Muted market response to near-$1 billion outflow; LIN TV firms on sale buzz

By Paul Deckelman and Paul A. Harris

New York, May 21 - The high yield market was eerily calm Friday, showing not much response to Thursday's news of a nearly $1 billion outflow from high yield mutual funds during the week ended Wednesday, which followed a more than $2 billion outflow the previous week. There was no rash of pulled new deals as here had been the previous week and in the early part of the latest week, and no slide in the secondary markets.

There was also not much activity, participants said, with no new deals seen having priced by the time trading had wrapped up for the day, and for the week, although price talk was heard on upcoming deals from Leiner Health Products and Teraphane Holding Corp. - the later deal was also downsized - and Finlay Fine Jewelry Corp. hit the road to market its $200 million eight-year deal.

In the secondary sphere, meantime, LIN Television Corp. bonds were seen to have firmed a little on a news report that the Providence, R.I.-based television station ownership group had hired a major investment bank to advise it on different options, possibly including the sale of the company or some of its assets.

LIN TV's 6½% notes due 2013 were being quoted up as much as 1¾ points at 95.5 bid, pushed up by a Reuters report that LIN had hired Morgan Stanley to advise it, leading to investor speculation that the company may be putting itself up for sale - or at least, some of its assets. In 1998, LIN sold 80% of its ownership stake in its valuable Dallas TV station for more than $800 million when it was acquired by the buyout specialist Hicks, Muse Tate & Furst, which still owns 46% of the company. There was no response Friday from LIN, Hicks Muse or Morgan Stanley to the Reuters report.

At another desk, a trader quoted the 61/2s at that same 95.5 bid level and said the company's 8% notes due 2008 were at 106.75 bid, 107.25 offered, but he opined that LIN was a name "we never seen trading around very much."

LIN's New York Stock Exchange-traded shares meanwhile jumped $1.64 (8.16%) to $21.74 on the buyout speculation. Volume was 22 million shares, more than 14 times the usual activity level.

Gap steady on better earnings

Not much movement, meantime was seen in Gap Inc.'s bonds, even as the San Francisco-based apparel retailer reported fiscal first-quarter net earnings of $3.12 million (32 cents a share), in line with analysts' estimates, but well up - better than 54% - from its year-earlier profit of $202 million (22 cents per share), continuing a turnaround that began last year after several years of nearly continuous quarterly losses.

A market source pegged the company's 6.90% notes due 2007 unchanged at 108 bid, while its 10.55% notes due 2008 were likewise steady at 120.

A trader said that he hadn't seen much in the company's bonds. "Their upgrade [by Moody's Investors Service] was on Tuesday and since then, nothing. There was no market in Gap at all - nothing on the 6.90s, or the 8.80s" due 2008.

Another trader did see the 6.90s at 107.5 bid, 108.5 offered, the 8.80s at 120.5 bid, 121.5 offered, and its 8.15% notes at 108.5 bid, 109.5 offered, all up about half a point.

Another upsider on the session was Level 3 Communications Inc., whose 11% notes due 2008 firmed to 81.25 bid, 82.25 offered from 80.5 bid, 81.5 offered.

Delta rises again

Delta Air Lines Inc.'s bonds continued to firm Friday, along with its common stock, a day after a Lehman Brothers analyst had issued a positive research piece on the Atlanta-based air carrier - even though Delta faces large challenges in cutting its labor costs, which the analyst acknowledged.

A trader said the Delta bonds were "better," although he said he had not seen "a whole lot of trading in them" going on. He quoted Delta's 8.30% bonds due 2029 as having firmed a point on the session to 42.5 bid, 43.5 offered.

Another trader quoted those bonds at 41 bid, 43 offered, but noted that they had crept up over the past two sessions from levels earlier in the week around 37 bid, 39 offered. He meantime saw Delta's 7.70% notes at 63.5 bid, up half a point or so.

On the equity side, Delta's New York Stock Exchange-traded shares - which had boomed some 15.86% on Thursday on the Lehman news - were up another 10.85% or 65 cents to close at $6.64 on volume of over 10 million shares, about double the usual turnover.

Analysts said that besides the positive glow generated by the Lehman recommendation, Delta's shares - and those of other air carriers - got a boost Friday as crude-oil futures dipped under $40 a barrel in apparent response to Saudi Arabia's announcement that it would recommend a 2 million barrel-per-day increase in output by the Organization of Petroleum Exporting Countries, of which the Saudis are probably the most influential member.

The rise in Delta's shares and bonds Thursday and Friday represented a dramatic turnaround, since the company's securities had fallen back only a few sessions earlier when it acknowledged in its quarterly filing with the SEC that if it were not successful in getting its pilots to sign on to much larger wage and benefit concessions than they have offered so far, Delta could face possible bankruptcy - the first time that the company had officially acknowledged that possibility, even though the language was the standard cautious boilerplate type phrasing typical of SEC filings.

In the interim, Delta has still not overcome the hurdle of its pilot costs - highest among the old-line major air carriers. The two sideways remain far apart, with the captains offering 9% in compensation cuts and the airline seeking 30%. Even with that unresolved problem - as well as jet fuel costs recently having risen in tandem with world crude oil prices - Lehman Brothers equity analyst Gary Chase on Thursday upgraded his rating on the stock to overweight from equal weight and increased his target price for the stock to $10.

What is more, Chase wrote in the research note, while he agreed that Delta faces daunting challenges in reforming its cost structure and dealing with higher fuel prices, the shares could conceivably be worth even as much as $20, under the right circumstances, chief of which is that the pilots would cave and accept the 30% reduction, which seems unlikely at this point. That lofty price would also assume a 33% equity dilution in exchange for the concessions and an 8% cut in non-labor costs.

Light trading

Elsewhere, "not a lot was going on," a trader said. "It was very quiet."

Market activity, he said was "kind of similar to what we had seen in the last couple of days - decent bid-wanteds, on a variety of size inquiries.

"Outflows continued, with the $1 billion outflow Thursday night [technically, $989.1 million], and that pattern is going to continue."

Trading flows, he said "were very light - it seems like some stuff was up a little bit, up half a point, or down half a point. Prices were largely unchanged. It seems like a lot of people took the day off."

Treasuries, he continued "backed off their [Thursday] gains and equities were about flat. There was nothing significant, nothing of note."

Another trader agreed that he "didn't see a lot of shock, a lot of fallout in the market from the outflow."

Yet another trader said that "yeah, we had almost a billion [dollar outflow Thursday] and another $2 billion the other day [in the week ended May 12], so that's $3 billion in two weeks, and that's a ton. But this market is off eight points, 10 points. So there's a lot of pain for people holding paper - they've got to be down a lot."

However, he said, I think this was kind of factored in" by the market already, following the previous week's $2.145 billion mega-outflow.

"What happens is the first [outflow], $2 billion, gets overdone, and the second one - well. You can't run it that much, unless there's a real major problem with certain credits," which there was not, on Friday.

So there was "not much deterioration" in the market on the heels of the latest outflow, but "the deterioration from the whole two weeks was incredible, five to 10 points across the board."

Primary quiet

In the wake of Thursday's news that the junk funds had undergone nearly $1 billion of redemptions during the most recent week reported, the new issue market sat almost perfectly still on Friday.

No issues priced, although observers went into the session with the expectation that one or possibly two might do so.

The little news that did emerge involved pending issues known to be in the market.

Price talk of 11%-11¼% emerged Friday on Leiner Health Products' upcoming $150 million of eight-year senior subordinated notes (confirmed B3/expected CCC+). The deal, via UBS Investment Bank, Credit Suisse First Boston and Morgan Stanley, is expected to price early Monday afternoon.

Meanwhile Terphane Holding Corp. downsized its offering of five-year senior secured notes (B3/B-) to $75 million from $100 million, and issued price talk of a yield in the 12¼% area on Friday. Pricing is expected on Monday via Jefferies & Co.

Also expected to price on Monday is Clean Harbors Inc.'s restructured $150 million of senior notes. The deal, now an eight-year-non-call-four, was previously a 10-year-non-call-five offering of senior subordinated notes. Price talk of 10¾% area had been heard Thursday.

Some sources had anticipated hearing terms emerge Friday on the Clean Harbors and Terphane offerings.

Will it be a $3 billion week?

In all the new issue market expects to see just under $3 billion of transactions take place during the final full week of May 2004.

The largest by far is BCP Caylux Holding (Celanese AG)'s planned $1.565 billion equivalent of senior subordinated notes due 2014 in dollar and euro tranches (B2/B-) via Morgan Stanley, Deutsche Bank Securities, Banc of America Securities.

Official talk on the Kronnberg, Germany industrial chemical company's deal has yet to be heard. The U.S. roadshow start was scheduled for Thursday May 20.

After a burst of April and early May euro-denominated business, the Celanese deal contains the only euro tranche now known to be in the market.

Late in the week of May 10 three euro offers were pulled because of the deteriorating circumstances of the junk market.

On May 13 Germany's Brenntag Finance GmbH postponed its €190 million offering of 10-year senior notes.

The same day Swedish shipping firm Stena AB pulled its $250 million 20-year deal.

And the following day Corus Group plc, the London-based steel firm, withdrew its €500 million offering of 10-year notes.

Prospect News asked one of its European sources to explain the evaporation of the euro junk pipeline which, a mere three weeks ago, appeared to be bustling with business.

"It's a thin market," responded the sell-sider in London. "Deals that priced just before the market fell went down quickly and dramatically in price from their new issue prices, leaving bad tastes in investors' mouths.

"It was all a result of too many deals in a weakening market, compounded by the fact that the European market is much thinner - and hence subject to wider variability in prices - than the more established US market."

Finlay hits the road

The market learned of one roadshow start on Friday.

Marketing began for Finlay Fine Jewelry Corp.'s proposed $200 million of eight-year senior unsecured notes (B1/B+), with pricing expected to take place in the mid-to-late part of the week.

Credit Suisse First Boston and JP Morgan are bookrunners for the New York City-based fine jewelry retailer's debt refinancing deal.

Meanwhile a trader said the new Chesapeake Energy Corp. 7½% senior notes due 2014 were trading around 100.25 bid, 101.25 offered; the Tulsa, Okla.-based oil and gas exploration and production operator's new issue had priced on Thursday at 98.269 before moving up to closing levels in the vicinity of par later that session.

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