FLEX flexes muscle, bounces back; funds see $153 million inflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 25- Flextronics International Ltd. - whose bonds and shares retreated on Wednesday after the electronics manufacturer was socked with a nearly $1 billion legal judgment arising out of a $2 million breach-of-contract dispute - rebounded Thursday, as market participants doubted whether the huge punitive damages portion of the award would remain intact and the company otherwise presented an upbeat assessment to analysts.

In the primary market, no new deals were heard to have priced by the close, but two did join the forward calendar - Phibro Animal Health Corp. and Universal Hospital Services Inc. Both plan to eliminate some existing bond debt using the proceeds of their respective deals (see Tenders and Redemptions elsewhere in this issue for full details).

Late in the day, market participants familiar with the weekly high yield mutual fund flow figures compiled by AMG Data Services Corp. of Arcata, Calif., told Prospect News that in the week ended Wednesday, $152.9 million more came into the junk funds than left them.

That broke a two week skid in which total net outflow from the funds was approximately $565 million, according to a Prospect News analysis of the AMG figures. That included the $79 million of outflows seen in the week ended Sept. 17.

The flow of money into and out of the junk bond funds is regarded by many market participants as a key barometer of overall junk market liquidity trends. The weekly numbers reflect only those funds which report on a weekly basis, and exclude distributions.

Counting the latest week, inflows have now been seen in 23 of the 38 weeks since the beginning of the year; according to the Prospect News analysis of the data, the year-to-date net inflow total, while still down from the peak level of $17.312 billion seen in the week ended July 16, fattened a bit in the latest week to approximately $16.402 billion from $16.249 billion the week before.

But for the third consecutive Thursday sources advised Prospect News that the junk market's current strength, as measured by the flows of cash in and out reported by AMG Data Services, is presently difficult to read.

The reason, said one sell-side official speaking after the session's close, is that recent fund flow numbers that have not been very persuasive, one way or another - the most recent one being a textbook example: the inflow of $153 million.

"Nobody can see anything with the numbers we've gotten during the past few weeks," said the sell-sider.

"If you look at the late-July/early-August time frame there were a couple of big outflows. That's when the Treasury market started going down. The Treasury market peaked around June, when the 10-year note touched a four-decade low.

"When the Treasury market started ticking up you saw money start flowing out of high yield.

"But there's no direction right now."

However, added this sell-side source, flat fund flow numbers may be altogether beside the point.

"You just saw a triple-C deal get done," noted the official, with reference to MetroPCS, Inc.'s $150 million eight-year deal (B3/CCC+) that priced Wednesday at par to yield 10¾%, dead on the 10¾% area price talk.

"That makes the primary market at least appear to be going strong, right now. That tells you that there's a lot of money in the market."

As if to indemnify this source's color, 10¾% area price talk came out Thursday on Level 3 Communications, Inc.'s upcoming $500 million of eight-year senior notes, expected to price Friday via Citigroup and Credit Suisse First Boston.

The Level 3 deal, which was rated CCC- by Standard & Poor's on Wednesday, was handed a Caa2 rating on Thursday from Moody's.

Price talk was also heard during the session on ASPropulsion Capital BV's eurobond deal to help fund the LBO of the FiatAvio SpA aviation engine business by The Carlyle Group. Talk is 9¾%-10% on the €200 million of 10-year senior notes (B2), which are expected to price late Friday or early Monday via Lehman Brothers, Citigroup and Goldman Sachs.

A market source told Prospect News that the deal is doing a Europe-only roadshow.

However the other eurobond offering presently in the market, EMI Group plc's split-rated €300 million of 10-year senior notes (Ba1/BBB-), is reportedly being presented to investors on both sides of the Atlantic.

"The book is building," confided one source close to the EMI deal. "It's very well oversubscribed already.

"The books will close in Europe at the close of business Friday and the roadshow will be underway in the U.S. Friday in Boston and New York."

The EMI deal, via bookrunners Royal Bank of Scotland, Barclays Capital and Citigroup, is expected to price on Monday.

And the split ratings notwithstanding, the source told Prospect News that the lion's share of focus on the offering has come from the junk accounts.

"There is good crossover demand," said the source. "There will be some people in the transaction who you more typically expect to see in investment grade deals.

"But it's fair to say that most of the interest is coming from the traditional high-yield market."

Aside from the price talk and ratings, two new deals entered the new issue pipeline Thursday.

A roadshow for Universal Hospital Services' $250 million of eight-year non-call-four senior notes is set to get underway early in the week of Sept. 29, with pricing expected during the Oct. 6 week.

Goldman Sachs and Credit Suisse First Boston are joint bookrunners on the deal from the Bloomington, Minn.-based firm, which is a provider of medical equipment outsourcing and services to the health care industry.

Meanwhile the roadshow starts Friday for Phibro Animal Health Corp.'s offering of $150 million four-year senior secured notes (B2). The Jefferies & Co.-led deal is expected to price late in the week of Oct. 6.

The bonds will be sold as units that will be comprised of debt from two issuing entities: Phibro Animal Health Corp. will sell $85 million and Phillipps Brothers Netherlands III BV will sell $20 million.

The medical and nutritional animal feed additives company, formerly Philipp Brothers Chemicals, Inc., is based in Fort Lee, N.J.

Finally on Thursday, Rayovac Corp. upsized its 10-year senior subordinated notes offering (B3/B-) to $350 million from $300 million.

Price talk remains at 8½%-8¾%, according to an informed source, who added that the Banc of America Securities-led offering, which had been expected to price Thursday, is now Friday's business.

The new WCI Communities Inc. 7 7/8% senior subordinated notes due 2013, which had priced at par on Wednesday, were seen little moved in their initial secondary trading, quoted at par bid, 100.625 offered.

Back among the more established issues, Flextronics - whose bonds had been quoted down around two points on Wednesday and whose shares had been halted with a loss on news that the Singapore-based electronics manufacturer had been ordered by a California jury to pay medical devices maker Beckman Coulter Inc. $934 million in a breach-of- contract suit - was making a comeback Thursday.

"I wonder if it's really going to be that number or if it's going to be a lot lighter," said a trader, who quoted its 6½% notes due 2013 - which had fallen to bid levels around 96 Wednesday from prior levels in the 98.5-99.5 area - as having opened Thursday at 96.5, and then having firmed to 98 bid, 99 offered by day's end. "So they were maybe half a point weaker, at most" than their levels earlier in the week and actually higher on the session.

At another desk, the 61/2s were likewise seen up, about a point-and-a-half, at 97.5.

A trader said that he had seen the bonds opening at 97 bid, 98 offered and then having moved up later to 98 bid, 99 offered.

Flextronics' New York Stock Exchange-traded shares - which on Wednesday had been halted after having fallen 82 cents (5.18%), continued to slide, down $1.10 (7.33%) to close at $13.90 on volume of 48.7 million shares, around five times the norm.

"Equity investors' anxieties aside, it's a pretty strong company," the first trader said. "They have a lot of free cash flow and they seem to be OK. This is not something that would sink the ship, is the impression that I got."

The company said that it would challenge the huge $931 million punitive damages award - it called the award "unlawful" - saying that it expected to only end up paying around $10 million after all is said and done.

Standard & Poor's however, was not so sure - it revised the company's outlook to negative, saying the final size of the award following a likely appeal was "unclear."

The trader noted further that someone on the jury had commented "we wanted to teach these big companies a lesson."

"With all of the corporate news swirling around," he said, "and the lack of corporate responsibility, the mom-and-pops on Main Street don't trust Wall Street, and I think when you get a jury pool together of Main Street versus Wall Street - these big companies - Main Street will have no problems hittin' 'em - big time."

Apart from such legal matters, Flextronics - which had been scheduled to meet with analysts and investors even before news of the jury verdict came down - asserted it is gaining market share and some of its businesses are now better than it had expected.

Also in the technology sphere, Murray Hill, N.J. -based telecommunications equipment maker Lucent Technologies Inc., said it had been given CDMA network expansion contracts by China Unicom that could be worth more than $230 million to the company.

Lucent's benchmark 7¼% notes due 2006 were quoted bid around the 96.375-96.625 area, up about a quarter point from Wednesday levels.

A trader quoted the company's 5½% notes due 2008 at 85 bid, 86 offered and its 6½% bonds due 2028 and 6.45% bonds due 2029 both at 69.25 bid, 70 offered.

He saw Canadian telecom equipment maker Nortel Networks Corp.'s bellwether 6 1/8% notes due 2006 at 100.5 bid, 101 offered, its 7 7.8% bonds due 2026 at 95 bid, 97 offered, and its 6 7/8% bonds due 2023 at 91 bid.93 offered. The paper frequently trades more or less in tandem with that of its U.S. rival.

Elsewhere, Rite Aid Corp. announced some positive second quarter numbers, which gave a boost to its bonds. The Camp Hill, Pa.-based drugstore chain operator's 7 1/8% notes due 2007 were a point better at 100.5 bid, 101 offered, while its 7 5/8% notes due 2005 hung in around their recent levels at 101.5 bid, 102.5 offered.

Rite Aid said that it lost $10.6 million (four cents per share) for the most recent quarter - in line with analysts' expectations and well below the year-ago losses of $105.3 million (21 cents per share).

Rite Aid also raised its estimate for total net earnings for the 2004 fiscal year that ends in February from its previous guidance that they would come in somewhere between break-even and a $63 million loss to somewhere between $4 million of profits and a possible $27 million loss.

And Levi Strauss & Co. said it would close its North American manufacturing and finishing plants, which will lead to the loss of nearly 2,000 jobs total in the U.S. and Canada.

The San Francisco-based apparel maker's bonds "initially weakened," a trader said, "but then they began to catch some bids" to firm off their earlier lows and finish on average down between half a point and 11/2.

Levi's 11 5/8% notes due 2008 closed at 87 bid, 88 offered, while its 12¼% notes due 2012 were at 84.25 bid, 85.25 offered, and its 7% notes due 2006 at 81 bid, 82 offered.

Charter Communications Holdings LLC's 7 3/8% notes due 2012 were down around a point at 82.5 bid, 83 offered. Its 7 7/8% notes due 2012 ended at 86 bid.

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