Upsized Williams leads new-deal surge; funds $1.45 billion inflows; airline bonds flying

By Paul Deckelman and Paul A. Harris

New York, June 5 - After a fairly sedate start to the week, primary side activity came roaring back with a vengeance Thursday, as four deals priced totaling nearly $1.5 billion, led by The Williams Cos.' upsized offering of $800 million 8 5/8% senior notes due 2010.

The new bonds issued by the four companies were heard to have been well received when they were freed for secondary dealings.

Among established issues, airline bonds continued their ascent, with Continental Airlines Inc. giving the whole sector a boost on the news that it plans to strengthen its liquidity position with a $150 million convertible debt offering - the latest in a series of such airline financing deals.

The airlines were generally indicative of both a more active secondary - in contrast to the lassitude the secondary saw in late May as the sizzling new-deal market grabbed the spotlight - and an overall better tone.

Indeed, both the revived primary market and the re-awakened secondary seem to coincide with a sharp turnaround in the trend of high-yield mutual fund flows, which are closely watched by market players as a key barometer of overall junk market liquidity trends.

After two straight weeks in which more money was reported to have ebbed from the junk funds than flowed into them, the funds showed a mammoth $1.45 billion inflow, according to market participants familiar with the weekly fund flow statistics compiled by AMG Data Services of Arcata, Calif. According to a Prospect News analysis of the fund flow figures, it was largest inflow seen since the week ended Feb. 26, when $1.54 billion more came into the funds than left them.

In the previous two weeks, outflows had totaled approximately $877 million - $620 million of that last week alone. That two-week trough had followed an incredible run of 12 consecutive weeks of inflows, including seven in which inflows had topped $1 billion and two other weeks in which it came close to that magic mark.

That kind of easy liquidity, dating back to mid-February, sparked a solid rise in the secondary and the percolating new-issues market. Since the beginning of the year, inflows have been seen in 16 of the 21 weeks to date, and the cumulative net inflow totals some $14.143 billion, including the latest week's inflow, excluding distributions and including any funds that report on a weekly, rather than on a monthly basis.

"This means that the rally in the high yield will definitely continue," one sell-side official commented on the reported inflow. "It now appears that this market will remain hot right up to the Fourth of July.

"It will be interesting to see whether the investment banks will come with more hot-market deals, and try to push the envelope," the official added.

Another sell-side source who spoke briefly with Prospect News late Thursday said that such a meaningful resumption of cash flowing into high yield has implications for the forward calendar that are hard to mistake.

"We are pretty excited about it around here," said the sell-sider, who added that the inflow, taken in conjunction with Thursday's successful transactions of new issuance, makes for convincing evidence that the high-yield market continues to rally.

The deals that the source mentioned included an even handful of new issues transacted during the session - four of which were upsized.

Tulsa, Okla. natural gas firm Williams had expanded its offering to $800 million from $500 million on Wednesday when it issued price talk of 8 5/8%-8 7/8%.

Williams' new seven-year senior notes (B3/B+/B+) ended up coming at the tight end of that talk, pricing at par to yield 8 5/8% in a deal that sources said was significantly oversubscribed.

Lehman Brothers, Citigroup, JP Morgan and Banc of America Securities ran the books on the Williams deal.

Two issuers upsized their notes offerings by $100 million apiece during Thursday's session.

Connecticut refiner Premcor Inc. increased the size of its sale to $300 million from $200 million, pricing its 12-year senior notes (Ba3/BB-/BB-) at par to yield 7½%, in the middle of the 7 3/8%-7 5/8% price talk.

Morgan Stanley was the bookrunner.

Likewise SPX Corp., of Charlotte, N.C., upsized its offering to $300 million from $200 million. SPX sold its eight-year senior notes (Ba3/BB+) at par to yield 6¼%, at the tight end of the 6 3/8% area price talk via JP Morgan.

Also upsized, and reportedly well oversubscribed, was the offering of 10-year senior subordinated notes (B2/B+) from oil and gas exploration and production firm Houston Exploration Co., which increased the size of its deal to $175 million from $150 million. The new notes, via Wachovia Securities, priced at par to yield 7%, also at the tight end of the 7%-7¼% price talk.

Finally, Warnaco Group, Inc. sold $210 million of 10-year senior notes (B2/B) at par to yield 8 7/8%. The New York City-based apparel-maker's deal, via Citigroup and JP Morgan, came in the middle of the 8¾%-9% price talk.

Hence, during Thursday's session not only did four of five deals upsize, but three of the five transactions, Houston Exploration, Williams Cos. and SPX Corp., came at the tight end of price talk. And the other two deals, Premcor and Warnaco, came in the middle of talk. These executions stand in contrast to recent market color Prospect News has heard from both buy-side and sell-side sources that during the waning days of May the market saw deals pricing at the wide end of - and occasionally wide of - price talk.

The market also heard scant details Thursday - via press releases and ratings actions - on new issuance from Calpine Corp., which announced it will bring $800 million via its subsidiary Power Contract Financing LLC, and Waterford Gaming, LLC and Waterford Gaming Finance Corp. which will bring $150 million senior notes due Sept. 2012 (B+) to fund the tender for the $102.349 million of outstanding of 9½% senior notes due 2010.

Finally, price talk of 9½% area emerged Thursday on United Components Inc.'s new deal, which is expected to price on Friday. The Jersey City, N.J. supplier of vehicle replacement parts downsized the offering of 10-year senior subordinated notes (B3) to $230 million from $255 million, shifting $25 million to the credit facility. Lehman Brothers and JP Morgan are joint bookrunners on the LBO deal.

When the new bonds of the five issuing companies were cleared for secondary dealings, traders heard that they had been well bid for - none so much as the Warnaco Group 8 7/8% senior notes due 2013, which moved up to closing levels around 102.875 bid, 103.375 offered from their par issue price.

Also heading upward were the new Williams 8 5/8% senior notes, which came at par and then managed to firm to 101.75 bid, 102.125 offered.

And Houston Exploration Co.'s new 7% senior subordinated notes due 2013 were quoted bid in the 102-102.5 area

But Premcor Refining Group's new 7½% senior notes due 2015 only moved up marginally from their par issue price to 100.5 bid, 101 offered.

Back among the already existing issues, airline bonds were "all better,' a trader said, lifted by apparent investor perceptions that the worst is probably over for the battered carriers, who are expected to recover as the recovering economy slowly sends back a stream of business and tourist fliers - that is, if the big network operators can hold onto market share in the face of stiff competition from rivals such as Southwest Airlines and the upstart Jet Blue.

Also helping out were moves by the major carriers to improve their liquidity and cut costs. On Thursday, Continental Airlines said it had sold $150 million of new 5% convertible notes due 2023 - following the lead of peers Delta Airlines and Northwest Airlines, who recently inked their own convertible deals.

"More debt [but] more liquidity," was how one trader put it. He pegged the straight Continental 8% junk notes due 2005 at 88 bid, 88.5 offered, up around a point, noting that the Houston-based carrier's had appreciated "probably at least 10 points over the last few sessions."

At another desk, the Continentals were quoted even higher, at 89.5 bid, up two points on the session.

A trader quoted American Airlines parent AMR Corp.'s 9% notes due 2012 as having firmed to 57.5 bid, 59 offered, from 56 bid, 57 offered on Wednesday.

And he saw Delta's 7.70% notes due 2005 having firmed smartly to 87 bid from prior levels at 84.5 on Wednesday. The Atlanta-based carrier said that it planned to cut $2.5 billion in costs by the end of 2005 - but wanted to do it without eliminating any jobs; the Delta strategy lies with efforts to reduce employee health care and pension benefits.

Among some of the smaller airline credits, ATA Holdings Corp.'s 10½% notes due 2004 firmed to 40 bid from prior levels around 38, after the Indianapolis-based carrier's ATA Airlines Inc said that in the month of May it saw traffic up 34.7% to 1 million revenue passenger miles (one paying passenger flown one mile) from 756,245 in May 2002.

ATA also said that its load factor for the month was 73.0%, up from 71.8% a year earlier. And it forecast that it would post a profit in the second quarter, before taking into account the effect of a one-time $37.2 million payment from the U.S. government under the Emergency Wartime Supplemental Appropriations Act of 2003.

A trader meantime saw Air Canada's 10¼% notes due 2011 as having firmed to 44 bid from 41, citing talk of a "bank deal" for the bankrupt Montreal-based Canadian national carrier. That may have been a reference to the deal - announced earlier in the day - under which the airline added American Express Co. as a partner to its Aeroplan customer loyalty program. The deal includes a cash advance by AmEx to the insolvent airline, although nobody is saying how much. The airline said that the cash advance will be repaid as Aeroplan miles are bought.

Back on the ground, Healthsouth Corp. - whose beleaguered bonds firmed solidly Wednesday (seniors in the mid-70s, juniors in the upper 30s) as all kinds of buyout and bankruptcy rumors swirled around the troubled Birmingham, Ala.-based provider of diagnostic and healthcare service - continued to hover near those levels, with one notable exception. "Nobody can figure out what's going on with them," a trader said. "It's bizarre."

Its 10¾% subordinated notes due 2008 were seen having moved up to around 46 bid from prior levels around 38.

The Gap continued to show success in its turnaround program, reporting a 10% rise in comparable-store May sales versus a year ago.

The San Francisco-based apparel retailer's 6.90% notes due 2007, which closed Wednesday offered around the 107-107.75 area, were quoted bid at 108. J.C. Penney, which posted a 3.2% gain in comparable-store sales, was largely unchanged, its 7.60% notes due 2007 staying at 102.5 bid, 103.5 offered.

Levi Strauss & Co.'s 11 5/8% notes due 2008 were a point better, at 86.

U.S. Steel Corp.'s 10¾% notes due 2008 were quoted up about three points on the session, at 107.25 bid. The Pittsburgh-based steelmaking giant announced a slew of executive changes, as part of the integration of its recently acquired National Steel Corp. subsidiary.

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