Penney gains on credit upgrade; Steinway prices eight-year deal; funds see $116 million outflow

By Paul Deckelman and Paul A. Harris

New York, Feb. 16- J.C. Penney Co. Inc.'s bonds were seen better Thursday, given a boost by the news that Moody's Investors Service lifted the Plano, Tex.-based retailer's credit ratings out of junkbondland and back to investment-grade territory.

Not much else was seen shaking in the secondary market on the last full trading day of this week (participants will see an abbreviated session Friday ahead of Monday's Presidents' Day legal holiday).

A high yield syndicate official said that the broad market had traded flat to slightly firmer on Thursday.

The source added that in the absence of any meaningful new issue supply high-yield investors who have cash to put to work are presently doing so in the secondary market which, the source added, is "standing up pretty well."

In the primary market, Steinway Musical Instruments Inc. was the featured soloist, as the Waltham, Mass.-based maker of pianos and other musical instruments successfully priced an eight-year offering of senior notes. Dave & Buster's Inc. was meantime heard to be getting ready to take its planned offering of eight-year senior notes on the road, beginning in the middle of next week.

And after trading had finished for the day, 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, $116.3 million more left the funds than came into them.

It was the second straight week of outflows, following the $40.3 million leakage seen in the previous week, ended Wednesday Feb. 8.

Outflows have now been seen in five weeks out of the seven since the start of the year.

AMG reported 529 million of net outflows for 2006 to date among funds that report on a weekly basis.

The latest outflow also reinforced the decidedly negative pattern seen in eight of the last 10 weeks, dating back to mid-December. In that time, net outflows have totaled around $1.376 billion, an analysis of the data by Prospect News indicated.

Those results in turn confirm the continuation of the predominantly negative trend that was in evidence throughout most of 2005, when around $11.483 billion more left the funds than came into them, according to the Prospect News analysis - much more severe than the $3.236 billion net outflow seen in 2004.

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 between 10% and 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 hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

J.C. Penney gains on upgrade

Back among the established issues, J.C. Penney's bonds firmed after Moody's moved its ratings back to investment grade, lifting its senior unsecured debt a notch to Baa3 from Ba1 previously. The outlook is stable, the ratings agency said. Moody's had been rating the company's debt as junk since a downgrade in March 2001.

A trader saw the department store operator's 7 3/8% notes due 2008 better by ¼ point at 104.25, but said "the real movement was in the longer bonds," like its 7.65% notes due 2016, which he pegged up a point at 112.75.

At another desk, a trader saw those bonds up even more, with a two-point gain to 114 bid, 115 offered. Penney's was the only real mover on an otherwise "pretty quiet" day, he said.

A market source saw the company's 7.40% notes due 2037 up two points to just under 113.

The Moody's upgrade after Penney reported strong fourth-quarter results, with profits up 65% from year-earlier levels. The company earned $551 million ($2.34 per share), well up from $333 million ($1.17 cents per share), a year earlier. For the full year, operating profit jumped 22.5% percent to $1.58 billion.

Moody's said that those full-year results indicate "sustained improvement in the company's operating performance and its ability to support a higher rating category."

Moody's cited Penney's "continued strong liquidity, healthy free cash flow generation, solid leverage and coverage metrics, and management's balanced approach to financial policy. In addition, the rating category reflects the company's geographically diverse store operations, well recognized private label brands (approximately 40% of sales), its multi channel approach, and the strength of its management team."

While Moody's mentioned some potential negatives, including Penney's need to keep developing new brands and reinvest capital in freshening its store base - not to mention the continued challenge posed by competitors like discounters Wal-Mart and Target and rival department store operator Kohl's - it said that the Baa3 rating "reflects Moody's expectation that J.C. Penney will continue to maintain very strong liquidity as a result of its on-balance sheet liquidity reserve, solid free cash flow generation and its $1.2 billion revolving credit facility."

Standard & Poor's currently rates Penney's bonds at BB+, a step below high-grade, while Fitch Ratings has them at an investment grade BBB- .

GM rises

Elsewhere, traders saw General Motors Corp.'s bonds slightly higher on the session, with one estimating the giant carmaker's benchmark 8 3/8% notes due 2033 at 71.25 bid, 72.25 offered, which he called up half a point on the session. Another had them up half a point at 71.5 bid, 72.5 offered.

The traders said that investors didn't seem too worried about the continued murky labor situation at former GM subsidiary Delphi Corp., even as a Friday deadline that the bankrupt Troy, Mich.-based auto components maker had set for union agreement to contract givebacks the company has demanded was fast approaching.

If the United Auto Workers and its other unions fail to give the company the green light to gut the wage and benefit provisions of the conflict - something Delphi says it must have to remain competitive - Delphi could go into bankruptcy court and ask the judge overseeing its case to toss out the contract - a step which the UAW warns will likely provoke a strike, which would not only affect Delphi but which would also badly affect GM, Delphi's former corporate parent and still single largest customer. Delphi, in turn, is GM's largest parts supplier, and a strike could disrupt the carmaker's production.

Despite these gloomy prospects, a trader saw Delphi's bonds actually up half a point at 53.25 bid, 54.25 offered. Another, however, saw Delphi lower, albeit in "pretty quiet trading." He saw the Delphi bonds "up in the morning, but then down later on," closing half a point lower at 52.5 bid, 53.5 offered.

The first trader meantime saw former Ford Motor Co. unit Visteon Corp.'s "slightly weaker," with its 7¼% notes due 2014 off ¼ point at 76.75. Its 8¼% notes due 2010 were unchanged at 83.25.

Cenveo unchanged on income trust plan

Apart from the automotive sphere, little or no movement was seen in the bonds of Cenveo Inc. as the Stamford, Conn.-based commercial printing company - the former Mail-Well - announced plans to establish a Canadian income trust fund, the Supremex Income Fund. The proposed fund will acquire and hold all of the common shares of Supremex, Inc., Canada's leading envelope manufacturer.

A trader saw the company's 9 5/8% notes due 2012 at 107.25 bid, 108.25 offered, "no different from where they were [previously]."

Elan rises

Elan Corp. plc's 9¾% notes due 2011 were up a point to 95 bid, while its 7¼% notes were up ¼ at 98.625. That followed Wednesday's news that U.S. Food & Drug Administration said that Irish-based Elan and its joint venture partner Biogen Idec Inc., could resume clinical trials of their multiple sclerosis drug Tysabri with patients who had previously been receiving the drug, a key step in the companies' hopes to eventually return the drug to the market place.

The companies had pulled the drug early last year after it was linked to reports that several people who had taken it had later developed a rare - but usually fatal - brain ailment.

XM steady on earnings

On the earnings front, XM Satellite Radio Holdings Inc. posted a much wider bottom-line net loss for the quarter ended Dec. 31, of $270.4 million ($1.22 per share) after payment of dividends for preferred stockholders, versus the year-earlier $190.4 million (93 cents per share) of red ink after dividends - even as revenue more than doubled to $177.1 million from $83.1 million.

That loss exceeded analysts' average expectations of about 92 cents per share. The Washington D.C.-based satellite radio operator blamed higher promotional costs in the latter part of 2005.

For the full year, XM showed a loss after preferred dividends of $675.3 million ($3.07 per share), versus a year-earlier $651.2 million ($3.30 per share) post-dividends, even as revenue more than doubled to $558.3 million from $244.4 million.

The company, however, touted the reductions it made in its bond debt last year, and predicted that it would be free-cash flow positive by the fourth quarter (see related story elsewhere in this issue).

Even so, a trader said, the bonds "didn't move very much." He saw XM's 10.18% notes due 2009 at 101 bid, 102 offered, and its 12% notes due 2010 at 112 bid, 113 offered, both unchanged despite the big loss.

"I get the sense that XM watchers [in the bond market] are comfortable with the results," he said. Bondholders "are more passive than the shareholders, who are only looking at the bottom line and worrying about things like the cost of acquiring new subscribers. The bondholders seem satisfied by the way they've run the balance sheet," reporting 2005 debt reductions and an expected fall in interest expense.

Star Gas steady on Soros bid

Holders of Star Gas Partners LP's 10¼% senior notes due 2013 were mulling over the news that an investment group controlled by billionaire financier George Soros had submitted an unsolicited recapitalization proposal to the Stamford, Conn.-based home heating oil retail distributor - the nation's largest - which has already agreed to an earlier proposal from another company.

Those 10½% notes were quoted at 101 bid, about the level they have held since the other would-be re-cap investor made its proposal in early December - since their treatment would be the same whether Soros or the other investor gets the company's nod.

Star Gas said that the financier's newly formed Soros Group - consisting of his Soros Fund Management LLC hedge fund, Atticus Capital LP and Almeida Oil Co. Inc. - has proposed to commit $30 million in new equity capital and a potential $35 million rights offering to common unitholders at an exercise price of $2.60 per common unit. Soros Group would become the company's general partner - essentially, its management.

Star Gas said the board of its existing general partner, Star Gas LLC, would evaluate the Soros Group proposal.

In early December, the company announced that Star Gas LLC had agreed to a recapitalization offer from Kestrel Energy Partners LLC, which would commit to $15 million in new equity and a potential $35 million more via a rights offering at $2 per common unit. Kestrel Heat LLC would become Star's new general partner.

Star Gas said that the Kestrel plan, if completed, would result in a reduction of between $86.9 million and $100 million in the estimated outstanding $255 million amount of Star's 10¼% notes.

Star said that it would use the $50 million in new equity financing, along with additional funds from operations, to repurchase at least $60 million, and at its option, up to approximately $73.1 million principal amount of the notes. At the same time, holders of some 94% of the notes agreed to convert about $26.9 million principal amount of the notes into common units at a conversion price of $2 per unit.

Under the terms of that agreement with the noteholders, they agreed to tender their notes at par in exchange for the new units, a pro-rata share of the cash, and for new notes representing the remaining principal amount of the tendered notes. The company said that the closing of the tender offer would be conditioned upon the closing of the transactions under the Kestrel unit purchase agreement.

Star Gas has scheduled a March 17 special unitholders meeting to consider the Kestrel deal, which is subject to termination if not completed by April 30.

The Soros proposal envisions keeping the same arrangement with the noteholders as the Kestrel plan.

The Star Gas bonds, which were trading in the low 80s at the end of November, jumped to levels just below par on Dec. 5, in line with the announcement of the Kestrel deal, and had gradually inched their way up to around 101 bid as of last week, where they stayed on Thursday.

Primary still quiet

Meanwhile the dead crawl in the primary market continued on Thursday as Steinway Musical Instruments, Inc. priced the day's only deal - a four-B rated $175 million issue that came in the middle of price talk.

Elsewhere Dave & Buster's Inc. stepped into the light with a $175 million deal which starts roadshowing next week.

Steinway in the middle of talk

Thursday's only completed transaction, Steinway Musical Instruments' $175 million issue of eight-year notes (Ba3/BB-), priced with a coupon of 7% at a dollar price of 99.2435 to yield 7 1/8%.

The UBS-led debt refinancing deal, which had run a brief investor roadshow that started at the beginning of this week, came in the middle of the 7% to 7¼% price talk.

Traders saw no aftermarket activity in the new Steinway 7% senior notes due 2014, nor were there any sightings of the new Wind Acquisition Finance dollar-denominated 10¾% notes due 2015, which priced on Wednesday as an add-on tranche to the Italian telecommunications company's existing bonds, along with an add-on tranche of euro-denominated 9¾% 2015 bonds.

Dave & Busters alone in the market

The Steinway deal having priced, the forward calendar of deals known to be in the market would have been bare had Dave & Busters Inc. not stepped forward Thursday.

The Dallas-based operator of upscale restaurant and entertainment complexes will start a roadshow Wednesday for its $175 million offering of eight-year senior unsecured notes (B3/CCC+).

The roadshow is set to conclude on March 2, with pricing expected to take place on March 3.

JP Morgan has the books for the LBO deal.

A high yield syndicate official, confirming late Thursday that Dave & Busters appears to be the only deal in the market heading into Friday, professed the belief that the forward calendar will build, but added that the build-up will not likely be a heavy one, at least for the next couple of weeks.

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