Parallel prices, CEVA restructures mega-deal; junk down across the board; funds see $366 million outflow

By Paul Deckelman and Paul A. Harris

New York, July 26 - Parallel Petroleum Corp. came to market Thursday with a $150 million offering of seven-year bonds, junk syndicate sources said.

Notable is the fact that the deal came within price talk.

Elsewhere Ceva Group, plc restructured its $1.4 billion notes offering to help fund the acquisition of EGL Inc., adding tranches of notes with second-lien security.

But the angst afflicting the debt markets in general - and the high yield market in particular - exploded full force on the secondary side of junkbondland, with numerous issuers seen down 2, 3 or 4 points on the day - and some even more than that. Probably the biggest loser was distressed power-generating credit Calpine Corp., whose various issues were seen down around 15 points on the session.

But even non-distressed names were seen taking it on the chin, hurt also by a gaggle of mostly lower quarterly earnings reports - and even the few companies that had some good news to report on that score, such as Ford Motor Co. and Owens Illinois Inc., were dragged down by the undertow.

A high yield syndicate official said that the junk-tracking CDX index ended the Thursday session 35 basis points lower on the day, and added that the index was trading in the context of 91¾ bid.

Earlier another sell-sider said that junk had opened the day very weak, and mentioned also that in the high grade market brokerage bonds were off very significantly at the open.

The source said that LBO paper was down several points in the morning, with other cash names down a point or two.

The source added that there was a lot of pressure on low-spread double-B bonds, given the flight to quality in the Treasury market.

This source and others made note of a full-scale retreat that was taking place in the stock market.

Funds see seventh straight outflow

Meanwhile the hemorrhaging of the high yield mutual funds continued during the most recent seven-day period.

Market 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 $366 million more exited those weekly-reporting funds than came into them.

It was the seventh outflow in as many weeks, including the $194.07 million leakage seen in the previous week, ended July 18.

That outflow sends the funds which report to AMG on a weekly basis deeper into the red, with respect to year-to-date flows. The weekly reporting funds are negative $593.6 million for 2007 to July 25.

However the funds which report on a monthly basis still post solid positive cash flows for the year: slightly less than $4.689 billion to Wednesday's close.

Hence the year-to-date aggregate flows, which tally both the weekly and the monthly reporting funds, also remain solidly in the black, at $4.095 billion.

The weekly reporting funds have now seen the latest losses of cash completely wipe out the cumulative inflows which had built up over the first half of the year - over $1.6 billion at their peak in early June, according to a Prospect News analysis of the AMG figures.

The sudden shift over the last few weeks came about even though inflows have still been seen in 19 weeks out of the 30 since the start of the year, versus just 11 weekly outflows - because the inflows to date were relatively small in most of those weeks, while the recent outflows have been more sizable.

The fund-flow numbers had started the year on a high note, as an aggregate total of some $862 million came into the funds in the first two months, according to the Prospect News analysis. That stretch run was then interrupted by a choppy four-week period in March, characterized by alternating weeks of outflows and inflows, none larger than $25 million. Over the next 11 weeks, though - through the week ended June 6 - with 10 inflows seen in that time, the funds had a net total infusion during that period of $786.9 million, according to the analysis. After that came the current downturn, which has now plunged the year-to-date flows picture deeply into the red.

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, most recently, hedge funds.

Parallel within the price talk

In primary news, Parallel Petroleum priced a $150 million issue of seven-year senior notes (Caa1/B-) at par to yield 10¼% on Thursday.

Jefferies & Co. and Merrill Lynch & Co. were joint bookrunners for the debt refinancing deal.

The yield was printed at the wide end of the 10% to 10¼% price talk.

Nevertheless it is notable in that in the presently choppy environs of the high yield primary market the deal came within talk.

By way of comparison, on Wednesday DAE Aviation Holdings, Inc. priced its $325 million issue of 11¼% senior notes due 2015 at 50 basis points beyond the wide end of price talk, while during the same session Saskatchewan Wheat Pool Inc. priced its C$200 million issue of 8½% senior notes due 2017 at 100 basis points higher than the wide end of talk.

Ceva restructures

The only other primary market news on Thursday came from Ceva, which restructured its $1.4 billion notes offering, according to market sources.

Originally in the market with $1.4 billion of dollar- and euro-denominated eight-year senior unsecured notes, the deal will now include $400 million equivalent of seven-year secured second-lien notes in fixed-rate and floating-rate tranches, to be issued in both dollars and euros.

The planned tranche of eight-year senior unsecured notes (B3/CCC+) was downsized to $1 billion equivalent from $1.4 billion equivalent.

As with the secured notes, the senior notes are expected to be issued in dollars and euros.

The deal is expected to price next week.

Although some market observers had anticipated hearing price talk on Thursday, none had been heard as Prospect News went to press.

Credit Suisse, Morgan Stanley, Bear Stearns, UBS Investment Bank, JP Morgan and Goldman Sachs & Co. are joint bookrunners.

A quiet Friday expected

Although three deals remain on the calendar as business which, at the outset of the week, had been expected to price before Friday's close, market sources told Prospect News on Thursday afternoon that it would not be surprising were all three pushed back into next week.

The three deals in question are:

• East Valley Tourist Development Authority's $290 million offering of eight-year senior secured fixed-rate notes, via Merrill Lynch, which are talked at the 9½% area. The company pulled a planned tranche of seven-year floating-rate notes;

• Aeroflex Inc.'s $370 million offering of 10-year senior notes via Goldman Sachs; and

• Downstream Development Authority's $235 million offering of eight-year senior notes (B-) via Banc of America Securities.

As Prospect News went to press on Thursday no price talk had been heard on the latter two offerings.

New Parallel deal unseen in secondary

Traders said that they saw no sign in the aftermarket of the new Parallel Petroleum 10¼% senior notes due 2014, which had priced at par. But even with prospective new deals dropping by the wayside left and right over the past few sessions amid investor concerns over bad market conditions, one said that "I did think that it would get done - it looked like a decent deal. It got done right on the screws, but I didn't see it break."

He noted that with Jefferies on the left side as joint lead manager along with Merrill Lynch & Co., it was a pretty sure bet the deal would emerge.

"Jefferies is a machine," he declared. They have a whole set of customers to go on their deals, because they believe [the credit's story]. So I wasn't surprised that got done."

DAE Aviation deal eases

A trader said that DAE Aviation Holdings Inc.'s new 11¼% notes due 2015, which priced at 97.45 on Wednesday, closed down ½ point on Thursday at 97 bid, 98 offered.

Another trader noted that while that deal got done successfully - even if the bonds had to price at a steep discount to par to lift the yield enough to entice buyers - the accompanying $937 million bank loan which along with the bond deal was supposed to fund the leveraged buyout of Standard Aero Holdings Inc. and Piedmont Hawthorne Holdings was scrapped by lead manager Barclays due to market conditions.

Tough day in the market

Back among the established issues, one of the traders said, "we didn't really miss a lot of action today - just a lot of jostling around."

He said that "things sold off real hard, almost like a climax for a while. . . . they were hitting bids [with] abandon."

He saw the widely followed CDX index of junk bond performance fall as low as 90 7/8 before ending at 91 5/8-92 - well below Wednesday's close at 93-931/4.

"And it will probably be worse [Friday]," he warned.

Another trader said that "it was just one of those days. People said 'I gotta get out,' and ran for the doors. Even the bottom-fishers got their fill pretty quickly."

"Any kind of news," he added, didn't seem to matter.

He noted the fact that Bowater Inc. and Abitibi Consolidated Inc. had received good news on Wednesday for their impending merger from Canadian authorities, and the companies' respective shareholders approved the merger Thursday. "And the Canadian dollar [which acts as a drag on exports of wood and lumber produced by Bowater, Abitibi and their sector peers] was down. That should have been positive for the paper sector."

Instead, he said that he had not seen Abitibi trade at all, or Bowater, while sector peer Tembec Inc.'s 8 5/8% notes due 2009 fell to 47 bid from prior levels around 53 bid, 55 offered, and the Montreal-based paper company's other issues were also several points lower, its 8½% notes due 2011 trading down to 43.5 bid, and its 7¾% notes "quoted, but not traded" at around 42.5.

Owens, Ford lower despite good news

Other names unable to take advantage of good news included Owens Illinois, whose stock jumped more than 14% after the Toledo, Ohio-based packaging maker reported that its second quarter profits more than tripled from year-ago levels, and its 89 cents per share earnings was nearly double the 48 cents Wall Street was looking for.

Even so, its 6¾% bonds due 2014 were seen down around a point at 91.375 bid, while its 7.80% notes due 2018 lost 2½ points, finishing at 93.5.

And Ford's bonds derived little benefit from the news that the Number-Two domestic car maker had unexpectedly posted a second-quarter profit - its first such quarterly gain in two years. Ford earned $750 million (31 cents a share), versus year-ago red ink of $317 million (a 17 cents per share loss). Wall Street had expected a 35 cent per share loss this time around.

Even so, a trader saw Ford's 7.45% notes due 2031 at 73¼ bid, 73.75 bid - although he noted that it was "only" 1¼ points lower on the day, and would have fared worse without the earnings news.

Sector peer General Motors Corp.'s 8 3/8% notes due 2033 "broke 80," tumbling to 78.75 bid, 79.25 offered, well down from prior levels around 84.

Calpine gets clobbered

But the big loser was Calpine. Traders saw its bonds especially hard-hit, even against the context of a mostly down market, but attributed the slide to generalized market weakness.

One trader saw the bankrupt San Jose, Calif.-based power generating company's 8½% notes due 2008 slide to 109.5 bid, 111.5 offered from previous levels around 122 bid, 124 offered.

At another shop, a trader saw the company's 8½% notes due 2011 at 111 bid, 113 offered, which he called down 15 points on the day, but said that it was due to "just the whole tone of everything"

A market source pegged Calpine's 8¾% notes due 2007 at 110 bid, a 14 point loss on the session.

Calpine's Pink Sheets-traded shares were meantime down 33 cents (10.51%) on the day, ending at $2.81. Volume of 21.1 million shares was nearly three times the norm.

Calpine bondholders and stockholders were meantime studying the joint ruling rendered earlier in the week by the U.S. Bankruptcy Court in Manhattan and the Court of Queen's Bench in Calgary, Alta., which are overseeing the reorganization of the parent company and its Canadian affiliates under Chapter 11 and the U.S. Bankruptcy Code's Canadian equivalent, the Companies' Creditors Arrangement Act, respectively.

Under that ruling, the two courts approved a settlement between Calpine and its Canadian affiliates which will eliminate some $8.5 billion of claims against the parent company with $12 billion in claims tied to bonds issued by a Calpine unit reduced to a single $3.5 billion claim. The parent company had sought the ruling, arguing that some of the eliminated claims were duplicative.

Movie Gallery mauled

Elsewhere, Movie Gallery Inc.'s bonds cascaded down into the mid-teens from prior levels in the 20s, continuing a slide seen over the past several days in the troubled Dothan, Ala.-based Number-Two U.S. video rental store chain operator's paper. That slide down to all-time low levels has come in the wake of the company's recent admission that it had failed to meet some of its bank loan covenants, forcing it to ask for, and receive, lender forbearance, through Aug. 14, on taking any action to force repayment of the debt.

A trader saw the company's 11% notes due 2012 open at 22 bid, 24 offered, around the same levels at which they had closed on Wednesday, and then fall as low as 14 bid, 16 offered, before coming slightly off those lows to end at 16 bid, 17 offered.

Another trader also saw the bonds at 16 bid, 18 offered, which he called a 7 point drop on the day.

Movie Gallery's Nasdaq-traded penny stock shares meantime lost a nickel (8.06%) to end at 53 cents, although the 1 million-share volume was only about half of the usual activity level.

Auto parts makers skid lower

Among the automotive parts makers, a trader said that Dana Corp.'s 6½% notes due 2008 had slid to 94 bid, 96 offered, down from par bid, 101 offered previously.

The market's overall weakness, particularly among the distressed names like Dana, even overshadowed Wednesday's announcement of positive news for the bankrupt Toledo, Ohio-based automotive parts company - that more than 2,000 unionized employees at eight Dana plants had overwhelmingly ratified a contract aimed at helping the company save more than $100 million annually as it tries to reorganize.

The trader saw Delphi Corp.'s 6.55% notes that were to have come due last year nosediving to 107 bid, 109 offered from prior levels at 121 bid, 123 offered. There was no fresh news seen out on the bankrupt Troy, Mich.-based automotive parts company, a former unit of General Motors Corp.

Dura Automotive Systems Inc.'s 8 5/8% notes due 2012 continued and deepened their recent slide, falling to 53 bid, 55 offered from prior levels around 61 bid, 63 offered, a trader said, while the bankrupt Rochester Hills, Mich.-based automotive components manufacturer's 9% subordinated bonds continued to languish down around the 3-4 bid level. No fresh news was seen out on the company Thursday.

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