoted them at 101 bid, 101½ offered.

The Bellevue, Wash.-based electric utility operator's quick-to-market $450 million of those bonds, upsized from $350 million originally, priced at 99.993 to yield 5 5/8%

A trader meanwhile opined that "there was not a lot of trading by any means" in reference to Tuesday's other deal, the quickly-shopped split-rated issue of 6% notes due 2017 from Newark, Del.-based education finance company SLM Corp.

That $350 million deal - upsized from the original $250 million - priced at 98.517 on Tuesday to yield 6 3/8%.

The deal was structured as an add-on to the $750 million of those 6% bonds which SLM sold earlier this year as part of an upsized two-part offering.

That mega-deal, increased from an originally planned $1 billion, priced on Jan. 24. It consisted of $750 million of the 6% notes, upsized from $500 million, which priced at 98.942 to yield 6 ¼%, and $750 million of 7¼% notes due 2022. The latter tranche, which was also upsized from an original $500 million, priced at 98.264 to yield 7½%.

On Wednesday, a trader said that the existing bonds were trading with a 99-handle for most of the day.

Junk signs remain mixed

Away from the primary realm, statistical indicators of junk market performance meantime were mixed for a third consecutive session on Wednesday, after having been higher across the board for the previous three sessions for the first time in several weeks.

A trader saw the Markit Group CDX North American Series 18 High Yield Index down by 1/8 point on Wednesday to end at 93 7/8 bid, 94 1/8 offered, in contrast to the 3/8 point gain seen on Tuesday.

The KDP High Yield Daily Index suffered its third consecutive loss, dipping by 4 basis points to 72.21, after having come in by 5 bps on Tuesday. Its yield crept up by 1 bp to 7.16%, after having widened out by 6 bps on Tuesday.

But the widely followed Merrill Lynch U.S. High Yield Master II Index got back in the black on Wednesday with a 0.115% gain .It had retreated by 0.143% on Tuesday after four straight sessions before that to the upside.

The latest gain lifted its year-to-date return to 5.154% on Wednesday, up from Tuesday's 5.033% but still well down from its peak level for 2012 so far, 6.80%, set on May 7.

ATP off once again

Among specific credits, a trader said that ATP Oil & Gas' 11 7/8s were going home around 44 bid, which he called down ¼ point from Tuesday's levels. He saw volume of over $27 million in the Houston-based offshore energy company's bonds, making them again one of the day's most actively traded junk-rated issues.

A second trader said that ATP was trading around 44½ late Wednesday, but "they traded down to these levels last night."

He saw them moving around on Wednesday between a low bid of 43¼ and a high of 45, but called that range little changed. On Tuesday, he said that the bonds had mostly traded with a 44 handle - but more activity." They held "the same general levels" on Wednesday.

ATP's bonds have been on the slide since last Friday, having plummeted from levels in the mid-to-upper 50s in response to the company's announcement that newly-hired chief executive officer Matt McCarroll had resigned his new post after barely a week on the job.

While the company attributed his departure to a failure to reach agreement on the terms of an employment contract, more cynical observers scoffed at that scenario and suggested - though with no concrete confirmation - that McCarroll had pulled out because he discovered that the situation at the embattled company was worse than initially thought.

Navistar gyrations continue

A trader said that Navistar's 8¼% notes due 2021 were finishing up around the 93 bid, level, which he called down a deuce on the day.

He said the beleaguered Lisle, Ill.-based truck, bus and diesel engine maker's paper had been "bouncing around down there all day" and estimated volume in the issue at about $20 million, putting it high up on the junk most-actives list.

A second trader pegged the bonds down 1 point on the day versus Tuesday's levels.

At another desk, a trader said that Navistar was "not as active" Wednesday as it had been on Tuesday, when volume was heard to have zoomed to over $95 million, with the bonds bottoming Tuesday around 89 7/8 bid at mid-day after an unfavorable federal appeals court ruling in an action brought by some Navistar competitors such as engine manufacturer Cummins Inc. and truck-makers Volvo and Daimler Benz AG. They objected to the Environmental Protection Agency allowing Navistar to continue to make and sell diesel engines that flunked federal clean-air standards, which their vehicles and engines all meet, by paying a fine of $1,900 per engine. The Navistar bonds later recovered some of their early losses to move back up to around a 93-95 context, still down by several points on the day from pre-news levels around 96-97.

On Wednesday morning, he saw the bonds open around 94 to 941/4, but then drop to the 93 neighborhood.

"They were kind of unched [unchanged] early in the day, then they traded back down to 93, but not down to yesterday's [Tuesday's] lows."

Alion Science way down

Out of the distressed-debt precincts, a trader said that Alion Science & Technology Corp.'s 10¼% notes due 2015 were well down from recent levels - which themselves were not so great to begin with.

He said that the bonds traded on Tuesday night down around the 30 level, which called down around 10 points from prior levels.

He saw no news out on the McLean, Va.-based employee-owned research and development and information technology government contractor that might explain the drop, and surmised that "they haven't traded in a while," causing the market to re-price the bonds.

"They hadn't traded well" even before the latest drop, he said, but the lack of recent quotes caused junk players to quote them lower in the wake of recent market woes.

A second trader said he "saw a couple of quotes" in the company's two issues of bonds, with its 12% senior secured notes due 2014 trading between 90 and 93 bid, though on "small" size.

He saw the unsecured 101/4s at 31 bid on Wednesday, but only on one small trade, for about $59,000.

On Tuesday, he said there had been a couple of $1 million trades at 29¾ to 30, "so they have gotten whacked."

But he said there had been very little, if any, trading in the credit in the days and weeks leading up to Tuesday - he said that "the last time I remember trading these things, they had a 50-handle," only half joking that "I don't remember how long ago it was."

He said that the bonds were around the 50-bid level and above back in April, but the last round-lot transaction before Tuesday was all the way back in late March. There was some sizable trading in the mid-40s in mid-May, around the time the company warned in a regulatory filing that it expects to have tap its $35 million revolving credit facility to "moderate the effects of interruptions to the collections cycle from contract funding delays," though not to any "significant extent" otherwise, except for letters of credit.

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