EchoStar sells upsized $2.5 billion three-part deal; junk funds see $79 million outflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 18 - EchoStar DBS Corp. brought a gigantic and hugely upsized $2.5 billion three-part offering to market late Thursday - and took total issuance for the year past the $100 billion mark.

EchoStar's deal, increased from an announced size of $1.5 billion is just a shade smaller than the year's biggest junk bond deal, Calpine's $2.55 billion of senior secured notes in three tranches priced on July 10.

EchoStar plans to use the deal proceeds to take out its existing 9 3/8% senior notes due 2009 (see Tenders and Redemptions elsewhere in this issue for full details).

In the secondary sphere, traders saw not much movement in the existing EchoStar bonds - even the issue slated to redeemed with proceeds from the new offering - which were already trading around the anticipated take-out level. Reliant Resources Inc. "jumped," a trader said, after the energy company was heard to have reaffirmed its cash-flow forecasts.

Late in the session, market participants familiar with the weekly high-yield mutual fund flow figures compiled by AMG Data Services Corp. of Arcata, Calif., told Prospect News that in the week ended Thursday, $79 million more left the funds than flowed into them.

The flow of money into and out of the junk bond funds are regarded by many market participants as a key barometer of overall junk market liquidity trends. The weekly numbers reflect only those funds which report on a weekly basis, and exclude distributions.

It was the second consecutive weekly outflow, following the nearly $486 million outflow in the previous week; however, the two-week outflow total of almost $565 million is still a relative pittance compared with the approximately $4.4 billion which had come into the junk funds the previous two weeks.

Even with the latest week's outflow, inflows have still been seen 22 of the 37 weeks since the beginning of the year; according to a Prospect News analysis of the data, the year-to-date net inflow total, while down from the peak level of $17.312 billion seen in the week ended July 16, remains an impressive $16.249 billion - meaning that the funds (and by extension, high-yield investors generally) continue to have ample cash.

One sell-side source commenting on the negative flow suggested that the funds flow data seemed to be telling one story while activity in the new issue market on Wednesday and Thursday seemed to be telling a much different one.

Pointing to Thursday's massively upsized EchoStar deal as well as Wednesday's upsized $1 billion deal from Nextel Communications, Inc., the sell-side official said: "Whatever the fund flow numbers are telling us, there has to be an enormous amount of cash out there that needs to be put to work.

"That would seem to be the most plausible explanation for the way these two transactions developed.

Nextel increased its add-on to its 7 3/8% senior serial redeemable notes due Aug. 1, 2015 from a planned $500 million and priced the quick-to-market transaction at 101.

Although the late pricing of EchoStar's transaction meant primary market watchers waited until very late Thursday to hear the session's major news, the consensus was that the news was worth waiting for.

EchoStar DBS, which left the launch pad earlier in the session with a $1.5 billion deal, had by session's end priced $2.5 billion in three tranches (Ba3/BB-). Included were a pair of fixed-rate bullet tranches, one of which came tight to inwardly revised talk, while the other came at inwardly revised talk.

The Littleton, Colo.-based satellite television company sold $1 billion of five-year fixed-rate bullets at par to yield 5¾%, tight to the revised 5¾%-5 7/8% price talk, which had been reduced from 5 7/8%-6%.

In addition the company priced $1 billion of eight-year bullets at par to yield 6 3/8%, at the revised 6 3/8% talk, reduced from 6 3/8%-6½%.

EchoStar also priced $500 million of five-year floating-rate notes. The non-call-two floaters priced at par with a coupon of Libor plus 325 basis points. Price talk was Libor plus 325 basis points.

Banc of America Securities and Credit Suisse First Boston were joint bookrunners on EchoStar's drive-by.

Thursday's session saw two other drive-by deals, both of them add-ons that were, of course, minuscule by comparison to EchoStar.

Meritage Corp. sold a $75 million add-on to its 9¾% senior notes due June 1, 2011 (existing ratings Ba3/B+) at 109 for a 7.642% yield to worst.

UBS Investment Bank was bookrunner.

And Morris Publishing Group LLC sold a $50 million add-on to its 7% senior subordinated notes due Aug. 1, 2013 at par to yield 7% via JP Morgan.

Pax World High Yield Fund portfolio manager Diane Keefe confided during an interview with Prospect News that she kept her wallet closed Thursday.

Keefe commented that Morris and Meritage were "too rich" in terms of their yield.

Keefe, whose fund submits credits to social issues screens, told Prospect News that she had played Miami-based branded apparel marketer Perry Ellis International, Inc.'s deal. The company sold $150 million of 10-year senior subordinated notes (B3/B-) at par Monday to yield 8 7/8%

And looking ahead on the calendar she expressed her intention to become involved in Seminis Vegetable Seeds Inc.'s $190 million of 10-year senior subordinated notes (B3/B-), set to be on the road until Sept. 22, via Citigroup and CIBC World Markets.

"There is going to be new ownership of a private equity firm," Keefe commented. "It's going to be cash flow-oriented. And they are introducing new products whereby they can double the price of the product if they solve a problem, like disease-resistance in a tomato.

"I talked to their research guy. He said 5% of their products are sold into the organic market, which is growing; if you can figure out a way to make organic produce, the ultimate retail price of that is higher to begin with, so increasing the yield of that is a valuable thing to do.

"And they have leading market position in the world. So it's a good company."

Although no new deals launched Thursday, Beverly Enterprises, Inc. announced that it plans to bring an offering of $100 million of subordinated notes (/B/B+). And IFCO Systems NV disclosed that its board of directors passed a resolution authorizing placement of €110 million of seven-year bonds.

No timing, syndicate names or structural details were disclosed in the press releases.

Price talk of 8 7/8%-9 1/8% emerged Thursday on Pinnacle Entertainment, Inc.'s upcoming $130 million of 10-year non-call-five senior subordinated notes (CCC+), expected to price on Friday via Bear Stearns.

And the price talk is 10½% area on Hines Nurseries, Inc.'s $175 million of eight-year non-call-four senior notes (B3/B), expected to price on Monday, via Credit Suisse First Boston.

In the wake of EchoStar's $2.5 billion, year-to-date new issuance in the high-yield market pushed past the $100 billion barrier, standing at $100.16 billion in 345 deals at Thursday's close. That compares to $59.65 billion in 252 issues for all of 2002.

Running the numbers a little further back, data collated by Prospect News shows that 2001 saw $77.37 billion in 288 deals, while $44.44 billion priced in 2000 in 152 deals. The 1999 total was $92.56 billion.

Meanwhile in the emerging markets, Pax World's Diane Keefe told Prospect News that she had participated in the deal priced last Friday by Innova S de RL de CV. The Mexico City-based satellite television service provider priced an upsized offering of $300 million (from $200 million) of 10-year senior unsecured notes (B3/B+) at par to yield 9 3/8%, via Citigroup and JP Morgan.

"I played the Innova deal because they are probably going to be merging with the DirecTV of Mexico," said Keefe. "They're going to have a leading market position in a growing market with improving demographics that are going to lend themselves to DirecTV going forward.

"And the owners are contributing $1 billion of equity," Keefe added. "So I think they're going to stand behind it.

"Televisa is an investment-grade company. Liberty Media is an investment-grade company. They want to sell their content to it. So I don't think that business is going away."

The new EchoStar bonds priced too late Thursday to trade around; even before they priced, traders were seeing little in the way of movement in the satellite TV broadcaster's existing bonds.

They quoted the 9 3/8% notes due 2009 - the issue which is to be redeemed using the proceeds of the new notes - at 107 bid, 108 offered. A market source said that this was up perhaps a point, while others saw it up even less.

The market source also quoted EchoStar's existing 9 1/8% notes due 2009 at 112.75 bid, up three-quarters of a point on the day, while its 10 3/8% notes due 207 were perhaps a point better at 112 bid.

There was likewise not much upside to the two Nextel issues which the Reston, Va.-based wireless telecommunications operator said it would redeem, the 9 ¾% notes due 2007 and the 12% notes due 2008 (see Tenders and Redemptions for details).

The Nextel 9¾% notes were quoted unchanged at around 103.25, slightly above the planned takeout level at 102.4375, while the 12% notes hovered around 106.75, again just above the 106 level at which Nextel said it will redeem the bonds.

The new Nextel 7 3/8% senior serial redemption notes due 2015, which priced at 101 on Wednesday, were seen easing as low as 100.875 bid, 101.125 offered, before closing around 101.25 bid.

A market source quoted Nextel's 9½% notes meantime at 111.75, up from 111, while its benchmark 9 3/8% senior notes due 2009 were trading around 109.25-109.5 bid, their recent trading level.

Beverly Enterprises Inc. is yet another company that plans to take out existing bond debt - its $180 million of 9% notes due 2006, using the proceeds of a new credit facility and note offering (see Tenders and Redemptions). A trader quoted the 9% bonds up "quite a bit," at least on the offering side; he saw them going from 101.5 bid, 102.5 offered Wednesday to 102 bid, 104 offered Thursday. The Fort Smith, Ark.-based nursing home operator's 9 5/8% notes due 2009 were up half a point to 105.5 bid, 107.5 offered.

Reliant Resources paper was solidly higher, after the Houston-based power generator's chief executive officer Mark Jacobs presented at Merrill Lynch's Power & Gas Leaders Conference. During the presentation, the Reliant executive reiterated the company's projection of 2003 full-year operating cash flow before capital expenditures of $600 million and free cash flow after capex of $370 million. EBITDA is expected to come in at $912 million and adjusted EBITDA at $950 million.

Reliant's 9¼% notes due 2010 were seen up about 2¼ points at 91.50. A market-watcher pegged its 9½% notes due 2013 at 90 bid, up from 88.75 bid.

A trader said AMR Corp.'s 9% notes due 2012 were "modestly better," at 77 bid, 79 offered, after the Fort Worth, Tex.-based corporate parent of U.S. airline industry leader American Airlines improved its liquidity situation by selling $300 million of new convertible notes.

Another trader, however, said the AMR paper was only "up marginally," quoting the 9s as having firmed no higher than 75.75 bid, 76.75 offered.

Levi Strauss & Co. bonds - which have recently been gyrating around - were back on the upside Thursday, as traders cited the company's progress in locking up a $1.15 billion bank loan.

A trader saw the San Francisco-abased apparel company's 11 5/8% notes due 2008 up a point at 91 bid.92 offered, while its 7% notes due 2006 were also a point better, at 85 bid.87 offered, and its 12¼% notes due 2012 were half a point up, at 88.5 bid.89.5 offered.

AK Steel Corp.'s 7 7/8% notes due 2009 were quoted down about a point to 81.25 late in the day, after the Middletown, Ohio-based steel producer announced that Chairman and Chief Executive Richard Wardrop and President John Hritz resigned. Chief financial officer James Wainscott was appointed acting CEO; no successor to Hritz was immediately chosen. One of the reasons cited by steel-industry observers and news media accounts was the continued fall in the company stock, which closed Thursday at $2.56 - up a penny on the session, but less than a tenth of the $28 at which it had been selling for as recently as 1999.

Steel industry-watchers noted that AK, like many American steel makers, has suffered from an influx of lower-cost foreign-made steel cutting into its traditional markets. Its competitive position was further eroded earlier this year when it failed to acquire the assets of the bankrupt National Steel Corp. after failing to reach an agreement with National's labor unions; the assets wound up going instead to rival producer United States Steel Corp.

AK also said it had formed an executive committee comprised of three independent directors to provide corporate oversight.

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