Quiet market mostly unfazed by large junk funds outflow

By Paul Deckelman and Paul A. Harris

New York, Dec. 21 - Traders struggled to stay awake Friday, as the junk bond market finished its last full trading week of the year. There was no new-deal activity, and secondary trading was likewise dull as dishwater. There was little overt market response to a surprisingly large reported outflow in high yield bond funds.

"Nothing went on, to be quite honest with you. This was just not a newsworthy day at all," a trader lamented. "If we did 50 trades, we did a lot. You just saw people doing year-end cleaning up, submitting bid lists, and that was about it. There was not Street activity, and no dealer activity. People have shut down their books for the year."

Besides the usual end-of-year lassitude ahead of the impending holidays serving to still the junk market (pre-holiday half-day sessions are scheduled for each of the next two Mondays, Dec. 24 and Dec. 31, and all U.S. financial markets will be closed on Tuesday Dec. 25 and Jan. 1), he noted that there was the added distraction of the rapidly deteriorating situation in Argentina, a factor in diverting attention and dollars from pure junk names, since some high yield accounts also have emerging market debt in their

portfolios.

Things were so quiet, he said, that "I didn't even see the DISHes (Echostar DBS Corp.'s new 9 1/8% senior notes due 2009, which priced on Thursday) trade today." He heard the Littleton, Colo.-based satellite broadcasting company's new bonds quoted at 100.25 bid/100.5 offered, "but nothing really traded."

Another trader saw the new bonds, which had priced at par, hovering in the par-to-100.5 range late in the afternoon, but added "that was this morning. I haven't seen anything since then."

Overall, he said, "it's dead. It seems like all of my brokers left three hours ago."

The first trader added that "everything was a little weaker today, just because there were not many participants. The feel was a little softer. People were selling stuff because they needed to get out of this paper (for year-end portfolio-adjustment reasons) and guys were throwing out stupid (low) bids. I think this will all reverse course in a week or two."

Not all issues were easier, however. Calpine Corp. bonds, which were on the rebound all week after having gotten clobbered the previous week on market angst over the collapse of Enron Corp., finished out the week on a firming note, its senior debt.

On Friday, the San Jose, Calif.-based power-plant operator and energy trader's more actively traded issues, 8.5% notes due 2011, and 8 5/8% notes due 2010, pushed up two points to 88 bid.

Meantime, the bonds of the bankrupt Enron continued to languish below 20 bid.

An even more distressed name (even though it is not in bankruptcy), Global Crossing, got a bit of a lift Friday; its senior notes were being quoted around 10 bid, up a point or so, a day after The New York Times reported that the troubled Hamilton, Bermuda-based international fiber optic network operator was trying to cobble together a restructuring plan which could include participation from sizable European and Asian investors.

On the other end of the communications spectrum, there was activity in Adelphia Communications Corp. debt, possibly due to financial market speculation that the Coudersport, Pa.-based cable operator - the nation's fifth largest - might be on the shopping list of AOL Time Warner or Cox

Communications; they lost out on acquiring AT&T's coveted cable unit, AT&T Broadband, which will be bought by Comcast, creating a cable powerhouse. Meanwhile, Cox or AOL, so the theory goes, might try to bulk up by acquiring smaller (but still sizable) players such as Adelphia. Other names which have come up in that same regard have included Cablevision and Charter Communications.

Adelphia's 10¼% notes due 2011 were one of the few heavily traded issues in an otherwise largely sleepy day; the Nasdaq FIPS high yield market pricing service indicated that more than $72 million of the bonds had changed hands by the time trading wound down. It was quoted up half a point to 99.

UnitedGlobalCom Inc.'s zero-coupon/10¾% senior secured discount notes due 2008 were quoted Friday at 21 bid, well up from 16 bid previously, after the Denver-based international cable and broadband operator announced that Liberty Media, which is purchasing a controlling stake in UnitedGlobalCom, will tender for the bonds.

There was meanwhile no movement seen in Brown Shoe Co.'s 9.5% notes due 2006, despite the company's announcement Friday that they will be called, with redemption slated for Jan. 22 at 104.75; the St. Louis-based footwear marketer had announced several weeks ago that it intended to call the notes as part of a big restructuring deal, and they had been hovering around the call price ever since.

Outside of isolated individual names such as Adelphia or Global Crossing, however, activity was extremely muted. Traders noted that there was not much reaction even to the news that high yield mutual funds - which had showed inflows for the past nine weeks - suffered a net outflow of $653.3 million in the week ended this past Wednesday (Dec. 19), according to market participants who track the weekly mutual fund-flow statistics released by AMG Data Services. Those numbers are seen as a generally reliable barometer of overall market liquidity trends.

In the previous week ended Dec. 12, net inflows had slowed to just $1 million, but they had totaled a hefty $2.852 billion in the prior eight weeks, as the funds recovered from a loss of $1.6 billion of liquidity in the weeks immediately after the Sept. 11 terrorist attacks.

"That was a huge number," a trader said of the latest outflow. "I wasn't expecting that one." Still, with nobody seeming to pay attention, it took on something of the aspect of a tree falling in a forest with nobody around to hear the crashing impact, traders generally agreed.

"It seems like the inflows follow the stock indices," the trader said in trying to explain why there would be such a massive outflow in a week in which there was no major downside activity. Generally, large outflows are usually accompanied by sizable, definite market reversals.

"Over the last week and a half or two weeks, you've seen some volatility in the equity indices," he said, "and (stocks) kind of slid a little bit. I think people just wanted to take some money (out of the junk funds)."

As to whether the big single-week outflow may metastasize into a sizable multi-week exodus of money from the junk market, as happened right after Sept. 11, the trader added: "I'm interested in seeing what people are going to do. Granted, we're not going to have any new issuance over the next couple of weeks. But if we have continuing outflows, and they try to do more deals, the secondary market will get slammed, I think."

But he agreed with the generally offered explanation that much of the outflows might be solely linked to market activity motivated by end-of-month/quarter/year cosmetic concerns, as portfolio managers and other players trimmed losing issues - as well as names and industries which even looked like they could head south - from their holdings. "I think that's pretty much what we saw this week," he concluded.

A similar opinion came from the sell-side.

"Last week the market wasn't as vibrant," said one syndicate official. "I would say that there is a little re-jiggering going on - the buy-side pulling out of positions that don't look too favorable going forward.

"Also there is probably some year-end profit-taking.

"But this is the first outflow in nine weeks," the source reiterated. "Since the attacks of Sept. 11, by my calculation, the market is plus $628 million."

Another official from another prominent investment bank had much the same take Friday.

"I think that outflow is more for the end-of-year profit-taking, and tax purposes - only because the high yield market's got a pretty good forward calendar," the official said.

"The market remains strong," the official added. "This is the first outflow in a long time. It's a pretty impressive run."

Given that the market anticipates a considerable, if not historic volume of new issuance in January - a prediction that no one has stepped forward to dispute in the waning days of 2001- Prospect News asked this official if January 2002 could shape up to be as strong a month in the high yield as January 2001.

Replying that January 2001 saw new issuance in the vicinity of $15 billion, this official evaded a direct yes or no. Comparing the market dynamics at the end of 2000 with those at the end of 2001, differences do emerge.

"2000 was a tough year," the official reflected. "There was something like $7.5 billion in outflows over the course of the entire year. The end of that year, starting in September, was very difficult.

"But then it started to improve. And January, 2001 was a great month, a fantastic month for high yield. And it started to have little trickling inflows right around the end of 2000.

"Starting in December of 2000 you started getting inflows after a terrible string of outflow. You had outflows of about $3 billion from mid-September until the end of November, 2000. And then in early December, and going all the way up until February (2001) you had $6.7 billion come into the market."

As with his counterpart quoted in the paragraphs above, this official reports hearing that the forward calendar for January appears to be building.

"That's the buzz on the Street, when you talk to different guys at different banks," the official said, "people have backlogs of stuff that will come to the market."

That said, the only news on the Friday primary market was that there was no news; no developments with regard to the four deals already announced for pricing in the first weeks of 2002:

--AMC Entertainment, Inc. $150 million, being run by Salomon Smith Barney, with a roadshow commencing January 7,

--Coventry Health Care $175 million, also from Salomon Smith Barney, and also starting on the road January 7,

--Longview Fibre Co. $185 million, via Banc of America Securities, set to hit the road January 8, and

--Solectron Corp. $500 million (approximately), from Goldman Sachs, with no announced launch, but with pricing expected sometime in January.

As usual, between December 24 and the New Year, no new business is expected to price.

End

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