Elan jumps on J&J news; new Wind bonds a winner but Toys in trouble; funds add $385 million

By Paul Deckelman

New York, July 2 - Elan Corp.'s bonds firmed several points Thursday in reaction to news that healthcare products giant Johnson & Johnson Inc. will take an 18% stake in the Irish drugmaker for $1 billion. However, trading in those credits was described by market participants as thin, in line with the general market lassitude on the final session of an Independence Day holiday-shortened week.

Elsewhere, NRG Energy Inc.'s bonds rose, pushed upward by the news that Exelon Corp. had upped its unsolicited offer to acquire the Princeton, N.J.-based power generation company.

Unisys Corp. held most of the gains which its bonds had notched on Wednesday after the company withdrew an unpopular debt-exchange offer and replaced it with an offer having better terms.

Beazer Homes USA Inc.'s bonds were better on the news that the Atlanta-based homebuilder had reached an agreement with the federal government settling allegations that the company had engaged in fraudulent mortgage practices.

Primary market activity was becalmed as new-dealers - no doubt exhausted from the whirlwind pre-July 4th holiday pricing marathon seen over the previous two sessions - began their Independence Day hiatus a day early.

Meanwhile, Wind Acquisition Finance SA's well-received new bonds continued to trade at levels considerably above those at which the mega-deal's two tranches had priced on Wednesday.

On the other hand, the big Toys 'R' Us Inc. offering that also priced on Wednesday kept trading Thursday no better than its issue price and, in some cases, below it.

Junk funds show $385 million inflow

And as trading was finishing up for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday some $385 million more came into weekly-reporting funds than left them.

It was a solid rebound from the previous week, which saw a $110.1 million net outflow from the funds in the week ended Wednesday, June 24 - the first such outflow since early March.

Including the latest week's total, inflows have now been seen in 15 weeks out of the last 16, according to a Prospect News analysis of the AMG numbers, totaling $9.375 billion during that long stretch. With the year now officially at the halfway mark, inflows have been seen in 22 weeks, versus just four weeks of outflows - the one seen in the June 24 week, plus three weeks of fund losses in late February and early March that totaled $996 million, according to the analysis.

Including the latest week's inflow number, the year-to-date net inflow for the weekly reporting funds rose to $11.94 billion - a new peak level for the year so far, up from $11.555 billion in the previous week, and up also from the old zenith of $11.665 billion seen in the week ended Wednesday, June 17.

The massive multibillion-dollar flow of funds into high yield is seen as the major catalyst for the relatively strong pace of new issuance and the solidly positive year-to-date returns that have been seen in Junkbondland for most of the first five months of the year and now into the sixth - except for a lull in both the primary and secondary spheres for several weeks that largely coincided with the aforementioned three weeks of outflows.

The sustained inflows have helped the junk market bounce back nicely from last year's staggering 25%-plus loss and sharply reduced primary activity totals. Total returns so far this year - while down from the peak levels of an astounding 30% seen last month - remain strong, in excess of 29%, handily beating virtually every other major asset class, while the more than $60 billion of new high yield debt issued so far this year globally is running well ahead of the anemic pace of last year's primary tally.

EPFR sees inflows returning

At another fund-tracking service, Cambridge, Mass.-based EPFR Global, analysts also noted that the junk funds had racked up their 15th inflow in the last 16 weeks, with the $329.3 million cash infusion they calculated pushing the total year-to-date inflow to $12.01 billion. In the previous week, it said the funds had seen an outflow of $208 million, with a year-to-date inflow total of $11.68 billion.

While the EPFR junk figures usually point essentially in the same direction as AMG's, the precise weekly and year-to-date numbers almost always differ somewhat due to EPFR's inclusion of some non-U.S. funds in its universe. All cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

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

Market indicators seen mixed

Looking at statistical market measures, the CDX Series 12 High Yield index - which had gained 3/8 point on Wednesday - was heard by a trader to have lost 1¼ points on Thursday to end at 83¼ bid, 83¾ offered. However, it showed a gain from the end of the previous trading week, on Friday, June 26, when the index stood at 82 5/8 bid, 83 1/8 offered.

The KDP High Yield Daily Index, which had jumped by 41 basis points on Wednesday, edged upward by 4 bps on Thursday to end at 62.93, while its yield tightened by 1 bp to 10.46%.

In the broader market, advancing issues - which had led decliners on Wednesday for a sixth consecutive session - continued to do so again on Thursday, by a nearly four-to-three margin.

Overall market activity, measured by dollar-volume totals, plunged 68% from Wednesday's levels. Although Thursday's session -- the last before Friday's closure for Independence Day - was technically a full-day affair, with the Securities Industry and Financial Markets Association having withdrawn its original recommendation for a half-day session back in early April, participants said that for all intents and purposes, it might as well have been an official early close, given the low amount of business which got done. Many shops were only skeleton staffed, if they were even open at all, and "everybody," said a trader around noon ET, "is going to disappear."

Another trader noted that at some houses, "a lot of the staffs aren't in today to analyze what's going on."

Elan improves on investment

With trading so relatively thin, it didn't take much for issues to show sizable gains. A case in point was Elan Corp. The Dublin, Ireland-based pharmaceuticals company's bonds were seen up several points on news that Johnson & Johnson will take a major stake in the company - although traders cautioned that the levels were thin and most of the trades smaller odd-lot pieces.

A trader saw higher quotes on Elan's 7¾% notes due 2011, which he described as "up a bit" at 98 bid, 101 offered, a level he said was 2 or 3 points better. "They're quoted up - but I'm not seeing a lot of volume in it." He also saw its 8 7/8% notes due 2013 quoted up "like a point or two," adding that he was not seeing any actual trades in them."

A second trader declared that "Elan is the bond" of the day, seeing the 73/4s at 97 bid, 99 offered, "or maybe a little higher," while its floating-rate notes due 2011 were at 93 bid, 95 offered, both bonds up on the day, but in "very thin activity." He said the floaters were up "about 5 or 6 points" on the day.

Unisys holds most gains

A trader saw "a little bit of profit-taking " in Unisys, whose bonds had firmed smartly on Wednesday on the news that the Blue Bell, Pa.-based information technology company had terminated its previous, unattractive and unpopular offer to exchange new debt for its existing bonds, and had announced a new offer with better terms.

He saw its 8% notes due 2012 --- which on Wednesday had jumped more than 20 points on the debt-exchange news, into the lower 80s - trading at 81, off a bit from Wednesday's 82½ bid level, though on "very light trading." He meantime said the company's 6 7/8% notes due 2010 - which were Wednesday's most heavily traded junk bond issue, rising to just below par, versus an 88-89 pre-news context on Tuesday -- "keep trading that 991/2-99 7/8 range.

"They're holding their gains, but it's pretty light activity today."

At another desk, a trader called the 6 7/8s up a point at 98 bid, par offered, while seeing the 8s unchanged at 80 bid, 82 offered.

Among the Unisys bonds that had failed to fully participate in the tremendous surge that had lifted the shorter bonds, a trader saw its 8½% notes due 2015 at 60 bid, 63 offered, up from the mid-50s levels to which those bonds had firmed on Wednesday. Its 12½% notes due 2016 were seen to have eased 2 points to 65 bid - off on the day, but still up from the levels they had held before Wednesday's announcement

NRG energized by new offer

NRG Energy's bonds were seen several points firmer across the board after would-be purchaser Exelon Corp. announced it was sweetening the terms of its unsolicited and unwelcome offer to acquire NRG.

A market source saw NRG's 8½% notes due 2019 - one of the busiest junk bonds of the session, with over $22 million changing hands - getting as good at 100¼ bid, before dropping back to 98¾ , about unchanged on the day.

However its 7 3//8% notes due 2016 - also busily traded, with over $10 million bought and sold - gained more than 2 points on the session, ending just below 98, while its 7 3/8% notes due 2017 were up nearly 4 points to the 98 level.

Exelon said it was increasing its offer for NRG by 12.4% to 0.545 of a share of Exelon common stock for each NRG share, from 0.485 of a share. The total value of the revised offer to NRG shareholders is $3 billion, Exelon said.

Beazer better on federal settlement

Traders saw Beazer Homes USA, Inc.'s bonds up, by several points in some cases, after the homebuilder reached an agreement with the federal government to settle the government's mortgage fraud case against the builder.

A market source called Beazer's 8 3/8% notes due 2012 up 4 points at 62 bid on about $10 million traded, while its 6 7/8% notes due 2015 climbed to about the 50 bid level from 46 previously.

Beazer agreed to comply with an agreement accepting responsibility for certain wrongdoing and pay millions of dollars to victims. The government had accused it of fraudulent mortgage originations and accounting practices.

Wind bonds remain buoyant

Among newly or recently priced issues, a trader said that Wind Acquisition Finance is "the one that's doing well."

That Wednesday pricing was easily the biggest deal of the week, with the company - a unit of Milan, Italy based Wind Telecomunicazioni SpA - pricing $2 billion of dollar-denominated 11¾% notes due 2017 at 97.492 to yield 12¼%, while also pricing a mirror tranche of €1.25 billion of euro-denominated bonds at 96.721 to yield 12½%. When the new bonds were freed on Wednesday, traders saw the dollar notes get as good as 101½ bid, 102½ offered, while the euro paper firmed to 99 bid, par offered.

A trader said that the dollar bonds were still at their exalted levels above par - one had them at 100½ bid, 101 5/8 offered - while the first trader said the new Wind notes were "doing well, hanging right in there."

Toys continues to struggle

A trader said that "the bond that's having trouble getting out of the blocks" is Toys 'R' Us' new $950 million of 10¾% notes due 2017. The Wayne, N.J.-based specialty retailer of toys and juvenile products priced those bonds on Wednesday at 97.399 to yield 11¼% and in aftermarket dealings later that session they were seen mostly bracketing their issue price at 97 bid, 97½ offered, although one trader saw them fall as low as 96.875 bid, 97.125 offered.

On Thursday, a trader said, the bonds were still around 96¾ bid, 97 offered, or maybe 97-971/4.

Limited Brands bounces back

A trader said that he did not know the reason why, but Limited Brands Inc.'s recently priced $500 million issue of 8½% notes due 2019 were on something a rebound.

The Columbus, Ohio specialty retailer's deal priced on June 16 at 96.752 to yield 9%. "When they came, they were higher," he said. "Then they traded down, to 953/4-95 7/8, and now they're 971/4-98 last." He noted that there was no news out on the bonds that might explain their comeback," so it could just be small trades" taking the bonds to unrealistic and unrepresentative highs.

"Let's see what happens with that on Monday," he counseled.

Primary market putters on

With Tuesday's nearly $1 billion pricing session and Wednesday's more than $3 billion day now in the record books, primary players took a breather, according to a high yield syndicate source, who noted that "it's been pretty light today - I actually didn't see much. I don't think anything really happened today."

He opined that guys are just keeping quiet - they're not announcing anything ahead of the three-day weekend."

With the new-deal cupboard essentially swept bare in the Tuesday-Wednesday borrowing binge, which saw deals for Bill Barrett Group Inc., Royal Caribbean Cruises Ltd., Targa Resources Partners LP/Targa Resources Partners, Digicel Ltd., Real Mex Restaurants Inc., Commercial Barge Line Co. and Casella Waste Systems Inc. price in addition to the aforementioned Wind Acquisition and Toys 'R' Us deals, that left just one deal firmly expected - a $275 million offering of first-priority senior secured notes due 2017 for Burlington, Mass.-based business telephone service provider One Communications Corp.

The deal may price Monday - or it may not. The syndicate source raised the possibility that "a lot of people might not come out on Monday - so it may be a four day weekend," at least for those participants.

Heading into the weekend, total year-to-date high yield deal volume, including the slew of deals this past week, had reached some $67 billion - well up from the $51 billion seen at this time last year.

Noting that at the beginning of the year, economic conditions were such that some observers were predicting that the new year might see a continuation of 2008's anemic new-issuance levels, the source said that the unexpectedly robust primary, fueled by ample liquidity "has been a pleasant surprise."

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