Junk rebound continues as ATP, Harrah's jump again; Goldman grabs Emdeon; funds lose

By Paul Deckelman and Paul A. Harris

New York, Oct. six - The ever-volatile high-yield market posted its second straight sizable gain on Thursday, with traders chalking it up more to a snap-back from recently oversold conditions than any kind of fundamental change in the economy or the financial markets generally.

One said that there was "no rhyme or reason to the day's activity."

As had been the case on Wednesday, the bonds hardest hit during the recent string of Junkbondland downturns were leading the way back upward on Thursday, particularly ATP Oil & Gas Corp.'s issue, which was seen up by 10 points - and some sources said even more amid heavy dealings.

Another always-active credit seen having gained multiple points on sizable turnover was Caesars Entertainment Corp., the gaming giant more familiar to market denizens as Harrah's Entertainment.

In the primary arena, syndicate sources continued to watch the evolution of the upcoming deal for Emdeon Inc., seeing exactly half of the health care administrative services provider's pending $750 million bond issue taken up by Goldman Sachs & Co. affiliates, with the rest slated for sale to other qualified institutional buyers, probably next week.

Statistical indicators of market performance were higher across the board.

But a key indicator - high-yield mutual fund flows, considered a reliable gauge of overall junk liquidity trends - were seen taking a turn for the worse in the most recent week, possibly indicating a renewed flight of capital out of junk and other risky investments.

AMG sees $363 million outflow

As Thursday's session was finishing up, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week ended Wednesday, $363.14 million more left those weekly reporting funds than came into them.

That broke a string of four consecutive inflows dating to the week ended Sept. 7 and totaling $1.63 billion, according to a Prospect News analysis of the numbers, including the $326.9 million cash injection seen in the week ended Sept. 28.

Those four weeks of gains had, in turn, broken a five-week losing streak dating back to the week ended Aug. 3, during which time the funds tallied a net loss of some $4.854 billion, according to the analysis.

For the year as a whole, inflows have been seen in 25 weeks versus 15 outflows, according to the analysis.

While at one point year-to-date net inflows had totaled as much as $7.82 billion, which was recorded in the week ended May 25, the recent string of sizable outflows eventually erased that bulge and drove that year-to-date total into the red for a time, although it's now back in the black.

However, with the latest weekly loss, the 2011 cumulative inflow total fell to an estimated $692 million from the prior week's estimated $1.054 billion, according to the analysis.

While fund flow patterns began the year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year, they turned choppy for several months after that with a couple of weeks of declines.

This was followed by several weeks of inflows, going back and forth. After a seeming break to the upside in July, when four straight inflows were recorded, August was a complete wipeout, with the five downturns while September saw the four inflows, leaving market participants to wonder whether October now will be another negative month, although the strong junk market performance in Wednesday's session and again on Thursday might indicate otherwise.

EPFR: $1.36 billion outflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, reported a $1.36 billion outflow to the funds in the latest week, coming on top of a $1.07 billion cash loss seen the week before.

EPFR said the latest outflow was the third in the last four weeks.

Over the longer term, following the strong start to the year, outflows have now been seen in 13 weeks out of the last 17, an analysis of the figures indicated, including the mammoth $6.71 billion outflow recorded in the Aug. 10th week - the single largest loss of cash from those funds since EPFR began tracking fund flows some years ago.

The latest week's big cash loss widened the estimated year-to-date net outflow to $3.03 billion from the previous week's $1.67 billion deficit.

EPFR's figures and those of AMG generally point in the same direction, although their actual numbers usually differ markedly since they calculate their respective fund-flow totals very differently. EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds and counts exchange-traded funds excluded from the more narrowly focused AMG tally.

Excluding the overseas-based and ETF funds, a market source suggested, it would produce an outflow total of some $447.5, considerably closer to the AMG tally.

Cumulative fund-flow estimates, whether of the AMG funds from Lipper/FMI or those from EPFR, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new deal borrowing binges seen in both 2009 and then in 2010 as well as the robust secondary market seen both years. Those trends had pretty much continued into 2011 as well, although the market hit something of a dry patch in June, then seemed to recover in July - only to run into a brick wall for all of August, from which the junk market has only partially recovered so far.

High yield rallies

Against a backdrop of soaring stock prices high-yield bonds rallied smartly for the second consecutive day, according to market sources.

The CDX HY 17 index finished 1 3/16 points higher on the session at 88¼ bid, 88½ offered, according to a hedge fund manager.

Investors were busy bargain shopping in the secondary market, grabbing bonds which began to sell off dramatically late last week, and continued to do so into the early part of the present week.

Harrahs Operating Co.'s 10% senior notes due December 2018 were 63 bid, 64 offered on Thursday afternoon, according to a fund manager who had seen them trade as low as 54 bid, 55 offered earlier in the week.

In the primary market, however, no deals were priced, nor were any launched.

Emdeon 11¼% notes circled up

The new issue market's focus continues to be trained on two big LBO deals.

Affiliates of Goldman Sachs have agreed to purchase $375 million of Emdeon 11¼% senior notes due 2020, according to a schedule 14 A document filed on Thursday with the Securities and Exchange Commission (SEC).

The affiliate in question is Goldman Sachs Asset Management, according to a high-yield mutual fund manager.

The $375 million of nine-year notes represent half of the overall $750 million amount, which the company intends to raise in the high-yield market.

The 11¼% coupon may be signaling guidance to the market as to where dealers hope to price both the $1.2 billion term loan B, which is already in the market, and the remaining $375 million of senior unsecured notes, the fund manager said.

The remaining $375 million of eight-year senior notes could hit the market late as early as Friday, but will more likely be launched in the week ahead, sources close to the deal have said.

Barclays Capital Inc., Bank of America Merrill Lynch, Citigroup Global Markets Inc., Goldman Sachs & Co. and SunTrust Robinson Robinson Humphrey are the joint bookrunners for Emdeon's bonds.

Kinetic is October business

With its downsized term loan already launched into the market, Kinetic Concepts Inc.'s upsized $2.55 billion two-part notes offer should hit the road in the mid-to-late October time frame, a source close to the deal said on Thursday.

It's possible that the roadshow could start in the week ahead, but more likely that it will commence during the Oct. 17 week, the source added.

The bonds, which were upsized from $2.15 billion, will be split between an upsized $1.65 billion tranche of 7.5-year senior secured second-lien notes and a $900 million tranche of eight-year senior unsecured notes.

The second-lien tranche was upsized from $1.25 billion.

With the upsizing of the bonds, $400 million was shaved off the company's term loan, reducing it to $2.2 billion from $2.6 billion.

The shift in proceeds to the bond deal from the bank deal is likely a reflection of demand, according to a mutual fund manager who plays both bank loan and junk bonds.

"The juice is going to be in the second-lien piece," the manager asserted on Thursday afternoon.

Morgan Stanley & Co. LLC, Bank of America Merrill Lynch, Credit Suisse Securities (USA) LLC and RBC Capital Markets will be the joint bookrunners for the Kinetic Concepts deal.

'No rhyme or reason'

A trader said that most of the names were up by at least 1 or 2 points, and some - he singled out ATP - did even better than that, quoting the Houston-based energy operator's 11 7/8% notes up by as much as 10 points, on top of Wednesday's already big gain.

He said that "on some days, you have all just one or two names trading" in any kind of sizable numbers, but Thursday's activity "was all kind of spread out, and there's no particular rhyme or reason to it. Either someone has to raise cash or they decided 'you know what we saw yesterday at those levels? Let's go try to buy them.' "

He said there was "all types of stuff all over the place. When you look at the Trace volume, it's not $100 million off one or two names - it's probably the top 40 are trading $10 million" apiece.

"It's like a big back of a lot of volume going on in this group of names all spread out."

Further noting the junk market's violent swing within the space of a couple of days between fear and loathing on the one hand and what former Federal Reserve boss Alan Greenspan some years ago famously tabbed "irrational exuberance," the trader said:

"It's depending what goes on in Europe," where market sentiment shifts from day to day from optimism to pessimism - and back - over the chances of Greece and some of the other weak economies avoiding default and straightening themselves out, with or without the help of big multinational players like the IMF or the European Central Bank.

"There's just no rhyme or reason to it, unless you have a Kodak-type event where the floor just drops out of it," he said, referring to last week's steep slide in the troubled Rochester, N.Y.-based photographic products and imaging technology company's bonds amid bankruptcy speculation, which the company later denied.

"Otherwise, it's just the tide. Everything's going up or everything's going down."

A second trader said that "things were all bouncing. People just got tired of selling things."

Playing catch-up

At another desk, a trader, who called the junk market's recent gyrations "ludicrous," declared that "everybody was a buyer."

"Everybody goes from being terrified to being a buyer," the trader added.

He suggested that with the high-yield market having spent most of the just-ended third quarter basically giving up its hard-won gains notched over the first half of the year, "now everybody is trying to make their year back - in 15 minutes, it seems."

Referring to the continued fixation of the financial markets - primarily equities, but also junk, which frequently takes its cues from stock market movements - he declared, with no small amount of disgust, that "I really do wish they'd let Greece go."

"Look," he said, some years ago "Russia defaulted - and we're still here. Argentina defaulted - and we're still here. If the French banks are so hamstrung [holding Greek debt], everybody should pitch in and help them out, but this whole thing is a charade of saying that Greece has agreed to concessions - but we're two years into this and they haven't done a thing."

As a result, he said, "it was a perfect excuse, with thin markets, to take the high-yield market apart - and after they dragged it down, now you have the strategists saying 'you have to buy high yield, it's really cheap because we have a calendar.' "

He said that from what he's seen, "the traditional high-yield investor still has plenty of cash."

Market indicators on the rise

A fair amount of that cash was obviously being put to work during Thursday's session, as demonstrated by junk market statistical performance indicators, which were solidly higher for a second consecutive session.

As stated, a trader said that the CDX North American series 17 HY index jumped by 1 3/16 point on Thursday to end at 88 1/8 bid, 88 3/8 offered, after having risen by 15/16 point on Wednesday.

The KDP High Yield Daily index soared by 75 basis points on Wednesday to close at 69.28, which followed its 19-bps rise on Wednesday - although that still doesn't fully wipe out the effects of the index's eye-popping 103 bps nosedive on Tuesday.

Its yield on Thursday tightened by 24 bps, to 8.76%, in addition to the 4 bps decline on Wednesday, although hereto, it still didn't fully cure the damage done on Tuesday, when it had ballooned upward by 36 bps.

And the Merrill Lynch U.S. High Yield Master II index posted its second straight gain on Thursday after five consecutive losses before that, rising a solid 0.94%, which followed Wednesday's 0.171% advance. But the index was still trying to recover from Tuesday's 1.566% swoon, its second-largest plunge this year.

Thursday's gain cut the index's year-to-date deficit to 2.93% from 3.834% on Wednesday.

While that's an improvement over its 3.998% cumulative loss recorded on Tuesday, the worst level of the year so far, those losses stood in stark contrast to the peak gain for the year of 6.362%, which was set on July 26.

The pace of junk market activity, as measured by dollar-price volume, was off by about 6% from Wednesday, when it had been unchanged from the previous day's level.

Junk, for a second straight session, seemed to be following the trail blazed on by equities, which saw the bellwether Dow Jones industrial average posting its third big gain in a row after several losses. The Dow, which on Wednesday had gained 131 points, rose on Thursday by another 183.38 points, or 1.68%, to close at 11,128.33.

The Standard & Poor's 500 index gained 1.83 on Thursday, while the Nasdaq composite firmed by 1.88%.

ATP rally rolls on

Among specific credits, a trader said that Thursday's activity "featured a lot of typical things," with the hardest-hit bonds of the recent several sessions seeming to post the biggest gains coming back.

Just as had been the case on Wednesday, ATP Oil & Gas' 11 7/8% second-lien senior secured notes due 2015 "were up another 10 points," as he pegged the Houston-based offshore energy operator's bonds at around 72 bid.

A market source at another desk said that the ATP bonds had gotten as good as 75 during the day - up from lows around 67 - before coming off those peak levels to finish at 72¼ bid, which he called a gain of more than 11 points on the session.

The source saw very heavy trading in the bonds, with over $40 million having changed hands by the close.

"ATP follows oil," said yet another trader, who had the bonds going home at 71 bid, which he called a 9-point improvement. "As oil goes, so ATP goes."

Actually, crude oil - on a tear the last few sessions - finally took a breather on Thursday, with the November contract easing by as much as 47 cents to $82.15 a barrel on the New York Mercantile Exchange. On Wednesday, it had hit a high of $82.59, for a two-day gain of 9.1%, marking the biggest jump seen since Feb. 22-23.

Crude prices are up by 3.9% this week, although they remain down 10% on a year-to-date basis.

Before that surge in oil prices, ATP's bonds had been getting crushed over the previous few sessions on apparent investor angst over soft world energy prices in the face of an economic slowdown, as well as more company-specific worries that ATP might not be able to fulfill its debt obligations when the bonds come due.

Sentiment has also recently soured since Moody's Investors Service said it issued a report early last week claiming that a restructuring was highly likely.

Harrah's higher again

Another big gainer, traders said, was Caesars Entertainment's 10% notes due 2018, which one of them said had gained as much as 3 points to end at 65 bid, 65½ offered, on top of a similar-sized gain on Wednesday.

Another trader saw the bonds up nearly 4 points on the day, at 65 ¾ bid, on very busy volume of over $30 million.

The Las Vegas-based gaming giant, still more popularly known in junk as Harrah's, had recently been taking it on the chin, getting hammered down to around 57 bid earlier this week in heavy trading, as usual, on continued investor fears that the soft economy would wreak havoc with the finances of companies heavily dependent on discretionary consumer spending. They include Caesars and sector peers MGM Resorts International.

Las Vegas-based MGM's six 5/8% notes due 2015 meantime were also better on the day, up nearly 3 points at 85½ bid.

It's 9% notes due 2020 likewise rose to 103¾ bid on active volume approaching $15 million, making it the company's busiest bond of the day.

Kodak comeback continues

A trader said that Eastman Kodak Co.'s bonds continued to firm for yet another session, as investors apparently became more confident that the iconic film, camera and printer giant will not be filing for bankruptcy any time soon, as had been rumored at the end of last week.

This time, its secured bonds the 9¾% notes due 2018 and the 10 5/8% notes due 2019, which heretofore had mostly held steady around a 70-71 context while its unsecured 7¼% notes due 2013 gyrated all around, were the major price movers, the trader said, seeing those notes climb to a 73-75 context, "definitely up on the day."

He saw the 71/4s, which had shot up to around a 46-47 finish on Wednesday, a gain of between 5 and 10 points, depending on whether you were basing their movement on round-lot or odd-lot trades, staying in that same neighborhood since "they didn't file or do anything crazy."

He noted that normally, the subs move a lot quicker and more than the secured bonds.

Another trader said that the market had "put a floor" under the secured bonds in the lower 70s, figuring that would be what the bonds would be worth in any kind of a restructuring scenario, in or out of court.

"The crappy unsecured bonds are the ones that fluctuate," moving from recent lows in the upper 20s at the tail end of last week to their current levels in the mid-to-upper 40s.

The latter bonds had been beaten down into the 20s following Kodak's hiring last week of Jones Day, a law firm that specializes in restructurings, but began coming back solidly from Monday on as it denied having any plans for filing Chapter 11.

Kodak claimed that "it is not unusual for a company in transformation to explore all options and to engage a variety of outside advisers, including financial and legal advisers. Jones Day is one of a number of advisers that Kodak is working with in that regard."

Kodak also proclaimed that it is "committed to meeting all of its obligations," and the company indicated on Monday that it had made the scheduled Oct. 1 interest payment of $14 million on its $400 million of 7% convertible notes due 2017.

The latter notes, which had swooned to 26 bid last Friday, climbed to 34 bid by Wednesday and hit 40 on Thursday.

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