Blockbuster nosedives on earnings warning; Energy Transfer postponed; funds up $554 million

By Paul Deckelman and Paul A. Harris

New York, Jan. 21 - Blockbuster Inc.'s bonds got blasted on Thursday in heavy dealings after the troubled Dallas-based movie-rental chain projected a 2009 net loss far larger than what Wall Street had been expecting.

Another downsider was NewPage Corp., whose bonds fell badly for a third straight session following Tuesday's surprise announcement that its president and chief executive officer had resigned, effective immediately.

Secondary dealings generally were lower, as were market indexes, continuing a week-long trend and reflecting, traders said, about equal parts of Junkbondland taking a breather after an exciting and lucrative first two weeks of the year, as well as Thursday's big stock market retreat in the wake of president Barack Obama's vow of tougher treatment for the nation's banks.

In the primary market, Energy Transfer Equity LP - which only on Wednesday had announced plans to sell some $1.75 billion of senior notes in two tranches, aiming to take out all of its term loan debt and interest rate swap agreements - announced a change of heart Thursday, saying it would not be proceeding with the big bond deal, citing market conditions.

However, other prospective offerings moved forward. Price talk was heard on Equinox Holdings, Inc.'s $400 million offering of six-year senior secured notes, which is seen as a candidate for possible pricing on Friday after the order books close.

Price talk also emerged on deals from several overseas issuers, including MU Finance plc and Kerling plc, which are both expected to price Friday, as well as from Italy-based SEAT Pagine Gialle SpA.

Another overseas issuer, Chinese property company Evergrande Real Estate Group Ltd., successfully brought an upsized $750 million offering of five-year senior secured notes to market.

Back among domestic credits, Chicago-based metals company Ryerson Holdings Corp. announced plans for a $200 million offering of senior discount notes, while Regent Seven Seas Cruises slated a $200 million tranche of senior secured seven-year notes.

Junk funds up by $554 million

As trading was winding down for the session, market participants familiar with the high yield mutual fund-flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday some $554 million more came into the weekly-reporting funds than left them, following the $734 million cash infusion which had seen in the previous week, ended Wednesday, Jan. 13 -- a sign of continued investor confidence in Junkbondland.

That brought the year-to-date inflow to $1.576 billion, according to a Prospect News analysis of the AMG figures - up from the previous week's $1.022 billion -- continuing the brisk pace of cash infusions seen in 2009, when they had totaled a record $20.56 billion.

Inflows have now been seen in all three weeks of the new year so far; in 2009, 47 weekly inflows were recorded, against just five isolated outflows, according to the Prospect News analysis.

The latest week's inflow was the 22nd consecutive weekly advance, a winning streak that dates all the way back to mid-August, after the last outflow of 2009 had been seen - a lonely $89.9 million outflow recorded in the week ended Aug. 19. Since then, inflows have totaled $8.123 billion, according to the analysis.

Those kind of sustained inflows - which also included the over $12 billion which came into a separate category of funds that report on a monthly basis, rather than weekly, swelling 2009's aggregate mutual fund inflow to a record $32 billion plus - made it possible for the junk market to come roaring back last year from 2008's staggering 25%-plus loss and sharply reduced primary activity totals, and the surge so far shows no sign of stopping, even though the calendar page has turned. As of the close on Wednesday, the authoritative Merrill Lynch High Yield Master II index showed a year-to-date return of 2.182% so far - off a little from the 2010 peak level to that point of 2.292%, seen the previous Thursday, but still considered an impressive gain. In 2009, the index had notched a record 57.512% advance, as high yield handily beat virtually every other major investment asset class.

The heavy inflows have also fueled the primary market's revival from the anemic levels seen in 2008, a rebound which is continuing unimpeded. As of the close on Wednesday, there had been $10.725 billion of new dollar-denominated high-yield debt issued in the U.S. market, -- $8.573 billion of it from domestic issuers - running some 528% ahead of the feeble pace of early 2009, while the domestic issuance represented a 590% gain over the 2009 year-to-date levels. Industrialized-country global issuance in all major currencies of $15.108 billion equivalent was a robust 609% ahead of 2009's pace.

In 2009, with ample incoming liquidity fueling its resurrection, the junk bond market by the Dec. 31 year-end close had seen $160.028 billion of new dollar-denominated high yield debt issued in the U.S. market -- $129.202 billion of it from domestic issuers - running some 120.87% ahead of the feeble pace of 2008, while the domestic issuance represented a 115.82% gain over the 2008 levels. 2009 industrialized-country global issuance in all major currencies of $174.902 billion equivalent was 171.05% ahead of 2008's pace.

EPFR sees flows continuing

Another fund-tracking service, EPFR Global of Cambridge, Mass., which uses a different methodology from AMG, saw inflows of $771 million on the week, almost exactly matching the $773 million seen in the previous week.

The inflow for the week ended Wednesday brought the year-to-date EPFR-calculated inflow total up to $1.991 billion, versus the prior week's $1.22 billion. In 2009, it said that some $22.9 billion of inflows had been seen, a record.

While the EPFR numbers generally point in the same direction as AMG's - with an exception to the rule here and there - the exact magnitude of those figures differs since EPFR includes in its calculations some funds domiciled outside of the U.S.

Any and all cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

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 comprise less of the total monies floating around the high yield universe.

Evergrande upsizes

In Thursday's primary market Evergrande Real Estate Group, Ltd. priced an upsized $750 million issue of five-year guaranteed senior secured fixed-rate notes (B1/BB-/BB+) at par to yield 13%.

The yield printed on top of the price talk while the size was increased from an original $500 million minimum.

Bank of America Merrill Lynch, Goldman Sachs & Co. (Asia) and BOC International were joint bookrunners.

The Guangzhou, China-based property company will use the proceeds to repay a structured secured loan, to finance existing and new property projects and for general corporate purposes.

Although ostensibly an Asian emerging markets property play, U.S. high-yield players were tuned into the Evergrande deal.

A busy Friday

Primary market players don't expect much of a breather on Friday, with three, possibly four, deals slated to price.

Equinox Holdings, Inc. talked its $400 million offering of six-year second-lien senior secured notes to yield in the 9¾% area with approximately 1 to 2 points of original issue discount, on Thursday.

The books close at 11:30 a.m. ET on Friday.

Morgan Stanley & Co. and Citadel Securities are joint bookrunners for the debt refinancing.

Europe active

Much of Friday's activity figures to come out of Europe.

England's Kerling plc set price talk for its €785 million offering of seven-year senior secured notes (B3/B-) at 10¾% to 11%, on Thursday.

In addition, the U.K.-based chemical company modified the deal's change of control language and covenants.

The order books close at 8 a.m. ET on Friday. The deal is set to price after that.

Barclays Capital and Bank of America Merrill Lynch are joint bookrunners.

Proceeds will be used to finance the acquisition of Ineos ChlorVinyls, to refinance debt related to the acquisition of Norsk Hydro's polymer business and to refinance Ineos ChlorVinyl's debt.

Italian yellow pages publisher Seat Pagine Gialle SpA set price talk for its €650 million two-part offering of senior secured notes (B+).

A tranche of seven-year fixed-rate notes, which come with 3.5 years of call protection, is talked to yield 10¾% to 11%.

Meanwhile a tranche of seven-year floating-rate notes, which come with two years of call protection, is talked at three-month Euribor plus 725 bps to 750 bps.

The roadshow is expected to continue through the end of the week.

Deutsche Bank, BNP Paribas, JP Morgan and RBS Securities are managing the debt refinancing deal.

Also MU Finance plc, a financing unit of England's professional soccer franchise Manchester United, set price talk for its £500 million equivalent offering of seven-year senior secured notes on Thursday.

The team talked its £300 million tranche at the 9% area, and its $325 million tranche at the 8¾% area. Both tranches are to be priced at to-be-determined discounts.

Pricing is set for the New York market opening on Friday.

JPMorgan, Bank of America Merrill Lynch, Deutsche Bank Securities, Goldman Sachs & Co. and RBS Securities are joint bookrunners for the debt refinancing.

Energy Transfer Equity pulls deal

Energy Transfer Equity, LP postponed its proposed $1.75 billion two-part senior notes offer (Ba2//BB) on Thursday due to recent market conditions over the past several days, according to a press release from the company.

Credit Suisse Securities, Morgan Stanley & Co., Wells Fargo Securities, Bank of America Merrill Lynch and UBS Investment Bank were joint bookrunners.

Proceeds, together with a new $200 million revolving credit facility, were earmarked to take out the partnership's existing $500 million revolver and term loan and to terminate its interest rate swap agreements.

Seven Seas roadshow starts Friday

Meanwhile two smaller deals surfaced on Thursday.

Regent Seven Seas Cruises will start a roadshow on Friday for its $200 million offering of seven-year second-lien senior secured notes.

Marketing wraps up on Jan. 28.

Barclays Capital, HSBC and Deutsche Bank Securities are joint bookrunners for the debt refinancing and general corporate purposes deal.

Ryerson discount notes to fund distribution

Finally, Ryerson Holding Corp. intends to raise $200 million of proceeds with an offering of five-year senior discount notes (expected ratings Caa3/CCC).

A brief roadshow will begin Friday.

The deal is expected to price early next week.

Bank of America Merrill Lynch and UBS Investment Bank are joint bookrunners.

Proceeds will be used to a fund cash distribution to Chicago-based metals company's shareholders.

New Vanguard bonds treading water

When Vanguard Health Systems Inc.'s new 8% notes due 2018 were freed for secondary dealings, a trader saw those bonds - which had priced too late in Wednesday's session for any kind of an aftermarket - at 98¼ bid, 98¾ offered. He said that at one point they had tightened a little to 98½ bid, 98¾ offered, but "the bid never did get above the issue price."

The Nashville, Tenn.-based hospital operator's $950 million issue - downsized a little from the originally announced $1 billion size - priced late Wednesday at 98.555 to yield 8¼%.

Late in the day, the trader said, the bonds had come off their intraday peak level and were back down at the 98¼ bid, 98¾ offered where they had started the day.

A second trader saw the new Vanguard bonds at 98½ bid, 99 offered, while a third saw them "initially up at 99," before they dropped back to 98 bid, 98¼ offered. He had the bonds going out at 98½ bid, 98¾ offered.

Accellent trades excellently

A trader saw Accellent Inc.'s 8 3/8% senior secured notes due 2017 get as good as 100¾ bid, 101 offered, before coming off that zenith to finish out the day at 100¼ bid, 100½ offered. Even so, he said, the Wilmington, Mass.-based medical devices company's new issue had traded well, estimating a nearly 1 point gain from where the $400 million bond offering had priced on Wednesday at 99.349 to yield 8½%.

A trader at another desk quoted the new bonds going out at 100 3/8 bid, 100 7/8 offered.

Newfield does nicely

And Newfield Exploration Co.'s $700 million offering of 6 7/8% senior subordinated notes due 2020 were trading at 99¾ bid, 100 1/8 offered on Thursday, a trader said - about where the bonds, which were upsized from an originally announced $650 million, had gone home on Wednesday after having priced earlier in the session at 99.109 to yield 7%.

A second trader also saw the Houston-based independent oil and gas exploration and production company's new bonds having come off early highs at 101 bid, but still trade up from their issue level, going out at 99¾ bid, 100¼ offered.

Smooth sailing for Teekay, Marquette

Among other recently priced issues, a trader said that Teekay Corp.'s 8½% notes due 2020 were trading at 101¾ bid, 102½ offered - well up from the 99.181 level at which the Hamilton, Bermuda-based ocean tanker fleet operator had priced its $450 million issue - upsized from the originally planned $300 million - on Jan. 15, to yield 8 5/8%.

And he saw Marquette Transportation Co. LLC/Marquette Transportation Finance Corp.'s 10 7/8% senior secured notes due 2017 trading at 100½ bid, 101½ offered. That was up from the 98.810 level at which the Paducah, Ky.-based inland ship fleet operator's $250 million of bonds had priced on Dec. 12, yielding 11 1/8%.

Market indicators on the slide

Among the established bonds with no new-deal connections, a trader saw the CDX Series 13 index plunge by 1 3/8 points on Thursday to finish at 98 bid, 98¼ offered, after having edged downward by 1/8 point on the previous two days.

The KDP High Yield Daily Index meanwhile fell by 16 basis points on Thursday to 71.74, after having declined by 5 bps on Wednesday.

Advancing issues remained behind decliners for a third straight session on Thursday, by around a seven-to-six margin.

Overall market activity, as measured by dollar volume levels, was roughly unchanged from Wednesday's pace.

A trader said that the market "started out OK - we had a little bit of a positive tone at the open, coming off of the close on Wednesday, when it was a little weaker but sort of rallied back in the afternoon. We sort of felt that same tone early this morning."

However, he said, things changed after president Obama's address promising new regulation on the banking business. "The stock market took a hit, and our market took a hit, with the CDX index down at least a full point versus" Wednesday's levels.

However, he noted, "a lot of the stuff did hold in. Some of the new issue guys were still trading around," as noted, "but some stuff was definitely lower."

He further pointed out that over in equities, the bellwether Dow Jones Industrial Average had fallen some 200 points over the span of two days, and "I think that's got a lot of people [in junk] nervous." He also cited the decision by Energy Transfer Equity to postpone its big new deal, which had been scheduled to come to market on either Thursday or Friday.

However, even with that piece of negative news overhanging the market - he said "a lot of people are really reading into that it's a really bad sign" - market technicals remain healthy.

"We saw over $700 million come in [to the mutual funds] last week and over $500 million this week. There's plenty of cash around. If this market sells off at all" - a prospect which he doubts - "there's going to be buying. There's plenty of cash around and guys are still pretty flush."

He said that Thursday's market was "a little bit heavy, and they were hitting some bids in spots, but I think to short the market here would be a mistake."

Blockbuster gets bombed

The name on most junk marketeers' lips on Thursday was Blockbuster, after the big movie-rental company issued full-year 2009 earnings projections calling for a much larger loss than analysts had been anticipating, due to poor sales during the crucial holiday season just passed, a short timeframe when Blockbuster traditionally generates as much as 30% of its earnings for the whole year.

A trader said that Blockbuster's 9% notes due 2012 traded as low as 25 during the early part of the session - down several dozen points from prior levels in the lower 60s - and were going out in the low 30s, making for a 30-point slide. He said that the last trade he saw was about 32 bid, and shortly after that, the bonds were offered at 311/2, and then at 31 to end the day.

There was "huge volume," and although the bonds traded as low as 25 "first thing this morning - it marched its way down - it started working its way back up to the low 30s," where most of the volume was.

The trader said that according to Trace, final volume in the issue was a breathtaking $77 million, at a minimum, "and it very easily could have been double that" since many trades are recorded on the bond-tracking service as being "$1 million-plus," with the excess amount not specified.

"There was just a lot of the paper trading."

He meantime saw the company's 11 ¾% notes due 2014, which were offered at 98 first thing in the morning, rapidly traded down to a 79½ -81½ range, finally going home in a 79-80½ context.

"Just the way the market has run up," he opined, "this thing [Blockbuster] isn't like a falling knife - it's like a falling guillotine. You want to be out of its way when bad news like this comes out."

At another desk, a market source pegged the 9% bonds going out at just under 33, on very heavy volume of over $70 million traded, calling them down some 27½ points on the day.

Another trader saw the big slide in Blockbuster's bonds, but said that probably didn't have too much of an impact on overall market sentiment, which was lower for other reasons.

"Maybe a little bit," he allowed, when asked about its influence, but added that "it was kind of a one-off name."

He noted that the company projected a 20% reduction in EBITDA, a key performance measure. "They had a bad quarter this quarter," he said, "but the reality is there is no real bank debt ahead of these things [the bonds].

"It is what it is - the story has been a tough sell, because that business has been undergoing some dramatic changes over the last 10 years, as people have moved from VHS-type movies, to DVDs, to on-line electronic [distribution], and [Blockbuster] has been slowly making the adjustment. It remains to be seen if they can keep up with the new technology as it evolves."

However, he predicted that "as they're doing that, if they can maintain a run rate of $200 million a year of EBITDA, they'll be fine."

While he said that the 9% subordinated notes, essentially "are worthless in a liquidation scenario, the 113/4s are probably fairly valued around 80, and they traded right down to there. So it's just a matter if they can pull it off. They did that [11¾%] deal to take out the bank debt, and basically, that's what everybody's hanging their hats on - that big, fat coupon."

In the worst case, he concluded, "even if you own them, you're still clipping a big coupon. Assuming they can maintain some semblance of business, I don't know that they'll go any lower from here."

The first trader meantime noted that besides the bad news contained in the company's earnings warning, there was a front-page story in one of the inside sections of The Wall Street Journal about how internet giant Google Inc. was getting into the video-rental business, "which probably didn't help things either. Even though it didn't mention Blockbuster, it's probably the last thing they needed to hear also today, going up against Google. That's one company I wouldn't want to go up against. "

Blockbuster said that its net loss for the year ended Jan. 3 would weigh in somewhere between $183 million and $193 million - nearly double the roughly $100 million of red ink analysts have been forecasting, on average.

NewPage falls anew

NewPage's debt "continued its slide," a trader said, as the papermaker's notes dropped another 6 to 7 points on the day.

The trader called the 10% notes due 2012 "fairly active," ending at 63 bid, 64 offered. That compared to levels around 70 on Wednesday.

Another trader saw the bonds slipping another 5 points to end at 64 bid, 65 offered.

"They've been wild," he said, adding that they were down "almost 20 points in a week."

A trader noted that the bonds had been trading last Friday at 83 bid, before tumbling into the low-to-mid 60s, with some quotes Thursday as low as the 62 area.

The Miamisburg, Ohio-based coated paper company's debt has been trading down all week. The declines started to get hot and heavy on Tuesday when the company announced its CEO had resigned and also reported preliminary fourth-quarter results. At that time, a trader told Prospect News that the numbers "seemed to disappoint" investors.

-Stephanie N. Rotondo contributed to this report

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