Lyondell launches $1.775 billion deal; GM up on Delphi hopes; funds see $107 million inflow

By Paul A. Harris

St. Louis, Sept. 7 - Sources marked the broad high-yield market unchanged to down a quarter of a point on light volume, Thursday.

The bonds of General Motors Corp. strengthened as the automaker's chief financial officer stated that talks between parts supplier Delphi Corp. and the United Auto Workers are a top priority.

Meanwhile gloomy forecasts from the home building sector caused both stocks and bonds to tumble in early trading. However by Thursday's close the home builders had recovered most of what they lost, and in certain cases ended higher.

In the new issue market, Lyondell Chemical Co. hit the investor roadshow trail with its $1.775 billion two-parter - one of the early installments in what sources say is shaping up to be an impressive parade of mega-deals coming this fall.

With the primary market expected to start cranking up - and late Thursday a high yield syndicate official intimated that next week will be far more dramatic than this week has been - sources are keen to measure the liquidity of the asset class.

Those observers heard positive news on Thursday as AMG Data Services reported that high yield mutual funds which report on a weekly basis saw $107.1 million of inflows for the week ending Sept. 6.

That reduces the red ink those weekly reporting funds have been swimming in year-to-date to negative $3.054 billion.

Funds that report on a monthly basis most recently reported a $366.4 million inflow, extending their year-to-date cash flows to positive $2.632 billion.

Year-to-date aggregate flows, tallying numbers from both the weekly and monthly reporters, stood at negative $421.8 million to Sept. 6.

A Prospect News analysis of the data shows that lately inflows have predominated. In five weeks out of the last seven, there have been inflows for a total of $542.3 million. Inflows have also now been seen in seven weeks out of the past 10 - a rarity in a fund-flow landscape so far this year that has been almost completely dominated by outflows. Over those nine weeks, net inflows have totaled approximately $639 million, according to the Prospect News analysis.

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 only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

GM gains

Traders and other market sources widely agreed that the bonds of General Motors traded higher on the session and on the week.

Mid-to-late Thursday morning a trader spotted the long-dated GM 8 3/8% bonds maturing in 2033 at 86 bid, and added that last Friday, before the Labor Day break, that paper was at 83.50 bid.

This source perceived technical market forces at work in the move.

"It's been higher over the past couple of days maybe because of the lack of supply in the market," the trader said, adding that since early August the high yield primary market has produced virtually no new issues.

"People have to buy something," the trader reasoned.

"This paper is liquid and it looks like people are putting cash to work, here."

Subsequently, however, other sources, allowing that high-yield paper is currently scarce, said that GM's paper improved on fundamental developments rather than for technical reasons.

They mentioned GM chief financial officer Fritz Henderson's Wednesday assertion that the automaker has made an equitable solution to wages and benefits negotiations between GM's major parts supplier, Delphi, and the UAW a top priority. This, the sources added, gives some reassurance to bondholders that a UAW strike against Delphi, which could cripple GM production, is a more remote possibility.

One trader, later in the day, said the GM 8 3/8% due 2033 was up a point on the day at 87 bid, 88 offered.

Another trader said that the same GM paper was definitely strong, and spotted the same 8 3/8% notes at 86.625 bid, 87.625 offered at the close, up ½ to ¾ point on the day.

Ford unchanged

The movement, or lack of it, in Ford Motor Co. bonds seemed to lend some credence to the assertions that GM paper had improved due to fundamentals - i.e. the Delphi news - rather than the overall scarcity of paper in the market.

While GM paper improved on Thursday sources said that Ford's paper was motionless.

Late in the morning a trader saw Ford's 7.45% notes maturing in 2031 at 80 bid, unchanged from two days ago when Bill Ford announced he would resign as chief executive of the company founded by his great grandfather, Henry Ford.

Bill Ford, who will remain as board chairman of the troubled automaker, is being replaced Alan Mulally, an executive vice president at Boeing, who will serve as GM president as well as CEO.

Later in the day another trader marked the Ford 7.45% bonds due 2031 at 80 bid, 81 offered, and added that it didn't do anything on the session.

Also idling Thursday were the Ford Motor Credit Co. 7% notes due 2013 which a source spotted at 94 bid, 94.50 offered, unchanged on the session.

Auto parts makers weaker

The news that carried GM paper higher, according to some sources, apparently had little or no apparent impact on the debt of Delphi Corp.

A trader spotted Delphi's 6.55% notes due 2006 at 90.50 bid, 91.50 offered, unchanged on the day.

Beyond Delphi the new was worse for the auto parts makers.

The most dramatic decline took place in the paper of bankrupt Toledo, Ohio, parts and systems manufacturer Dana Corp.

Although sources roundly concurred that Dana's bonds dove throughout the session, none of them could provide an explanation.

Mid-morning a source spotted Dana's 6½% notes due 2008 at 79.50 bid, 80.50 offered, down a point.

Meanwhile the Dana 5.85% bonds maturing in 2015 were at 70 bid, 71 offered, also down a point, according to the source.

At the long end of the curve Dana's 7% paper due 2028 was at 73.75 bid, 74.75 offered, late in the morning, down ¾ point.

Later in the day, a trader said the Dana 6½% notes due 2008 were trading at 77 bid, 77.75 offered, down from 79.50 bid, 80.50 offered late in the morning.

Well after the close another trader had the 6½% notes at 76.50 bid, 77.50 offered, "down 4 points on no news."

Tower drops too

Also plunging, though less dramatically, was the bond debt of Novi, Michigan chassis-maker Tower Automotive, Inc., another bankrupt parts-maker.

Late in the morning a trader said that Tower paper was down a couple of points on news that its creditors' panel has objected to a settlement the company reached with its unions because, according the panel, the settlement puts the interests of labor ahead of the interests of the creditors.

Bondholders see the objection as a setback because now the parties may have to hash out a new set of agreements.

Another source said along with nothing getting widely circulated on the bankruptcy plan, news of Tower agreeing to classify preferred securityholders as creditors was probably cause for the decline.

"More people are looking for a piece of the pie," he said.

One trader had Tower's 12% bonds due 2013 spotted at 36 bid, 36.50 offered at the close, down from Wednesday's 37.25 bid, 38.25 offered. The source added that the paper looked weaker.

However late in the session a source said that while that same paper was down 2 points at 35.75 bid, 36.75 offered in the morning, it improved somewhat to finish the session at 36 bid, 38 offered.

Also off Thursday was the debt of Rochester Hills, Mich., brake and gear-maker Dura Automotive Systems, Inc.

One source said that Dura's 8 5/8% notes due 2011 were at 73 bid, 73.50 offered in morning trading, down ¾ point.

Meanwhile the Dura 9% notes due 2009 were at 16 bid, 17 offered, down a quarter.

Bricks and mortar

If auto parts makers softened on little or no news, home builders held their water, and in some cases actually improved, despite bad news.

The bad news was that two major home builders, KB Home and Beazer Homes USA, Inc., cut guidance, saying that their profits will not meet expectations.

"Our earnings expectations for the third quarter and full year reflect an increasingly challenging housing market, where the supply of new and resale home inventories has built up in recent months in markets that have experienced rapid price appreciation or substantial investor activity, or both, in the past few years," said Bruce Karatz, chairman and chief executive officer of KB Home, in a Thursday press release.

KB Home lowered its earnings guidance for the year to $8 to $8.50 a share, down from an earlier estimate of $10 a share.

Beazer lowered its guidance to $8 to $8.50 per share, down from $9.25 to $9.75.

Early Thursday morning a junk bond market source advised Prospect News that both company's stocks were getting hit, but added that the bonds were not uniformly lower.

For example, the source said, KB Homes 5¾% notes due 2014 were at 88 bid, 88.75 offered, unchanged, while the company's 6¼% notes due 2015 were at 89.25 bid, 90 offered, also unchanged.

Meanwhile, the Thursday morning source added, Beazer's 8 5/8% notes due 2011 were actually up 1.5 to 2 points at 99.50 bid, 100.50 offered.

However the Beazer 8 1/8% notes due 2016 were down a point at 94.75 bid, 95.75 offered, the Thursday morning source added.

A trader who spoke after the close said that while home builders' shares took a hit right out of the gate Thursday morning, down 3% to as much as 5%, those stocks "came storming back," with some actually ending unchanged or even higher.

This trader tracked similar movement in the bonds.

The source, specifying that most of the activity took place at the long end of the maturity curve, spotted KB Home's 7¼% notes due 2018 at 92.50 bid, 93.50 offered at the close, down ½ point on light activity.

And Beazer's 6 7/8% due 2015 closed the day at 88.50 bid, 89.50 offered, basically unchanged, the source said.

Meanwhile, the trader said, the paper of Hovnanian Enterprises, Inc. - which reported on Wednesday that its numbers were down, but that they nonetheless beat expectations - saw its 8 5/8% bonds due 2017 closing at 97 bid, 98 offered, unchanged on the session after being down ½ point earlier in the day.

This trader suggested that it was Hovnanian that supported the "bull theory" that all of the negative home builder news was already priced into the bonds and stocks.

Lyondell lets it rip

Over in the primary market the anticipated fall parade of billion-dollar plus mega-deals got underway Thursday as Houston-based Lyondell started a roadshow for its $1.775 billion two-part offering of senior unsecured notes (expected B1/expected B+/confirmed BB-).

The company is offering eight-year notes which come with four years of call protection, and 10-year notes which come with five years of call protection. Tranche sizes remain to be determined.

JP Morgan, Banc of America Securities LLC, Citigroup and Morgan Stanley are joint bookrunners for the debt refinancing - some of it related to Lyondell's acquisition of Citgo Petroleum Corp.'s 41.25% interest in Lyondell-Citgo Refining LP.

Avnet's split-rated deal a blowout

Phoenix-based distributor of electronic components and computer products Avnet, Inc. priced an upsized split-rated $300 million issue of 6 5/8% 10-year notes (Ba1/BBB-) at Treasuries plus 187.5 basis points on Thursday - the price talk at which the offer was launched.

The notes sold on Thursday at 99.545 to yield 6.688%.

Banc of America Securities, LLC and JP Morgan were joint bookrunners for the debt refinancing deal that was upsized from $250 million.

Sources said that the deal was massively oversubscribed.

A buy-side source whose allocation of bonds was "cut back," said that the deal likely saw considerable junk play as people are presently wanting to get into higher quality paper.

However sell-side sources, speaking later, suggested that interest in the Avnet notes among high-yield investors may not have been that high.

Upgrade boosts United Rentals

Back in the secondary market the bonds of United Rentals Inc. got a late-day boost as Moody's raised its rating on the company's corporate family rating to B1 from B2. The outlook is stable.

Late Thursday a trader spotted the United Rentals 6½% notes due 2012 at 94.75 bid, 95.25 offered, unchanged, while the United Rentals 7% notes due 2014 were at 92.25 bid, 92.75 offered, up ½ point.

After the close a trader told Prospect News that following the announcement from Moody's nothing happened initially.

"Then you saw some buyers," the trader asserted, saying that the 6½% notes due 2012 traded late at 95.50 bid, 96.50 offered, up ½ point, which the 7¾% notes due 2013 went out at 96 bid, 97 offered, also up a half.

This trader also mentioned that the bonds of Sea Containers Ltd. have recently seen some activity, and added that lately the company's bonds have been trading on top of one another whereas they had previously been segregated by security and yield.

"People are now looking at them as 'pari passu' in the event of a restructuring which looks likely since management has not said anything with regard to restructuring plans or an equity offering," the trader commented.

Kodak trades up

News that Eastman Kodak Co. expects to cut its debt by approximately $800 million by year-end - including the prepayment of $500 million of debt due in 2012 registered a positive impact on that company's outstanding bonds, according to traders.

One trader saw the Kodak 7¼% due 2013 at 96.50 bid, 97.50 offered, up ½ point, while the Kodak 3 5/8% notes due 2008 closed at 95 bid, 96 offered, unchanged.

Another trader saw the Kodak 7¼% notes due 2013 finishing the day at 96.50 bid, 97.50 offered, unchanged.

"The market is pretty sticky," the trader said, marking the broad junk market half a point lower on the day.

"There is no new issuance right now, but it will be interesting to see what happens in the secondary when you get the LBO issuance in the face of a slowing economy."

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