El Paso units, Chesapeake Energy price deals; Ahold continues rebound; mega-inflow buoys market

By Paul Deckelman and Paul A. Harris

New York, Feb. 28 - El Paso Corp. sold $700 million of new debt via two subsidiaries on Friday, while Chesapeake Energy Corp. weighed in with another $300 million of bonds. Traders said that both companies' issues of new bonds traded up when they were freed for secondary dealings.

Elsewhere in the secondary market, the bonds of Royal Ahold NV were up solidly, the second straight day in which the Dutch supermarket operator's debt was bouncing off the low levels to which it had tumbled earlier in the week. Market participants meantime said that the junk mart got a shot in the arm from the reported billion-and-a-half-dollar high-yield mutual funds inflow - a reassuring sign that the liquidity surge that has powered both the primary and the secondary markets in recent months is by no means over.

In the wake of that "humongous" $1.54 billion inflow for the week ending Feb. 26, two new issuers taxied toward the runway during the session. Stamford, Conn. aerospace parts manufacturer Hexcel Corp. is in the market with $125 million of five-year notes while publisher Hollinger Inc. will bring $110 million of seven-year paper.

For offerings pricing during the session, the new bonds from Chesapeake Energy and the tandem-marketed deals from El Paso subsidiaries Southern Natural Gas Co. and ANR Pipeline Co. brought the day's issuance to $1 billion and the week's total to $2.775 billion, rounding out the biggest month since June 2001, according to Prospect News data (see story elsewhere in this issue).

Oklahoma City independent natural gas producer Chesapeake Energy priced $300 million of 7½% 10-year senior notes (Ba3/B+) at 99.102 to yield 7 5/8%. Price talk on the deal, via joint bookrunners Salomon Smith Barney, Credit Suisse First Boston and Bear Stearns & Co., was for a yield in the 7 5/8% area.

Proceeds from the Rule 144A notes will be used to help finance the acquisition of natural gas properties from El Paso Corp.

That firm, El Paso, basked in the primary market footlights throughout the day on Friday, as two of its subsidiaries also priced deals during the session.

Southern Natural Gas Co. and ANR Pipeline Co. both issued of 8 7/8% seven-year senior notes (B1/B+) - $400 million for Southern Natural Gas and $300 million for ANR Pipeline - and both priced at 98.718 to yield 9 1/8%, at the low end of the 9 1/8%-9 3/8% price talk.

Bookrunners for both transactions were Salomon Smith Barney and Credit Suisse First Boston.

Also on Friday the market learned that Hexcel will start roadshowing $125 million of five-year senior secured notes on Monday. The deal, via Goldman Sachs & Co., is expected to price on March 7.

In addition, Hollinger announced its intention to come to the high-yield market with $110 million of seven-year senior secured notes (B) via Wachovia Securities. Timing on that deal remains to be determined. However one market source told Prospect News that there is an expectation that Hollinger will get underway in the week of March 3.

The issuer is the parent company of Hollinger International Publishing Inc. which priced $300 million of eight-year senior notes (B2/B) last Dec. 16 to yield 9%, also via bookrunner Wachovia Securities.

In its High Yield Market Notes Friday, Bear Stearns noted that for the week ending Feb. 26 AMG Data Services reported that with the most recent $1.5 billion weekly inflows - the second largest ever after $1.6 billion in August 2002 - the year to date net inflows have now passed $4 billion.

High yield strategist Michael Taylor and the research team at Bear Stearns notes: "This seems inconsistent with year-to-date equity performance (S&P 500 down 5%) and net equity outflows, year-to-date."

One sell-side source who spoke to Prospect News on Friday said that issuers in the near-term, might be expected to step out from behind the bushes for two reasons: the perception that the buy-side is heavy with cash that it needs to invest and because of a perceived slight softening in the drone of the war drums.

"There are bids without offerings in the market because of all the cash that came in last week," the source said.

"Last week when war appeared more imminent people didn't want to go. This week, when it looks a little farther off, here they came. If it appears that war with Iraq isn't going to happen for a while or not at all then I think some deals will come off the shadow calendar and get on the road. But I think right now all bets are off."

Asked for an opinion as to the source of the most recent inflow, the source said: "I think $800 million or $900 million is possibly market-timer money. We've seen it over the last couple of months. A lot of these big inflows correspond with a week or 10 days of lousy trading in the Dow. Obviously we become a more attractive asset class when the Dow is trading below 8000 than when it's trading at 8500.

"If the Dow goes back the other way I think you'll see that money come out - maybe not in such a big chunk, but it will bleed out over time as people reallocate from bonds back into stocks."

When the new El Paso bonds were freed for secondary activity, a trader said that they were "both up substantially," with the Southern Natural Gas notes rising to 102 bid/102.5 offered, and the ANR Pipeline bonds firming to 101.5 bid/102 offered, well up from their 98.718 issue price earlier in the session.

A trader said the new Chesapeake bonds got as good as 101 bid before easing slightly to 100.25 bid/100.75 offered, still well up from their issue price at 99.102.

The trader said that the new bonds of both companies had been snapped up, while bids tightened in the secondary market, in the wake of the $1.54 billion of junk fund inflows - the largest inflow since last summer.

Market participants generally regard the weekly fund flow numbers compiled by AMG Data Services of Arcata, Calif. as a reliable barometer of overall liquidity trends in the junk market. The strong surge of liquidity seen since last fall has coincided with both a sharp turnaround in what was previously a faltering secondary sphere and burst of revived new-deal activity that began in October and that has continued merrily along since then.

"The inflow was huge," he said. It was a sign that there's money to be put to work, so bids tightened in retail, in telecom, in a lot of areas."

"Once the AMG number came out," another trader said, "people breathed a sign of relief." That's because up until that point, it was not clear whether the liquidity surge would continue, with outflows totaling nearly $1 billion having been seen in four of the five previous weeks, including a nearly $141 million hemorrhage of funds in the preceding week (ended Feb. 19).

Once it was clear that the market's liquidity run would continue, a number of issues were firmer, but none more so than international supermarket operator Ahold, which owns the U.S. Stop N Shop and Giant chains.

Its bonds and shares had gotten clobbered early in the week after it revealed last Monday that there were accounting irregularities at its U.S. Foodservice unit, which in turn led to the resignations of its chief executive officer and chief financial officer.

But those bonds and shares had bounced on Thursday, after the company indicated that the problem was essentially confined to the foodservice unit and did not affect its other operations, and the bonds "just flew" on Friday, in the words of one trader. He quoted Ahold's 6¼% notes due 2009 as having firmed to 76 bid/78 offered from opening levels around 71, while its 8¼% notes due 2010 pushed up to 78 bid/80 offered from 72. The company's 6 7/8% notes due 2029 improved to 66 bid/70 offered from 62 at the open.

Ahold "continues to dominate the market," another trader said, pegging the 6 7/8% notes as 67.5 bid/68.5 offered and the 81/4s at 77.5 bid/78.5 offered, "up substantially" from, Thursday's levels - which, in turn were considerably better than the levels seen Wednesday.

The trader said that Ahold debt investors - particularly those with holdings in its convertible bonds - were looking toward the company's successful conclusion of talks with its lenders. "Everything is predicated on getting that credit facility signed," he said.

A market source at another desk estimated that the Ahold bonds were all up "anywhere from six to eight points."

But unlike Thursday, when the bond rise was accompanied by an even bigger boost percentage-wise in the company's shares, on Friday some of those nearly 32% gains were unwound, as the stock dropped 40 cents (9.76%) to $3.70 in New York Stock Exchange dealings, on volume of 8.9 million shares, about eight times the average.

Also lower was Fleming Companies Inc., whose shares slid 34 cents (14.11%) to end at $2.07 on NYSE volume of 2.2 million, about double the norm.

On the bond side, the Dallas-based wholesale grocery giant's debt "was languishing," a trader said, while another described it as "status quo," with the company's 10 5/8% subordinated notes due 2007 staying around the 30-32 zone, while its 10 1/8% senior notes due 2018 remained around 57 bid/60 offered.

Fleming's bonds - which began the month getting pounded on the news that it had terminated its multi-year, multi-billion-dollar supply pact with its biggest customer, bankrupt Kmart Corp. - ended it reeling from the news that it would close some Kmart-related operations and take a $290 million earnings charge. Meanwhile, the Securities and Exchange Commission officially upgraded its formerly informal probe of Fleming's accounting practices to a full-blown official investigation.

And Standard & Poor's said late Thursday that it had downgraded Fleming's corporate credit by a notch to B- from the previous B. The ratings agency cited its belief that "the challenges Fleming faces in restructuring its wholesale business may weaken cash flow protection measures. Although liquidity for the near term appears sufficient and Fleming intends to reduce debt with proceeds from the sale of its retail assets, debt service costs in relation to cash flow remain high."

Also in the retailing area, bonds of The Gap were little changed, despite its shares having fallen $1.78 (12.01%) to $13.04, after the San Francisco -based apparel seller said that the first quarter was off to a slower-than expected start, February same-store sales to date falling short of its projections; company officials cited winter storms on the East Coast, as well as lowered consumer confidence and more merchandise price discounting.

But if those projections were uninspiring, a trader said, "they had great numbers the other day [earlier Thursday], when Gap reported fiscal fourth-quarter net of $249 million (27 cents per share), swinging back into the black after a year-earlier loss of $34 million (4 cents per share).

Gap - which had been bedeviled by two-and-a-half straight years of falling year-over-year monthly same-sales figures and several quarters of red ink, has recently been in a recovery mode, and its bonds have reflected that; on Friday, the trader quoted its 6.90% notes due 2007 at 100.75 bid/101.75 offered. He said there had been "no major movement" Friday despite the disappointing projections and the stock slide. And as for the lack of any upside, he asked "how much tighter can they get?"

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