HCA prices $5.7 billion deal; Dana jumps on plant-closing plans; funds see $39 million inflow

By Paul Deckelman and Paul A. Harris

New York, Nov. 9 - HCA Corp.'s long-awaited $5.7 billion three-part offering of new junk bond debt was heard by primary syndicate sources to have priced Thursday - and the Nashville-based hospital giant's gigantic new mega-deal did not disappoint, seeing brisk demand in primary allocations and then trading up handsomely when the new bonds were freed for secondary dealings.

The new-deal market also saw Elan Corp. plc unveil plans to sell $500 million of new bonds through its Elan Finance plc unit, with the company starting a roadshow Monday to market the seven-year notes to potential investors.

In the secondary market, apart from the surge in the new HCA bonds in aftermarket dealings, the big mover was Dana Corp., whose bonds were seen up between 5 and 7 points, as the bankrupt Toledo, Ohio-based automotive components maker announced plans to close eight additional plants in the United States and Canada - this on top of previously announced plans to shift some production or close several North American facilities.

Also on the upside, for a second straight session, were the bonds of Amkor Technology Inc., pushed higher after the Chandler, Ariz.-based provider of testing and packaging services to the semiconductor industry reported a solid third-quarter profit and record sales.

Funds see second straight inflow

And as the session came to a close, participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday, $39.2 million more came into the funds than left them - the second straight inflow, following the $201.3 million infusion seen the previous week, ended Wednesday, Nov. 1, and the third in the last four weeks. During that time, a total of $216.4 million more came into the funds than left them, according to a Prospect News analysis of the AMG statistics.

That analysis shows that even though a negative trend has been effect so far this year, over the past roughly four to five months inflows have held sway, totaling about $744.3 million, with 11 such infusions seen in the last 19 weeks.

According to AMG, the weekly reporting funds are now negative $2.949 billion year to date.

Meanwhile the most recent number AMG has for the funds that report to it on a monthly basis is $476.5 million, extending the year-to-date inflows for monthly reporting funds to $4.222 billion.

Hence, year-to-date aggregate flows, tallying the weekly reporters outflows and the monthly reporters inflows, are $1.273 billion.

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.

Busiest day in U.S. market

The Thursday primary session turned out to be the biggest for 2006 to date as HCA Inc. priced $5.7 billion in three tranches, topping the previous high of $5.208 billion seen on Oct. 5.

A sell-side source not in the HCA deal marked the market slightly stronger and said that the existing bonds of HCA and Tenet Healthcare Corp. were really active, and added that both did well.

'Historic' demand for HCA

Only one issuer priced new bonds on Thursday. However the amount of paper priced by Hercules Holding II, the equity consortium that plans to acquire Nashville-based health care services company, HCA Inc., was sufficient to make Thursday the biggest day in the primary market year-to-date.

HCA priced $5.70 billion of bonds (B2/BB-) in three tranches.

A $1.0 billion tranche of eight-year senior secured second-lien notes priced at par to yield 9 1/8%, on the tight end of the 9¼% area price talk.

In addition a $3.20 billion tranche of 10-year senior secured second-lien notes priced at par to yield 9¼%, 12.5 basis points below the 9 3/8% to 9½% price talk.

Finally, a $1.5 billion tranche of 10-year senior secured second-lien toggle notes priced at par to yield 9 5/8%, in the middle of the price talk that had the second-lien notes coming 25 to 50 basis points behind the 10-year secured notes. The toggle feature provides for a 75 basis points coupon step-up when the interest payment are made in kind as opposed to in cash.

Citigroup, Bank of America Securities, JP Morgan, Merrill Lynch, Deutsche Bank Securities and Wachovia Securities were joint bookrunners.

A new dollar record

At $5.7 billion, HCA's deal was the biggest dollar-denominated offering ever in the junk market, according to a market source (it also had the largest ever single tranche at $3.2 billion, beating the $2.85 billion bond from Idearc Inc. that took the record when it priced on Nov. 1).

However, on a currency-adjusted basis, NXP BV and NXP Funding LLC's €4.5 billion offering that priced Oct. 5 was marginally ahead of HCA.

That record, however, is unlikely to stand for long. Freescale Semiconductor Inc.'s $5.95 billion equivalent of dollar and euro notes set to price next week will become the new title holder if it comes at the expected size.

When Prospect News asked a source close to the deal to characterize the demand for HCA paper, the source responded by saying that it was "historic demand" and added that orders had come from nearly all of the accounts in the market from the United States and Europe.

The source added that the HCA deal went well despite "tight pricing," because the size, as well as the issuer's name recognition among the accounts, seemed to compel investors to come in.

The new par-pricing HCA paper traded into the 103-plus bid-range, the source said, because "allocations were severe," and accounts seemed anxious to gain exposure to the credit even at those levels.

Absorbing the supply

Prospect News did manage to find one investor who had not played HCA. However this source said it is no surprise that the deal went well.

"There is very little nine-plus paper around, period," the buy-sider said, adding that the HCA deal encompassed a huge amount of issuance from a well known name.

This investor added that the junk market is presently digesting the phenomenal new issue supply that has appeared in the fourth quarter of 2006 - and is doing it without a lot of existing paper being offered.

"That shows that there is a tremendous amount of liquidity out there to absorb the deals," the source said, adding that a lot of that liquidity has come in the form of coupon payments and redemptions, but there is also a lot of leveraged cash in the junk market at present.

The Friday session

In the backwash of Thursday's HCA deal, the final primary market session of the Nov. 6 week promises to produce what by any other measure is a respectable total of issuance: $1.1 billion and €1.8 billion.

Terms are expected early Friday on Bombardier Inc.'s €1.8 billion equivalent in three parts (Ba2/BB) via Deutsche Bank Securities, JP Morgan and BNP Paribas.

With regard to dollar-denominated deals, Sally Beauty is expected to price $710 million in two parts: $430 million of eight-year senior unsecured notes (B2/CCC+) talked at 9¼% to 9½%, and $280 million of 10-year senior subordinated notes (Caa1/CCC+). Merrill Lynch & Co., Banc of America Securities, JP Morgan and Morgan Stanley are joint bookrunners.

Finally, Australia's Griffin Coal Mining Co. is expected to price a $400 million offering of 10-year senior notes (Ba2/BB-), also via Merrill Lynch.

Elan launches $500 million

Only one new deal announcement circulated on Thursday.

Elan Finance Corp. will begin a roadshow on Monday for a $500 million offering of seven-year notes (B3/B) in two tranches.

Goldman Sachs & Co. is the bookrunner for the debt refinancing deal from the Dublin, Ireland, biotechnology company.

HCA shoots up in secondary

When the three tranches of new HCA bonds were freed for secondary dealings, traders saw them shoot up right out of the gate, to levels above 103 from their par issue prices earlier in the session.

A trader saw the company's 9 1/8% senior secured notes due 2014 and 9¼% senior secureds due 2016 rise to 103 bid, 103.25 offered, while its 9 5/8% senior secured toggle notes due 2016 were seen at 103.25 bid, 103.625 offered.

Another trader described the new deal as oversubscribed at the primary level, and said that the aftermarket dealings that took the bonds up 3 points "speaks to the resiliency of the high yield market," which in the past two weeks has seen other mega-deals from NRG Energy Inc. ($1.1 billion on Wednesday), Sabine Pass LNG LP ($2.032 billion the previous Wednesday), and Idearc Inc. ($2.85 billion, also the previous Wednesday), plus a slew of smaller deals - though some of them still quite substantial in their own right - from the likes of Continental Airlines Inc., Huntsman International LLC and Michaels Stores Inc.

And with junk investors still having lots of money to put to work, other investors being willing to reach down on the credit ratings scale to pick up some yield, and with leveraged buyouts suddenly all the rage - HCA's deal, for instance, was undertaken to fund the company's going private - more big deals lie ahead. Big as HCA was, the trader said, "Freescale is coming with an even slightly bigger deal next week, so we'll see how that goes."

HCA's existing bonds - which have recently been trading up solidly in anticipation of the new deal, defying the conventional wisdom and puzzling traders and other market participants - continued to do so on Thursday, with the company's 5¾% notes due 2014 up another 1¾ points to around 82.75, its 6¼% notes due 2013 at 87 bid, up a point on the day, and its 6 3/8% notes due 2015 at 84 cents, up another 1¼ points. At the long end of the curve, the 7½% notes due 2033 were up 2¼ points at 80.75.

New NCO bonds trade up

A trader saw the new NCO Group Inc. bonds that priced late Wednesday move up a little, quoting its $165 million of floating-rate senior notes due 2013 and $200 million of 11 7/8% senior subordinated notes due 2014 both at 100.5 bid, 101 offered, up from their par issue price. Another trader, though, pegged the Horsham, Pa.-based business services provider's subordinated bonds actually a little lower on the session at 99.75 bid, 100.25 offered.

The second trader saw NRG's new 7 3/8% notes due 2016 at 100.25 bid, 101.625 offered, up from their par issue price on Wednesday, though off from the somewhat higher levels that they hit when the bonds were freed for aftermarket dealings later that session.

Apart from new-deal influenced trading, "everything else was pretty much unchanged," he said, but for a couple of significant movements.

Dana soars on latest turnaround effort

One such movement was in Dana, whose bonds were "all up substantially," a trader said, with its 6½% notes due 2008 at 77.25 bid, 78.25 offered, up sharply from Wednesday's closing levels at 70.5 bid, 71.5 offered, while its 5.85% notes due 2015 climbed to 72 bid, 73 offered from prior levels at 67.5 bid, 68.5 offered. Even the company's long-dated issue, its 7% notes due 2029, was well up from the previous day's levels at 74.5 bid, 75.5 offered, versus 68.5 bid, 69.5 offered.

A trader at another desk pegged the company's 6½% notes due 2009 at 77 bid, 78 offered, which he called a 5 point gain on the session.

A market source at yet another desk called the Dana 9% notes due 2011 up 3 points at 74.25, while its 10 1/8% notes due 2010 were about a point up at 77.

Dana's Pink Sheets-traded shares were meantime up 25 cents (18.80%) to $1.58, on volume of 2.39 million, about 2½ times the norm.

The Dana bonds and shares climbed after the company - which sought protection from its junk bond holders and other creditors this past March via a Chapter 11 filing with the U.S. Bankruptcy Court in New York - outlined a sweeping package of further cost-cutting moves, on top of those announced earlier in the year.

Dana said in a filing Wednesday with the Securities and Exchange Commission that it plans to close eight additional plants in the United States and Canada and downsize three others, and will also try to obtain price increases on parts from its customers and extract wage and benefit cuts from its employees, in hopes of improving its pretax income by $405 million to $540 million per year.

Dana did not identify the facilities slated for closing, nor the number of jobs that might be eliminated. It said that it would shift production from those factories to lower-cost countries, such as Mexico. It expects to cut expenses by between $60 million and $85 million annually with those production changes.

Dana warned in the filing that its U.S. operations continue to burn cash at a significant rate and said that situation will not improve in 2007 without further cuts on top of those which have been previously announced. The company's finances, it said, have been further squeezed by the major recent vehicle production cuts announced by its core customers, the "Big Three" U.S. automakers, particularly for sport-utility vehicles and pickup trucks. Demand for its parts from the carmakers is expected to remain soft in 2007, the company cautioned.

It raised the possibility of having to dip into cash from asset sales and overseas operations to meet its liquidity needs in the coming year, particularly if it cannot realize anticipated savings from the production shifts and other methods.

Dana envisions improving annual pre-tax earnings by $175 million to $225 million by rejecting unprofitable deals - something it can legally do under the bankruptcy laws - and otherwise dragooning higher prices out of its customers, although many of these have their own financial problems to deal with and are likely to resist such a course.

It also hopes to save between $60 million and $90 million annually via wage and benefit cuts and further looks to its workforce for between $70 million and $90 million of annual savings via changes in its pension structure, including freezing defined-benefit plans. Dana looks to save another $40 million to $50 million annually by cutting overhead costs.

Traders said that while Dana was up on the turnaround strategy, they saw little in the way of coattails carrying other troubled parts suppliers up along with it, quoting Dura Automotive Systems Inc.'s 8 5/8% notes due 2012, for instance, unchanged at 26 bid, 27 offered, while Tower Automotive Inc.'s 12% notes due 2013 were actually down a point at 14 bid, 16 offered.

Goodyear gains on results

One automotive name other than Dana which was going up was Goodyear Tire & Rubber Co., whose 7.857% notes due 2011 were seen by a trader up 1½ points at 99 bid, par offered.

At another desk, the Akron, Ohio-based tiremaking giant's 7.857s were seen up as much as 2¼ points at 100.25, while its 9% notes due 2015 were up 2 points at 104. Cooper Tire & Rubber Co.'s 8% notes due 2019 got a sector sympathy boost of about ¾ point to 91.5 bid.

Goodyear's New York Stock Exchange-traded shares jumped $2.37 (15.62%) to $17.54. Volume of 19.7 million shares was almost five times the usual daily handle.

The bonds and shares rose even though the company reported a swing into the red in the third quarter, with a loss of $48 million (27 cents per share) versus a year-earlier profit of $142 million (70 cents per share). However, the loss was largely due to a series of one-time charges, including a restructuring charge of $126 million (71 cents per share). Without those special items, Goodyear earned 42 cents per share, beating Wall Street's estimate for earnings ex-special items of 24 cents per share.

Goodyear also moved to get talks restarted in the month-long strike against the company by 15,000 United Steel Workers union members that has halted production at 16 U.S. plants.

In announcing its results, it also posted details of a new contract proposal that includes one plant closure - down from the two that the company originally asked for - and the establishment of an independent trust to fund retiree medical expenses. The union - which so far has flatly refused to entertain the notion of any plant closings - has said it is ready to return to talks as long as the company is willing to bargain in good faith.

Amkor continues earnings-fueled rise

Also on the earnings front, Amkor's bonds were seen heading higher for a second straight session, fueled by strong quarterly numbers which it reported late Wednesday.

A trader saw its 7 1/8% notes due 2011, which had risen about 1¾ points on Wednesday, up an additional point Thursday at 93.5 bid, 94.5 offered, while its 9¼% notes due 2008 rose ¾ point to 96.625 bid, 97.125 offered, on top of the 1½ points which they gained on Wednesday.

Amkor's Nasdaq-traded shares gained 84 cents (11.21%) in Thursday's dealings to $8.33. Volume of 16.1 million shares was nearly four times heavier than usual.

Amkor on Wednesday afternoon reported net income for the third quarter of $52.8 million (27 cents per share) - a sharp improvement from its year-earlier loss of $19.5 million (11 cents per share), and up as well from Wall Street's expectations of earnings around 24 cents per share.

Sales grew to $713.8 million from $549.6 million a year ago, easily beating analysts' consensus projections of about $691 million.

Amkor said that the sales figure was a record, with revenues driven by driven by "seasonal builds for wireless and other mobile devices, and for high performance applications, including game consoles and networking."

The company is projecting fourth-quarter sales in a range of $678.1 million to $692.4 million - down 3% to 5% from the third-quarter, but better than the $676 million that Wall Street has been predicting. Earnings for the quarter are expected to come in between 20 cents and 24 cents a share, versus analysts' expectations of 21 cents.

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