Rent-A-Center rises, Vertis up on merger; Tousa gains as exclusivity extended; Six Flags steady but active

By Paul Deckelman and Paul A. Harris

New York, May 23 - The high yield secondary market went through the motions on Friday, but accomplished little in the way of real bond movements as the market marked time until its early close ahead of the three-day Memorial Day holiday break, which also saw U.S. financial markets shuttered across the board on Monday.

Rent-A-Center Inc.'s bonds were seen among the more actively traded issues on the session, up several points despite a lack of news seen out on the Plano, Tex.-based furnishings rental company.

Also seen fairly active on no real news, though with no price movement, was Six Flags Inc., a trader speculating that the theme-park company may benefit from high gas prices that will keep summertime travelers from straying too far from home.

A credit which did have some concrete news attached to it, Vertis Inc., was seen several points better on its having reached a merger agreement with rival print advertising company American Color Graphics after some months of speculation and negotiations.

Traders saw some erosion in Hovnanian Enterprises Inc. paper and generalized weakness across the whole of the homebuilding sector in probable response to the latest negative news on the business, as existing-home sales matched their all-time low levels in April. From that same troubled sector, a trader saw Tousa Inc.'s senior bonds quoted several points higher, apparently helped by a favorable ruling from the federal bankruptcy court jusdge overseeing its Chapter 11 reorganization.

The primary market, meantime, was already on vacation, with nothing seen going on in the new-deal realm; issues which priced earlier in the week such as Thursday's El Paso Corp. offering and Wednesday's Nortel Networks Ltd. deal, were unchanged from Thursday's levels.

Market indicators keep moving down

Back in the secondary, a trader said the widely followed CDX junk bond performance index was down by ½ point to 96 3/8 bid, 96 7/8 offered. The KDP High Yield Daily Index fell by 16 basis points to 76.10, while its spread widened by 3 bps to 9.16%.

In the broader market, advancing issues trailed decliners by a not-quite three-to-two margin. Activity, represented by dollar volume levels, plunged nearly 60% from Thursday's already reduced pre-holiday pace.

"There was not much to say today," a trader opined. "It was pretty quiet, with not a ton of stuff going on. It was the Friday before a long weekend where everyone was going to the beach, so everyone kind of skedaddled for the most part right after lunch.

Another trader saw an even earlier exodus - the holiday, he declared "started at 7:30 a.m. [ET]."

Rent-A-Center rises on no news

Despite the paucity of real activity going on, Rent-A-Center's 7½% notes due 2010 were seen having moved up to just below the par level from prior levels around 96.5, on the strength of several large-block trades.

Traders saw no news out Friday on the company, which leases television sets, furniture and other household goods to people on a rent-to-buy basis. Controversially, it is also becoming a major provider of so-called "payday loans" - short-term, relatively high-interest loans made to borrowers who are steadily employed but who may not have the proper credit metrics to get a loan on more favorable terms from traditional lenders such as banks. The company recently reaped some negative publicity, including a write-up in The Wall Street Journal, for its role in persuading a food bank charity to which it donates to withdraw the charity's support for state legislation in Ohio that would cap the interest rates that such payday lenders could charge to their borrowers.

Six Flags active but unchanged

A trader said that he saw a pretty fair amount of activity - given that it was getaway day before a holiday weekend - in Six Flags paper, although by the end of the day, the bonds - just like one of the New York-based theme park operator's many roller coasters - had ended up right where they had begun.

"There was a lot of interest" in the credit, although he hadn't seen any new developments in the company. "There was a lot of trading going on," with its 9 5/8% notes due 2014 having recently "stabilized" in a 61.75-62 bid range.

"There was a lot of activity," he reiterated. "But in the absence of news, I think people [in the market] think that a lot of people aren't going to travel as much, and they're going to go to some of these parks with their kids."

For instance, he agreed with the notion that rather than take long, gas-intensive driving vacations throughout the entire Northeast, or fly to other destinations outside the region in the face of energy-price driven higher airline fares, people in the New York metropolitan area, or in metropolitan Philadelphia, for that matter, may just decide that it is cheaper and easier to just take their kids to the company's big Six Flags Great Adventure theme park in Jackson, N.J., located roughly halfway between the two cities, around 50 miles of fairly quick highway driving from each.

"They must feel that as a result of that, the earnings are picking up," he said. There were a lot of bonds trading today."

That line of thought echoes projections that Six Flags executives themselves made earlier this year when they released improved attendance and revenue figures and speculated that the desire of travelers not to venture too far from home because of high fuel prices could work to the advantage of Six Flags, which has struggled financially in recent years but whose more than 20 theme, water and animal parks, like Great Adventure, are scattered throughout different parts of the country and located not too far from many major metropolitan areas, including Chicago, Los Angeles, Washington D.C., Atlanta, St. Louis and Dallas, in addition to New York and Philadelphia. That's in contrast to key rival Disney, whose theme parks are concentrated in Southern California and Central Florida.

At another desk, however, the company's 8 7/8% notes due 2010 were quoted down 2 points at 92.25.

Vertis gains on merger plan

A market source saw Baltimore-based print advertising and direct-marketing producer Vertis' 9¾% notes due 2009 up as much as 6 points Friday in busy trading, finishing at 94.5 bid.

However, as another shop, those bonds were seen up around 2 points on the day at that same 94 level.

Meantime, American Color's 10% notes due 2010 were seen by the Trace bond-tracking service as having gained about 5 points to the 34 level, although some traders said that they had seen no movement in the Brentwood, Tenn.-based printing company's paper.

Those bond movements follow the joint announcement by the two companies late Thursday of their plans to combine. The merger comes along with a restructuring plan aimed at improving their balance sheets, as well expanding their positioning in North America.

The announcement stated that both companies had entered into agreements with their respective bondholders. Under the terms of the agreement, debtholders can exchange their notes for $550 million in new bonds, as well as "substantially all of the new equity in the combined company." The agreement will effectively reduce overall debt by $725 million. The companies plan to further restructure by filing prepackaged Chapter 11 plans.

"The plan, which includes the merger, the note exchanges and new financing will strengthen the company's finances and enable Vertis to better compete in today's challenging environment," said Mike DuBose, chairman and chief executive officer of Vertis, in a news release.

This is not the first time the companies have mulled the idea of a merger. A letter of intent to merge was initially inked in July 2007, only to fall apart in October.

"It will get done," one trader opined of the renewed deal.

On Wednesday, Vertis reported its first-quarter financials, which showed an 8.2% decrease in revenue to $303.7 million compared to revenue of $330.7 million for the first quarter of 2007. Net loss widened to $41 million, versus a net loss of $25.2 million the previous year.

Tousa better as exclusivity extended

Distressed-debt market players were meantime also looking at Tousa. A trader saw its 9% senior notes due 2010 and its 8¼% notes due 2011 having jumped 5 points to 65 bid, 67 offered. That followed a ruling by the bankruptcy court judge overseeing the company's reorganization that extends the period during which the bankrupt Hollywood, Fla.-based builder has the sole right to file a reorganization plan that deals with its various claims by five months to Oct. 25. Those exclusivity rights were scheduled to lapse at the end of this month, which would have cleared the way for the creditors to file their own plans.

Judge John K. Olson of the U.S. Bankruptcy Court for the Southern District of Florida, in Fort Lauderdale, specifically also rejected the creditors' request that they be given the sole authority to settle claims related to a 2007 financing deal involving a Tousa unit, instead allowing the builder itself to settle those claims.

However, he also ruled that the unsecured creditors, including its bondholders, could pursue litigation against its secured bank creditors challenging their deal with Tousa, before it went bankrupt. The financing deal took place in July; Tousa slid into bankruptcy this past January.

Unsecured creditors including Carlyle Group, a Blackstone Group hedge funds, GSO Capital, and Aurelius Capital, claim that Tousa and secured lenders Citigroup and Wellls Fargo acted improperly when they reached a deal for the banks to bail out and provide refinancing for Tousa's failed Transeastern joint venture. Tousa bought into the Florida company in the summer of 2005 - what turned out to be the top of the Florida real estate market, although nobody foresaw this at the time - and then saw the value of the joint venture plummet over the next two years.

The unsecured creditors claimed that the deal, which included giving the banks security interests in Tousa guaranteed by its various subsidiaries although they allegedly gained no benefit from the arrangement, amounted to "an $800 million blatant fraudulent conveyance" of assets to the bankers just months before the parent company itself went into Chapter 11.

Olson rebuffed requests from the lenders that the matter be put on hold to give the parties time to explore alternatives, ruling that Tousa would not be able to effectively reorganize with "an $800 million question mark hanging over this estate."

Because of its extended exclusivity rights, Tousa could propose a settlement of the matter as part of its overall restructuring, although such a settlement might not be to the liking of its unsecured creditors. Still to be decided are creditor claims on the way Tousa is using cash that is the collateral for the banks' debt. The judge left the status quo in place, letting Tousa use that cash under the previously agreed-upon terms, over the objections of the creditors, and set another hearing in the case for June 10.

The trader also saw Tousa's junior debt - its 7½% notes due 2011, its 10 3/8% notes due 2012 and its 7½% notes due 2013 - unchanged at 11 bid, 13 offered.

Builders off as industry struggle continues

Elsewhere among the builders, the trader saw WCI Communities Inc.'s 9 1/8% notes due 2012 continuing to erode, quoting them down a point at 37 bid. He saw Beazer Homes USA Inc.'s 8 5/8% notes due 2011 unchanged at 85 bid, 87 offered, saw Standard Pacific Corp.'s 7% notes due 2015 unchanged at 71 bid and Hovnanian Enterprises Inc.'s 6 3/8% notes due 2014 and 6¼% notes due 2016 unchanged at 69.

A trader at another desk saw Hovnanian's 8 7/8% notes due 2012 unchanged at 74.5 bid, 75.5 offered.

Another market source saw the 6 3/8% notes down 2½ points on the day at 69.5, while Standard Pacific's 6½% notes due 2010 were down 1½ points at 78 bid.

The builders' bonds were generally lower - with the exception of Tousa - against a backdrop of continued deterioration of the building industry. The latest bad news for the sector was Friday's report from the National Association of Realtors, that industry's trade group, indicating that existing-home sales fell by 1% in April, the measure's eighth fall in the past nine months. That drops the widely watched statistic to a seasonally adjusted annual rate of 4.89 million units, matching the all-time low set in January. The group has been keeping track of such measures since 1999.

New deals go nowhere

Traders Friday saw no movement in new bonds of issues that priced during the week. One saw El Paso Corp.'s 7¼% senior notes due 2018, which priced at par on Thursday, at the same par bid, 100.25 offered level at which the bonds had gone home that session.

He saw the new Nortel Networks' 10¾% notes due 2016, which priced at 99 on Wednesday as an add-on to the company's existing debt, unchanged at 99 bid, 99.5 offered.

Busy week ends quietly

Friday's primary market produced no news.

However by 2008 standards the week leading up to Memorial Day was a busy one.

Issuers raised just under $4 billion of proceeds in seven junk-rated, dollar-denominated, Rule 144A or public tranches.

Hence it was the market's third busiest week for 2008 to date, or, discounting issuance directly related to the hung LBO financings, the second busiest.

Excluding offshore issuers the pre-Memorial Day week also saw the biggest single session of 2008 to date.

Tuesday's primary market session saw the largest amount of issuance from U.S.-based high-yield issuers thus far in in the year - excluding LBO-related deals - as three issuers, each pricing a single tranche, raised just under $1.95 billion of proceeds.

Plains Exploration & Production Co. priced $400 million. Chesapeake Energy Corp. priced $800 million, and EchoStar DBS Corp. priced an upsized $750 million issue at a slight discount.

Meanwhile news regarding the liquidity of the high yield asset class remained positive.

According to sources AMG Data Services reported a $190.7 million inflow to high yield mutual funds for the week to May 21.

That's the eighth consecutive inflow, one sell-sider remarked, adding that the last run of eight straight inflows occurred between April 18 and June 6, 2007, just as the junk market, along with all the credit markets, stood poised on the brink of a massive sell off that has yet to unwind.

The sell-sider added that if AMG reports a positive number next week it will be the first time since late 2003 that the high yield had nine weeks of positive flows.

No calendar

Although weekly volumes in the new issue market have all topped the $2 billion mark since mid-April, during most of that time there has been no forward calendar to speak of.

The preponderance of primary market business has come in the form of a.m.-to-p.m. drive-by deals, or quickly shopped trades that clear the market following one-to-two days of roadshowing.

So it is as the market crosses the Memorial Day boundary into the high yield's summer season.

Sources vary as to what kind of volume the summer market might see, with some envisioning a moderate deal flow and others forecasting a meager flow.

Only one deal is on the calendar heading into the three-day holiday.

Symbion Inc. is attempting to place a $179.84 million offering of 11% senior PIK toggle notes due Aug. 1, 2015 (Caa1/CCC+).

A brief roadshow was held during the middle part of the week. Some market-watchers had been expecting it to price by the end of the week, however the deal has carried over into the post-Memorial Day week, sources say.

Merrill Lynch & Co. and Banc of America Securities LLC are joint bookrunners for the bridge refinancing.

Stephanie N. Rotondo contributed to this report

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