Utility names firm a bit; funds continue to bleed; Amerco deal shelved, Golfsmith prices

By Paul Deckelman and Paul A. Harris

New York, Oct. 10 - Shares and bonds of a number of utility and merchant energy providers pushed cautiously higher Thursday after having been soundly walloped over the previous several sessions, although the news on the battered sector was by no means favorable. Meantime market players pondered the third consecutive week of outflows in high-yield mutual funds, which are considered a key barometer of overall junk market liquidity trends.

In the primary market, Golfsmith International Inc., which had been hanging around on the forward calendar but with no firm time frame for teeing off with its planned seven-year senior secured note deal, stepped up and hit the green with a $93.75 million offering priced at a discount. But while Golfsmith was playing through, it was back to the clubhouse for Amerco Inc.'s $275 million seven-year note offering, which was postponed due to current market conditions.

The $176.6 million junk funds outflow heard by market sources came on top of outflows of $144.6 million in the week ended Oct. 2 and a mammoth $1.403 billion outflow in the week ended Sept. 25.

While inflows have still been seen in 22 of the 41 weeks since the beginning of the year, and the year-to-date cumulative fund flows total remains positive, with a $3.364 billion inflow, according to a Prospect News analysis of the statistics released by AMG Data Services, the recent trend has been decidedly negative; the year-to-date total has fallen sharply from levels above $5 billion seen as recently as mid-September. The statistics only take into account weekly-reporting funds and exclude distributions.

This latest bit of unfavorable news was heard too late to affect trading on Thursday, and is expected to really not have much impact on Friday, given that Friday's session will be an abbreviated pre-holiday affair (The Bond Market Association has recommended a 2 p.m. ET close Friday ahead of the Columbus Day holiday on Monday, which will see U.S. fixed income markets and banks closed, although the equity markets will maintain their normal schedules both days).

Austin, Texas golf products retailer Golfsmith priced $93.75 million - for $75 million in proceeds - of senior secured notes due Oct. 15, 2009 (B2/B) via Jefferies & Co., a syndicate source disclosed to Prospect News on Thursday afternoon.

The 8 3/8% notes, which are secured by a first priority lien, priced at 80 to yield 13%.

The proceeds will fund the acquisition by a subsidiary of Atlantic Equity Partners III, LP.

Meanwhile Reno, Nev.-based Amerco Corp., parent company to U-Haul International, departed with an empty trailer from the junk world and headed toward other undisclosed destinations in the capital markets.

The company cited "current adverse conditions in the high-yield market" as it postponed its $275 million of seven-year senior notes (Ba2/BB+/BB+), according to a Thursday press release.

The company went on to state in the release that it would review other opportunities in the market in order to raise the money it intended to use to repay debt and for general corporate purposes.

Price talk of 12% area was heard on the deal on Oct. 7, and market sources told Prospect News that terms on Amerco were first expected to emerge on Wednesday.

With Golfsmith in the clubhouse the only deal that remains on the calendar as business to be transacted during the week of Oct. 7 is the deal from Dallas-based business club and golf resort operator ClubCorp. Inc. It is selling $225 million of eight-year senior notes (B3/B) via Banc of America Securities and Deutsche Bank Securities Inc.

No price talk was heard as the Prospect News High Yield Daily went to press Thursday night.

Meanwhile all the good news coming from the equities side of the fence did not really buoy the junk bond market, although certain sectors did get a bit of a lift, among them the troubled utility and merchant energy sector.

Stocks were sharply higher on Thursday after several key issues reported better-than-expected third-quarter profits and new weekly unemployment claims dropped below the 400,000 mark for the first time since August. . The Dow Jones Industrial Average rose 247.68 (3.4%) to 7533.95, with 28 of its 30 component stocks advancing, while the S&P 500 added 27.16 (3.5%) to 803.92, and the Nasdaq Composite Index climbed 49.26 (4.4%) to 1163.37 - the biggest gain since Aug. 14.

Two investment-grade utility names which have been slapped around of late, TXU Corp. and American Electric Power Co. Inc., both saw their stock jump about 20% in Thursday's New York Stock Exchange trading. TXU, which has suffered recently on investor nervousness about whether the problems of its European unit will drag the Dallas-based parent down as well, firmed as it reportedly mulled over whether to continue to support the European unit with more cash, try to sell all or part of it or just sever all links and let the European business sink or swim on its own.

It also got a boost from Fitch Ratings, which affirmed the company's BBB senior note and preferred stock rating and the F2 commercial paper rating. Fitch additionally affirmed the outstanding ratings and stable outlook on its Texas subsidiaries. Fitch said its TXU Corp. ratings and their stable outlook "are based upon the robust and stable cash flow from the US operations in electric and gas distribution and wholesale and retail supply business and adequate liquidity for these businesses and at the holding company." Fitch added that its analysis "focuses much more heavily on cash flow than on earnings."

Standard & Poor's meanwhile, dropped the ratings on TXU Europe's bonds to BBB- from BBB previously, echoing a similar ratings cut Wednesday by Moody's Investors Service, which cut those ratings to Baa3 from Baa1.

S&P said the TXU Europe downgrade reflected "a material deterioration in the company's credit quality during 2002, primarily due to weak U.K. wholesale power market conditions, a perceived diminution in support from its parent TXU Corp., and increased liquidity pressures."

American Electric Power, meantime, cut its 2002 earnings guidance to $2.85-to-$3.15 per share from its previous expectations of $3.20-to-$3.35, citing general weakness in the overall economy and in the wholesale electricity markets, and said that ongoing earnings for 2003 would be somewhere in that same 2002 range. Analysts had been predicting 2002 per-share earnings of about $3.01 and $3.11 for 2003 for the company, the largest U.S. electric power generator.

That caused the Columbus, Ohio-based utility company's shares to fall, but they recovered later in the session when it said in a conference call that it would downsize its trading and marketing operation and explore other cost-cutting actions.

With two such major players in the industry leading the way, shares and bonds of high yield sector players such as Calpine Corp. and AES Corp. were also on the rebound.

AES's shares were up 6 cents (5.44%) to $1.16; its 8 3/8% notes due 2007 were quoted up more than four points, at 23 bid, while its 10¼% notes due 2006 were a point better at 21 bid and its 9 3/8% notes due 2010 firmed two points to 40 bid.

The bonds firmed even as Standard & Poor's said that it was putting the BBB- holdings of Arlington, Va.-based AES's U.K. subsidiary, AES Drax, on review for a possible downgrade due to the latter's exposure to the problems of TXU's troubled European unit.

Calpine shares jumped 35 cents (21.08%) to $2.01 on volume of 15 million shares, up from the usual 9 million share handle. On the debt side, the San Jose, Calif.-based independent power producer's 8½% notes due 2011 were being quoted up two points from Wednesday's lows, ending at 35.5 bid/36.5 offered. Its 8¼% notes due 2005 were quoted at 38 bid while its 10½% notes due 2006 were at 41, although a market source said that those issues had essentially held steady, with little movement either way.

Also in the energy sector, Dearborn, Mich.-based CMS Energy Corp.'s 7½% notes due 2009 were four points higher on the session at 67 bid while its shares were up 24 cents (4.15%) to end at $6.03. On Wednesday, when the shares and bonds had also risen, CMS announced that it had received bank commitments to use stored natural gas as part of a collateral package to raise $200 million to $250 million in financing for its main unit, Consumers Energy.

CMS said that the financing would likely close this month, and would eliminate the need for Consumers Energy to go to capital markets for the rest of the year.

But all was not upside in the utility/merchant energy sphere. Mirant Corp. debt - though not its shares - was lower Thursday after Moody's cut the Atlanta-based operator's ratings by three notches, lowering its senior unsecured bonds to B1 from Baa1 previously.

Moody's cited "significantly lower operating cashflow relative to [Mirant's] high debt burden coupled with the likelihood that future operating cashflow levels may weaken further due to asset sales and challenging market conditions for the North American merchant power business and the energy marketing and trading business."

A distressed-debt trader quoted Mirant's 2006 bonds at 43 bid/46 offered, well down from recent levels around 52 bid.

Mirant, in response to the downgrade, said that it was "disappointed in this action, but not surprised." CFO Ray Hill said in a statement that the company had "moved aggressively to strengthen liquidity and reduce trading and marketing activity to ensure that our business is able to service customers despite rating agency actions. Ratings downgrades do not trigger any default or acceleration of debt obligations for Mirant, but they could require us to post additional collateral. We previously estimated this to be in the range of $300 million - a very manageable amount compared to our current liquidity of $1.7 billion. Importantly, this collateral estimate doesn't take into account the flexibility we have to further reduce commercial activities and cut collateral needs."

Perhaps in response to the company's efforts to reassure investors, Mirant's shares meanwhile rose from their day's lows at $1.16 to end up seven cents (5.88%) to $1.26.

Outside of the power and utility arena, Yum! Brands shares swooned on the restaurant chain operator's lowered fourth-quarter guidance - but its bonds were little changed.

The shares plunged $6.18 (20.77%) to $23.57 on NYSE volume of 13.2 million shares, more than six times the norm, after Louisville, Ky.-based Yum! - the company formerly known as Tricon Global Holdings - released third-quarter earnings late Wednesday. While those numbers showed an overall 19% gain, Yum! admitted that September same-store sales at its key Kentucky Fried Chicken franchise fell 10% from year-earlier levels.

The company - which also owns Taco Bell and Pizza Hut besides KFC - lowered its fourth quarter guidance, predicting earnings in the 54 to 56 cents per share range, down from the analysts' estimates of 58 cents. That and the chicken restaurant numbers fried Yum!'s goose with stock investors Thursday, even though the company raised its full-year guidance to $1.89 to $1.91 per share from $1.88 previously.

Bond investors were meanwhile unfazed; the company's 7.45% notes due 2005 "immediately traded off" in the morning, dipping to par from Wednesday's finish at 102, "but then they came back later" to end at 101.5 bid, down half a point on the session.

The trader also saw no negative bond market response to the Federal Communications Commission decision blocking Echostar DBS from acquiring competitor DirecTV from the Hughes Electronics unit of General Motors Corp., citing antitrust grounds. The Littleton, Colo.-based satellite TV broadcaster's 9 3/8% notes were quoted up half a point, at 95.75 bid/96.75 offered, although at another desk, Echostar's 10 3/8% notes due 2007 were seen at 98.5 bid and its 9¼% notes due 2006 were at 95, both half a point easier.

Echostar stock was down only about three cents (0.19%) to a shade under $17 in Nasdaq dealings, on volume of 10 million shares, around triple the usual amount. Echostar and Hughes said they would revise the $18.8 billion deal in hopes of overcoming the objections of the federal panel, which voted 4-0 to forbid the combination. It was the first time since 1967 that the FCC had nixed a major media merger.

Observers have said that win, lose or draw, Echostar comes out ahead; if it can revise the merger to make it go through, it will acquire the assets of DirecTV and cement its own role as the top satellite dish network, giving it a leg up in its battle with the cable industry. Even if the federal ban stands, though, Echostar will have tied up its rival and prevented DirecTV from making any substantial strategic moves for the better part of the year, and will have gained valuable information as to its competitor's operations and financing.

Magellan Health Services Inc.'s 9 3/8% notes were down two points, to 59 bid; that followed S&P's downgrade of the Columbia, Md.-based healthcare services provider's counterparty credit rating to CCC from B- . S&P said it cut the rating because the company has discontinued its plan to refinance its bank debt and because its financial profile has not improved. S&P also said that the outlook on Magellan is developing because of the company's uncertain future.

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