Gap gains on December sales; National Steel jumps on US Steel deal; inflows top $1 billion

By Paul Deckelman and Paul A. Harris

New York, Jan. 9 - The Gap Inc. surprised Wall Street on Thursday by posting better-than-expected sales figures for December and its bonds firmed smartly on the news. Also on the upside were the bonds of National Steel Corp., which rose sharply on the announcement that United States Steel will buy the assets of its bankrupt rival for $950 million.

In the primary market, the pace quickened Thursday as Fisher Scientific International Inc. priced the first deal of the new year, triggering a positive reaction from the buy-side.

And news circulated Thursday of several more pending deals: solid information from Eco-Bat Technology Ltd. and bits of news from Houghton Mifflin and United States Steel Corp..

However it was the cash flowing into high-yield mutual funds that stole the show following the session's close.

Shortly before the broom hit the boards on Thursday night, sources advised Prospect News that Arcata, Calif.-based AMG Data Services had reported a $1.025 billion inflow into high-yield mutual funds for the week ending January 8.

It was the largest such cash infusion undergone by the funds since a record-setting $1.556 billion came in for the week ending Aug. 28, 2002.

One sell-side official told Prospect News shortly after Thursday's funds flow number circulated that the $1.025 billion inflow serves as evidence that investors have re-acquired their appetites for risk.

"I think there is a lot of year-end money that's being re-deployed into risk-based assets," the official said, adding that the substantial inflow reported Thursday might be attributed to the "January effect."

"People have new budgets and new abilities to place bets," the sell-sider said.

"There is no question that this is a hot, incredibly attractive seller's market."

Turning away from the funds-flow number, this source said that the session's other main primary market news event, the terms on the Fisher Scientific add-on, further demonstrated the market's strength.

Fisher Scientific International Inc. priced a $200 million add-on to its 8 1/8% senior subordinated notes due May 1, 2012 at 104.00 on Thursday for a yield to worst of 7.409%. Credit Suisse First Boston, Deutsche Bank Securities Inc. and JP Morgan were joint bookrunners on the Hampton, N.H.-based scientific equipment wholesale distributor's Rule 144A deal.

"I don't think there was any new issue concession on that," said the source, who was not a part of the Fisher Scientific syndicate.

"It was fairly stunning that it came on top of where bid levels were," the official added.

Further evidence of high-yield's present strength, the sell-side source added, could be seen in the secondary market, with new issues that priced late in 2002 trading up sharply. Sanmina-SCI Corp., which priced an upsized offering of $750 million of eight-year senior secured notes (Ba2/BB-) at par on Dec. 18 to yield 10 3/8%, saw the notes lately trading at 105, according to the source, who added that the company recently struck a strategic deal with IBM. Also trading up are Atlanta healthcare information services company NDCHealth Corp. That issuer priced an upsized $200 million of 10-year senior subordinated notes (B2/B) at par on Nov. 18 to yield 10½%. Those notes, the official said, had lately been seen trading at 103.

"Most of the deals in the last week of December actually traded right around par, or a little south of new issue, just because of the flurry of deals," the official commented. "Investors were just frankly putting in indications that were well north of what they thought was an appropriate hold-target. So there was all sorts of paper that was being pushed around, right around that flurry of transactions.

"A lot of the deals were trading right around new-issue price. And most of those deals have moved up nicely in the new year."

This sell-side source expressed surprise that the 2003 new issue calendar had not built up more substantially by Thursday's close. However, the official added, with the substantial inflow to the funds that picture might be expected to change.

"I think a lot of deals that were targeted for January were accelerated, and a bunch of them were done that people did not anticipate doing. And it really emptied the inventory piles.

"I think people now are going a little deeper in convincing people that this is a great market opportunity."

Asked who the market might anticipate showing up with new issuance the source said: "I think that if you are a frequent issuer it's natural to consider a drive-by financing, to state the obvious. The homebuilders are a natural issuer class. You often see them pounce on windows that open. So I wouldn't be surprised if several of the homebuilders and the broadcasters would try to punch out transactions in the near term."

Thursday's primary market session also produced news of a eurobond deal that was heard to be late-January business. Eco-Bat Technology, a U.K.-based company that recycles batteries, will bring €185 million of 10-year notes via Credit Suisse First Boston and Salomon Smith Barney, and will use the proceeds from the Rule 144A/Regulation S deal to finance the acquisition of two recycling plants.

Also on Thursday United States Steel Corp. announced it would bring a $650 million combination of debt securities, equity-linked securities, bank borrowings and cash balances to help pay for its purchase of National Steel Corp. valued at $950 million. J.P. Morgan is acting as financial advisor to U.S. Steel.

And sources told Prospect News that Houghton Mifflin's credit facility was restructured with a smaller term loan B following a decision to increase the company's bond offering to $650 million from $500 million. CIBC, Goldman Sachs and Deutsche Bank are the lead banks on the credit facility. No timing or structure on the notes was heard.

Back in the secondary, Gap's 6.9% notes due 2007 were quoted trading at par, up from levels around 98.5 bid/99.5 offered seen earlier in the week.

The San Francisco-based apparel retailer - the largest U.S. clothing store chain - announced that net sales in the five-week period ended Jan. 4 totaled $2.5 billion, a 10% increase over the $2.2 billion seen in the same period a year earlier. Comparable-store sales for December (sales at stores which were also open at the same time a year ago, considered the key industry measure of a retailer's performance) were meantime up 5% from December, 2001, when comparable store sales fell by 11%.

December marked the third consecutive month in which the company showed an overall comparable-stores sales increase from a year earlier - after 29 straight months in which that important retailing performance measure had fallen year-over year.

Gap's numbers "were a big surprise," said Debra Anne Downey, senior vice president for research at Miller, Tabak Roberts & Co. , especially since a number of retailers had what she termed "horrible numbers," particularly such rival specialty apparel retailers as Ann Taylor Stores Corp., whose same-store figures plunged 14.6% from a year ago, and Talbot's Inc., down 9.1%. Other Gap competitors also lagged, with J. Crew down 6.1% and Abercrombie & Fitch sales flat, despite all of the buzz created by the latter high-end apparel seller's controversial mail order catalogue, which critics said seemed to feature more models without very much clothing on than with.

"What's interesting about Gap is that these are nice positive numbers in a weak retail environment, which gives these numbers even more strength," Downey said.

Gap was one of the few bright spots in the whole retail industry, which saw possibly the worst December holiday shopping season in three decades. Even the mighty Wal-Mart Stores Corp. Inc. could do no better than a weak 2.3% same-store sales advance, while its main rival, Target Corp. saw its comps fall 0.3% for the month - making the performance of Gap all the more remarkable.

Downey noted that sales were up year-over-year at all four Gap divisions (Gap domestic and international, Old Navy and Banana Republic), with Old Navy showing the biggest comparable increase, 9%, and the biggest swing from its poor results a year ago, when the division had shown a 14% decline from the previous December.

She pointed out that Gap had indicated on its pre-numbers sales call for financial analysts that besides the increases in total sales and same-store sales, its merchandise margins for December would also be up, "which is good, because considering that we are in a very, very promotional environment, one way a company might get higher sales is by giving away the clothing [at greatly reduced prices] - but it looks like that was not the case. Their merchandise margins [i.e. the difference between what the company paid for the clothing items and what they were able to sell them for] were better year-over year, in all four company divisions."

Oddly, despite the better sales figures - which beat analysts' consensus projection that same-store sales would be up by around 3% from a year ago - and the resulting rise in the bonds, Gap shares actually eased by two cents (0.13%) to $15.82. Briefing.com attributed the shares' lackluster performance to the same-store results, while beating the Street, having fallen short of whisper estimates of as much as a 10% year-over-year gain.

Downey said that another retailer whose bonds firmed Thursday on the sales data was J. Crew Group Inc., even though that New York-based specialty retailer saw same-store sales drop 6.1% in December from year-earlier levels.

The MTR analyst said that in recent months, "they had been having double-digit negative comps, so [falling 6.1% instead of a lot further] was a nice surprise." She also noted that the company's direct sales via the internet "were up strongly," and they were able to renew their bank credit line last month.

"There had been a lot of concern [in the investment community] about J.Crew - they lost their CEO last year and their PIK [payment-in-kind bond] went cash-pay, so the fact that their sales were only down 6.1% compared against your Ann Taylors and your Talbot's, which were down a much greater amount" , was apparently seen as a positive."

J. Crew's 10 3/8% notes due 2007, which had been trading around 84 bid/89.5 offered the other day, pushed up to 87.5 bid/89.5 offered Thursday, "even more of a price move than Gap," Downey concluded.

Also in the retailing area, a market source quoted J.C. Penney's long-dated bonds trading "in the low 101s." The Plano, Texas-based retailer also showed signs of relative strength amid the weak numbers posted by other store chains, its comparable-store sales up 4.7% in December.

Apart from the retailers, Nextel Communications Inc. "was up a couple of sticks," a trader said, quoting the Reston, Va.-based wireless telecommunications operator's benchmark 9 3/8% notes due 2009 a point-and-a-half better at 96.75 bid/97 offered, in the wake of Wednesday's release of positive guidance by the company; Nextel projected that fourth-quarter results to be released in February would show that the company achieved its target of gaining more than 1.9 million net new subscribers, had generated at least $3.1 billion in operating cash flow and was also able to reduce capital expenditures by more than 20% percent over 2001, to under $1.9 billion. It predicted that it would become free cash-flow positive in 2003.

He also saw Charter Communications LLC's 8 5/8% notes due 2009 as having moved up to 51 bid/52 offered from 49/5 bid/50.2 offered on Wednesday, citing the St. Louis-based cable operator's announcement that it had agreed with Microsoft Corp.'s MSN Network of Internet services to market a co-branded version of MSN 8, extending the relationship between Microsoft and Charter, which is controlled by the billionaire co-founder of Microsoft, Paul Allen.

The two companies had previously developed and launched a co-branded portal used as the home page for Charter Pipeline, a high-speed Internet service Charter offers as part of Allen's "wired world" strategy of combining cable, telecommunications and Internet access in one platform.

The trader called the news "a vote of confidence" by the software industry leader in Charter at a time when the cabler is reeling from soft performance, questions about its subscriber numbers, recent executive changes and a depressed stock price.

Charter shares were up 36.8 cents Thursday (31.72%) to $1.528, on Nasdaq volume of 34.3 million shares, almost triple the norm.

The trader also saw another, even more troubled, cable operator, the bankrupt Adelphia Communications Corp.'s 10 7/8% notes having pushed up to 45.25 bid/46.25 offered from prior levels at 43 bid/44 offered. Its 10 ¼% notes due 2006 were also up three points at 46. The 8 7/8% notes due 2007 of Adelphia's Century Communications unit were four points better, at 34 bid.

He saw National Steel's 9 7/8% first mortgage notes due 2009 as having jumped to levels about 65 bid, 67 offered from previous levels in the mid-40s, on the news that U.S. Steel will buy the bankrupt steeler's assets for $950 million. The biggest U.S. steel maker's own 10¾% notes due 2008 were quoted at 101 bid, up from 99.25 bid earlier in the week.

But Bethlehem Steel Corp.'s battered bonds remained quoted down in the 3 to 5 cents on the dollar range, despite news earlier in the week that International Steel Group has offered to buy what used to be the second-largest U.S. steel producer for $1.5 billion.

Noting that even though both bankrupt steelmakers are to be bought out of bankruptcy rather than just liquidated, the National bonds are secured by mortgages on its facilities and Bethlehem's paper isn't. The trader noted that "that is not the same deal at all."

More generally, "as you can imagine, stuff has been better bid," a market source said. "Accounts have a lot of cash, and since January 1, stuff has been running up."

While he saw the gains Thursday in issues like Nextel and Charter, he said the overall performance Thursday was "mixed. The [stock] market was up big, high yield wasn't up as much with the stock market."

The source saw some softening in sectors that had recently been running up strongly, including the technology issues and the gaming names. The latter, he said, were hurt by the combination of Wednesday's earnings warnings from MGM Grand and Mandalay Bay, and "the Treasury curve getting whacked."

The techs, he said - "the Avayas, the Amkors, the Sanminas and the Flexes - were a hair softer. "

That sector, he said," had run up so big, that even with the Dow up 200 points, we started to see some offerings. People think [some of the bid levels] are getting stupid up here, trading where it is from where it's been."

The recent surge of liquidity into the junk market has lifted many previously beleaguered areas, from the techs, even into parts of the still-beleaguered telecom grouping.

He cited names like communications antenna tower players American Tower and Crown Castle International, "10 times levered [total debt to EBITDA]. Six months ago, people said they might be going bankrupt, now the bonds are trading near 90. So you're going to see some offerings up here. "

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