WMG prices downsized two-parter; aaiPharma bounces; funds see $173 million outflow

By Paul Deckelman and Paul A. Harris

New York, April 1 - WMG Acquisition Corp./Warner Music Group's downsized two-part offering of 10-year notes apparently struck a responsive chord among high yield investors Thursday, pricing both its dollar- and sterling-denominated tranches inside of pre-deal market price talk. Warner Music led a primary parade which also saw deals from Aearo Co., Mission Resources Corp., Cablecom Luxembourg SCA, Nevada Power and Exco Resources.

In the secondary market, aaiPharma Inc.'s bonds continued to gyrate wildly in reaction to the latest developments in the embattled Wilmington, N.C. -based pharmaceutical company's unfolding saga; those bonds, which had surged from recent lows on Tuesday only to fall back sharply on Wednesday, were once again on the upside Thursday after the company had lined up some badly needed short-term liquidity.

Late in the day, market participants familiar with the high yield mutual fund flow numbers compiled weekly by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday $172.6 million more left the junk funds than came into them. It was the third consecutive weekly outflow, following on the heels of the $208.2 million outflow seen in the week ended March 24.

Including the $264.8 million outflow seen in the week ended March 17, a total of $645.6 million more has left the funds than come into them over the past three weeks, according to a Prospect News analysis of the weekly AMG figures, counting only those funds which report on a weekly basis and excluding distributions.

Inflows have still actually been seen in a majority of the weeks since the start of the year - just barely, with seven inflows versus six outflows - but the recent trend has been all negative, eclipsing the early gains seen in the first few weeks of the year.

Six outflows have now been seen in the last nine weeks, according to the Prospect News analysis of the AMG statistics, including back-to-back outflows of over $1 billion recorded on consecutive weeks in early February. During that nine-week stretch, net outflows have totaled around $2.975 billion.

For the year to date, the total net outflow grew to $1.601 billion in the latest week from $1.428 billion the previous week, according to the analysis of the figures.

Although the mutual funds make up only part of the total assets in the high yield universe - other money sources include insurance companies, pension funds, endowments and retail investors - their behavior is viewed by many in the market as a reliable indicator of overall liquidity trends in the junk market.

Following the inflows seen in the first weeks of the year, and then the two giant consecutive outflows, the pattern of subsequent fund flows since then has been choppy, with a week or two of inflows alternating with a week or two of outflows.

But while the high yield secondary market has struggled ever since the easy flow of liquidity seen in the 2003 fourth quarter and the first four weeks of 2004 came to an abrupt halt in early February - market performance, as measured by the weekly indexes compiled by the major investment banks has recently bounced up and down more or less in tandem with the fund flows - new issuance seems not to have been much affected, with the junk market absorbing $2 billion of new Cablevision Systems Corp. paper this week, along with a number of smaller deals, and getting ready to swallow down another $1.5 billion from Charter Communications Inc.

And terms on junk bond deals continued rolling out of the investment banks during Thursday's session.

The market saw $900 million of dollar-denominated issuance during the session, led by the $465 million sale of 10-year paper from Warner Music Group.

Market "feels better" since Wednesday

Although the mutual funds now have undergone three consecutive outflows, sell-side officials who spoke to Prospect News Thursday noted that the most recent one covers a seven-day period that ended Wednesday and that high yield felt decidedly firmer on Thursday.

"The funds flow numbers have not been large," one official observed. "This time it was $172.6 million. That's not flat but it might as well be. People don't notice that.

"Three in a row does not look good, of course. But these are not huge outflow numbers."

Warner Music leads $900 million session

WMG Acquisition Corp., a subsidiary of New York City-based global music company Warner Music Group, priced two tranches of 10-year senior subordinated notes (B3/B-) on Thursday, bringing home the largest amount of proceeds for the day.

The company sold $465 million of notes at par to yield 7 3/8%. Price talk was for a yield in the 7½% area.

It also sold £100 million of notes at par to yield 8 1/8%. Price talk was 8¼%-8½%.

Deutsche Bank Securities, Bank of America Securities, Lehman Brothers and Merrill Lynch & Co. ran the books on the acquisition financing.

Also selling bonds Thursday, was Indianapolis-based personal protection equipment maker Aearo Co., which priced $175 million of eight-year senior subordinated notes (B3/B-) at par to yield 8¼%.

The Deutsche Bank Securities-led transaction came at the tight end of the 8¼%-8½% price talk.

Mission Resources Corp. sold $130 million of seven-year senior notes (Caa2/CCC) at par to yield 9 7/8%, with Guggenheim Capital Markets LLC in the lead.

The Houston-based independent oil and gas exploration and production company's notes priced wide of the 9¼% area price talk.

In drive-by action, Nevada Power Co. sold $130 million of eight-year general and refunding mortgage notes, series I (Ba2/BB) at par to yield 6½%, at the tight end of the 6½%-6 5/8% price talk.

Merrill Lynch & Co. and Lehman Brothers ran the books for the deal from the regulated public utility which is based in Las Vegas.

In Europe, Swiss cable TV firm Cablecom sold €290 million of bonds.

The issuer was Cablecom Luxembourg SCA and its 10-year senior notes (Caa1/CCC+) came at par to yield 9 3/8%, tight to the 9 3/8%-9 5/8% price talk. Deutsche Bank Securities ran the books.

Finally, in a private deal that was completed on Wednesday, Brown Jordan International, Inc. priced $135 million of three-year senior secured floating-rate notes at par, bearing an interest rate of three-month Libor plus 900 basis points, with a yield calculated at 10.11%.

Imperial Capital, LLC ran the books on the deal from the Pompano Beach, Fla.-based outdoor furniture manufacturer.

NTL Cable rejigs, tightens talk

High yield sources continued to note on Thursday that there is no shortage of paper from companies in the telecommunications constellation.

News circulated during the session that New York City-based NTL Cable plc had revised price talk its restructured £800 million equivalent offering of notes in dollar, euro and sterling tranches (B3/B-), with tranche sized remaining to be determined.

Revised talk is 8¾% area, down from 9%-9¼%, on the dollar and euro 10-year non-call-five fixed-rate senior note tranches, with the 10-year non-call five senior fixed-rate sterling tranche now expected to come 75-100 basis points behind the dollar tranche instead of in the 75 basis points area behind.

Meanwhile, the tenor of the dollar-denominated floating rate notes was increased to 8.5 years from six years. Price talk remains Libor plus 500 basis points.

The floaters will come with one year of call protection.

Deutsche Bank Securities and Goldman Sachs & Co. have the books.

The deal is expected to price on Friday.

Talk on two deals, Invista downsizes

Price talk of 9½%-9¾% emerged Thursday on Consolidated Communications' upcoming $240 million of 10-year senior notes (B3/B-), which are expected to price Friday morning via Credit Suisse First Boston and Citigroup.

Also Port Townsend Paper Corp. issued price talk on a restructured offering of senior secured notes (B3/B) that are expected to price on Friday.

Price talk has the notes coming at a discount with an 11% coupon to yield 12%.

The bonds were cut to seven year maturity from 10. And call protection was decreased to four years from five years.

JP Morgan and UBS Investment Bank are bookrunners.

Prospect News learned Thursday that Invista has downsized its pending issue of eight-year guaranteed unsecured notes (B1) to $575 million from $1.2 billion.

JP Morgan and Deutsche Bank Securities will run the books, although timing on the bond deal remains to be determined.

Invista increased the size of its credit facility to $2.05 billion from $1.8 billion.

The financing will be used to support the $4.4 billion acquisition of Invista (formerly DuPont Textiles & Interiors) by subsidiaries of Koch Industries, KED Fiber Ltd. and KED Fiber LLC.

And in a late Thursday press release, International Steel Group announced that it intends to sell $600 million of senior notes due 2014 in a Rule 144A offering.

The Richfield, Ohio integrated steel company will use proceeds to repay debt.

Massive forward calendar

One sell-side official who spoke to Prospect News on Thursday pointed to the now-jammed new issue pipeline and noted that the volume of deals means that issuers can figure on printing interest rates on bonds a tad higher than had been the case in the earliest weeks of 2004.

"The market in general feels a little softer," said the official. "A lot of that can perhaps be attributed to the fact that there is close to $9 billion of paper that is going to price over the next three weeks or so.

"That puts a lot of pressure particularly on the new issues. It's very hard to push aggressive price talk and pricing even if the credit warrants it.

"People are going to look for a little rate now.

"It makes things a little trickier. But it is also an indication that the market is pretty healthy but selling off just a bit."

However, this official specified, rates for prospective junk bond issuers in general remain notably low and attractive.

Warner up in trading

When the new Warner Music Group 7 3/8% senior subordinated notes due 2014 were freed for secondary market dealings, they were seen having pushed up to levels around 102.25 bid, 102.75 offered from their par issue price earlier in the session.

A trader saw the new Mission Resources 9 7/8% senior notes due 2011 at 100.5 bid, 101.5 offered, up slightly from their par issue price. He pegged the new Aearo 8¼% notes due 2012 at 102.5 bid, 103.5 offered, up from their par issue price, and saw Cablevision's new 8% senior notes due 2012 offered at around 100.125.

At another desk, a trader also saw the 8% Cablevision notes in that same context, at par bid, 100.125 offered, unchanged from Tuesday's par issue price. Cablevision's new CSC Holding Inc. 6¾% senior notes due 2012 were "pretty tight" at 101.75 bid, 101.875 offered, he said, well up from their par issue price.

aaiPharma gains on new loan

Back among the established issues, a key mover was aaiPharma, which announced late Wednesday that it signed a commitment letter for a $40 million 15-month priority revolving credit facility offered by Bank of America NA, subject to the consent of a majority of its existing bank lenders and holders of its senior subordinated debt.

That helped its 11% notes due 2010 - which have been gyrating around all week - bounce off the lows at which they ended Wednesday and firm solidly Thursday. One trader quoted the notes bid at 87.5 on Thursday, well up from their Wednesday close around 80 bid.

Several others saw them bouncing as high as 90 bid, 92 offered during the session.

"Some people were trading them flat [without accrued interest] on Wednesday and some were trading them with accrued," a trader said, after the company's Wednesday announcement that because of its delay in filing its 10-K annual report with the Securities and Exchange Commission, it was in default on its $100 million credit revolver and its lenders might not allow it to make the scheduled April 1 bond payment.

He said either way, "there wasn't very much interest" - with a maturity of April 1, 2010, "the interest was pretty well cleaned up."

Without access to its current credit revolver, the new revolver is welcome news for the company, which is wrestling with problems on several fronts, stemming from its recent revelations of "irregular" sales figures for two of its products, prompting an internal investigation that has delayed filing the results and that has gotten it in trouble with its bank lenders and bondholders.

U.S. Steel jumps higher

Elsewhere, United States Steel Corp.'s 10¾% notes due 2008 were seen up as much as three points on the session, to around 120 bid, although there seemed to be no fresh news out about the Pittsburgh-based integrated steel producing giant.

Hollywood Entertainment Corp.'s 9 5/8% notes due 2011 were being quoted as having moved up to 117.25 bid from prior levels around 114.5, continuing the impressive rise the Portland, Ore.-based video rental chain's bonds have seen - moving up in stages from their prior levels around par - since the announcement earlier in the week that the company is being taken private in a management-led buyout. It is assumed in the market that the bonds are likely to be tended for by the new owners at a price somewhere around that 117.25 figure, although there has been no official indication yet of such a bond buyout offer.

Extended Stay America Inc.'s 9 7/8% senior subordinated notes due 2011 were seen having firmed about two points on the session to 120 bid; the Spartanburg, S.C. -based lodging company announced on Wednesday that it was tendering for those bonds - at a price to be determined - and for its 9.15% senior subs due 2008 as well.

J.C. Penney firmer

Elsewhere, J.C. Penney Co. Inc.'s bonds were seen having firmed a bit, on news reports that the Plano, Tex.-based department store operator is close to inking an agreement with U.S. drugstore giant CVS Corp. and Canadian retailer Jean Coutu Group to sell its money-losing Eckerd drugstore operation for about $4.4 billion. CVS would likely take the southern stores, to avoid antitrust problems, while Jean Coutu would take the remainder. Penney is expected to use at least some of the proceeds to pay down its roughly $5 billion of debt.

A trader said he didn't see much movement in the Penney bonds, while allowing that they did seem a little stronger, with its 8 1/8% notes due 2027 at 113.5 bid, "maybe up a little" from prior levels around 112 bid, 113 offered, while its 7.40% notes due 2037 were at 1114.125 bid, up from 112.5 bid, 113.5 offered.

Still to be determined is what impact a Penney deal with CVS/Jean Coutu might have on the bonds of Rite-Aid Corp., which has put in a rival bid of about $4 billion for the Eckerd stores. Assuming CVS/Coutu is the winner, Camp Hill, Pa.-based pharmacy chain operator Rite-Aid won't get the stores, while its rival CVS bulks up; on the other hand, that's $4 billion that Rite-Aid doesn't have to raise or spend - good medicine in the eyes of bondholders and other creditors.

The trader said that "there's been a little pressure" lately on Rite-Aid's bonds, "but nothing substantial. There were no sellers for a while, and now there are a selective few sellers." However, he saw no action in the credit on Thursday.

At another desk, a market-watcher saw Rite-Aid a little firmer, with the 7 1/8% notes due 2007 up half a point to 100.5 bid and its 9½% notes due 2011 likewise half a point better at 111.75 bid.

Rhodia gains

On the foreign front, French chemical company Rhodia's bonds were seen having firmed from levels they held earlier in the week before the news that the company will sell €600 million of new bonds and increase a planned rights offering, while putting in place a previously negotiated new €758 million credit line. Rhodia's dollar-denominated 7 5/8% notes due 2010 were at 92 bid, up from 89.5 earlier, while its 8 7/8% notes due 2011 went to 83.5 bid, from pre-news levels at 80.

A market source said however, that most of the gains had probably come during Wednesday's session, with the bonds unchanged to up only slightly on Thursday.

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