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Starbucks to buy back more shares with bond-sale proceeds

Starbucks (NASDAQ: SBUX) today completed a $500 million offering of 2.10% notes due Feb. 4, 2021 at T+75, or 2.112%, sources said. The issue was printed at the firm end of guidance in the T+80 area, and through early whispers in the T+95 area.

Proceeds will be used for general corporate purposes, including the repurchase of common stock under the company’s ongoing share-repurchase program, business expansion, payment of cash dividends, and/or financing possible acquisitions, according to regulatory filings.

As of Dec. 27, 2015, the company had bought back an equivalent of $5.86 billion of common stock, or nearly 252 million shares, under its share-buyback program dating to August 2006. When the program was initiated, the board authorized the repurchase of 25 million shares, and that has since grown to 300 million shares when the authorization was last increased on July 23 of last year, according to S&P Capital IQ.

The company spent roughly $1.5 billion on share buybacks over the 12 months through Dec. 27, 2015, the most in the company’s history after expenditures of $935 million in 2014 and $202 million in 2013, according to S&P Capital IQ.

Even so, the company’s free cash position remained constructive as Starbucks generated roughly $4 billion of operating cash flow last year, or more than the $3.8 billion of combined spending across share buybacks, capital expenditures ($1.34 billion), and common dividends ($986 million).

Earlier today, Standard & Poor’s and Fitch assigned A–/A ratings to the proposed 2021 issue. “Pro forma for the proposed debt issuance, adjusted debt to EBITDA will increase to 1.1x from 1.0x at Dec. 27, 2015,” S&P stated.

According to Fitch—which upgraded Starbucks’ rating to A, from A– in November—for the year ended Sept. 27, 2015, lease-adjusted leverage was 2.0x, down from 2.2x at the end of fiscal 2013. “Cash flow priorities are to invest in its business and return cash to shareholders. The company has maintained a dividend pay out to earnings in line with its 35–45% target and has been prudent with share repurchases, funding buybacks mainly with internally generated cash,” Fitch said.

In September 2015, Moody’s upgraded Starbucks’ senior unsecured rating to A2, from A3. “”The upgrade reflects Moody’s view that Starbucks measured growth strategy, product pipeline, digital initiatives and balanced financial policy will continue to drive operating earnings, credit metrics, liquidity and scale that is more reflective of an A2 rating,” Moody’s said at the time.

The ratings outlook is now stable on all three sides.

On Thursday, Starbucks announced quarterly earnings that beat analysts’ expectations on profits; however, its stock took a hit on that day, when its forecast for the current quarter lagged expectations.

The Seattle-based specialty coffee company last tapped the market in June 2015, when it completed an $850 million, two-part offering, including 2.7% notes due 2022 at T+78, or 2.703%, and 4.3% notes due 2045 at T+138, or 4.32%.

An infrequent issuer in the market, Starbucks in December 2013 completed a $750 million, two-part offering, including 0.875% three-year notes due 2016 at T+38, and 2% five-year notes due 2018 at T+63, or 2.04%. For reference, the 2018 issue changed hands a week ago at a G-spread equivalent of 36 bps, according to MarketAxess. Terms:

Issuer Starbucks Corp.
Ratings A-/A2/A
Amount $500 million
Issue SEC-registered senior notes
Coupon 2.10%
Price 99.943
Yield 2.112%
Spread T+75
Maturity Feb. 4, 2021
Call Make-whole T+15 until notes are callable at par from one month prior to maturity
Trade Feb. 1, 2016
Settle Feb. 4, 2016
Books GS/JPM/MS
Px Talk guidance T+80 area (+/– 5 bps); IPT T+95 area
Notes Proceeds will be used for general corporate purposes
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Third Ave’s liquidating debt fund holds concentrated, inactive paper

The leveraged finance marketplace is abuzz this morning ahead of a conference call to address to a plan of liquidation for the Third Avenue Focused Credit mutual fund following big losses this year, mild losses last year, heavy redemptions, and now a freeze on withdrawals. The news was publicly announced last night by the fund, and there will be a call at 11 a.m. EST for shareholders with lead portfolio manager Thomas Lapointe, according to the company.

Market sources yesterday relayed rumors of a near-$2 billion redemption from the asset class, and as one sources put forth, “the odd thing was it was difficult to trace the money that left, what was sold, and where it went.”

That was followed up by last night’s whopping, $3.5 billion retail cash withdrawal from mutual funds (72%) and ETFs (18%) in the week ended Dec. 9, according to Lipper, although it’s not entirely clear if that figure—the largest one-week redemption in 70 weeks—can be linked to Third Avenue. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

Nonetheless, it’s worthy of a dive into the open-ended fund, which trades under the symbol TFVCX. The fund shows a decline of 24.5% this year, versus the index at negative 2.94%, after a 6.3% loss last year, versus the index at positive 2.65%, according to Bloomberg data and the S&P U.S. Issued High Yield Corporate Bond Index.

It’s an alternative fixed-income fund that’s “extremely concentrated,” and “hardly representative of a ‘high yield’ or ‘junk bond’ fund,” outlined Brean Capital’s macro strategist Peter Tchir in a note to clients this morning. He highlighted that Bloomberg analytics show a portfolio that’s almost 50% unrated, nearly 45% tiered at CCC or lower, and just 6% of holdings rated BB or B.

The holdings are all fairly to extremely off-the-run, hence the trouble selling assets to meet redemption, and thus, the liquidation. The remaining assets have been placed into a liquidating trust, and interests in that trust will be distributed to shareholders on or about Dec. 16, 2015, according to the company.

Top holdings follow, and none have traded actively or very much in size of late, trade data show:

  • Energy Future Intermediate Holdings 11.25% senior PIK toggle notes due 2018; recent trades in the Ch. 11 paper were at 107.5.
  • Sun Products 7.75% senior notes due 2021; recent trades were at 87.5, versus 90 a month ago and the low 70s a year ago.
  • iHeartCommunications 14% partial-PIK exchange notes due 2021; block trades today were at 30 and 32, from 27 last month.
  • New Enterprise Stone & Lime 11% senior notes due 2018; odd lots traded recently in the low 80s, versus mid-80s last month.
  • Liberty Tire Recycling 11% second-lien PIK notes due 2021 privately issued in an out-of-court restructuring; trades reported in the mid-60s.

Amid those any many others of a similar ilk, the fund also reports a holding in Vertellus B term debt due 2019 (L+950, 1% LIBOR floor). The chemicals credits put the $455 million facility in place in October 2014 as part of a refinancing effort, pricing was at 96.5, and it’s now at 78/82, sources said.

“Investor requests for redemption … in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders,” according to the company statement.

“In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions,” the statement outlined.

Further details are available online at the Third Avenue Management website. — Matt Fuller

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

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Huge high yield bond fund outflows: Why it’s not as bad as it seems

 

An LCD News story earlier today passed on incorrect information from data administrator Lipper regarding the Third Avenue Focused Credit fund that halted redemptions and is being liquidated. There was, in fact, a $111 million redemption from that fund this past week. A corrected story follows:

U.S. high-yield funds saw a net $3.5 billion retail cash withdrawal in the week ended Dec. 9, marking the largest one-week redemption since the record $7.1 billion outflow 70 weeks ago, or since the week ended Aug. 6, 2014, but it’s not as bad as it seems. Lipper today clarified with LCD that mutual funds this past week reported large seasonal distributions, but reinvestment has not yet been recognized, so it’s essentially a mid-read and look for a “catch up” in the weeks ahead.

This is a time of year when distributions “wreak havoc” with the flows data, according to Lipper. It’s possible that we’ll see the reinvestment characterized as inflows next week, but there also may be more distributions, Lipper added.

As per the flurry of news surrounding the liquidation of the alternative fixed income mutual fund Third Avenue Focused Credit, Lipper relayed that the fund-management group overall reported multiple outflows this past week, with $111 million specifically pulled from that open-ended fund. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

As for the one-week figure, see “US HY funds report largest cash outflow since record 70 weeks ago,” LCD News, Dec. 10, 2015. — Matt Fuller

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

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High yield bond prices fall further as some constituents notch large declines

The average bid of LCD’s flow-name high-yield bonds fell 132 bps in today’s reading, to 89.03% of par, yielding 10.58%, from 90.35% of par, yielding 10.05%, on Nov. 19. Performance within the 15-bond sample was deeply negative, with 12 decliners against two gainers and a lone constituent unchanged.

Today’s decline is a seventh-consecutive observation in the red, and it pushes the average deeper below the previous four-year low of 91.98 recorded on Sept. 29. As such, the current reading that has finally pierced the 90 threshold is now a fresh 49-month low, or a level not seen since 87.93 on Oct. 4, 2011.

The decrease in the average bid price builds on the negative 58 bps reading on Thursday for a net decline of 190 bps for the week. Last week’s losses were also heavy, so the average is negative 369 bps dating back two weeks, and the trailing-four-week measure is much worse, at negative 545 bps.

Certainly there has been red across the board, but several big movers of late continue to greatly influence the small sample. For example, in today’s reading, Intelsat Jackson 7.75% notes were off six full points—the largest downside mover today, to 44, and now 20.5 points lower on the month—while Hexion 6.625% paper was off five points, at 73.5, and Sprint 7.875% notes fell 5.5 points, to 77.

The market has been crumbling especially hard this week, with energy and TMT credits leading the charge, amid a lack of participation, the influence of speculative short-sellers, and despite signs that retail cash has been flowing into the asset class. There was a similar dynamic after Thanksgiving last year, sending the average to the year-end low of 93.33 on Dec. 16, 2014.

As for yield in the flow-name sample, the plunge in the average price—with many names falling into the 80s and a couple of others more deeply distressed—has prompted a surge in the average yield to worst. Today’s gain is 53 bps, to 10.58%, for a 2.92% ballooning over the trailing four week. This is a 13-month high and level not visited since 10.70% recorded on June 10, 2010.

The average option-adjusted spread to worst pushed outward by 47 bps in today’s reading, to T+791, for a net widening of 167 bps dating back four weeks. That level represents a wide not seen since the reading at T+804 on Sept. 23, 2010.

Both the spread and yield in today’s reading remain much wider than the broad index. The S&P U.S. Issued High Yield Corporate Bond Index closed its last reading on Monday, Nov. 23, with a yield to worst of 7.88% and an option-adjusted spread to worst of T+652.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell nine bps, to 96.31% of par, for a discounted loan yield of 4.42%. The gap between the bond yield and discounted loan yield to maturity is 616 bps. — Staff reports

The data

Bids fall: The average bid of the 15 flow names dropped 132 bps, to 89.03.
Yields rise: The average yield to worst jumped 53 bps, to 10.58%.
Spreads widen: The average spread to U.S. Treasuries pushed outward by 47 bps, to T+791.
Gainers: The larger of the two gainers was Valeant Pharmaceuticals International 5.875% notes due 2023, which rebounded 3.25 points from the recent slump, to 85.25.
Decliners: The largest of the 12 decliners was Intelsat Jackson 7.75% notes due 2021, which dropped six full points, to 44, amid this fall’s ongoing deterioration of the credit.
Unchanged: One of the 15 constituents was unchanged in today’s reading.

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Scientific Games bonds slip further on CFO resignation

Bonds backing Scientific Games slipped further today after the company announced the resignation of its Chief Financial Officer, Scott Schweinfurth, according to a company release. The 10% notes due 2022 shed 2.5 points to 77.625, yielding 15%, according to trade data. Meanwhile, sources quote the 7% notes due 2022 at 96/97, down from trades at 97.50 on Friday. The company’s shares are down nearly 4% at $7.62 today.

As reported last week, Scientific Games debt and equity came under pressure after the gaming technology company released third-quarter results that came in shy of Street expectations. The 10% notes, for instance, had been trading in the high 80s prior to the earnings release, before shedding five points on the results to the mid-80s and ending the week at an 80 context.

Loans backing Scientific Games are little changed today, with the B-2 tranche due 2021 (L+500, 1% LIBOR floor) recently marked at 92.75/93.75, though note the loan is about 5.5 points lower since the earnings release. According to the statement, Schweinfurth will continue in his role through the year-end financial audit and filing of its Form 10-K and the appointment of his successor.

Conditions are soft today in the high-yield market, with the cash market down about a quarter of a point and ETF sellers circulating, sources relay. The HY CDX 25 is quoted at 101.25, unchanged today, but down 1.3% week-over-week.

B+/B2 Scientific Games placed the $950 million issue of 7% secured notes and a $2.2 billion issue of 10% unsecured notes in November 2014 via a J.P. Morgan–steered underwriting team to help fund the Bally acquisition. The company also placed the $2 billion B-2 term loan in September 2014 to support the Bally transaction; the loan was issued at 99. Bank of America Merrill Lynch is administrative agent on the term loan. —Staff reports

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RAAM Global files Ch. 11, negotiating credit bid with term lenders

RAAM Global Energy filed for Chapter 11 today in Houston, court filings show.

According to court documents, the company is in the process of negotiating a stalking-horse credit bid purchase agreement with its term loan lenders that it hopes to unveil next week.

According to an affidavit in the case filed by the company’s chief restructuring officer, James Latimer, “a confluence of factors in 2014 and 2015 led to the [company’s] need to pursue a financial restructuring,” citing the “historic decline of crude oil and natural gas since the summer of 2014.”

In addition, Latimer pointed to the company’s September 2013 determination that it would be unable to meet financial certifications required to obtain permits to develop its offshore Ewing Banks 920 project in the Gulf of Mexico—as a result of which the project no longer met the requirements of reasonable certainty to remain booked as proved reserves—and the “catastrophic collapse” at the company’s Flipper Field in Texas in May 2013 that damaged four wells and cut the field’s production by 92%, to 166 BOEPD from 1,960 BOEPD, as “impairing” the company’s liquidity and “compelling” the company to restructure.

In explaining the decision to file for Chapter 11, Latimer said that the company’s proposed out-of-court exchange offer for its $238.4 million of 12.5% senior secured notes due 2019, launched in June and terminated on Aug. 20, failed to attract the requisite 99% participation, reaching only 94.77% participation (see “RAAM Global Energy cancels refi exchange as bond maturity looms,” LCD News, Aug. 24, 2015).

Further, Latimer said, the company has been unable to raise cash or identify other capital resources such as bank funding, private investments, or public debt and equity markets, “due to the current economic environment.”

As a result of the elimination of these restructuring alternatives, Latimer said, the company was “compelled … to negotiate with their creditors regarding Chapter 11 proceedings in order to address liquidity concerns and maximize the value of their assets for the benefit of their creditors and other constituencies.”

Latimer said the company was currently negotiating a stalking-horse credit bid purchase agreement with holders of about 99% of the $63.8 million of outstanding debt under the company’s term loan facility, adding that it was “seeking” to present the proposed purchase agreement and bidding procedures to the bankruptcy court by Nov. 6.

The company did not disclose any terms of the proposal, but said it would “create a defined sale process,” and that it “hoped that that interested parties will bid on its assets in such process.” — Alan Zimmerman

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LINN Energy reduces RC borrowing base to $3.6B

LINN Energy disclosed yesterday that the borrowing base under its revolving credit facility due April 2019 was reduced to $3.6 billion and netted an amendment that, among other things, relaxes its interest coverage covenant. It was previously $4.05 billion, an SEC filing shows.

LINN’s undrawn capacity was $790 million, based on outstanding borrowings as of Sept. 30.

Subsidiary Berry Petroleum’s borrowing base was reduced to $900 million, including $250 million of restricted cash previously posted as collateral with lenders, the company notes. It was previously $1.2 billion. Lenders also approved a potential combination of LINN and Berry’s facilities, subject to a combined borrowing base of $4.05 billion.

Pricing on both facilities is in a range of L+150–250. Commitment fees are 37.5–50 bps.

With the amendment, LINN and Berry reduced minimum interest coverage to 2x, from 2.5x, through Dec. 31, 2016, with steps to 2.25x through June 30, 2017, and back to 2.5x on July 1, 2017. The amendment also allows LINN and Berry to incur junior-lien debt of up to $4 billion and $500 million, respectively, subject to borrowing base reductions. LINN also gained flexibility to divest assets that do not contribute to its borrowing base, the company said.

Houston-based Linn Energy is an independent oil and natural gas company that trades on the Nasdaq under the ticker LINE. LINN acquired Berry Petroleum in 2013. Corporate ratings are B+/B2. — Jon Hemingway

 

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LCD’s High Yield Market Primer/Almanac Updated with 3Q Charts

LCD’s online High Yield Bond Market Primer has been updated to include third-quarter 2015 and historical volume and trend charts.

The Primer can be found at HighYieldBond.com, LCD’s free website promoting the asset class. HighYieldBond.com features select stories from LCD news, weekly trends, stats, and analysis, along with recent job postings.

We’ll update the U.S. Primer charts regularly, and add more as the market dictates (new this time around: an historical look at Fallen Angels, courtesy S&P).

Charts included with this release of the Primer:

  • US High Yield Issuance – Historical
  • 2015 High Yield Issuance, by Purpose
  • High Yield LBO Issuance
  • Fallen Angels – Historical
  • Cash Flows to High Yield Funds, ETFs
  • PIK Toggle Issuance (or lack thereof)
  • Yield to Maturity: Historical, Recent

LCD’s Loan Market Primer and High Yield Bond Market Primer are some of the most popular pieces LCD has published. Updated annually (print) and quarterly (online) to include emerging trends, they are widely used by originating banks, institutional investors, private equity shops, law firms and business schools worldwide.

Check them out, and please share them with anyone wanting an excellent round-up of or introduction to the leveraged finance market.

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Bond prices surge again, reach 2.5-week high with broad gains

The average bid of LCD’s flow-name high-yield bonds surged 154 bps in today’s reading, to 95.10% of par, yielding 7.62%, from 93.56% of par, yielding 8.05%, on Oct. 6. Performance within the 15-bond sample was broadly positive, with nine of the 14 gainers up more than a point, and a single constituent unchanged.

Today’s gain follows a 146 bps boost on Tuesday, for an overall rally of 300 bps this week. The advance puts the average at a 2.5-week high and 312 bps above the recent low of 91.98 recorded on Sept. 29, which itself was not just a 2015 trough, but also a four-year low, or the deepest average bid price since 91.25 on Oct. 6, 2011.

Dating back two weeks, however, includes some of the September slump, so the average is up just 66 bps over that span. And for the trailing four-week observation, the average is negative 334 bps.

As for the year to date, the average is down 60 bps, which is much moderated from the deeper negative year-to-date reading of 372 bps at the end of September. Recall that the 2014 decline was 536 bps, which followed a loss of 463 bps in 2014.

Today’s gain was driven by ongoing strength in heavily shorted names in sectors that have recently been under pressure, like Energy and Telecom. Today’s lead gainer was the Dish Network 5.875% notes due 2022, which jumped 6.5 points, to 95, after selling off heavily in recent weeks. Moreover, buying interest has been buoyed by heavy cash inflows to the asset class this week, with $1.1 billion plowed into the exchanged-traded fund JNK over the past three days alone.

With the solid rebound in the average bid price, the average yield to worst fell 43 bps, to 7.62%, and the average option-adjusted spread to worst cinched inward by 47 bps to 617 bps. Both are roughly 100 bps inside the observations at the recent trough, which were 8.62% and T+708, respectively.

The yield and spread in today’s reading are now back in line with the broad index. The S&P U.S. Issued High Yield Corporate Bond Index closed the last reading, Wednesday, Oct. 7, with a yield to worst of 7.61%, and an option-adjusted spread to worst of T+628.

Bonds vs. loans
The average bid of LCD’s flow-name loans was unchanged in today’s reading, at 97.20% of par, for a discounted loan yield of 4.35%. The gap between the bond yield and discounted loan yield to maturity is 327 bps. — Staff reports

The data:

  • Bids rise: The average bid of the 15 flow names jumped 154 bps, to 95.10.
  • Yields fall: The average yield to worst dropped 43 bps, to 7.62%.
  • Spreads tighten: The average spread to U.S. Treasuries pulled inward by 47 bps, to T+617.
  • Gainers: The largest of the 14 gainers was the Dish Network 5.875% notes due 2022, which surged 6.5 points, to 95.
  • Decliners: None.
  • Unchanged: The Fiat Chrysler 8.25% notes due 2021 were steady, at 106.5.