Nova prices $400 million deal; IMC up on Cargill speculation; funds see $506 million inflow

By Paul Deckelman and Paul A. Harris

New York, Jan.8 - Nova Chemicals Corp. was heard by high-yield syndicate sources to have priced a $400 million offering of eight-year notes during Wednesday's session. In secondary dealings, bonds of another chemical maker - IMC Global Inc. - were seen up more than five points on the session, on merger and acquisition speculation involving the world's largest producer of phosphate fertilizer.

And high yield mutual funds - the key barometer of junk market liquidity trends - started 2004 the same way they finished 2003 - with more investor money coming into the funds than leaving them, according to market participants familiar with the weekly fund flow statistics compiled by AMG Data Services of Arcata, Calif.

In the week ended Wednesday, net inflows to the funds totaled $506.05 million, the market participants said. It was the 10th consecutive week of inflows, following the $92.1 million infusion seen the week before, as well as the 15th week in the last 16. It was also the largest weekly flow of cash into the junk funds seen since the week ended Oct. 16, 2003, when $768 million more came into the funds than left them.

The inflow figure for the first week of the year is also, of necessity, the total for 2004 so far.

In 2003, inflows had been seen in 36 weeks out of 52, for a cumulative net inflow of $20.126 billion, according to a Prospect News analysis of the AMG figures. That total includes only those funds that report on a weekly basis and excludes distributions.

In 2003, the record liquidity surge - with money coming into junk not only from the mutual funds but from other sources such as insurance companies, pension funds and endowments as well - fueled the spectacular high yield secondary market rally, which saw junk bonds produce total returns of nearly 30%, while also helping to power a near-record $138 billion-plus of new issuance.

And as has been widely predicted, that primary market momentum appears to have carried over into the start of the new year, with the forward calendar building and sizable deals like Nova Chemicals coming to market to sop up some of those excess cash balances.

In total the primary market saw $600 million price Thursday in two issues.

And with the first full week of the new year approaching its final session, sources report that there seems to be quickening pace to primary market activity.

That may be due to the phenomenal present liquidity of the high-yield asset class, sources added, Thursday.

"This rally has three quarters to run still, I believe," one sell-side official told Prospect News as the funds flow numbers circulated the market.

"People express concern about the possibility that the Fed will raise rates, and that the curtain will subsequently come down on all of fixed income. But this is an election year. How much will they raise rates in an election year? Do you see them tightening by 100 basis points, given that scenario?! I don't think so.

"And a 25 basis points increase, which is much more plausible, does not end this rally, I don't think."

There seemed to be an appetite for junk bonds at play during Thursday's primary market session.

Elizabeth Arden upsizes

Elizabeth Arden, Inc. upsized its deal to $200 million from $150 million, and priced its 10-year senior subordinated notes (B3/B-) at par to yield 7 ¾%, richer than the 8%-8¼% price talk.

Credit Suisse First Boston and Morgan Stanley Dean Witter were bookrunners.

Shortly before the deal priced Pax World High Yield Fund portfolio manager Diane Keefe told Prospect News that given the present circumstances in the new issue market, the Elizabeth Arden's 10-year notes have a pretty agreeable fragrance.

"I'm in that deal," Keefe confided on Thursday morning. "We owned Elizabeth Arden 11¾% paper for years.

"Management is doing a great job of delevering the company," she added. "And they are taking out a lot of their high coupon debt.

"They are not choosing to lever it up a lot more. And they have been getting a lot of growth out of the mass retailers and the health and beauty aid stores of the world. It was kind of a tired brand, a couple of years ago. But they really have done some great things with it.

"And they are improving global sales, not just U.S. sales. It's just a well managed company."

Thursday's session also saw a completed transaction from Nova Chemical Corp., which sold $400 million of eight-year senior notes (Ba2/BB+) at par to yield 6 ½%. With Citigroup running the books the notes priced at the tight end of the 6½%-6 5/8% price talk.

One roadshow start was heard Thursday.

ASAT Holdings Ltd. begins marketing Friday in Hong Kong for an offering by its New Asat (Finance) Ltd. subsidiary of $125 million of seven-year senior notes due 2011 (B3/B), which are expected to price late in the week of Jan. 12 via Citigroup.

The semiconductor assembly, test and package design services company, which is based in Pleasanton, Calif. and Hong Kong, will use proceeds to refinance debt.

Meanwhile, price talk of the 7¼% area was heard during the session on CSK Auto Corp.'s upcoming $200 million of 10-year senior subordinated notes (B-).

The deal, led by Credit Suisse First Boston, Lehman Brothers and JP Morgan, is expected to price on Friday.

Pax World portfolio manager Keefe also said her fund was having a look at CSK.

"I looked at the lease-adjusted leverage and it looks like about 5.2-times, which is high, but not horribly high. We usually have about a 5.0 upper limit in terms of what is interesting to us. So they're right in there.

"And people are going to continue to fix their cars, even if the recovery that everybody is jumping up and down about happens."

Keefe's economic outlook

The last time Keefe conversed with Prospect News, during mid-December, she had expressed a somewhat bearish outlook on the U.S. economy, suggesting that the recovery is a function of historically low interest rates and tax cuts.

On Thursday Prospect News inquired as to whether this macroeconomic view had undergone any change in the interim.

"My analyst put up a quote on my door: 'A recovery by any other name is still a recovery,'" Keefe responded.

"We had this conversation where my analyst expressed the point of view that it doesn't matter that the present strength is pegged to monetary stimulus and that we're mortgaging our future.

"I think it does matter, though, because it's not based on capital investment and innovation, which is what buttresses a real recovery that causes people to go out and build businesses."

Nevertheless, she sees reason to believe that the present rally in high yield has some legs.

"Foundations and other institutions have been looking at the numbers from last year in junk, and they think that maybe it makes sense to go out of investment grade and into a little more high yield," she said.

"And on the margin, if you do that it creates a lot of institutional cash coming in.

"There is not enough [bond] supply for all of that cash coming in, so the spreads have gone from 480 off on average to 450 off, according to my information. There has been a lot of tightening in the past month.

"I've never been a market timer," Keefe added. "But the 'bull' scenario says it goes down to the 300s. And that is possible, given the alternatives people have: a massively rallied stock market or a Treasury yield curve that continues to be at 45-year lows."

So, Prospect News asked, does the tightening high yield asset class continue to adequately reward risk?

"What is more risky," Keefe shot back. "Taking incremental credit risk at 400-plus off of the curve or taking interest rate risk, which you have absolutely no control over?

"That's what the average trustee is facing right now."

When Nova Chemicals' new 6 ½% notes due 2012 were freed for secondary dealings, they were heard to have initially firmed to bid levels between 101.25 and 102.25; a trader pegged them going home at 102 bid, 102.5 offered, on "basically better buyers."

IMC up 6½ points

Back among the established issues, IMC Global's 10 7/8% notes due 2008 were seen having firmed to stratospheric levels around 117.5 bid, a gain of some six-and-a-half points on the session. The rise in the bonds coincided with an equally strong equity surge for the Lake Forest, Ill.-based chemical maker's shares, which jumped $1.01 (9.46%) to $11.69 on busy New York Stock Exchange volume of 12 million shares, about twelve times the norm.

It was a new 52-week high for IMC and was attributed to market speculation that the company may merge its business with Cargill Inc. The companies declined to comment. The IMC-Cargill rumors got a further boost when FertilizerWeek Online, an agricultural chemicals industry internet trade newsletter, reported Wednesday that "US phosphate giants could merge." Although no names were mentioned, investors were quick to assume that the parties involved are IMC and Cargill. Investment-oriented internet bulletin boards buzzed with postings indicating that some sort of IMC-Cargill announcement was pending, assuming financial arrangements could be worked out. They also indicated that one sticking point could be IMC's sizable debt load, including the $400 million of 10 7/8% notes that the company sold in July 2003.

Elsewhere, a trader, when asked what was up, quipped "everything, pretty much. It seems like things were definitely stronger [Thursday] overall. By the end of the day, there may have been a little bit of profit-taking, a little bit of weakness. But all and all, it's still been an incredible week.

"Every day," he continued, "stocks up, junk bonds up."

Telecom equipment gains

One area he saw definitely on the rise, "just when you thought that they couldn't go any higher," was telecommunications equipment makers such as Nortel Networks Corp. and Lucent Technologies Inc., seen as likely winners from Thursday's announcement that a major telecom industry player plans an extensive infrastructure upgrade.

He quoted Nortel's 6 1/8% notes due 2006 - which gained two points on Wednesday - as having pushed up again, to 104.25 bid, 104.75 offered, from Wednesday's close at 103 bid, 104 offered, while Lucent's 7¼% notes due 2006 opened at 103.5 bid, 104 offered and got as good as 104.75 near the close.

At another desk, a market source quoted Lucent's 6.45% notes due 2029 as having improved to 85 bid from prior levels at 82.5.

Even though no contracts have been awarded yet, Lucent and Nortel are seen as likely major beneficiaries of telecom giant Verizon Communications' planned $3 billion upgrade of its system, which will see the regional Bell operating company invest $1 billion on its wireless network and $2 billion on its wireline network over the next three years, and which is expected to push competitors like SBC Communications, BellSouth, AT&T and Sprint Corp. into matching its investment, lest they fall behind and lose market shares.

Both companies already do business with Verizon - which just Wednesday separately announced that it had awarded Nortel an exclusive contract to supply switches to its VoIP (voice-over-Internet-protocol) and multimedia-services infrastructure improvements over the next 18 months. No financial terms were announced, although some observers think the multi-year pact could be worth as much as $100 million to Ontario-based Nortel. While the awarding of the exclusive pact was seen as a coup for Nortel and a defeat for Murray Hill, N.J.-based rival switch maker Lucent, that company on Wednesday announced its own big equipment deal, with VIVO, the leading wireless operator in Brazil, the world's seventh-biggest wireless market.

Those contracts - and the contracts which companies like Lucent and Nortel are expected to harvest from the newly announced Verizon spending spree and whatever similar moves come from its rivals - provide a welcome shot in the arm for telecom infrastructure companies, whose fortunes had headed south along with those of the whole telecom industry when the industry imploded in 2000-2001, with many players driven into bankruptcy and the survivors forced to slash their capital spending budgets to survive.

Gap dips as sales fall short

Retailing names were in the news Thursday, as a number of them reported comparable-stores sales figures for December.

A major disappointment was Gap Inc., the San Francisco-based apparel chain, whose rebound after nearly three years of decline was one of the business world's big stories on 2003, seemed to lose some momentum in December, when sales at stores which had been open at least a year, the most widely used gauge of a retailer's strength, went up 1%, far less than the 5% gain Wall Street was looking for. Gap's 6.90% notes due 2007 dipped half a point to 110.5 bid, 111 offered.

However, J.C. Penney reported a better-than-expected 4% rise in December comps, even though its Eckerd pharmacy chain's sales were off 2.5% from a year earlier. Penney's 2018 bonds, which trade like investment-grade instruments, were quoted as having tightened five basis points, to bid levels 320 bps over Treasuries and offered levels 310 bps over.

Great Atlantic & Pacific Tea Co. Inc.'s 7¾% notes due 2007 were quoted at 91 bid, 92 offered, which a trader said was down about a point or so from where the Montvale, N.J.-based supermarket chain operator's bonds had recently been seen at; another trader said the company was scheduled to release numbers on Friday, and indicated that some investors were nervous about the company's prospects in the highly competitive, low-margin supermarket business.

Overall, a trader said, "the market was a little more active," although he saw signs of "a little more weakness toward the end of the day. It opened basically flat from [Wednesday] night's close, and stuff traded up a little bit.

One issue he saw better early on was longer-dated Georgia Pacific paper, although he offered no levels.

"Anything with a little yield was better bid for, but by the end of the day - and don't get me wrong, there are still buyers out there - for the first time this year, we saw significant selling."

Emerging markets calendar grows

One new emerging markets corporate deal came into view during Thursday's session. The Industrial Development Bank of India is expected to sell $300 million of eurobonds due 2009 (Ba1/BB) in early February, with JP Morgan and Citigroup having been mandated to run the books.

During the conversation with Pax World High Yield Fund portfolio manager Diane Keefe, the subject of another corporate deal from the Indian subcontinent, Reliance Industries' $750 million five-year bond (existing ratings Ba2/BB), via Credit Suisse First Boston, came into play.

Keefe said that the Pax Fund, which submits companies to a series of social issues screens, is presently evaluating Reliance.

"We're working on a model for India," Keefe added. "They are moving toward an agreement with Pakistan, which is a good thing. But the bottom line is that Musharraf was targeted for assassination a few weeks ago. So even if India gets an agreement with him they might be facing a radical Islamicist regime a year from now.

"Clearly the momentum in the Indian government is in going in the right direction, in terms of negotiations. They want to realize their potential as a world economic power. But the instability of Pakistan may prevent that from being something that is actually lasting.

"So I am focused on how much the sovereign has rallied on these positive diplomatic developments and whether people feel as though there is too much optimism. Ultimately I think all of these Indian credits are going to rely upon that as a base."

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