Ceridian rejigs mega-deal, Melrose sets talk; good stats little help to builders; funds lose $34 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 25 - Ceridian Corp. restructured its upcoming $1.3 billion two-part bond offering, high yield syndicate sources said Thursday, and also set price talk on the issue.

Those sources also heard talk emerge on Melrose Resources plc's pending eight-year euro-denominated offering.

In the secondary market, bonds of homebuilders such as KB Home, Hovnanian Enterprises Inc. and Beazer Homes USA Inc. were seen having gotten little boost from the unexpected 4.8% gain in new-home sales seen in September - probably because that positive development was tempered by the news that August's figure was revised sharply downward to its lowest level in years.

And the mortgage industry problems that have helped to depress home sales were spooking investors ahead of Friday's scheduled release of third-quarter earnings results from the biggest U.S. mortgage lender, Countrywide Financial Corp., whose bonds were hammered down several points. Sector peer Residential Capital Corp.'s bonds were likewise seen lower.

A senior high yield syndicate official marked the broad high yield market ¼ to ½ point lower.

$34 million outflow first in five weeks

And as trading wound down for the session, market participants familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $33.6 million more left the weekly reporting funds than came into them.

It was the first outflow after four consecutive weeks of inflows totaling $852.4 million, including the $139.6 million cash infusion seen in the previous week, ended Oct. 17.

Those four inflows followed a lengthy string of outflows which had begun around mid-year, completely wiping out the roughly $1.6 billion cumulative inflow which had built up over the first half of the year and plunging the year-to-date fund flow numbers deeply into the red.

Even with those four weeks of inflows, that 2007 cumulative total remains decidedly on the downside, at $1.277 billion, up from the prior week's $1.243 billion.

However the funds which report to AMG on a monthly basis are squarely in the black, having seen $5.024 billion of inflows thus far in 2007.

Hence the year-to-date aggregate flows, which tally both the weekly and monthly reporting funds, also remain firmly in the black at $3.747 billion.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Ceridian structure

No issues were priced during the primary market session.

However news surfaced on the Ceridian Corp./Merger Foundation Sub Inc. $1.3 billion two-part notes offer, which is expected to price on Friday.

Ceridian set price talk for a restructured $1.3 billion two-part offering of eight-year senior notes (Caa2/CCC+).

The Minneapolis-based management services provider's cash-pay notes are expected to yield 11% to 11¼%.

The toggle notes, meanwhile, are expected to come 100 basis points behind the cash-pay notes, and to feature a 75 basis points PIK coupon step-up.

Books close Friday at 10 a.m. ET. The notes are expected to price Friday afternoon.

Deutsche Bank Securities, Credit Suisse and Banc of America Securities LLC are joint bookrunners.

The amount of notes in the market was upsized to $1.3 billion from the $1 billion size announced on Monday. However a $300 million tranche of senior subordinated notes was not included in the Monday announcement.

On Thursday an informed source said that the contemplated $300 million senior subordinated notes tranche had been withdrawn, with that amount of proceeds moved into the senior notes tranches.

Overall the bond financing initially contemplated for the Ceridian LBO has been downsized to $1.3 billion from $1.4 billion, with $100 million shifted to the bank loan market.

Melrose price talk

Melrose Resources Plc set price talk for its €250 million offering of eight-year senior subordinated notes (CCC+) at 10% to 10¼%.

The deal from the U.K.-based oil and gas exploration and development company, which is being led by Merrill Lynch, is expected to price early next week.

If so, it will be the first issue of high-yield bonds from a European issuer to be placed since the mid-summer sell-off in the international credit markets.

Proceeds will be used to refinance debt and provide working capital for the company's projected exploration and development program.

TXU: the biggest deal

Just after 10 a.m. ET on Thursday, a sell-sider marked the CDX High Yield 9 at 98 7/16 bid, and remarked that it was "flat-ish."

"The primary market has been quiet," the source commented.

The official had chalked up Wednesday's TXU Corp. $7.5 billion three part transaction as the biggest high-yield deal ever from a single corporate entity, even though there were actually two separate issuers borrowing the money.

To recap, Texas Competitive Energy Holdings Co. LLC (TCEH) priced an upsized $3 billion issue of eight-year senior cash-pay notes (B3/CCC) at par to yield 10¼%.

Meanwhile Energy Future Holdings (EFH) priced a $2 billion issue of 10-year senior cash-pay notes at par to yield 10 7/8% and a $2.5 billion tranche of 11¼% 10-year senior toggle notes at 97.815 to yield 11 5/8%.

On Thursday morning the official said that the TXU notes were holding in, and noted that TXU surpasses the previous record holder, Freeport McMoRan Copper & Gold Inc., which placed $6 billion of high yield senior notes in mid-March this year.

Sources roundabout the high yield market have remarked that the massive TXU deal went well, but warned that the Texas utility's LBO deal is a poor indicator of the primary market's present health.

In part that's because a big utility is relatively shielded from the vagaries of the U.S. economy.

By contrast sources are pointing to a deal now in the market from Guitar Center, Inc.

The Westlake Village, Calif., musical instruments retailer is in the market with a $750 million two-part offering: $375 million of eight-year senior cash-pay notes (Caa1/CCC) and $375 million of eight-year senior PIK notes (Caa2/CCC).

It is one of the hung LBO deals, and is being led by JP Morgan.

In contrast to the utility sector, sources say, the retail sector has plenty of exposure to a swooping U.S. economy, say these sources.

Builders unmoved by September sales boost

Back among the established issues, the unexpected news out of Washington that new-home sales shot up solidly in September was seen giving little support to bonds of high-yield homebuilders, even though it did give the companies' stock prices a lift.

KB Home's actively traded 6¼% senior notes due 2015 were seen hovering just under 88 bid for most of the day, not much changed from Wednesday's close at 88.25, although a market source saw several late trades around the 89 level. The Los Angeles-based builder's 8 5/8% subordinated notes due 2008, after briefly rising, fell back to around the 98 level, down slightly more than 2 points on the session

Red Bank, N.J.-based builder Hovnanian's issues were seen not much traded overall. Its 8 7/8% subordinated notes due 2012, which had finished Wednesday's session just above 75 bid, opened 2 points lower and then bottomed in the mid-72 range before coming back up from that floor to around 74.5. The company's 6¼% senior notes due 2016 were essentially unchanged at 77.

A market source said Atlanta-based Beazer's 8 5/8% notes due 2011 clung to the same 81 level at which they had finished Wednesday.

At another desk, a trader saw the Beazer bonds unchanged at 79 bid, 81 offered.

He also saw Tousa Inc's bonds continuing to fall, with the 8¼% senior notes due 2011 and the 9% seniors due 2010 dropping to 58.5 bid, 60 offered from previous levels around 61 bid, 62 offered. Among the problem-plagued Hollywood, Fla.-based builder's junior bonds, the 10 3/8% notes due 2012 lost a point to 14.5 bid, 15.5 offered. Its 7½% notes due 2011 were down a point at 15 bid, 16 offered, while its 2015 71/2s lost 1½ points to 123.5 bid, 14.5 offered.

Another trader, looking over the sector names, dismissed the impact of the favorable government numbers.

"The homebuilders were softer," he said, noting that "with so much bad news in that sector, one good number isn't going to push [the sector into better territory] that much."

The bonds were little moved even though the Commerce Department reported that during September, new-home sales rose 4.8% to a 770,000-unit annual pace. That news caught Wall Street by surprise, with most analysts having predicted that the figure would show between a 2.5% and 3% decline from August's levels.

However, the nominally good news was tempered by the fact that the August sales rate was revised downward to just 735,000 units from the 795,000 annual unit rate originally reported. The revised sales pace was the slowest in 11 years - a sign of the continued problems in the building industry amid tightened credit conditions in the wake of the subprime lending debacle earlier in the year, as well as weak consumer confidence.

The new-home sales data follows Wednesday's announcement by the National Association of Realtors that sales of existing homes fell 8% in September - the most since the real estate industry organization began keeping records consolidating sales of houses and condominium units in 1999. The NAR also said that median existing-home prices, the point at which half the homes sold for more and half for less, fell 4.2% from year-ago levels in September to $211,700 - the largest drop in nearly a year, reflecting the deepening problems in the troubled housing market.

Mortgage names off

With housing in the dumps, can the mortgage lenders be much further behind? Apparently not.

Countrywide Financial's bonds fell and its debt-protection costs spiked upward on investor unease about Friday's scheduled report of third-quarter results by the Calabasas, Calif.-based mortgage lender, the nation's largest.

Analysts are looking for anywhere from $700 million of red ink to two, or even three times that amount.

Investor angst over what is expected to be a bad loss caused Countrywide's 6¼% subordinated notes due 2016 - nominally split-rated at Ba2/BBB+/BBB but trading like distressed junk bonds - to fall sharply. They dropped to a 76-77 context from prior levels at 82.5.

The cost of hedging against a default in the paper via credit default swaps contracts meantime widened out to a yawning 489 bps from 417 bps the day before.

Sector peer Residential Capital Corp.'s 7 7/8% notes due 2015 were down 2½ points at 73.

Overall, a trader said, "it was a lackluster day. There's a lot of cash just sitting ion the sidelines - but people are just watching earnings, to see what's coming next."

Among market barometers, the KDP High Yield Daily Index was up 0.2 at 79.78, its yield narrowing 1 basis point to 8.01%.

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