Icahn mega-deal hits the road, Brocade slates; ResCap up; funds add $347 million to end '09

By Paul Deckelman and Paul A. Harris

New York, Jan. 4 - Back from its well-deserved two-week long holiday-time hiatus, the high yield primary market picked up pretty much where it had left off before the break, getting ready to open the new year and the new decade by pricing several big deals.

Icahn Enterprises LP/Icahn Enterprises Finance Corp., the New York-based holding company controlled by the eponymous billionaire investor, was heard by syndicate sources to have started a roadshow for its $2 billion bond offering, which had been announced last week. They also heard that the big deal will be split-rated and will come to market in two tranches.

There was little or no movement seen in two issues of existing Icahn paper slated to be taken out with the proceeds from the mega-deal.

Brocade Communications Systems Inc., a Silicon Valley-based provider of networking solutions, announced plans for up to $600 million of senior secured notes.

Apart from that, the new-deal arena was quiet, participants still marveling at the record issuance of more than $160 billion which was sold in the year just past.

And just as the primary market was seen getting back in its old groove, so was the secondary market, which unlike the primary, had been officially open for business the previous two weeks, although not very much actually went on. Market indexes showed the year opening with robust gains, and volume back to near-normal levels.

Residential Capital LLC's bonds were big gainers on the day, helped hugely by the news that corporate parent GMAC LLC - which last week received an additional $3.8 billion in government funding - will use most of that money to help out its struggling mortgage lending arm - even though many analysts believe it's a case of throwing good money after bad.

Compton Petroleum Corp.'s bonds firmed in busy trading after the Calgary, Alta.-based independent energy operator announced completion of an additional portion of a previous asset sale, with the extra proceeds earmarked for further debt reduction.

Overall, the high-yield market firmed on Monday, according to a trader, who added that there did not appear to be any selling to make room for a new issue calendar that is expected to be big.

Junk funds up $347 million to end year

On Monday morning, market participants familiar with the high yield mutual fund-flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended last Wednesday, Dec. 30, some $347 million more came into the weekly-reporting funds than left them. The numbers usually circulate in the market on Thursday afternoons, but were delayed due to last week's year-end holiday schedule changes.

The latest week's inflow was the 19th consecutive advance, and followed the $387.56 million cash inflow seen in the previous week, Tuesday, Dec. 23. During that stretch, dating back to mid-August, inflows have totaled $6.547 billion, according to a Prospect News analysis of the AMG figures.

It was also the 26th week in the last 27 in which inflows were seen, dating back to mid-June. Some $8.976 billion of net inflows have been seen during that stretch, according to the Prospect News analysis - a run interrupted only by a lonely $89.9 million outflow recorded in the week ended Aug. 19.

With 2009 now history, inflows, including the latest weekly gain, were seen in 47 weeks out of the 52 that comprised the year, according to the analysis, against just five outflows - the Aug. 19 retreat, a $110 million outflow in the week ended June 24, and three weeks of outflows in late February and early March, totaling $969 million. The inflows, on the other hand, include an incredible 14-week run of consecutive gains, dating from mid-March through mid-June, during which time the funds grew by a record $9.1 billion.

Counting the number generated during the final week of the year, the total net inflow for the weekly-reporting funds rose to $20.56 billion, according to the analysis - its peak level for the year, eclipsing the old mark of $20.213 billion recorded the previous week. Funds which report on a monthly basis, rather than weekly, have meantime seen a year-to-date inflow topping $12 billion. Consolidating the data from the weekly and the monthly reporters, aggregate inflows for the year so far total about $32 billion, a market source said.

Such sustained inflows made it possible for the junk market to come roaring back last year from 2008's staggering 25%-plus loss and sharply reduced primary activity totals. Total returns for 2009 finished at a truly eye-popping 57.512% as of Thursday's close, according to the authoritative Merrill Lynch High Yield Master II index - a new peak level for the year, handily beating virtually every other major investment asset class.

The heavy inflows also fueled the primary market revival, with the $160.028 billion of new dollar-denominated high yield debt issued in the U.S. market as of Thursday's year-end close -- $129.202 billion of it from domestic issuers - ran some 120.87% ahead of the feeble pace of 2008, while the domestic issuance represented a 115.82% gain over the 2008 levels. Industrialized-country global issuance in all major currencies of $174.902 billion equivalent was a blistering 171.05% ahead of last year's pace.

Record inflows

The AMG data showed record inflows into high-yield mutual funds during 2009, according to one syndicate desk's analysis of the figures.

The $347.1 million of inflows during the final week of 2009 for funds which report to AMG on a weekly basis, sent the year's total to $20.549 billion, said a syndicate banker who worked on the analysis.

That tops the previous record, $20.261 billion, seen in 2003, the banker added.

Funds that report on a monthly basis saw a total of $12.128 billion of inflows during 2009.

The resulting $32.677 billion of aggregate inflows - which tally both the weekly numbers and the monthly numbers - is by far the biggest amount of yearly aggregate inflows the market has ever seen, the syndicate source added.

EPFR sees record flows

Another fund-tracking service, EPFR Global of Cambridge, Mass., which uses a different methodology from AMG, saw inflows of $433 million for the week, bringing the full-year total to $22.9 billion, a record, this "despite a surge in debt issuance and numerous high profile ratings downgrades."

While the EPFR numbers generally point in the same direction as AMG's - with an exception to the rule here and there - the exact magnitude differs since EPFR includes in its calculations some funds domiciled outside the United States.

All cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they comprise less of the total monies floating around the high yield universe.

Prepping a big calendar

Meanwhile, news on the new issue front remained somewhat muted on the first day back from the 2009 holiday season.

However the news flow is expected to receive a meaningful boost on Tuesday.

Dominating Monday's primary market news was the roadshow start of a split-rated deal from Icahn Enterprises LP and Icahn Enterprises Finance Corp.

Icahn's $2 billion two-part offering of senior notes includes tranches of six-year notes, which come with three years of call protection, and eight-year notes, which come with four years of call protection.

The offering, via bookrunner Jefferies & Co., is expected to be rated Ba3, by Moody's, and BBB- by Standard & Poor's.

The roadshow for the Rule 144/Regulation S with registration rights deal wraps on Jan. 11.

Proceeds from will be used to refinance the master limited partnership's 7 1/8% senior notes due 2013 and its 8 1/8% senior notes due 2012 and to fund general corporate purposes.

A high-yield flavor

Unlike other recent split-rated deals, for example recent issues from Boston Scientific Corp. and Otter Tail Corp., the Icahn deal has more of a high-yield flavor, sell-side sources said on Monday.

"Typically crossover deals are marketed quietly, on non-deal roadshows," one sell-sider explained.

"Then the deal launches and prices in an a.m.-to-p.m. drive-by, whereas the Icahn deal is running a full, high yield-style roadshow," the source added.

Icahn takes its place on the forward calendar alongside United Air Lines, Inc., which began a roadshow on Monday for its $500 million offering of 3.5-year senior secured notes (expected ratings B3/B+).

That roadshow is also scheduled to conclude on Jan. 11.

JP Morgan is the left lead bookrunner. Goldman Sachs & Co. and Morgan Stanley are joint bookrunners.

Meanwhile, Birch Communications, Inc. is attempting to place $100 million of six-year senior secured notes (B3/CCC+) via bookrunner Knight Libertas Capital Group.

Also, Formation Metals Inc. is selling 102,041 units, comprised of $100 million of five-year senior secured notes and C$60 million of common shares.

Jennings Capital Inc. is the lead agent. Blackmont Capital Inc. and Acumen Capital Finance Partners Ltd. are agents.

At least two bookrunners said that they expect to roll out deals on Tuesday, although neither source volunteered an issuer name.

One of the two will be Canadian dollar-denominated, an informed source said.

Little movement in Icahn existing bonds

The news that Icahn Enterprises had begun shopping its $2 billion behemoth of an offering around in the market had little impact on the company's existing 7 1/8% senior notes due 2013 and 8 1/8% notes due 2012, which are currently the subject of a tender offer, to be funded with the new-deal proceeds.

A trader said he had heard the bonds quoted late last month - but saw nothing going on in them, and on very low volume, on Monday, which he called "surprising - you would think that they would trade more."

He saw the 8 1/8s last trading on a round-lot basis around par on Dec. 23, and said that "most of the trading" was around par.

He last saw the 7 1/8s trading around 99¼ on Dec. 22, with $2 million changing hands, but nothing doing on Monday.

He noted that both issues were trading near the levels at which they will be taken out via the tender, "so there's nowhere left for them to go."

Market indicators seen firmer

Back among statistical measures of market performance not related to the new-deal market, a trader saw the CDX Series 13 index up a full point on the first trading session of the new year to end at 100¼ bid, 100¾ offered, after having retreated by 3/8 point in 2009's final session.

The KDP High Yield Daily Index meanwhile was up by 12 basis points on Monday at 71.31, after having gained 6 bps last Thursday. Its yield narrowed by 5 bps, to 8.02%, after having come in by 2 bps the previous session.

Advancing issues continued to lead decliners, by a ratio of eight-to-five.

ResCap rallies on government green

Residential Capital's bonds surged in Monday trading, following last week's news that the troubled mortgage lender's parent was planning another capital injection.

A trader said the 6 3/8% notes due 2010 "flew today," ending at 93 bid, 94 offered, compared to levels in the mid-70s before New Year's. Another trader said the paper traded in a range between 88 and 94, ending around the 94 mark.

"Wow, that's way up," he said.

Another market source called the 8 7/8% notes due 2015 about 12 points better at 83 bid. ResCap's 8 3/8% percent notes due 2010 jumped to 94 bid; that paper had traded as lower as the 60s in mid-December.

Last Wednesday, GMAC LLC - the parent company of problem-plagued ResCap - announced that it would get another $3.8 billion from the U.S. government, about $2.7 billion of which would then be used to support ResCap.

But even as the Minneapolis-based lender's bonds posted hefty gains, some market players were wondering what GMAC could possibly be thinking.

"Treasury pumped in another $3.8 billion into GMAC largely so that GMAC could support ResCap, which is ring-fenced off from GMAC and lacks a compelling ongoing business model," wrote CreditSights analysts Adam Steer and David Hendler in a note to clients. "We are at a loss for words over the complete lack of logic behind using tax dollars to support ResCap."

Even Moody's Investors Service said the capital infusion would likely do little to help the ailing company.

"It remains uncertain if additional deterioration will occur in these portfolios and whether ResCap can return to profitability," Moody's said in a statement issued Thursday. "The company has been unprofitable on a quarterly basis for three years, its liquidity position is tenuous, capital insufficient and franchise impaired."

GMAC is reportedly holding a conference call Tuesday to discuss the situation.

Compton climbs as asset sale completed

Traders saw relatively busy activity in Compton Petroleum's 7 5/8% notes due 2013, with over $12 million of the normally inactive bond seen changing hands at 81¼ bid, 82¼ offered - up from levels in the high 70s before New Year's.

One trader saw the bonds get as good as 82, up from 79 bid, 80½ offered, noting that the Canadian oil and gas exploration and production company had announced the exercise of the option by a purchaser to acquire the remaining 2.5% of the previously announced 5% overriding royalty. Compton said that the purchaser "has acquired half the optioned 2.5% ORR for proceeds of $23.8 million and has expressed its intention to acquire the remaining portion of the optioned 2.5% ORR by Jan. 31 for additional proceeds of $23.8 million subject to completion of due diligence and financing.

The additional sale brings the aggregate sale price of the ORR, from the initial sale plus the exercise of the option, to a total of $95 million and represents a 5% ORR on the gross production revenue on Compton's existing land base, less certain transportation costs and marketing fees, calculated on a monthly basis. The sales concluded to date resulted in a realized sale price of $71.3 million and represent an ORR of 3.75%. Proceeds will be used to reduce Compton's bank debt, which totaled approximately $105 million as of Dec. 31 -- a reduction of $245 million from the peak bank debt level in 2009.

AIG unit is active

A trader said "a lot of" International Lease Finance Corp. bonds were traded, with the American International Group Inc. aircraft leasing unit's 5¾% notes due 2011 likely the busiest, with the bonds "up a little bit," trading in a 92-92½ context, with some bonds seen as high as 93, versus levels around 91¾ bid, 92¼ offered last week.

However, a source at another desk said that ILFC's 6 3/8% notes due 2013 were off about a point on the day at above the 82 level.

Also among the financials, a trader saw some activity in the new 7% notes recently issued by CIT Group Inc., with the 2016 notes "off a little bit" at 87 bid, versus 88 last week, but he added that "there was no offered side on either day."

He saw the New York-based commercial lender's 7% notes due 2017 between 86¾ and 88, while its 2015 notes were at 89¾ bid, 90¾ offered, in round-lot trading. He further said that apart from the 2016 notes, "they generally look a little higher than they were last week."

At another desk, a market source quoted the CIT 2017 notes at 88¼ bid, up more than a point on the session, while seeing the 7% notes due 2014 off nearly a point, at the 92 level.

Automakers motor upward

A trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 up a point at 28½ bid, 29½ offered. He also saw GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 likewise up a point at 89¼ bid, 90¼ offered.

YRC seen higher upon offer completion

A trader saw the YRC Worldwide's 8½% notes slated to come due on Apr. 15 "up a lot" from recent levels on the news that the Overland Park, Kan.-based trucking company had successfully completed its previously announced offer to exchange new common and convertible preferred stock for its outstanding 81/2s and for its contingent convertible notes.

Seeing the 81/2s trading in the high 80s, he speculated that the roughly $45 million of the bonds still outstanding after the exchange offer were up because "the guys who held out may be getting par plus some accrued when the bonds mature in April."

He saw "some small trades" in the 86-87 area, while "they were trading in the 50s not too long ago." He said about 100 bonds -- $100,000 - traded Monday at 87, versus the 65 level at which about 125 bonds traded on New Year's Eve, but there weren't any round-lot trades. He also saw a 78 bid for 250 bonds on Monday, "so they're definitely up, but there's not a lot of activity, obviously."

Another trader also saw "bids in the 70s, but only small lots" on Monday, even seeing an offering at 88 for "a small piece" of the untendered bonds. He had seen $30 million trade around 60 bid last Wednesday, Dec. 30, and $2 million at 65 on Dec. 31.

He also saw the new series A preferred shares which were given to the tendering noteholders in exchange for their bonds bid around 791/2. He also saw an offering at 981/2, "so you can drive a truck through that - it's a 20-point market," although he allowed that the real market "may be a little tighter" than that.

Lumena loses ground

A trader said that Lumena Resources Corp.'s 12% notes due 2014 were off Monday on the possibility that the Chinese mineral mining and chemical company might be forced to buy back those bonds - a transaction which would severely affect its finances.

He said that there was an announcement that the company's main shareholder had "pledged a pile of his shares" as collateral for a bank loan -- and observed that according to Moody's Investments Service, there is a provision in the bonds' indenture which says that if the main shareholder's ownership drops below 30%, this could trigger a change-of-control put.

"That would create some hardship for the company, I would think because they'd have to pay the bonds off at 101," he said. The $250 million of bonds priced at 99.085 on Oct. 21 to yield 12¼%, but "have been trading fairly weakly since they came," declining to about the 85-86 level as of last week. "Today, they traded down some more," to between 83 and 831/2. Lumena's dollar-denominated bonds attract interest from both junk players and emerging markets investors, the trader said.

He took pains to point out that the mere pledging of the stock as collateral does not "yet" put the company in the change-of-control situation - and said that it was quite possible that the possibility of such a default could be "next to zero" - but he cautioned that "if he were to default on that loan, it would have ramifications for these bonds. The bonds had been trading relatively weakly anyway - but this made them a little weaker. If they had the wherewithal to pay the bonds off, they would move up on this news - but since people are concerned that if this guy were to default and the bondholders would put the bonds at 101 and they couldn't pay, it would create a big mess, I assume," in trying to explain the latest erosion of the bonds' price.

"It seems to be having an effect on the bonds."

-Stephanie N. Rotondo contributed to this report

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