SandRidge prices upsized 10-years, new bonds rise; Blockbuster gains on numbers; funds add $121 million

By Paul Deckelman and Paul A. Harris

New York, May 15 - SandRidge Energy Inc. sold an upsized issue of 10-year notes Thursday; those new bonds were seen to have traded solidly higher when they were freed for aftermarket dealings.

In the secondary market, Blockbuster Inc.'s bonds were seen almost a point firmer in busy size trading as the video- and game-rental giant came in with better-than-expected fiscal first-quarter numbers - including the first year-over-year gain seen in several years in the closely-watched same-store numbers in its core U.S. market.

There was considerable activity in the bonds of Momentive Performance Materials Inc. following the release late Wednesday of the Wilton. Conn.-based specialty materials maker's latest quarterly results, but when all was said and done, the bonds ended Thursday essentially little changed. Also on the earnings front, Alltel Corp.'s bonds rose after the telecommunications provider reported what one trader called "healthy" quarterly numbers highlighted by a gain in net revenues and strong subscriber additions. Realogy Corp.'s bonds were also up following that company's quarterly results.

Downey Financial Corp.'s bonds were being quoted well below recent levels; new month-by-month data from the California-based savings-and-loan operator show its total assets sharply lower and the percentage of non-performing assets versus its total asset base notably higher over the past three months and especially, since a year-ago, financial damage likely the fault of the ongoing credit crunch.

Funds up by $121 million on week

And as trading was winding down for the session, market participants familiar with the high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday some $121 million more came into those funds than left them. It was the seventh consecutive inflow, following the cash infusion of $611.9 million seen in the previous week, ended May 7.

Over that seven-week stretch, inflows have totaled $2.472 billion, according to a Prospect News analysis of the figures, far outweighing the $409.6 million of net outflows which had been seen over the three weeks immediately before that.

The results over the past seven weeks have represented a sharp break away from the negative fund-flow trend which had dominated for most of this year. With 20 weeks now in the books, inflows - after trailing outflows pretty much all year - have now pulled slightly ahead, with 11 inflows and nine outflows seen since the start of the year, according to the Prospect News analysis.

That winning streak has also now erased what previously was a sizable year-to-date outflow totaling over $1 billion as of the week ended Wednesday, March 26, the last week in which a net outflow had been seen.

According to market sources, net inflows from the weekly-reporting funds since the start of the year are now $1.397 billion, up from $1.276 billion the previous week.

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, more recently, hedge funds.

SandRidge upsizes

The primary market saw three tranches from two issuers price on Thursday, generating over a billion of proceeds.

SandRidge Energy priced an upsized $750 million issue of 10-year senior notes (existing B3/confirmed B) at par to yield 8%, at the tight end of the 8% to 8 1/8% price talk.

The issue was upsized from $500 million.

Banc of America Securities LLC, Barclays Capital and JP Morgan were joint bookrunners for the debt refinancing and capital expenditures deal from the Oklahoma City-based oil and natural gas company.

Elsewhere Russia's Evraz Group SA (existing ratings Ba2/BB-/BB) raised $404.6 million of proceeds by tapping two of its existing issues on Thursday.

The Moscow-based vertically integrated steel and mining concern priced a $250 million add-on to its 8 7/8% notes due April 24, 2013 at 101.15 to yield 8.579%.

The reoffer price came at the rich end of the 100.85 to 101.15 price talk.

The tap increased the size of the issue to $1.3 billion. The original $1.05 billion priced at par on April 17.

Evraz also priced a $150 million add-on to its 9½% notes due April 24, 2018 at 101.15 to yield 9.371%.

Again, the reoffer price came at the rich end of the 100.85 to 101.15 talk.

The tap increased the issue of 9½% notes due 2018 to $700 million. The original $550 million also priced at par on April 17.

A source close to the deal said that it went very well, with both issues trading above issue price in the aftermarket.

The order book for the 2018 bonds was $783 million, and there were $860 million of orders for the 2013 bonds.

The source said that the order books were a mix of U.S. high yield, emerging markets and some crossover accounts.

The source added that the Thursday taps went well because the notes of the original issues have traded well.

"The allocations for the original notes were pretty severe," the source added.

The source said that to some of the U.S. high yield accounts it made a difference that Evraz has assets in the United States including Oregon Steel Mills and Claymont Steel.

Noble Group launches dollar deal

Thursday's sole deal launch surfaced from emerging markets as well.

Hong Kong's Noble Group will begin marketing a dollar-denominated offering of five-year fixed-rate senior notes (Ba1/BB+/BBB-).

Investor roadshows will be conducted in Asia, Europe and the United States.

Citigroup and JP Morgan are the physical bookrunners for the Rule 144A/Regulation S debt refinancing deal.

Market indicators move up

Back among the established issues, a trader said the widely followed CDX junk bond performance index was up by 5/8 point to 98 bid, 98½ offered. The KDP High Yield Daily Index rose by 16 basis points to 76.34, while its spread tightened by 6 bps to 9.10%.

In the broader market, advancing issues led decliners by a better-than five-to-four margin. Activity, represented by dollar volume levels, fell 17% from Wednesday's pace.

New SandRidge bonds up amid better tone

Despite the lessened activity level, traders saw an overall improved atmosphere. One said that Thursday's market was characterized by "renewed interest from accounts. We saw that accounts finally came back to the market after sitting on the sidelines for some time. I think the market had a better tone going out."

He said the better tone was seen "across a mix of names," saying it was "really hard to pin down one name or one sector that was hotter than the other." But "definitely after lunch, it seemed like someone put the switch 'on' and accounts finally stopped focusing on new issues, earnings and every other excuse in the book [for avoiding the secondary] and started getting back to business."

He said that "even with the new issues, accounts finally got back to trading [them] - the focus seemed to be there again."

He saw the new SandRidge Energy 8% notes due 2018 "performing fairly well," moving as high as 101.5 bid, 101.625 offered late in the day. He noted that "it was one of the few new issues in the past week or two that's actually reached the 101 handle on the first day." In contrast, he said "a lot [of the other recently priced deals] kind of hung around the 100.125-100.375 level, but this one saw some good buying," finally finishing at 101 bid, 101.65 offered. On the other hand, the new AES Corp. 8% notes due 2020 seemed to fall into the other category - bonds that priced at par but didn't go too far beyond that. He saw them going out at 100.5 bid, 100.75 offered.

Another trader saw the SandRidge notes heading home at 101 bid, 101.5 offered.

At yet another desk, a trader called the new SandRidge bonds better by more than a point from their par issue price at 101.25 bid, 101.5 offered. He attributed the strong aftermarket showing to a combination of factors - including the fact that it's "a decent credit, even though it's only rated B3/B-." Then too, it's an energy name and "energy is the sector to be in - it's in vogue."

On top of that, the trader opined that the SandRidge issue was also helped by "the beginning of a euphoria that the worst is behind us - I think that had something to do with it."

That euphoria also seemed to carry over to the broader market, where there was, he said, "definitely a better tone overall - people seemed to be more optimistic; you had stocks up, Treasuries rallying, and high yield up." However, he warned that amid such possibly irrational exuberance, "everyone's forgetting that there could be another shoe to drop. There could be other problems" that might kill off the nascent rally. "But that's how this roller-coaster ride always goes - there's always over-reaction in every direction."

Blockbuster back in the black, bonds up

Among specific established issues, Blockbuster's 9% notes due 2012 were seen by a market source up ¾ point in round-lot trading to the 82.5 level, while a trader called them up a full point in that same 82.5 bid, 83.5 offered context. The bonds rose after the Dallas-based Number-One U.S. video-rental chain operator reported a better-than-expected fiscal first quarter, including a return to profitability versus its year-ago loss. The company attributed the improvement to its success in cutting expenses and the improved results from its subscription service, as well as domestic sales growth.

Another trader saw the Blockbusters get as good as 83 before going home at that 82.5 bid level, which he called up ¾ to a full point. And he said that by all rights, the bonds should have risen even further, all other things being equal.

"I'm surprised that they didn't rally more on that news," he said, noting the role that cutting costs had played in generating that profit. The main thing limiting those bond gains, he said, was "the overhang of Circuit City," referring to Blockbuster's current efforts - by no means universally applauded by the financial markets - to acquire the Circuit City consumer electronics chain for somewhere north of $1 billion. "Take out the Circuit City potential acquisition and the huge leveraging of Blockbuster" that could accompany such a deal, "and I think you would have seen [the bonds] up 3 or 4 points on the news."

Bond investors still reacted with enthusiasm to Blockbuster's report of a net profit after preferred dividends of $42.6 million, or 20 cents per share, in the fiscal quarter ended April 6, versus its year-earlier net loss of $51.8 million, or 27 cents per share. That beat Wall Street expectations of around 15 cents per share of earnings, and also was a sequential improvement from the 18 cents per share gain seen in the fiscal 2007 fourth quarter.

Operating income totaled $70.2 million, versus a year-earlier operating loss of $19.4 million. While cash-flow remained negative on both an overall basis and a free cash-flow basis, the size of the negative cash flow was in each case reduced by more than $100 million from a year earlier, to negative $19.5 million and negative $39.4 million, respectively.

Revenues did fall 5% year over year to $1.39 billion from $1.47 billion, and missed analysts' forecasts of about $1.44 billion, after the company sold or closed 412 unprofitable or less-profitable stores; however, the remaining nearly 8,000 stores, over 5,000 in the United States and the rest international, showed a 1.4% overall gain in revenues versus the previous year, helped by a 19.7% jump in merchandise sales in the United States. Domestic same-store sales at those outlets open at least a year, the retailing industry's key sales metric, actually rose 2.9% with the company attributing the gain to a better line-up of new movies, improved in-store merchandising and more effective pricing - the first such domestic increase in five years.

Blockbuster is in the midst of shifting some of its focus away from traditional big mortar-and-brick video-rental stores, an area in which it has traditionally dominated smaller rivals such as Movie Gallery Inc. (now reorganizing under Chapter 11) but which industry experts consider to be a declining part of the video- and game-rental business. Blockbuster is instead increasingly orienting itself towards newer methods of taking orders for videos and video games and getting them into the hands of its customers, including its Total Access on-line mail-order service, which competes head-to-head the industry leader in alternative content delivery, Netflix Inc. It will also soon begin experimenting with a system of kiosks in high-traffic locations where customers can digitally download movies, although the company does not expect what it calls "widespread deployment" of such a system for at least two to three years.

Blockbuster is currently trying to acquire Circuit City in hopes of creating a company that can provide customers with both content such as DVDs and video games, and the hardware needed to play them. Many analysts and other observers are skeptical about the utility of trying to combine two companies which each have serious problems - Blockbuster's being its need to move away from the declining traditional video-rental business paradigm and into the new ordering and delivery technologies, while Circuit City struggles against bigger rivals Best Buy and Wal-Mart. After first dismissing Blockbuster's $1 billion-plus acquisition offer, Circuit City has now agreed to provide its would-be acquirer with the information it needs to conduct due diligence. Blockbuster, meantime, will decide in the coming weeks whether to keep pursuing the Circuit City deal. Its chairman and chief executive officer, Jim Keyes, told analysts on a conference call following the release of the numbers that Blockbuster "will not proceed with the transaction unless it makes sense both strategically and financially."

Momentive shows not much momentum

Elsewhere among companies posting earnings, Momentive Performance Materials' 9¾% notes due 2014 were among the most actively traded credits on the day.

A market source saw the bonds gyrating around in a 94-96 context before finally ending slightly above 96, up about ¼ point on the day. Another source called the bonds essentially unchanged.

Its 10 1/8% notes due 2014, which were less active, likewise held to a narrow range before closing at 94, while its 11½% notes due 2016 closed at 87 bid and again were seen only marginally changed on the day.

The company - a former General Electric Co. unit which manufactures silicones, quartz, and ceramic products for a variety of industrial uses - continued to lose money in the fiscal first quarter ended April 1, although it trimmed its losses to $48.9 million from $57.3 million a year ago, and reported a strong rise in operating income - $42.1 million in the latest period, more than triple the year-earlier $13.1 million. Adjusted EBITDA rose 2.4% to $105.9 million from $103.4 million previously, while net sales rose 8% to $656.6 million from the year-earlier $608.2 million.

Alltel bonds look alright

Also rising on the release of numbers were Alltel's 7% notes due 2012, quoted by a trader up 2 points on the day at 88 bid, 90 offered, while another trader called the Little Rock, Ark.-based wireless telecom service provider's 6½% notes due 2013 more than a point better at 81.75 bid, 82 offered, helped by what were described as "healthy" first-quarter performance.

Alltel - the fifth-biggest U.S. wireless operator, which went private last fall in a nearly $25 billion transaction - did report a $124.9 million first-quarter loss versus last-year's $230.1 million profit.

However, the company attributed the loss to factors connected with its privatization deal, including a $177 million rise in depreciation and amortization expenses. There was also a jump in interest expense to $496.5 million - more than 10 times the year-earlier interest expense level of $46.7 million - due to changes in the company's leverage growing out of Alltel's acquisition.

Against those negatives, Alltel boasted some solid positives, eagerly seized upon by its bond investors.

For one thing, net revenues grew 11%, to $2.3 billion from $2.1 billion a year ago, and average revenue per customer, a key communications industry performance metric, grew 2% to $53.64. On top of that, there were a lot more of those customers - the company added 1 million gross wireless customers for the quarter, a 26% increase. Even factoring out churn - turnover from customers leaving the company-net customer additions rose 63% to nearly 385,000, an all-time high. Net adds for post-pay customers - users billed for their service on a regular monthly contract rather than on a pre-paid basis and thus considered the most stable and desirable kind of customers - totaled 163,000, up 50% year-over-year.

Alltel could also report improved liquidity, with a current ratio of 1.49 for the quarter, up from 1.32 in the fourth quarter of last year. Its chief financial officer, Sharilyn Gasaway, said on the company's conference call that it will consider using some of that additional liquidity for an optional prepayment on its debt or for reinvesting in the business, among other potential choices.

Realogy on a roll despite loss

A trader said that Realogy's 10½% notes due 2012 were "the big name - they were heavily traded" and rose 2 points to 73 bid, 74 offered. Another market source saw those bonds get as good as 75.75.

The gains came despite the generally softer numbers from the Parsippany, N.J.-based provider of real estate and relocation services, attributable to the troubled housing market and the problems this has caused for the real estate industry.

It reported that its first-quarter 2008 net revenue totaled $1.05 billion, down from $1.37 billion a year earlier and net loss was $132 million, due mainly to interest expense of $164 million, a sharp deterioration from a $32 million year-ago gain. EBITDA shriveled to just $4 million from $122 million a year ago, but was modestly above the company's earlier guidance.

The company's president and chief executive officer, Richard A. Smith, sought to highlight what few positives there were in the numbers, noting that "the first quarter of any year is historically our slowest from an earnings perspective almost entirely due to the seasonality of the residential real estate market.

He said that the company still has "most of our annual EBITDA opportunity in front of us and, of course, that's where our focus lies."

Downey at lower levels

Even more of a victim of the downturn that's hit the housing market was Downey Financial, whose 6½% notes due 2014 were seen languishing at the lower levels to which the Newport Beach, Calif.-based thrift operator's paper has recently fallen amid investor concern about the impact the ongoing credit crunch, particularly in the mortgage industry, has had on the company's finances.

A market source quoted those bonds around the 69 bid level following several large-sized trades on Wednesday; before that the bonds had last been seen about a week earlier, trading in an 80-81context.

The company - parent of Downey Savings & Loan Association, which operates 169 branches in California and five in neighboring Arizona and is a sizable mortgage originator in the region - on Thursday released financial data showing a continuation of recent negative trends over the past several months, as well as over the past year.

As of the end of April, its total assets had fallen to about $13.145 billion, versus $13.555 billion at the end of January and $15.14 billion as of April 30, 2007. Meanwhile, non-performing assets as a percentage of its total asset base had increased to 13.24% at April 30, up from 9.12% three months earlier and up sharply from just 1.04% a year earlier.

Nuveen off on numbers

Also from the financial sector, a trader saw Nuveen Investments Inc.'s bonds "under pressure" after the Chicago-based financial services company reported disappointing first-quarter earnings, including a 9% drop in adjusted EBITDA to $106 million, and a drop of 8% in assets under management to $153 billion, down from $164.3 billion at the end of the previous quarter and $166.1 billion a year earlier.

Nuveen's 10½% notes finished down 2 points on the day at 94.5 bid, 95.5 offered.

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