Northwest, Von Hoffman, Perry Ellis price deals; big junk fund inflow fails to budge secondary

By Paul Deckelman and Paul A. Harris

New York, March 15 - A quickly shopped $300 million offering for Northwest Airlines took flight on Friday, traders said, as did another drive-by deal, for fashion house Perry Ellis. Also pricing was a scheduled forward calendar deal for Von Hoffman Corp., as new deals continued to come down the chute to absorb some of the high yield market's ample liquidity.

Yet another indication of just how much cash is floating around waiting to go to work was seen Friday, with the report that high yield mutual funds saw a new inflow in the latest reporting week of $1.228 billion, the biggest in nearly four years. But the news didn't do much to float anyone's boat in the secondary market, traders lamented.

But in the primary it was another matter: as activity got underway Friday punctuation mark of choice was the exclamation point.

"HUGE INFLOW!!!!!" read the subject line of the first e-mail message to reach the Prospect News primary market desk, Friday morning.

The sender, a sell-side source, was making reference to the $1.228 billion of mutual fund money that was reported by AMG Data Services to have come into high yield during the week that ended March 13.

Another sell-side official put that number into historical perspective.

"Since we began recording data in January 1996 this week's inflow ranks as second-largest," the official commented, identifying the $1.341 billion inflow reported on May 7, 1997, as the biggest of that time frame.

This official also stipulated that the inflow which preceded this week's - the $1.109 billion inflow for the week ending March 6, 2002 - ranks six on that list.

Ed Schriver, portfolio manager of the ING Pilgrim High Yield Fund, told Prospect News that the inflow reflects a perception on the part of investors that high yield is a worthwhile place to be, owing to several factors.

"A lot of what comes into high yield mutual funds tends to be a retail product," Schriver said, adding that those retail customer have perhaps been burned in the equity market and have seen that Treasuries and investment grade paper do not presently represent much in the way of yield.

"I think the coupon on these high yield funds looks kind of attractive to the retail investor," Schriver said.

As with other buy-side sources who have recently spoken with Prospect News, Schriver said that some of the paper in high yield is, at present, trading "rich."

"A lot of the funds are having a hard time," he commented. "You can't invest the money at the yield that's on your books because the new issue market's awfully rich.

"All of the sudden everybody has cash," he added.

Specifying that his fund is not a big player on the new issue market, Schriver nevertheless anticipates a considerable volume of new deals.

"I think that new issuance will probably stay at a fairly high level, and that spreads probably won't tighten up much more than they already have, because they are tight," he said.

Five transactions amounting to $1.046 billion took place Friday in the primary market.

Northwest Airlines made an unannounced landing with a drive-by deal of $300 million five-year senior notes (B2/B+) which priced at 99.515 to yield an even 10%. Morgan Stanley ran the books on Northwest's new off-the-shelf bullets.

Investors showed up in sufficient numbers for $300 million of new paper from Rotech Healthcare, Inc. The Orlando, Fla.-based respiratory therapy provider's new 10-year senior subordinated notes (B2/B+) priced at par, to yield 9½%. UBS Warburg and Goldman Sachs & Co. were joint books on the deal that a syndicate source said priced at the tight end of 9½%-9¾% talk, and was well-subscribed.

Rotech's new bonds are part of its exit financing from Chapter 11.

The ink also began drying, Friday, on St. Louis circular printer Von Hoffman Corp.'s upsized $215 million of seven-year senior notes (B2/B) which priced at par to yield 10¼% via Credit Suisse First Boston. The deal had originally been set at $200 million.

Also on Friday, to finance its acquisition of assets from swim suit-maker Jantzen, Inc., Perry Ellis International revealed a drive-by deal for $55 million seven-year senior secured notes. They priced at a discounted level of 97.525 to yield 10% via bookrunner Wachovia Securities.

And with a considerable number of interested eyes watching from around the market, the wheel stopped spinning Friday on Resorts International Hotel & Casino's seven-year first mortgage notes. The deal priced at 97.686 to yield 12%, with proceeds totaling $175.8 million. Merrill Lynch ran the books.

The sum of Friday's transactions brought the year-to-date total of new issuance in the high yield primary market to within a hair of $15 billion. The precise figure is $14.990 billion.

The Ides of March also brought talk that two deals, New World Restaurant Group and Shop At Home, have been postponed. Word of the postponements began circulating late in Friday's session, and Prospect News was unable to verify those actions with the syndicates.

Finally, price talk of a yield in the 10½% area was heard Friday on Enodis plc's £100 million of 10-year senior notes which are expected to price Tuesday via Credit Suisse First Boston.

In the secondary sphere, "there's a lot of hype over the AMG number," a trader said, "but I didn't really see it translate into a rally in the secondary. It was more of a bidding-up factor for the new-issue market. That seems to be where the emphasis and the focus of activity is right now."

Another trader, noting the generally slow pace of dealings in the secondary on Friday, agreed that the AMG number had little impact there.

"There's already too much cash out there, and nowhere to put it to work," he said. "You can combine the AMG number with the fact that today was a vary large coupon payment day (for bondholders) and add to that the cash that has been coming into the market and not put to work over the past few weeks. There's not enough liquidity in the market to allow all of that cash to be put to work. It's unfortunate, but unless the deal calendar heats up quickly, there are going to be lot of days like this."

The trader explained that "most of the better-quality paper is already trading at very tight spreads and yields, and there's no compelling stories out there. Everyone's chasing the same order, so trading is very difficult right now. There couldn't be a reaction to AMG because for the most part, there's nothing to buy." He said that while you might have $1 billion of new issues coming in the near term, "they'll get bid up to levels that doesn't make them worth buying in the secondary market."

Magnum Hunter Resources Inc.'s $300 million offering of 10-year senior notes, for instance, priced at par on Wednesday to yield 9.60%, inside of pre-deal official price talk in the 9.625-9.875% range, "which I thought was a little on the tight side," he said. The offering was actually upsized from the originally planned $250 million to meet some of the intense demand, but it actually could have been upsized to several times the final deal amount, since, the trader noted, "the book was huge, over $2 billion." With that much money chasing a relatively few bonds, he noted, the bonds have moved up to trade above 103 bid, and "looking at it on a pure yield basis, it's pretty crazy where these things are," with levels too tight to Treasuries for many high yield investors.

He called the rise in the energy company's bonds "a pretty good example of what's going on in the new issues when one comes that meets with any demand, so there's just nothing out there. "

The trader saw little or nothing going on Friday with Kmart Corp. bonds, which had risen sharply at midweek to around the 49-50 bid area from its previous levels around 43-44 on speculation that French-based international supermarket giant Carrefour SA - the world's second-largest retailer after Kmart's main rival, Wal-Mart Stores Inc. - might be mulling making an offer for Kmart, which is currently restructuring under bankruptcy court protection. Even when Carrefour said Thursday that it has no plans to enter the U.S. retailing market, the bonds pulled back only about a point or so at the most, much to the surprise of traders who fully expected bloodbath after such a run-up based, apparently, on nothing.

But on Friday as well, Kmart was quiet, continuing to hold in the high 40s. "I saw bonds trading between 48 and 50 all day, so they haven't settled back from where they were. And that rumor is pretty much what drove them up (at mid-week). Beyond that rumor, that was it," he declared, adding that "there's real interest in some of the secured paper," which is backed by lease revenue from Kmart stores as collateral and which trades at various higher levels than the unsecured notes.

Elsewhere, a market observer noted: "It was very quiet; I tried to call some people around 3 o'clock (ET) and was told that everyone was gone. People seemed to be leaving early at a lot of places, either to go on vacations, or go to Las Vegas, or to the basketball games," referring to the annual attack of "March Madness" that descends on much of Wall Street as the college basketball championship playoffs get underway.

He saw auto parts maker Dana Corp.'s bonds tighten overnight, its 9% notes due 2011 firming a point to 97.5 bid, while its recently priced 10 1/8% notes due 2010 moved up to 103.25 from prior levels at 102.25.

On the downside, Telewest plc's bonds were off about three or four points on the session, the London-based communications operator's 9 5/8% notes due 2006 dipping to 49.50. The company was downgraded by Moody's Investors Service which warned that without a "meaningful injection" of equity the company would likely have to restructure its balance sheet.

Doman Industries Ltd.'s 8¾% notes due 2004 were heard quoted down eight or nine points, to around the 14 bid level, after the Duncan, B.C.-based lumber and pulp producer said it did not make the semi-annual interest payment on the $388 million of 8¾% notes, citing "industry, financial and market circumstances." The company has 30 days in which to make the payment.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.