MGM Mirage brings deal; GMAC gyrates on bank, debt plans, Rite Aid up on sales; funds lose $74 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 30 - MGM Mirage priced a large issue of new five-year secured notes on Thursday - but had to do so at a steep discount to par to boost its yield to an attractive enough level to get the deal done. The new bonds were seen by traders having moved down when they began changing hands in the aftermarket.

The deal, the first offering of high-yield notes issue since late September, came as a restructured $750 million issue of 13% five-year senior secured notes (Ba1/BB) priced at 93.132 to yield 15%.

Also on the new-deal scene, Brocade Communications Systems Inc. and Foundry Networks Inc. announced revised terms on Brocade's pending acquisition of Foundry, and a source said Brocade will not go through with the $400 million bond offering, part of the Foundry funding, which it has been shopping around to potential investors.

In the secondary arena, GMAC LLC's bonds were bouncing around as the problem-plagued automotive and residential lender said that it plans an exchange offer that would take out "a significant amount" of its outstanding debt in return for a reduced principal amount of new debt, and meanwhile confirmed that it is seeking status as a bank holding company so as to participate in federal programs that could boost its liquidity.

Elsewhere, Rite Aid Corp.'s bonds were seen solidly higher as the Camp Hill, Pa.-based drugstore chain operator reported a nearly 3% gain in sales from a year ago at stores that have been open at least a year, one of the retailing industry's key performance measures.

Idearc Inc.'s bonds slid after the telephone directory publisher posted sharply lower third-quarter earnings from a year ago and said that it had hired Merrill Lynch to review alternatives for its capital structure. But good earnings boosted the bonds of Community Health Systems Inc. and Owens Illinois Inc.

Back on the downside, Elan Corp. plc's bonds fell as the Irish pharmaceutical company disclosed a new problem with its Tysabri multiple sclerosis drug.

Funds fall by $74 million on week

As trading was winding down for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $74 million more left the weekly reporting funds than came into them, almost precisely reversing the $72.3 million inflow reported last week for the seven-day period ended Oct. 22.

The latest outflow was the sixth over the last seven weeks; before last week's lone inflow, there had been five consecutive outflows through the week ended Oct. 15 that totaled $1.706 billion, according to a Prospect News analysis of the AMG figures. That run of mostly outflows stood in stark contrast to the trend which had been seen in the eight weeks before that, from July 23 through Sept. 10. Inflows had been seen in seven of those eight weeks, according to the Prospect News analysis, totaling $632.366 million.

Over the somewhat longer term, although inflows and outflows have been evenly matched during the last 20 weeks, dating back to the week ended June 18, with nine inflows and 11 outflows, the funds have still lost a net of $1.871 billion during that time, according to the analysis, mostly due to large cash losses earlier this month - $590 million in the week ended Oct. 15 and $471.7 million in the week ended Oct. 8 - and the massive $651.2 million outflow seen in the week ended June 25. Before that had come a run of 11 consecutive weekly inflows, stretching from early April through mid-June, during which time $3 billion of inflows were recorded, according to the analysis. Prior to April, outflows had been recorded in most weeks, with net outflows totaling around $1 billion.

But with the calendar fourth quarter now about one-third gone, inflows, after that slow start, remain ahead - albeit modestly - with 24 inflows versus 20 outflows seen in the 44 weeks since the start of 2008, according to the analysis. According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous retroactive adjustments and revisions, are now estimated at $43.5 million, down from $117.5 million the previous week. At its peak, the 2008 net inflow totaled $1.933 billion in the week ended June 11, the final week of the 11-week run of straight inflows.

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 comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash seen in recent years such as insurance companies, pension funds and hedge funds.

While high yield funds have now seen negative flows in six of the past seven weeks, that is not as bad as the bank loan mutual funds, noted a source, who said that the most recent $93 million outflow from the bank loan funds, reported by AMG for the week to Wednesday, was the 12th consecutive negative weekly flow.

MGM Mirage prices $750 million

In the primary, Las Vegas gaming and resort properties developer and operator MGM Mirage priced a restructured $750 million issue of 13% five-year senior secured notes (Ba1/BB) at 93.132 to yield 15%.

The coupon came higher than the 11¾% to 12% price talk, however the yield came within - but at the wide end of - the 14½% to 15% yield talk.

A market source spotted the new notes in the secondary market wrapped around the issue price on Thursday evening at 93 bid, 93¼ offered.

Banc of America Securities LLC, BNP Paribas, UBS Investment Bank, RBS Greenwich Capital, Deutsche Bank Securities, Morgan Stanley and Scotia Capital were joint bookrunners for the quick-to-market issue.

Call protection was extended to the life of the bond. The initial offering gave 2.5 years of call protection. Also the equity clawback was withdrawn.

Proceeds will be used to repay a portion of the company's $7 billion credit facility and for general corporate purposes.

MGM Mirage's 13% secured notes due 2013 was the first new issue to price since Sept. 24 when Memphis restaurant operator Perkins & Marie Callendar's sold $132 million of 14% secured notes, also a five-year deal.

Calendar cleared

The MGM Mirage deal having cleared, the forward calendar once again is bereft of deals in the market.

That is because Brocade Communications Systems Inc.'s $400 million offering of six-year senior unsecured notes (B2/BB-) is expected to be withdrawn following the $400 million downward revision of Brocade's bid for Foundry Networks, Inc.

A source close to the deal said that although no formal announcement has been made its safe to assume the bonds won't be sold, and added that an official notification of the bond deal's withdrawal might not be made until the rescheduled Nov. 7 Foundry shareholders meeting, whereupon the lowered bid will be put to a vote.

Brocade lowered its bid to $16.50 per share, cash, or $2.6 billion, from $19.25 per share, or approximately $3 billion.

Banc of America Securities LLC and Morgan Stanley have the books for the notes.

The unsecured financing was downsized by $100 million in September, with the proceeds shifted to the company's bank loan.

New MGM bonds seen lower...

When the new MGM Mirage 13% notes due 2013 were freed for secondary dealings, a trader saw them retreating to 89.5 bid, 91.5 offered, down from the 93.132 level at which the bonds had priced earlier.

Another trader said that it will be interesting to see how the new issue does.

"The way the market was behaving before this deal came, you'd think that there was no value in the assets any more. But I think they spent a lot of time on the [investor] call [Wednesday] and made people feel comfortable that they had a lot of liquidity and that they're doing all the right things to fix their cost structure for this environment that they're in."

He further noted that "they kicked the coupon up from 12%," and, referring to the long roster of banks participating in the deal, "everybody's in this deal." Since the issue is "a five-year, secured, non-call piece of paper, if you can't like that, you might as well just sell Las Vegas."

Another trader called the new deal "down one or two points on the day" and quoted it around a 90-91 context.

...but existing bonds are firmer

Among the Las Vegas-based gaming giant's outstanding bonds, one of the traders said that they "didn't seem to be as active as [Wednesday] - I guess everyone was waiting on the new issue. They were kind of up on the day."

He saw the company's 7½% notes due 2016 and 7 5/8% notes due 2017 trading around a 62-63 level. "Remember when the news came out [earlier in the week] about the MGM deal, they were trading as low as around 55. They ended up on the day [Wednesday], and were probably up another point today before the new issue was priced."

He saw the company's 6% notes due next Oct. 1 "back up" to around 90 bid, given a boost by expectations that with MGM Mirage's liquidity bolstered by the new deal, holders of those short-term bonds would now enjoy a greater likelihood of repayment. He also saw its 8½% notes due 2010 trading between 70.5 and 71.5, versus 69 on Wednesday, "so they were up a couple of points."

He saw the 8 3/8% notes due 2011 just below 60, after having traded as low as 55 on Wednesday.

On the other hand, he noted that the company's 7 5/8% notes due 2013, which had been issued by the old Circus Circus Enterprises, later renamed Mandalay Resort Group and absorbed by MGM Mirage in 2004, "are still quoted in the low-to-mid 40s. There's a huge disparity between them and the 8 3/8s."

Another trader saw the 71/2s up ½ point, though at 60 bid, 61.5 offered. He saw the MGM 6¾% notes due 2013 "maybe up a point on the day" at 63.5 bid, 65.5 offered.

"It's weird," he declared - the new ones were down, and the old ones looked like they were up."

He said that all of the notes coming due from 2011 to 2017 "are trading right on top of each other in that 63-66 range," up a point.

"Most people are trying to figure out whether they have enough cash to operate. All of those things out to '17 are trading about the same - but the ones before that," including the 6% '09s "are trading in the high 80s and around 90 and the 8½% '10s are in the 70s, but as soon as you hit the '11s, to the '17s, they're all in the 60s, all right in the range."

Market indicators improve again

Back among the established issues with no new-deal connections, the widely followed CDX High Yield 11 index of junk bond performance, which had risen by ½ point on Wednesday, gained another ¾ point on Thursday, a trader said, quoting it at 81 bid, 81½ offered. The KDP High Yield Daily Index meantime rose by 35 basis points to 54.05, as its yield tightened by 36 bps to 15.88%.

In the broader market, advancing issues led decliners by a better-than two-to-one margin. Overall market activity, reflected in dollar volumes, fell nearly 14% from Wednesday's pace.

A trader said that the junk market was seeing "a totally different mentality right now. It's more a function of everyone looking hard at what they should possibly jump into here. And at the same time, the anxious sellers of a few days ago, and over the past six weeks, have become less anxious."

He said that it now appears that "those who were liquidating because of forced redemptions have liquidated, and that part is over for now."

At this point, heading into the final two months of the calendar year, he said, "it's more a matter of managing the portfolio and trying to recoup the tremendous losses of the year."

With major measures of junk bond performance all testifying to the magnitude of those year-to-date losses - the Merrill Lynch High Yield Master II Index showed a cumulative loss of 25.713% as of Thursday morning, while Bank of America's High Yield Broad Market Index was off by 24.42% - "obviously we are going to end up on the downside," he concluded, "but [investors will] just try to lessen the pain."

"It was better this morning," another trader said, "and there was some two-way activity. I'm not sure if it was all short-covering. There were some guys putting money to work, and there was some short-covering."

Community Health back on its feet

One issue that he saw benefitting from that trend, he said, was Community Health Systems' 8 7/8% notes due 2015; those notes - a large, liquid seen in many quarters as a fairly indicative market barometer - had actually underperformed the overall junk market over the previous two sessions.

The bonds had languished around an 80ish context on Tuesday and Wednesday, even though most junk names were up. The trader saw the bonds having gone home at around 81 bid on Wednesday, before the Franklin, Tenn.-based hospital operator released positive third-quarter results after the close of trading.

He said the bonds "were kind of active, and up a couple of points," having moved up to 83 bid, where most of the day's trading took place, before the bonds close around 82.75 bid, 83.75 offered.

"They're usually in the middle of the pack, or at the top of the activity list," he said, adding that "they surprised [investors] on the upside" with the numbers.

Community Health said late Wednesday that its third-quarter net profit almost quadrupled to $50.4 million, or 53 cents per share, versus its year-earlier gain of $10.5 million, or 11 cents per share. However, the results fell slightly short of the roughly 55 cents per share Wall Street had been looking for. But revenue for the quarter rose by 23% from a year ago, to $2.77 billion, a little above the forecasts.

Community Health attributed the gains to a 23% rise in admissions, mostly due to a 2007 expansion of its hospital network.

Another trader, who also saw the bonds at 83, opined that "they seemed to have rebounded," calling them up 1 1/8 points on the day, with fairly busy trading of over $20 million recorded.

GMAC gyrates on bank, debt plans

A trader said that GMAC's bonds "were moving around like crazy," although he estimated that its most widely traded issue, the 8% bonds due 2031 were up 2 points on the day at 49 bid, 51 offered.

Another trader saw the 8s at a round-lot level of 50, which he called down 2 points on the session on fairly active volume of over $30 million. He also saw GMAC's 6 7/8% notes due 2011 last trading at 64.5 bid, up some 3.5 points, "so go figure."

A market source at another desk, however, said a large trade late in the day lifted the 8s to a lofty 56 bid level, up nearly 4 points on the day. Before that, the bonds had actually opened at 55, up several points from Wednesday's close at 52, but then bounced around between lows of under 49 and their high eventual ending point, on brisk activity.

GMAC confirmed Wednesday's news reports indicating that the Detroit-based automotive and mortgage lender looks to convert to a bank holding company, which would allow GMAC to obtain financial help from the government under the $700 billion credit rescue package recently passed into law. It would be able to get equity injections from the Treasury Department's capital purchase program and qualify for temporary debt insurance from the Federal Deposit Insurance Corp. Should it become a federally chartered bank, it would also be able to borrow from the Federal Reserve discount window.

GMAC further said Thursday that it is considering raising and maintaining sufficient amounts of additional capital to meet regulatory requirements related to bank holding company status, and as part of that process, it plans to make a private offer to exchange a "significant amount" of its outstanding debt for a reduced principal amount of new debt. It provided no further details on when such an exchange might take place or how large it might be.

Sales numbers a remedy for Rite Aid

A trader saw Rite Aid's bonds solidly higher on improved same-store numbers for October, one of the key performance metrics in the retailing industry.

He saw Rite Aid's 10 3/8% notes due 2016 rise to 69.25 bid from prior levels at 63, while its 7½% notes due 2017 were up 7½ points to the 63.5 level.

He said that "between those improved numbers and the recent positive sentiment in the market, you have maybe some short-covering, some bottom-fishers, and just a combination of the two is going to move bonds higher as quickly as [bonds move] lower. Just like we gapped down - now we're gapping up."

Another trader saw "an across-the-board bid out there" for its paper, citing its junior 9½% notes due 2017 and its 9 3/8% notes due 2015 trading in the mid 30s, with the senior 10 3/8s around 69-70, "so yeah, there was a fair amount of activity there, when you put it all together." He noted that the 10 3/8s had opened at 63.5 and moved up to around 69-69.5 at the end of the day, "so they had a nice pop."

However, another trader saw the 6 7/8% notes due 2013 unchanged on the day at 33 bid, 34.5 offered, after having dropped to around the 32.5 level earlier in the day. While the bonds had a high round-lot print above 34 late in the morning, "they gradually went down" to their low, before coming up from that bottom to end unchanged.

The third-largest retail drugstore chain operator in the United States, exceeded only by Walgreen Co. and CVS Caremark Corp., said that in October sales at its stores open at least a year rose by 2.9%, improving on the 1.7% gain seen in September and the 1.1% increase in August. Pharmacy sales were up 1.9% on that basis, even though revenues were negatively impacted by introductions of new generic versions of more costly brand-name medications, and non-pharmaceutical "front-end" sales of such things as cosmetics, film and photo developing and candy and other food items, was up 4.9%.

The company said that its key measures improved as it was finally able to halt sales losses at the Brooks and Eckerd drugstores which it had acquired in 2007 from the Jean Coutu Group. Difficulties integrating those nearly 1,800 stores with Rite Aid's own roughly 3,200 outlets have slowed overall sales growth and hurt Rite Aid's finances. Without the Brooks and Eckerd stores, whose same-store sales were up 0.4% in October - an improvement from their 1.2% sales decline the month before - Rite Aid's comps were up more than 4% year-over-year, both for pharmacy sales and the non-pharmaceutical front-end sales.

Idearc falls on bad earnings

A trader said that Idearc "got crushed" as investors reacted to the Dallas-based telephone directory publisher's latest quarterly numbers.

Another said it was the most active issue of the day, approaching $40 million of volume. He saw the bonds slide 3¾ points to 14.5 bid.

The company's New York Stock Exchange-traded shares meantime tumbled 18 cents, or 35.60%, to close at 32 cents. Volume of 7.9 million shares was almost double the norm.

Idearc said its earnings in the third quarter slid about 37% from a year ago, to $73 million, or 50 cents a share, from $117 million, or 73 cents a share.

It also announced that it has retained Merrill Lynch and Co. as well as Moelis and Co. as financial advisers as it pursues strategic alternatives related to its capital structure.

Earnings aid Rogers, Owens Illinois

Also on the earnings front, a trader said that "it looks like trading was more spread out, among different names."

He saw some trading in Rogers Wireless Inc.'s 8% notes due 2012, "which looked like they popped up a point after their numbers the other day." The Canadian telecommunications operator's bonds traded at 93 bid, 94 offered.

The trader also saw Amkor Technology Inc.'s 9¼% notes due 2016 "active," following the release of quarterly numbers and an earnings call Wednesday by the Chandler, Ariz.-based provider of testing and packing services to the semiconductor industry. "They were like everyone else - lower profit on lower sales with the economy."

He saw the bonds get as low as 58, with most of the trades between 59 and 60, before closing out around 60, essentially unchanged.

Another market source meantime saw Amkor's 7¾% notes due 2013 down 3 points at 62.

A trader said that Owens-Illinois' 7½% notes due 2010 gained 2 points to 96.25 bid, while its 8¼% notes due 2013 were up 2.25 points to 94.5.

That rise followed the announcement by the Perrysburg, Ohio-based producer of glass packaging containers that its quarterly net income was $78.6 million, or 46 cents per share. That was well down from its year-earlier $1.16 billion, or $6.86 per share - but excluding one-time charges, earnings came in at 90 cents per share, beating analyst estimates by at least a nickel per share. Owens-Illinois' NYSE-traded shares rose more than 21% on the session.

Another bitter pill for drugmaker Elan

A trader saw Elan Corp.'s 7¾% notes due 2011 at 68 bid, down 4 points on the session. Meanwhile, its American Depositary shares were down 85 cents, or 11.10%, to $6.81.

The slide followed the news that another patient taking Tysabri - the drug jointly developed by Elan and Biogen Idec to treat multiple sclerosis - had contacted PML, a rare, but serious brain disease occasionally seen as a side effect of Tysabri usage by patients genetically predisposed to suffer from PML. Several cases of PML linked to Tysabri usage forced the makers to pull the drug from pharmacy shelves for more than a year earlier in the decade while new safety tests were done and new, more restrictive rules for the drugs use were formulated by federal regulators.

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