Stone Container prices quickie deal; ATA dives on earnings warning; junk funds see $340 million inflow

By Paul Deckelman

New York, July 15 - A financing unit of Stone Container Corp. successfully priced a $200 million offering of 10-year notes following a whirlwind marketing campaign Thursday. However, a much larger offering, for Freescale Semiconductor Inc., was a no-show - said to have been held up by delays in pricing the equity portion of the company's financing.

In the secondary market, ATA Holdings Corp. bonds and shares were seen in a nosedive after the Indianapolis-based low-cost airline operator warned that it would likely not make a profit this year.

And after trading had rolled up 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 the funds had a net inflow of $339.6 million in the week ended Wednesday.

It was the second sizable inflow in as many weeks, following the $439.7 million inflow seen in the week ended July 7, as the junk market continues to rebound from the doldrums that it saw in late May and much of June. In the past two weeks, some $780 million more has come into the funds than has left them, according to a Prospect News analysis of the AMG figures.

Even though mutual funds account for but a relatively small percentage of the total capital in the high yield universe, market-watchers consider their movements a generally reliable barometer of overall junk bond market liquidity trends.

For the year so far outflows have been seen in 16 weeks against just 12 inflows and the cumulative net outflow is about $4.617 billion - down from $4.957 billion the week before, according to the Prospect News analysis.

After a sizzling start for both the primary and secondary spheres, fueled by more than ample liquidity seen in the first four weeks of the year, the liquidity picture abruptly turned negative and has stayed that way since. Throwing out the strong first four weeks, which were essentially a carryover from last year's atypically strong fund flows trend, outflows have been seen in 16 of the 24 weeks since then, with total net outflows in that time of almost $6 billion.

The abrupt shift in the liquidity patterns did not throw the junk market into a tailspin - but it did call a sudden halt to both the strong secondary rally seen at the beginning of the year as well as the torrid new-deal pace. Since then, secondary levels are showing just modest gains while new issuance has proceeded at a much more sustainable pace than that seen at the start of the year.

Stone Container prices

In new-deal activity on Thursday, Stone Container Finance Co. of Canada II priced a quickly shopped $200 million offering of 10-year senior notes, which priced at par to yield 7 3/8%, at the tight end of pre-deal market price talk of a 7 3/8% to 7 5/8% yield.

The deal was brought to market by joint lead managers Morgan Stanley, Banc of America Securities and JP Morgan, with Citigroup and Deutsche Bank Securities as co-lead managers.

The company - a unit of Smurfit-Stone Container Corp., a Chicago-based packaging maker - priced the deal in the afternoon after a mid-morning investor call.

Proceeds of the offering will be used to fund the call of Stone Canada's 11½% notes due 2006 and to repay bank debt. The redemption is part of a restructuring announced Thursday to simplify the structure of the company for debt issuance purposes. Stone Container Corp., Jefferson Smurfit Corp. (U.S.) and holding company JSCE Inc. will merge into a single company.

American Home prices reopening

The only other pricing action seen during the course of the day, traders said, was the re-opening of American Home Mortgage Investment Corp.'s 9¾% series A perpetual preferred shares offering. The Melville, N.Y.-based mortgage real estate investment trust had priced $35 million of the shares on June 29 - although that was downsized from the $75 million originally proposed.

The reopening resurfaced Wednesday, with some talk in the market that the company, via bookrunner Citigroup, would sell another $5 million of the $25 par shares, or 200,000.

Instead, said a market source, "they opened it wide up and said they would sell as many shares as possible, ultimately selling 650,000 at $25, for total gross proceeds of $16.25 million.

The source declined to exactly call it an upsizing; as to whether it was surprising that deal went so well that more shares were sold in the add-on. He said that the whole re-opening itself was "slightly unexpected," given that the original deal had only priced less than three weeks ago - and at that, had been downsized.

In this case, though, demand was sufficient to permit more shares to be sold.

And it looks like even more shares than the 650,000 could have been sold - the source said that the underwriters "tried to keep the hot money out and just sell to the steady, buy and hold investors." He noted that with the existing preferred shares selling recently for $26.25 and the new shares going for $25, "on paper, at least, that's a terrific arbitrage."

Freescale waiting for IPO

While all of this was going on, the anticipated big deal of the day - Freescale Semiconductor's $1.2 billion three-tranche offering - was a no-show.

A syndicate source said with some disgust late in the session that no, it had not priced - and that as for himself, "I'm not waiting around for it."

He cited delays in pricing the equity portion of the Austin, Tex.-based microchip maker's financing, which he said had to be resolved before the bonds could price, and agreed with the assertion that the junk market would have to wait until Friday - if even then.

Freescale, being partly spun off by electronics giant Motorola, is scheduled to sell 121.6 million shares in its IPO, with news reports and analysts suggesting that it would come in at the low end of the anticipated $17.50 to $19.50 per share range. They noted the fact that the other big IPO of the week, for Domino's Pizza, produced less in the way of proceeds than originally expected.

When the market does get to pricing the bonds, the offering will price in three parts, consisting of 10-year and seven-year fixed-rate notes, and five-year floating-rate notes.

The tranche of 10-year fixed-rate notes is expected to price to yield between 250 and 275 basis points over the U.S. Treasury note coming due in May 2014. The coupon on the fixed-rate seven-year notes is expected to be 25 basis points inside the 10-year coupon, while the five-year floating-rate notes will price in the area of 275 basis points over Libor.

The megadeal is being brought to market by a large team of underwriters, led by joint book-running managers Goldman Sachs, Citigroup and JP Morgan. The co-lead managers are Banc of America Securities, Credit Suisse First Boston, Deutsche Bank Securities and Merrill Lynch.

Stone up in trading

When the new Stone 7 3/8% senior notes due 2014 were freed for secondary dealings Thursday afternoon, they were heard to have been well received, climbing to 101 bid, 101.5 offered from their par issue price earlier in the session.

Caesar's gains again

Back among the established issues, Caesar's Entertainment Inc. - whose bonds were heard to have pushed up about 1½ points on Wednesday as the market buzzed with talk that Harrah's Entertainment Inc. might choose to buy the fellow Las Vegas-based gaming giant for around $10 billion - gained a further two or three points on Thursday as that rumor became a reality.

The former Park Place Entertainment's 7% notes due 2013 were seen two points better at 105.75 bid, a market source said, while its 8 1/8% notes due 2011 were likewise up a deuce at 111.5.

A trader at another desk quoted the company's 7 7/8% notes due 2010 as having firmed to 109.5 bid, 110.5 offered from 106 bid, 107 offered, and said most of that gain had come in Thursday's trading.

On a morning conference call at which Harrah's executives outlined their plans for the company to analysts and investors, company chief financial officer Charles Atwood said that Harrah's would assume about $4 billion of Caesars' debt. He said the company had no information to give out on possible refinancing of that debt.

The total debt load of the new company, Atwood said, would be some $11.3 billion - and even so, he said, Harrah's planned to remain investment grade, by using free cash flow, which he estimated in the range of $400 million to $500 million annually, even without expected synergies, to reduce debt.

Moody's Investors Service said it was eyeing Caesar's debt - with the senior debt rated at Ba1 - for a possible upgrade when the acquisition by the more financially secure Harrah's goes through.

EDS falls

While Caesar's debt seems headed northward, ratings-wise, the debt of Electronic Data Systems Corp. is headed in the opposite direction, as Moody's cut the Plano, Tex.-based provider of information technology services to Ba1 from its previous rating at Baa3 - and Standard & Poor's said it might do the same to its BBB- rating on the company.

That caused the company's bonds to widen out at least 40 basis points, said a trader, who quoted its 2009 notes at 103 bid, 103.5 offered post-downgrade, with the 2013 notes at 95 bid, 96 offered and its 2029 bonds at 91.5 bid, 93 offered,

"Although EDS is taking steps to implement a business turnaround, the pace of the company's progress is slow, and as a consequence, the level of free cash flow is not sufficient to support an investment grade rating," Moody's declared in its downgrade message.

ATA lower

Also on the downside were the bonds of ATA Holdings, after the airline company said in an 8-K filing with the Securities and Exchange Commission early Thursday that it does not anticipate being able to make a profit this year. The company cited "rising jet fuel costs and weak revenues caused by aggressive pricing in the industry. ATA Holdings Corp. is implementing cost-cutting measures to reduce the expected 2004 loss," it added.

A trader quoted the 12 1/8% notes due 2010 at 40 bid, 45 offered - well down from levels in the 60s at the beginning of the week, and even above that, in the 70s to 80s, only a couple of weeks ago. He saw the company's 13% notes due 2009 offered at 45, with no bid seen.

Another trader saw the carrier's bonds having augured in to around 44 bid, 47 offered, from prior levels at 50 bid, 52 offered.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.