Market sleep-walks through short post-blackout session, ponders outflow; Dex deal downsized

By Paul Deckelman and Paul A. Harris

New York, Aug. 15 - It was back to work Friday - sort of - for the junk bond market, after a tumultuous Thursday that saw Charter Communications Inc. cancel its $1.7 billion new deal that would have funded that a tender offer for over $1 billion of bonds and some bank debt reduction besides, New York and other Northeastern business centers thrown into confusion by a massive late-day power failure, and a third straight huge high-yield mutual funds outflow - signaling a shuddering halt to the easy liquidity which had been fueling the junk universe's recent strong advance.

In the primary market, full terms emerged on Dex Media West LLC's two-part offering of seven- and 10-year notes, which had actually priced late in the session Thursday; while execution of the new deal more than fulfilled market expectations - no easy task in recent days and weeks - the Denver-based telephone directory publisher did downsize its deal somewhat in favor of the concurrent bank facility in response to strong demand in the leveraged loan market. Also on the new-deal front, Alaska Communications Systems Holdings priced its eight-year note offering at a discount to par.

Traders said secondary market activity was very thin, with something like half of Wall Street not even at work Friday due to the lingering effects of Thursday's blackout. The Bond Market Association recommended an early close at 2 p.m. ET and the junk market, eager to end a much less-than-stellar week, eagerly took that advice.

As market players headed home - some for the first time in more than 24 hours, owing to the blackout's effects on mass transit - they may have been pondering what effect the big mutual funds outflow reported late Thursday by AMG Data Services might have on activity Monday, when - in theory - things are supposed to be back to normal.

That outflow - $1.2 billion - marked the fourth consecutive week in which more money left the high yield mutual funds than came into them, and the third straight week in which the hemorrhage was more than $1 billion, including the $1.06 billion outflow seen in the week ended July 30 and the record largest-ever $2.56 billion bleed recorded in the week ended Aug. 6.

According to a Prospect News analysis of the weekly numbers compiled by AMG and relayed to Prospect News by market sources familiar with the statistics, the outflow brought to $4.912 billion the net amount by which the funds' aggregate assets have decreased since the losing streak began in the week ended July 23 with an innocuous-enough loss of $91 million.

The cumulative net inflow for the year to date has dropped in that time from its peak level of $17.312 billion observed in the week ended July 16 - the last week in which an inflow had been seen - to a more pedestrian $12.4 billion bulge, counting only those funds which report on a weekly basis and excluding distributions.

The funds flow numbers are closely watched by market participants as a generally reliable barometer of overall junk market liquidity trends, even though the assets held by the funds only constitute a relatively small portion of the overall junk bond universe.

Inflows have still been seen in 20 out of the 32 weeks since the beginning of the year, but with four straight weeks in the red, the momentum is clearly negative.

Just as the now-stalled liquidity surge which had been seen beginning in last year's fourth quarter and running through early summer had coincided with a revival of the formerly moribund new-deal market and a sharp rise in secondary valuations, the abrupt downturn has gone hand-in-hand with a backup in the secondary market and a new-deal environment which has suddenly seen a number of prospective deals pulled off the table - witness Thursday's demise of Charter's ill-fated $1.7 billion mega-deal and a smaller $150 million throwback for supermarket operator Gristede's Foods Inc. - while other issuers have been forced to fatten the yields on their offerings to get those placements done.

One issuer who proved to be the exception to that rule this past week was Dex Media West, which priced one of its two tranches of new bonds at the tight end of pre-deal market price talk, while the other tranche actually priced inside of market expectations.

In total, a hand-cranked high yield market purposefully priced three transactions on Friday, in the wake of the massive power blackout that hobbled the northeastern U.S. and parts of Canada on Thursday.

Market sources told Prospect News that a notable aggregate of investors had shined their flashlights on the billion-plus two-tranche offering from Dex Media West LLC. And that because of the blackout (and also because of the $1.2 billion outflow from high-yield mutual funds reported just as the lights were going out on Thursday, sources said) investors were afforded an opportunity to reconsider their Thursday afternoon purchases of the new Dex West bonds.

Few if any took the opportunity to get out on Friday, however.

Dex priced $385 million - decreased from an originally planned $535 million - of seven-year senior notes (B2/B) at par to yield 8½%, at the tight end of the 8½%-8¾% price talk. The downsizing was due to $150 million shifting from the senior notes to the simultaneous new credit facility in response to strong bank loan market demand.

The company also sold $780 million of 10-year senior subordinated notes (B3/B) at par to yield 9 7/8%, inside of the 10%-10¼% price talk.

JP Morgan, Banc of America Securities, Deutsche Bank Securities Inc., Lehman Brothers and Wachovia Securities were bookrunners on Dex West, proceeds from which will be used to fund the acquisition of second part of Qwest Dex's directory business.

Louise Rieke, portfolio manager of the Waddell & Reed Advisors High Income Fund, told Prospect News that she had gotten in on Dex.

"The fact that it did well was credit specific, I think," Rieke said Friday. "You had other yellow pages out there and they have all done well. And the Dex East bonds have done extremely well.

"Dex East came in a very difficult market, so you got a little extra in the coupon because of that," the portfolio manager added. "The price of those bonds has a huge premium because the subs are 113.5 bid, which is a 9%-plus yield.

"They probably priced Dex West a little bit through Dex East. It definitely helped that Dex East has performed so well in the market."

"People are very comfortable with the sector and the credit."

A primary market source commented late in the blackout-abbreviated session that Dex West demonstrated that the market remains open for "good credits."

The investment bankers also held up lanterns to two other deals during the final session of the Aug. 11 week.

Alaska Communications Holdings priced $182 million ($175.97 million proceeds) of 9 7/8% eight-year senior notes (B2/B-) at a discount price of 96.687 to yield 10½%, according to a syndicate source.

JP Morgan, CIBC World Markets and Citigroup were bookrunners on the Alaskan telecom company's deal.

And Maracay Homes Arizona I, LLC sold $25 million of seven-year senior subordinated notes at par to yield 14%, in the middle of the 14% area price talk, via Friedman Billings Ramsey.

Heading into the week of Aug. 18 one sell-side official expressed the hope that the lights, the internet and the telephones would all be working at full capacity come Monday.

However, said the source, as far as the high yield primary goes there won't be terribly much to look at.

The source said that heading into the week only two deals are expected to price:

* Monitronics International Inc.'s downsized $155 million of seven-year senior subordinated notes (B3/B-), via Banc of America Securities; and

* Oxford Automotive Inc.'s restructured $240 million units made up of senior secured second lien notes with warrants deal (B3/B-). Having been announced as a single fixed-rate notes tranches, the deal was re jigged Thursday into two tranches: $140-$170 million of fixed-rate notes due 2011, price guidance 12 5/8% area, and $70-$100 million of floating-rate notes due 2008, price guidance Libor plus 875 basis points. Lehman Brothers and Credit Suisse First Boston are running the books.

Waddell & Reed's Rieke told Prospect News that the thinning out of the recently crowded new issuance calendar is a seasonal phenomenon and not necessarily a reflection of a less-liquid high yield market.

The recent spate of outflows - $4.91 billion over the course of four weeks - from high-yield mutual funds is only part of the picture, Rieke specified.

"I think the fact that there are relatively few deals right now reflects the fact that you're getting close to the Labor Day holiday and the last two weeks everybody goes on vacation," she said.

In the secondary market, the sharp slide in the debt of Charter Communications Inc.'s junk-bond issuing subsidiary, Charter Communications Holdings LLC seen on Thursday after Charter scrubbed the tender offer for $1.063 billion of straight junk debt and $350 million of convertible debt, did not have much in the way of coattails on Friday, when the St. Louis-based cable operator's bonds firmed from their Thursday lows.

A trader noted that Charter's benchmark 8 5/8% notes due 2009 - which on Thursday had fallen to levels as low as 67.5 bid, 72 offered post-news, from prior levels in the mid-70s - opened Friday quoted around 70 bid and then "kept going up from there," to go home at around 72 bid,73.5 offered.

"Yesterday [Thursday] they finished in the 60s," he said. I came in this morning [Friday] and magically, there were some bid around, so somebody knew something. Maybe it felt like [Thursday] was an over-reaction" to the news of the terminated tender offer and the withdrawn new deal. "They re-took four, five, six points from yesterday's panic levels."

He said the company's other bonds, which had also fallen on Thursday "moved up a bit," albeit on thin trading in a mostly deserted market on Friday.

Another trader quoted the 8 5/8s as having opened Friday at "a very wide" 71.5 bid, 74.5 offered, although he had no further levels, while at another desk, the bonds finished around 73 bid, up more than three points on the session.

Elsewhere, little was seen going on, with, as one trader put it, half the Street not even there in the aftermath of the blackout, which snarled commuting and left some office buildings in lower Manhattan and Midtown without lights, air-conditioning or computers even as late as Friday afternoon.

"I saw all of nine trades," one market observer said, "if even that." The observer saw "a little bit of Charter," with the benchmark bonds in the low 70s and the 10% notes due 2009 bid around 73.5-74, as well as a trade in WorldCom Inc. (still in the 27ish area) and a little activity in Conseco Inc. long debt.

"The only people whom I saw in were a couple of dealers who basically decided not to commute home last night [Thursday] and who slept on or under their desks," a trader said, noting that while he could have dealings Friday "with all of the north Jersey brokers' brokers, all of the New York brokers were out.

"It was the same spooky kind of feeling we had on and after 9/11."

Another trader called the situation "unbelievable" and said Friday may have been among the slowest days of the year, even including pre-holiday trading sessions, which generally are deadly dull. Certainly, all of the people he was e-mailing and instant-messaging all day were not responding - a sure sign they were not in their offices.

Here and there, he said, there had been a trade in Apogent Technologies, Goodyear Tire and Navistar, but "that was it. It was plain ridiculous."

But despite disruptions to business and the markets seen Thursday and Friday, the trader did not see Blackout 2003 having any kind of lasting economic impact the way 9/11 did. "I don't think anyone looks on this as anything other than a bad snow day. It's a non-event economically, and nobody [among the forecasters] is going to revise their numbers because of it."

For instance, traders saw little impact on the bonds of the major air carriers, even though they were collectively forced to cancel more than 1,000 flights Thursday and Friday - mostly those into and out of Kennedy and La Guardia airports in New York, but some also involving other affected destinations such as Cleveland, Detroit and Toronto.

"I didn't see any numbers" among airline bonds, a trader said, "but it didn't seem like they were under a lot of pressure, judging from their stocks [which closed with only small losses despite the widespread disruptions]. It sounds like everybody was in the 'let's get together, work together, and cooperate' mood - let's get this past us, and this shouldn't affect anything on a long-term basis."

Of potentially far more concern to junk players might be the fund-flow numbers, although the trader said, when asked whether the junk market might get clobbered Monday in reaction to the $1.2 billion funds outflow, "it [already] got clobbered all week. You can feel the [AMG] numbers before they come out. I felt it all week [that a big outflow was coming], so it wasn't like I was shocked, and I don't think anybody who follows the market closely would be shocked as well, because it's just been crummy all week - off two, three four points, a few dramatic things here and there, but just the decline itself, and it certainly felt like it."

He added that "I wouldn't be surprised if we see a little bit more weakness [in the upcoming week], but I think it's just part of the correction that we're seeing in high yield, which is normal. The market got a little too rich."

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