Level 3 prices two-part deal; GM jumps on Delphi deal report; funds see $185 million outflow

By Paul Deckelman and Paul A. Harris

New York, March 9 - Level 3 Communications Inc. priced a two-part offering of five- and seven-year notes, high yield syndicate sources said Thursday. The deal was said to have gone well although both tranches came on the wide end of price talk and both priced at significant discounts. The Broomfield, Colo.-fiber optic telecommunications network operator's deal appeared too late in the session for any kind of aftermarket activity.

Also in the primary realm, price talk emerged on Levi Strauss & Co.'s planned two-part offering of dollar-and euro-denominated bonds - the latter tranche an add-on to its existing 8 5/8% euronotes due 2013.

In the secondary market, General Motors Corp.'s bonds were up - as were Delphi Corp. - in response to a newspaper report that the two companies and the United Auto Workers union were close to agreement on a plan to help the bankrupt Delphi cut its burdensome labor costs that it inherited when GM spun off the Troy, Mich.-based parts maker several years ago. Even the UAW's hurried clarification that a deal was by no means imminent was not enough to reverse the rise in GM bonds - only to slow it and limit it a little.

Elsewhere, traders in the distressed markets reported that Movie Gallery Inc.'s bonds continued their freefall on Thursday, plunging from the mid-50s all the way down to the upper 40s, before coming off those lows to regain some - but by no means all - of their lost ground.

Overall sources gave various marks on the broad high-yield market following the Thursday session.

One buy-sider said that it traded flat, but added that in the face of the recent backup in Treasuries high-yield has held up pretty well. The source added that there remains demand for double-B paper, even though spreads are tight.

A source from the sell-side said that apart from autos, which were firmer, the market was basically unchanged.

However another sell-sider chalked Thursday up as yet another negative session in high-yield, which was down as much as a quarter of a point.

And after the close of trading for the day, 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 $185.1 million more left the funds than came into them. It was the fifth consecutive outflow, following the very small $3.5 million leakage seen the previous week, ended March 1. (Prospect News erroneously reported last week that there had been a $3.6 million inflow).

During that five-week stretch, outflows have totaled $376.5 million, according to a Prospect News analysis of the AMG statistics.

Outflows have now been seen in eight weeks out of the 10 since the start of the year, totaling $746.15 million, up from the previous week's $561.05 million total, according to the Prospect News analysis.

The latest week's inflow did little to reverse the decidedly negative pattern seen in 10 of the last 13 weeks, dating back to mid-December. In that time, net outflows have totaled around $1.591 billion, the analysis 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 approximately $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.

A source from the buy-side commented that the outflow news does not pack the kind of wallop it might have three or four years ago, and added that there seems to be plenty of cash remaining to be put to work in the high-yield asset class.

"People are a little more patient right now," the source said.

"There is a sentiment in the market that you are going to have a lot better buying opportunities in a month or two than you do now.

"People are holding what they own and waiting for some weakness before they step in."

Level 3 completes two-parter

Thursday's sole issuance came from Broomfield, Colo.-based telecommunications company Level 3 Communications.

Issuing via subsidiary Level 3 Financing Inc. the company raised $386.7 million with the sale of two tranches of senior notes (Caa1/CCC-).

The company priced a $250 million issue of 12¼% seven-year fixed-rate notes at 96.618 to yield 13%. The yield came on the wide end of the 12¾% to 13% price talk. The sale generated $241.545 million of proceeds.

Level 3 also priced a $150 million issue of floating-rate notes that will pay a coupon of six-month Libor plus 637.5 basis points. The floating-rate notes priced at 96.782 resulting in a yield to maturity of six-month Libor plus 725 basis points, at the wide end of the Libor plus 700 to 725 basis points price talk. The sale of the floating-rate notes generated $145.173 million of proceeds.

Merrill Lynch & Co. ran the books for the acquisition financing.

A source close to the deal said that it went well, with the paper seeing interest from a familiar roster of big name high-yield accounts.

Meanwhile a buy-side source said that the floating-rate tranche may have generated some interest among "bank loan types."

Levi price talk

The only other development in Thursday's primary market came from a company which, like Level 3, is a familiar name to junk watchers.

Levi Strauss & Co. issued price talk on its $470 million equivalent two-part high-yield bond deal (B3/B-/B) which is being led by Banc of America Securities and Citigroup.

The San Francisco-based branded apparel-maker talked a $350 million offering of new 10-year senior notes at a yield in the 8¾% area.

Meanwhile the company talked a €100 million add-on to its existing 8 5/8% senior notes due April 1, 2013 at the 103.50 area.

The debt refinancing deal, which was essentially marketed via an investor conference call on Thursday, is expected to price on Friday morning.

A buy-side source told Prospect News that the Levi Strauss is taking advantage of a new issue calendar that is presently sparse.

"They were smart to bring that deal," the source commented, adding: "It should go okay."

GM gains on Delphi report

Back in the secondary market, GM was the major story of the day, firming smartly in the early going on a report in The Wall Street Journal that indicated that GM, Delphi and the UAW were close to an agreement on helping Delphi out. Even though the union later cautioned that things aren't quite that far along yet, investors only took the carmaker's bonds off their early highs for the day - but left them still solidly ahead at day's end, apparently operating on a feeling, a trader said, that "where there's smoke, there's fire."

GM's benchmark 8 3/8% notes due 2033 "raced up" to 73.25 bid from late Wednesday levels at 72.25 bid, 73.25 offered, the trader said. "Then, the UAW came out and warned that people were putting the cart before the horse" in touting an agreement that was by no means a done deal.

The union left no doubt about where it stood; in a statement posted to its website, the UAW said "nothing could be further from the truth" than the idea that some sort of deal was close at hand. "The parties are not close to working out such an agreement.

"There are many, many, significant issues to be resolved," the UAW statement continued. "Overall the situation has changed very little since our last meeting."

That threw some cold water on the campfire and pushed the bonds back to 72.5 bid, 73.5 offered, only slightly above Wednesday's close - but by the end of the session, the GMs had firmed once again, to 73 bid, 74 offered.

"GM rallied early in the day on the Journal story," another trader said, pegging the 8 3/8s up a point on the session at 73 bid, 73.5 offered. He also saw General Motors Acceptance Corp.'s 8% notes due 2031 up perhaps a quarter point at 92 bid, 92.5 offered.

"Then when the UAW said around 10:30 a.m. [ET] that the two sides were not that close, things sold off from their highs."

Yet another trader saw the GM bonds as high as 74.5 bid, 75.5 offered, a 2½ point gain, before the union's message; after the market heard the UAW's disclaimer, they slipped a little from that high-water mark to close at 73.5 bid, 74.5 offered, still up 1½ points on the day.

"The stock and the bonds did not care about that," he said. "It seemed like they were pleased that they thought they were getting somewhere. They just brushed [the union's warning] off."

Delphi mostly seen better

He meantime saw Delphi's 2009 bonds at 60 bid, 61 offered, actually down a point.

But at other desks, the parts supplier's bonds were seen having moved up on the initial news - and having stayed up.

Another trader said that Delphi's 6.55% notes due 2006 were at 60 bid, 61 offered, up two points on the day, while its 7 1/8% notes due 2029 were also up a pair, at 61 bid, 62 offered. "They managed to keep a lot of their gains," he said.

Auto names generally stronger

Other automotive names seemed to have caught a bid in response to the GM news - even though it turned out not to be such big news after all.

A trader said that Visteon Corp.'s 8¼% notes due 2010 moved up to 80 bid, 82 offered from 78 bid, 80 offered on Wednesday, while its 7% notes due 2014 were a point better at 75 bid, 77 offered.

Even among the bankrupt parts suppliers there was a firmer tone. The trader saw Delphi's bonds appreciate two points to 59 bid, 61 offered and saw a three-point rise in the newly bankrupt Dana Corp. to 73 bid, 74 offered. The Toledo, Ohio-based parts maker's bonds have been heading northward ever since that Chapter 11 filing a week ago, with many market participants speculating that the rise was linked to expectations that bonds would be needed for delivery to settle credit default swaps contracts on Dana debt some time around the end of the month.

Elan holds at higher levels

Outside of the automotive area, the bonds of Elan Corp. plc were pretty much unchanged from their closing levels Wednesday, when they rose solidly in response to the news that a Food and Drug Administration advisory panel had unanimously recommended that the Irish pharmaceuticals maker's Tysabri multiple sclerosis drug be put back on the market, a year after it was pulled from the pharmacy shelves and placed under scrutiny following several patient deaths apparently linked to the drug.

Elan's 7¼% notes due 2008 were at 99.625 bid, 100.125 offered, while its 7¾% notes due 2011 stayed at 96.25 bid, 97.25 offered.

Jean Coutu mixed

Jean Coutu's Group's bonds, which had fallen about 1½ points over the previous two sessions, were mixed in the wake of the news that Moody's Investors Service had downgraded its senior subordinated ratings. That followed the news earlier in the week that the Montreal-based retailer had asked its banks for easier terms on its credit facilities

Its 8½% notes were seen down ¼ point at 92.5 bid, 93.5 offered, while its 7 5/8s were actually slightly firmer, at 97.75 bid, 98.75 offered.

Blockbuster weaker after results

Traders saw Blockbuster Inc.'s 9% notes due 2012 easier even as the Dallas-based top video rental chain operator reported better fourth quarter and 2005 full-year numbers. It also touted the growth of its new Blockbuster Online service, and said that its liquidity and credit facility availability were enhanced by several transactions the company completed late last year (see related story elsewhere in this issue).

The bonds retreated on investor concerns about the sagging fortunes of the video-rental industry, finishing down a point at 84.5 bid, 85.5 offered, a trader said.

Blockbuster competitor Movie Gallery Inc.'s bonds "continued to get shellacked," a trader said, noting that the Dothan, Ala.-based Number-Two video chain company's 11% notes due 2012 fell as low as the upper 50s from prior levels around 54-55 bid. Those bonds came off those early lows, they said, to finish at around 50 bid. Burdened by a heavy debt load and intense competition, the company met with its lenders earlier in the week to seek covenant relief.

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