Fedders prices downsized deal, Hovnanian brings drive-by; funds see $392 million outflow

By Paul Deckelman and Paul A. Harris

New York, Feb. 26 - Three new deals brought a jolt of activity to the high-yield primary market, which had previously been ticking over at a one-a-day rate. But air conditioner maker Fedders North America Inc. downsized and restructured its scheduled offering of 10-year notes, and priced them at a discount to par, well outside of pre-deal market price talk. However, there was enough moxie in the market for K. Hovnanian Enterprises Inc. to get a 10-year drive-by deal done.

In the secondary sphere, activity was generally quiet and featureless, although Iron Mountain Inc.'s bonds firmed after the Boston-based document storage and information management company posted strong, above-expectations fourth-quarter earnings and issued positive revenue-growth guidance.

Late in the session, after trading had wound down for the day, market participants familiar with the weekly fund flow statistics compiled by AMG Data Services of Arcata, Calif. reported that in the week ended Wednesday $392.151 million more left the high yield funds than came into them.

It was the third week in the last four in which a net outflow had been seen, broken only by the relatively modest inflow of $227.4 million recorded last week.

During that four-week span, which included two straight weeks of outflows of more than $1 billion, the junk funds - regarded as a reliable and steady measure of overall high yield market liquidity trends - have seen a net hemorrhage of $2.772 billion, according to a Prospect News analysis of the AMG figures.

That loss of funds has coincided with something of a cooling down in the high yield primary market, which had been extremely active in January, and as well, a softening of the secondary market, which had notched an unsustainably strong return nearing 30% in 2003 and which seemed on pace - at least during January - to continue those amazing gains.

Inflows have now been seen in five weeks out of the eight since the start of the year, although recent momentum has been almost entirely negative, and the cumulative net outflow for the year-to-date widened this week to $1.398 billion from $1.006 billion last week.

Nonetheless, in addition to the three new issues cranked out during Thursday's session, one new offering was added to the forward calendar, adding to what impressed one sell-side official, who spoke to Prospect News late Thursday, as a substantial new issue backlog.

Third outflow in four weeks

As it happens, this source was speaking shortly after the market learned that for the third time in the past four weeks there is evidence that money went out of the high yield asset class over the course of the seven-day period ended Feb. 25. AMG Data Services reported a $329.2 million outflow from high yield mutual funds for that period, according to sources.

The sell-side official, speaking in the wake of that news, suggested that the impact of that outflow may have already played out.

"I don't think it's going to make a big dent," said the sell-sider. "The market was actually a little bit better today than it had been, so I think we already have seen the impact of that outflow, to be honest.

"Things really haven't been moving too much. If you look at some of the bigger capital structure names, we've seen some volatility but the overall market has just been drifting here and there, without a lot of active trading. Instead there has been more quoting. So we haven't seen the kind of volume that it takes to get a good read.

"And part of it is the big backlog of deals on the forward calendar," the official adding. "We have an approximately $7.25 billion backlog, counting euro deals. Most of those deals are kind of small, but there is a large number of them and people are out there doing their work, digging into the credit, a little more, perhaps thinking things were getting a little rich."

Meanwhile an investor, speaking on background, was not caught off guard by the news of the outflow.

"Actually I'm surprised it's not worse," the buy-sider said. "We've had a pretty bad week of flows."

Restructured Fedders prices, two drive-bys

On Thursday the primary market broke with the one-a-day pattern that it had set over the preceding three sessions. Terms were heard on three transactions.

Fedders North America, Inc. completed what turned out to be a significantly restructured and downsized deal.

The Liberty Corner, N.J. maker of air treatment products priced $155 million of 9 7/8% 10-year senior notes at 96.932 to yield 10 3/8%.

Price talk was for a 9 7/8% coupon, priced at discount to yield 10¼%, having been revised from the 9¾% area.

The sale generated $150.244 million of proceeds, whereas the announced size of the deal had been $160 million.

The offering was restructured into senior notes guaranteed on a senior basis by the operating company. Previously the company had been in the market with senior subordinated notes.

Credit Suisse First Boston ran the books on the Rule 144A issue.

Also on Thursday homebuilder K. Hovnanian Enterprises Inc. sold a quick-to-market $150 million of 6 3/8% 10-year senior notes (Ba2/BB) at 99.057 to yield 6½%.

Credit Suisse First Boston, Citigroup, UBS Investment Bank and Wachovia Securities were joint bookrunners on the deal that came at the wide end of the 6 3/8% area price talk.

And InSight Health Services Corp. priced a $25 million add-on to its 9 7/8% senior subordinated notes due Nov. 1, 2011 (B3/B-) at 101.0.

The Banc of America Securities-led transaction, an acquisition financing, resulted in a 9.636% yield to worst and a 9.682% yield to maturity for the Newport Beach, Calif.-based provider of diagnostic imaging company.

Evergreen to hit the road Monday

News of one roadshow start surfaced on Thursday as Denver-based natural gas producer Evergreen Resources, Inc. announced it would start the roadshow Monday for $200 million of eight-year senior subordinated notes.

Goldman Sachs & Co. will run the books on the debt refinancing deal.

And Team Health, a Knoxville, Tenn. provider of outsourced physician services, announced that it would bring an unspecified amount of high yield bonds in addition to its $350 million credit facility, to refinance debt. The bank piece will be led by Banc of America, JP Morgan, Merrill Lynch & Co.

No timing or structural details were heard on the bonds.

Talk on week's remaining deals

Friday's session figures to be a busy one with eight tranches expected to be priced.

Price talk of 11%-11¼% emerged Thursday on AMH Holdings Inc.'s $258 million proceeds of 10-year senior discount notes (Caa1/B-), expected to price on Friday via UBS Investment Bank.

Meanwhile the price talk is 6¾%-7% on Ainsworth Lumber Co.'s $200 million of 10-year senior notes (B1/B+), also expected to price on Friday, with Goldman Sachs & Co. running the books.

One investor, speaking on background, said that the Ainsworth deal is heard to be oversubscribed.

"It's going well," said the buy-sider. "I hear they backed up the pricing a little bit and that it's going to come on the wide side of guidance.

"It's 1.5 times leveraged," added the investor. "They're due for an upgrade. It's generating free cash flow like crazy.

"They're not really 1.5 times leveraged. They're probably more like 2.5 times leveraged. But I still think that they look okay."

Price talk also surface on the deal from Pinnacle Entertainment, Inc., whose eight-year senior subordinated notes (Caa1/CCC+/B-) were heard to be in the 8¼%-8 3/8% range. The Lehman Brothers and Bear Sterns & Co. led offering is also expected to price on Friday.

Finally, the price talk is 6½%-6¾% on The Reader's Digest Association, Inc.'s $300 million of seven-year senior notes (Ba3/BB-), expected to price on Friday via JP Morgan.

When the new Hovnanian 6 3/8% senior notes due 2014 were freed for secondary dealings, there was "not a whole lot of movement in them," said a trader, who quoted the bonds offered at par; they had been issued at 99.057 earlier in the session.

The Fedders deal priced too late in the session for any aftermarket activity.

Iron Mountain climbs

Back among existing issues, Iron Mountain's 7 ¾% notes due 2015 were heard to have firmed to 105.25 bid from prior levels around 104, while its 8 5/8% notes due 2013 were a point better at 109 bid.

The company reported fourth quarter earnings of $28.4 million, (33 cents a share), up 72% from its year-earlier profit of $16.5 million, (19 cents a share). Iron Mountain blew through Wall Street expectations, which had projected earnings in the 21-cent-per share range.

The strong earnings were attributable to increased revenue from its storage operations, which increased about 22% to $240.3 million even as total quarterly revenue advanced to $408.5 million from $340.5 million a year ago.

Another factor behind the improved performance was Iron Mountain's $333 million acquisition last July of Hays plc's U.S. and European records management business, which doubled its European presence.

Looking ahead, Iron Mountain reiterated previously released 2004 revenue guidance of between $1.7 billion and $1.75 billion; analysts expect about $1.73 billion. The guidance assumes first-quarter revenue in the $417 million to $430 million range - well above analysts' consensus expectations of $401.7 million. Year-ago revenue was $351.8 million a year ago.

J.C. Penney up on earnings

Elsewhere, J.C. Penney Co. Inc.'s bonds were better, after the Plano, Tex.-based retailer announced strong fourth-quarter earnings from continuing operations and took a writedown on its investment in the Eckerd drugstore chain - a move seen by investors as a positive sign that Penney is closer to unloading the ailing pharmacy unit.

Penney's 7.40% bonds due 2037 pushed up to 110.875, a gain of more than a point. At another desk, a trader quoted its 8% notes due 2010 half a point ahead, at 115.5 bid. 116 offered, but opined that Penney "is one of those bonds that doesn't have very much more that it can go [up]."

Penney reported a fourth-quarter net loss of $1.07 billion - but that included a non-cash charge of $450 million to reflect its investment in Eckerd, which is now classified as a "discontinued operation," as well as goodwill, at estimated fair value. Penney took a second Eckerd-related non-cash charge, of $875 million, reflecting the company's estimated tax liability when the Eckerd sale is completed, although that liability could change either way, based on the ultimate price Penney can get for the underperforming unit.

Apart from Eckerd, Penney rang up strong results, with earnings from continuing operations up 45% to $253 million (83 cents a share), versus 53 cents a share a year earlier, and up from analysts' projections of 80 cents a share.

The gains were attributed to good holiday sales and improved clothing sales. Looking ahead, Penney is projecting first-quarter earnings from continuing operations of between nine cents and 12 cents per share.

Gap seen hitting ceiling

Clothing retailer Gap Inc. reported net income for the fiscal fourth quarter ended Jan. 31 of $355.8 million (37 cents a share) - up 43% from 248.7 million (27 cents a share), a year earlier, although the per-share result was in line with analysts' expectations for the San Francisco-based merchant.

Gap reported that overall sales rose 5.1% to $4.89 billion from $4.65 billion last year; comparable-store sales at stores open at least a year - the most reliable indicator of a retailer's performance - were up 3% from a year ago. U.S. same-store sales at the company's eponymous Gap chain were up 2% in the quarter while international Gap sales were down 2%; comps for its Old Navy chain were up 4%, while the higher-end Banana Republic unit posed a 9% jump in same-store results.

Gap's numbers were released after the close of trading; a trader said that during the session, the company's 6.90% notes due 2007 hovered around 109.5 bid, 110.5 offered, but added his assumption that the bonds would likely not move during Friday's session - or at least move a lot - because, like Penney's paper, "they're so high already that they don't move around a lot."

United Rentals steady after drop

United Rentals Inc., whose bonds had fallen several points in Wednesday's dealings after the Greenwich, Conn.-based equipment rental company released fourth-quarter results showing a sharper net loss, a smaller-than-expected operating profit and soggy guidance, was little changed Thursday, its 7¾% notes due 2013 staying around 98 bid and its 9¼% notes due 2009 remaining at 105. Its 6½% notes due 2012 stuck around 98.75 bid.

Lucent rises

A trader saw Lucent Technologies Inc.'s bonds push up about a point, quoting the Murray Hill, N.J.-based telecommunications equipment maker's 7¼% notes due 2006 as high as 103.25 bid before the bonds went home around 103 bid, 103.5 offered, still up a point on the session.

The trader saw Lucent's 6½% bonds due 2028 and 6.45% bonds due 2029 only slightly better, at 82.375 bid on the session, a gain of about a quarter-point to a half-point.

The trader noted that late in the session, after trading had wrapped up, the tape carried a story about how Lucent's chief executive officer, Patricia Russo, is looking for ways to cut the company's retiree health-care costs, which amount to some $850 million annually - about three times Lucent's estimated profit for this fiscal year.

"I don't know what this news is gonna do to trading [Friday]," he said.

Overall, he said, Thursday's session was "pretty quiet, basically unchanged to up a quarter point, with nothing drastically up or down."

Emerging markets nurse Carnival hangover

With the Lenten season underway, one buy-side source told Prospect News that Latin players had yet to make their presence felt in the wake of the Brazilian Carnival celebrations, which concluded on Fat Tuesday.

"Is Carnival over?!," the investor asked facetiously. "I hadn't noticed. Apparently they're still partying because not much has changed.

"It seems like the emerging markets are up about a point today," the buy-sider added. "It seemed like earlier in the week it was ticking higher, but no big moves. Today it seemed as though we had something of a lifting action going on in the market. I think today was the first day we tightened on a spread basis.

"Today, it seemed like Brazil was the out-performer,"

Another investor had similar color.

"It's kind of flat because there is no new information," said this source.

"Prices are flat from the close of yesterday. For example, the benchmark Brazil C bond is up a quarter of a point. In the long end, Brazil '40 is up by 10 cents. Basically, it is flat."

The action is in Asia

Meanwhile one new emerging markets corporate offering took shape Thursday.

Korea First Bank's $300 million of 30-year notes, via Lehman Brothers and UBS Warburg, were heard talked at 300-325 basis points. The deal is expected to price in early March.

One investor commented that pricing like that is not necessarily cheap for 30-year piece of Korean paper.

The deal from the Korean bank comes one day after India's largest power-generating utility, National Thermal Power Corp. (NTPC), announced a Monday roadshow start, in Singapore, for its Regulation S-only $200 million seven-year bond offering (Ba2/BB/BB+), via Merrill Lynch & Co. and ABN Amro.

That Indian credit, which makes its debut in the international capital markets with this offering, follows in the wake of Wednesday's pricing by Industrial Development Bank of India (IDBI) of a split-rated $300 million five-year deal (Baa3//BB+). IDBI's deal came at a spread of 185 basis points, with a coupon of 4¾%.

In the domestic market National Thermal reportedly prices through IDBI. However one investor advised Prospect News to look for that to happen when National Thermal makes its bow on the international stage.

"IDBI is almost a benchmark bond at this point," said the buy-sider. "So I think it would be tough for NTPC to come through it, especially given the recent volatility. "

This investor went on to explain that tight yields on Asian deals are no surprise, given the dynamics of the Asian investor base, as contrasted to the Latin investor base.

"The Asian banks have an insatiable appetite for Asian paper," said the investor. "That causes those deals to come tighter than you would think they should come.

"Also, the Latins are basically trying to get money offshore, with a high yield. The Asian buyers tend to be banks looking for higher quality paper, and willing to pay whatever it takes."

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