XTO achieves yield of just 6¼% on $400 million deal; airlines, El Paso gain; $555 million inflow

By Paul A. Harris

St. Louis, April 17 - The high-yield market plowed its way toward the Easter break with one new deal pricing during Thursday's shortened session.

As the dust settled on XTO Energy, Inc.'s $400 million offering, however, sources had to admit that although they were rated Ba2/BB the 6¼% yield printed on the new 10-year senior notes was not really a "high" yield after all. In 2003's tight-pricing bond derby, XTO shot out in front on Thursday.

And one source had XTO's new notes trading as high as 102 after they were freed for trading in the aftermarket.

Late in the day, news emerged of another big inflow into high-yield mutual funds, although rather smaller than the massive cash infusions seen in recent weeks.

Junk bond mutual funds saw $555.2 million of cash come in during the week ended Wednesday, as measured by AMG Data Services Inc. of Arcata, Calif., according to market sources who watch the data. The figure is for funds that report on a weekly basis only and excludes distributions.

That was the eighth consecutive inflow although it was well down from the $1.165 billion recorded the previous week. It brings net inflows for the year to $9.907 billion, according to a Prospect News analysis of the AMG figures.

In the secondary, the bonds of the air carriers were said to be enjoying a tail wind for a change on news that AMR Corp.'s flight attendants became the final union to approve labor concessions, keeping that airline out of bankruptcy for the present.

El Paso Corp. bonds were seen on a definite upward trajectory, perhaps on news of its bank refinancing and an asset sale.

However one trader wondered, during a conversation with Prospect News late in Thursday's shortened session, whether the buoyancy in the bonds of the airlines and of El Paso might be attributable to short sellers covering their positions.

In the primary most of the talk centered on XTO. The natural gas producer from Fort Worth, Texas had already expanded the size of its offering to $400 million from $300 million on Tuesday. On Thursday, the 10-year senior notes (Ba2/BB) priced at par to yield 6¼%, at the low end of the 6 3/8% area price talk.

Lehman Brothers and JP Morgan ran the books on the "heavily oversubscribed" transaction, which according to sources, saw play from high-grade accounts as well as junk investors.

"It got phenomenal execution," commented one sell-side source who did not participate in the transaction. "A 6¼% yield is unbelievable for a Ba2/BB rated name. The company is on positive outlook from both rating agencies. And they stayed at $400 million, instead of upsizing, which I think added to the demand."

One trader said that after they were freed for trading the new XTO notes went as high as 102 in the aftermarket, then settled to 101.5/101.75.

"It was a very well received deal," commented the trader. "But you can barely call 6¼% a 'high yield,' I might add."

Another sell-side source disclosed that at one point the notes got high enough to have a sub-6% yield before settling to around 101.5 to 101.625.

With their 6 ¼% yield the new XTO notes take a commanding lead over other notably low yielding transactions by U.S. issuers in 2003, including D.R. Horton Inc. which priced $200 million of new senior notes on April 11 to yield 6 7/8% and iStar Financial, Inc. which priced a $35 million add-on on April 7 to yield 6.339%. Peabody Energy Corp. also achieved 6 7/8% with its $650 million of senior notes on March 14. However XTO did not match Korea First Bank, which remains a stand-out with a yield of just 5.783% on its $375 million of subordinated notes priced March 5.

Also during Friday's primary market session news was heard of a roadshow beginning during the week of April 28 for CMA CGM SA. The French container shipping company will be marketing a €150 million offering of seven-year non-call-four notes (BB-). Citigroup is running the books on the Rule 144A/Regulation S deal.

Meanwhile Thursday's secondary market saw a generally quiet session, sources said.

Activity trailed off early as the Bond Market Association recommended a 2.00 p.m. ET finish Thursday ahead of the full close Friday for the Good Friday holiday.

"It's slowly trading up on light volumes," commented one source noting that recently priced new issues appeared firmer.

For example, the source pointed to Equistar Chemicals, LP's new senior notes due May 2011 (B1/BB/B). They priced Wednesday at par to yield 10 5/8%.

Earlier in the session another source had quoted them at 102.375 bid, 102.625 offered.

Meanwhile Rite Aid Corp.'s new 8 1/8% senior secured notes due 2010, which priced Tuesday at 98.688, were seen Thursday as having firmed to 99.25 bid, 100.25 offered.

Allied Waste Industries, Inc.'s 7 7/8% senior notes of 2013, which priced on April 4 at par, were seen Thursday at 101.5 bid, 102 offered. And Tesoro Petroleum Corp.'s 8% senior secured notes due April 2008, which priced April 7 at 98.994, were quoted at par bid, 101 offered.

However the big news zooming around Thursday's secondary market was the notable ascent of airline paper, which sources attributed to news of concessions made to AMR Corp. by its flight attendants, and also to news that U.S. air carriers will get $2.3 billion of new government aid by May 16 as part of the $79 billion measure to pay the costs of the Iraq war that President George W. Bush signed into law last Wednesday.

"The airlines are up," said a trader, "I guess because the president signed the aid package, which is $3 billion on an industry that is losing $13 billion a year.

"It doesn't seem like much but still I guess it's something."

AMR's 9% notes of 2012 were seen ending at 45 bid, 47 offered, having closed the previous session at 38 bid, 40 offered, the trader said.

"They were up about seven points from Wednesday, and up about 15 points from a week ago," the source commented.

"Other airlines are up," the trader added.

He saw Delta Airlines' 7.70s of 2005 going home at 68 bid, 69 offered, up from 64 bid, 65 offered Wednesday.

Northwest Airlines' 8 7/8s of 2006 finished at 57.5 bid, 58.5 offered, up from 54 bid, 55 offered.

"I really don't understand the AMR thing," commented the source on the firming of that company's bonds. "United did the same thing. They got labor concessions and they subsequently filed Chapter 11 anyway.

"The reports that have come out from the airlines - Continental, Delta, Northwest - don't say they're seeing any bright lights here.

"I don't have any compelling reason why they would be running so much. Maybe it's some short covering. It's been pretty quiet out here. Maybe you've got some retail nibblers taking a shot."

The trader also expressed a modicum of incredulity at the firmness seen in the bonds of El Paso Corp.

The Houston energy company announced that it had reached a $3.8 billion financing deal with its banks Wednesday including a new $3 billion secured revolver and said it would sell its interest in a New Jersey power plant to the Goldman Sachs Group for $456 million - both seen as positive moves in the company's endeavor to trim debt.

"El Paso paper was moving up, today," said the trader.

He saw El Paso's 7 7/8s of 2012 at 87.5 bid, 88.5 offered, five points better than 82.5 bid, 83.5 offered earlier in the week.

"They announced they were selling some assets, and it's all going according to plan. But I'm not sure that all this stuff reflects excitement among investors. You might have a moderate number of investors who are then forcing anyone who shorted these securities to go out and cover them. I'm not so sure we're seeing the rebirth of El Paso here.

"In general the market has a moderate amount of short-squeezing going on."

This source also saw some stability in the securities of Levi Strauss & Co., which took a tumble Tuesday on news that the privately-held clothing giant from San Francisco is being sued by two of its former tax officials who allege they were fired for not going along with what they described as shady accounting tactics. Levi Strauss denied the allegations and said it would vigorously contest them.

"It's pretty quiet today," the trader said. "It has been very volatile over the last couple of sessions. It looks like it's in a stable mode, although not regrouping at all."

He saw Levi's 11 5/8s at 82.5 bid, 83.5 offered, which he described as "down a little" from Wednesday.

Another trader had both the Levis 11 5/8s and the 121/4s "a little weaker." He saw them at 80 bid, 82 offered, maybe 80.5 bid, 82.5 offered.

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