Ace Hardware prices deal; R.H. Donnelley gains on numbers, exchange; funds see $612 million inflow

By Paul Deckelman and Paul A. Harris

New York, May 8 - Ace Hardware Corp. successfully priced $300 million of new eight-year senior notes Thursday. The new bonds were seen to have risen slightly when they were freed for secondary dealings.

Also in the primary sphere, price talk emerged on Public Service Company of New Mexico and PNM Resources Inc.'s upcoming $700 million deal, which will be divided into two tranches, one for each entity, one pure junk, one split rated.

In the secondary arena, R.H. Donnelley Corp.'s bonds and those of its wholly-owned Dex Media Inc. subsidiary rose by several points in active trading after the Cary, N.C.-based telephone directory publisher announced better-than-expected quarterly results - excluding a huge goodwill impairment charge - and said it would exchange high-coupon new debt for a portion of its outstanding bonds. It also announced plans to refinance the Dex credit facility. Sector peer Idearc Inc.'s bonds were also seen higher.

Elsewhere, Hovnanian Enterprises Inc.'s bonds firmed smartly as the Red Bank, N.J.-based builder raised some fresh capital with a 14-million share offering. However its stock fell badly.

Trump Entertainment Resorts Inc.'s bonds were seen gyrating around at mostly lower levels after the Atlantic City, N.J.-based gaming company reported a wider quarterly loss, although the bonds managed to firm from their day's lows to end only off a little.

A high yield syndicate official said that junk was a touch lower on Thursday, mostly in the CDX index, but added that cash bonds felt heavy.

Funds up by $612 million on week

And as trading was winding down for the session, market participants familiar with the high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $611.9 million more came into those funds than left them. It was the sixth consecutive inflow, following the cash infusion of $297.2 million seen in the previous week, ended April 30.

Over that six-week stretch, inflows have totaled $2.351 billion, according to a Prospect News analysis of the figures, far outweighing the $409.6 million of net outflows which had been seen over the three weeks immediately before that.

The results over the past six weeks have represented a sharp break away from the negative fund-flow trend which had dominated for most of this year. With 19 weeks now in the books, inflows - after trailing outflows pretty much all year - have now pulled slightly ahead, with 10 inflows and nine outflows seen since the start of the year, according to the Prospect News analysis.

That winning streak has also now erased what up till that time was a sizable year-to-date outflow totaling over $1 billion as of the week ended Wednesday, March 26

According to market sources, net inflows from the weekly-reporting funds since the start of the year are now $1.276 billion, up from $664.1 million the previous week.

The sources meanwhile said that there was an increase of $1.027 billion in the total assets of funds which report on a monthly, rather than a weekly basis. So far this year, $1.575 billion more has come into that latter group of funds than has left them, up from the previous week's year-to-date net inflow figure of $547.8 million.

Taken in the aggregate, combining the cumulative totals for the monthly-reporting funds and the weekly reporters, the high yield mutual funds show a consolidated net inflow of $2.851 billion, the market sources said.

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, more recently, hedge funds.

Ace prices

Meanwhile a single issue priced, as Ace Hardware Corp. sold $300 million of 9 1/8% eight-year senior secured notes (Ba2/BB-) at 98.60 to yield 9 3/8%.

Banc of America Securities was the bookrunner for the debt refinancing and general corporate purposes deal.

Friday's calendar

The final session of the first full week of May is expected to see terms emerge on two high yield tranche and one split-rated deal.

Public Service Co. of New Mexico and PNM Resources set price talk for a combined $700 million amount of Securities and Exchange Commission-registered notes in two tranches on Thursday.

The deals are expected to price on Friday.

Public Service Co. of New Mexico, the operating company, talked a $350 million amount of split-rated 10-year senior unsecured notes (Baa3/BB+/BBB-) at 8% area.

The operating company deal is being run off both the high yield and investment grade syndicate desks, with high grade accounts expected to take part in the deal.

Lehman Brothers and Merrill Lynch & Co. are the active bookrunners. Citigroup, Deutsche Bank Securities, Morgan Stanley, RBC Capital Markets and Wedbush Morgan are the passive bookrunners.

Meanwhile at the holding company level, PNM Resources talked its $350 million offering of seven-year senior unsecured notes (Ba2/BB-) at 9¼% to 9½%.

Lehman Brothers and Banc of America Securities are the active bookrunners. Merrill Lynch & Co., Morgan Stanley and Wedbush Morgan are passive bookrunners.

Also expected to price Friday is Petrohawk Energy Corp.'s $500 million offering of senior notes due 2015 (B3/expected B).

On Wednesday the notes were talked at 7¾% to 8%.

Lehman Brothers, JP Morgan, Merrill Lynch & Co., BNP Paribas, Credit Suisse and Banc of America Securities LLC are joint bookrunners.

Ace mostly stays in place

A trader said that the new Ace Hardware 9 1/8% notes due 2016 had edged up to 99 bid, par offered when they were freed for secondary dealings, versus their 98.60 issue price earlier in the session.

At another desk, a trader saw the new bonds at 98.875 bid, 99.375 offered.

Also among newly issued bonds, a trader saw the new DirecTV Holdings LLC/DirecTV Financing Co. 7 5/8% notes due 2016, which had priced on Wednesday at par, having inched up to 100.125 bid, 100.375 offered.

And he saw Newfield Exploration Co.'s 7 1/8% notes due 2018, which had priced on Monday at par, for the first time actually dipping below the par level, if only on an intraday basis, at 99.75 bid, par offered. However, he said, the bonds ended at par bid, 100.125 offered, "so they did rebound."

Market indicators slightly lower

Back among the established issues, a trader said, the widely followed CDX junk bond performance index was down by ½ point to 96.5 bid, 97.25 offered. The KDP High Yield Daily Index eased by 2 bps to 76.18, while its spread widened by 1 bp to 9.10%.

In the broader market, advancing issues held only a slight edge over decliners, the two groups separated by just a handful of issues. Activity, represented by dollar volume levels, was down 31.5% from Wednesday's pace.

A trader said that Thursday was "a pretty stealthy day," with most names either "up or down 1 [point]" at the most, with a handful of significant of names that had stories attached to them perhaps doing better or worse.

Donnelley dominates on numbers, offer

Chief among the former was R.H. Donnelley, whose bonds were seen up anywhere from 3 to 6 points on the session after the company released what seemed to be fairly positive quarterly results and announced its debt-exchange offer, part of a larger plan to actually cut its debt. A trader called the name "certainly one of the more notable ones on the day," seeing its bonds up about 3 to 5 points across the board.

He said that while the earnings released in the morning were "good," the bonds' rise was motivated by a combination of the results and news of the exchange offer, "but obviously, the exchange offer was really a lot of it."

Its several series of 6 7/8% notes due 2013 rose as high as the 69 level on Thursday from Wednesday's closing levels around 63, a market source said, with a number of large-block trades, although the bonds were seen coming off that peak to end in a 67-68 context, still up a good 4 or 5 points.

Its 8 7/8% notes due 2016 mirrored that rise, going to around 70.5 bid from Wednesday's close at 66 before easing slightly to end at around 69.5.

A trader at another desk saw its 8 7/8% notes due 2017 likewise up more than 3 points on the session, going home at 67.25 bid, 68.25 offered.

The Donnelley bonds, said another trader, were "quite active." He saw the '16s move up to 70, up nearly 6 points from the last round-lot trading levels Wednesday at 64.5, adding "that's a nice move."

Donnelley's New York Stock Exchange-traded shares meantime jumped by $1.82, or 28.527%, to $8.20, on volume of 13.1 million shares, more than four times the norm.

Also up were the bonds of Englewood, Colo.-based Dex Media, which Donnelley acquired in 2005. Its 8% notes due 2013 were up more than 4 points on the day at one stage at 81.5 bid. However, they too came down from the early peak level to end at 80, up some 3 points on the session.

The company's Dex Media East bonds were seen among the most busily traded credits of the day, with a trader seeing its 9 7/8% notes due 2013, which got as good as 97.5 bid, finally closing about a point below that, but still up nearly 3 points from Wednesday's close at 93.75. And he saw the Dex East 8½% notes due 2010 go as high as 100.75 bid, up from 98.875 previously. Those bonds finished Thursday at 99.875.

Donnelley announced on Thursday that it was beginning an offer to exchange new 11¾% senior notes due 2015 for $700 million principal amount of its existing bonds - three series of its 6 7/8% notes due 2013, plus its 8 7/8% notes due 2016 and its 8 7/8% notes due 2017.

The company currently has an estimated total principal amount of approximately $3.53 billion of those five series of "old" bonds outstanding, and will accept notes for the exchange offer on a pro-rated basis should the amount of a particular series of bonds tendered exceed the maximum exchange amount for that series that the company has set. Donnelley is offering participating noteholders between $652.50 and $675 principal amount of the new bonds in exchange for $1,000 principal amount of their old bonds, plus the standard 3 cents on the dollar additional payment for early participation in the offer, bringing total compensation being offered to between 68.25 and 70.5 cents on the dollar. It set an early participation deadline of 5 p.m. ET on May 21, with the overall offer scheduled to expire at midnight ET on June 6 (see related story elsewhere in this issue).

The debt-for-debt exchange is one of several measures dealing with its total $9.951 billion of debt that Donnelley unveiled on Thursday; it also announced its intention to refinance the credit facility of its Dex Media West LLC subsidiary and to amend its own credit agreement to provide additional covenant flexibility as well as extend the maturity date of the revolving credit facility (see related story elsewhere in this issue).

The company's chairman and chief executive officer, David C. Swanson, said in a statement releasing the financial results that the measures would reduce near-term mandatory debt repayments, extend the company's maturity profile and reduce debt levels. "These actions provide us with greater flexibility to navigate through this business cycle and manage the business for sustainable growth when a better climate returns," Swanson declared.

Calls results 'solid'

The company characterized its first-quarter financial results as "solid." Although it posted a yawning net loss of $1.623 billion, or $23.60 per share, versus year-ago net earnings of $16 million, or a diluted 22 cents per share, it pointed out that the huge deficit was as a result of a $2.5 billion non-cash, pre-tax goodwill impairment charge that it took to reflect the recent decline in the market value of its debt and equity securities; excluding the effect of goodwill impairment recorded in the quarter, net income would have been $15 million, or 22 cents per share. That beat Wall Street expectations of ex-items earnings in the 15 to 17 cent per share area.

Donnelley emphasized the fact that its net revenues of $674.7 million were up 2% from year-ago sales of $661.3 million. The company had adjusted EBITDA of $357 million and its adjusted EBITDA margin was 52.9%. Adjusted free cash flow in the quarter was $92 million based on cash flow from operations of $100 million.

Swanson said that the company "generated strong revenues in the quarter driven by the pull through of ad sales from the prior year, lower claims and allowances and the addition of Business.com. This resulted in solid EBITDA in the quarter. Ad sales, a leading indicator of revenues, reflected weak economic conditions in our markets as we expected." The company affirmed previously issued full-year 2008 guidance that it had issued in February, including full-year revenue projections of $2.6 to $2.7 billion. "We are aggressively managing costs in response to this operating environment," Swanson added.

Analyst Dave Novosel of the Gimme Credit investment research service noted that the first-quarter results "handily beat consensus estimates," with revenue up 2% while margins rose 110 bps. He said that the positive market reaction on both the equity side and the bond side "is symbolic of how low expectations had gotten."

Even so, he had a generally positive assessment of the company, which he rates as "improving." In a research note Thursday, he wrote: "Given its meaningful free cash flow we still believe the company has ample opportunity to reduce leverage," and said that the announced note exchange offer "will provide more financial flexibility for R.H. Donnelley at a time when some are questioning its future."

Idearc improvement continues

While the R.H. Donnelley and Dex Media bonds were the pace-setters for the day, their Dallas-based competitor Idearc's 8% notes due 2016, weren't doing too badly either. Those bonds have been up solidly this week following unexpectedly good first-quarter results released on Tuesday, and they continued along in that same vein on Thursday.

A trader pegged the notes 2 points higher, with a round lot seen at 70 bid, while another called them "maybe up another ½ point" to current levels, leaving the bond "pretty much sitting at 70."

However, at another desk, the bonds were seen having been actively traded during the session but having really not gone anywhere, finishing at 72.5, unchanged from the smallish final odd-lot trade seen late Wednesday.

While the bonds continued to gain - or at least did not lose their prior gains - the company's NYSE-traded shares, up solidly the past two sessions following the quarterly results, were surrendering some of those gains, finishing down 34 cents, or 6.73%, at $4.71. Volume of 11.9 million shares was more than three times the usual turnover.

Hovnanian higher on equity sale

Apart from the directory names, traders saw movement in Hovnanian Enterprises, coinciding with its sale of 14 million shares at $9.50 each. The $133 million raised is expected by some analysts to be devoted to paying debt. Hovnanian's stated use of proceeds is general corporate purposes.

Hovnanian's 6 3/8% notes due 2014 were seen up a point at 72.5, while its 7¾% bonds were seen by another market source to have zoomed nearly 5 points to just below the 70 level.

While Hovnanian's bonds were hot, its NYSE-traded stock was definitely not, falling $1.53, or 13.75% to $9.60. Volume of 9.6 million shares was a shade less than three times the usual daily handle.

Trump in a slump

On the downside, Trump Entertainment Resorts' 8½% notes due 2015 were "heavily traded," a trader said, "but it was a sideways move." He saw the bonds trade as low as 60 bid after the company's numbers came out, but saw a round lot trading back up around 61.75 late in the day, although he said the final, smaller trades were around the 62.5 offered area, which he called up ½ point.

At another desk, a trader said the bonds were "pretty active" and closing at 62, off from about 62.25 on Wednesday. He saw the day's low around 61. "Although they got hit initially," he said, "they rebounded nicely to end almost unchanged."

"Trump traded down as much as 1 to 1½ points," another trader agreed, "but they closed at 62, down just a little."

The bonds took their early dive after the company - which operates three hotel-casino resorts in Atlantic City, but which has been in the process of beating the bushes for potential buyers for some or all of its operations there - reported a wider quarterly loss, citing the general economic weakness that has hit the whole casino industry pretty hard since the economic downturn began last summer. It suffered a first quarter net loss of $18.6 million, or 59 cents per share - more than double its year-earlier red ink of $8.1 million, or 26 cents per share.

Isle of Capri Casino's 7% notes due 2014 were seen around ½ point lower, just below 78.

Sara Rosenberg contributed to this report.

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