Day after huge outflow sees more deals pulled, but also something of a comeback

By Paul Deckelman and Paul A. Harris

New York, May 14 - Friday was The Day After the high yield market saw its second-biggest weekly mutual fund outflow ever, the demise of Revlon Consumer Products Corp.'s planned bond offering and several other prospective new deals amid issuer concern over worsening market conditions - but those things did not prove to be the neutron bomb that completely leveled the junk market.

While the primaryside saw no offerings having priced by the closing bell, and in fact saw two more upcoming deals taken off the calendar, at least for now, from Samsonite Corp. and Corus Group plc, secondary market traders said that after some morning weakness they saw the market bouncing back a little from Thursday's bad news and from the whole week's declines later in the session. However activity levels were thin and many players were still hugging the sidelines.

"There was quite a turnaround," in the secondary market, one trader said. He saw JP Morgan's widely followed HYDI junk market index down 1 5/8 points early in the morning - but by the time things rolled up for the day, the tracking index of 100 popular issues was back up about a point on the session at 94.25 bid, 94.75 offered versus Thursday's finish at 93.25.

"That's a pretty big move," the trader said with some understatement - a swing of more than 2½ points on the day.

By way of contrast, he said, the 10-year Treasury note had what was, for that particular instrument, "a huge move," opening down 8/32 from Thursday's close and then bouncing off its lows to finish up 9/32 on the day.

"The low-grade market more than doubled what Treasuries did. It was pretty interesting."

Revlon lower, then bounces

All eyes were on Revlon Friday morning, in the wake of the New York-based cosmetics company's announcement Thursday evening that it had decided to postpone is planned offering of $400 million of new junk bonds. It also terminated its tender offers for its 8 1/8% and 9% senior notes due 2006, and its 8 5/8% senior notes due 2008. Those bonds, which had previously risen to around their anticipated takeout levels when the tender offer was first announced some weeks ago, had been coming down ever since, and on Thursday had fallen several points on signs that the new bond deal was in trouble, including indications that the new issue, were it to have been done, would have carried a coupon of at least 11%, or possibly even above that - factors which caused the company to scuttle the deal Thursday, citing deteriorating market conditions.

On Friday, a market source said, the existing Revlon bonds continued to move down early in the session, with the 8 5/8s dropping to 83 bid from prior levels at 86, while the 9% notes dipped to 96, off a point. He also saw Revlon Consumer Products' 12% notes due 2005, which were not being tendered for, really take a hit, dropping to 108 bid from prior levels around 113. A trader in distressed credits saw the 12% notes down even further, pegging them as low as 103 bid during the session.

But at another desk, a trader saw the Revlon bonds having pushed off their lows on what he termed "a lot of short-covering.

"Guys were short [in the existing Revlon issues] ahead of the deal - and then, when the deal didn't materialize, they had to scramble around to cover the shorts."

He saw Revlon's 8 5/8% notes as having moved up to 87 bid from lows of around 83-84, and quoted the 9% notes closing at 97 bid, 98 offered, up from lows at 94 bid, 95 offered.

Yet another trader said that the 8 5/8s were closing at 85 bid, 86 offered, "well off from they were at the beginning of the week," before the new deal ran into such trouble, while the 8 1/8s were at 95 bid, 97 offered and the 12% notes in the 110-111 area, with "no real movement" day-to-day.

The first trader agreed that short-covering had pushed the Revlon bonds back up from their lows.

In fact, he said, junk market players have "shorted ahead of a lot of these different things - and when they haven't come through they kind of got their butt handed to them."

Salton ends slide

Apart from Revlon, Salton Inc. bonds continued to trade actively for a fourth consecutive session, following the release of poor earnings numbers earlier in the week by the Lake Forest, Ill.-based maker of the George Foreman hamburger grills and other small appliances.

But for the first time, after three sessions of sharp declines that brought its 10¾% notes due 2005 down to the lower 50s from the mid-90s at the start of the week and dropped its 12¼% notes due 2008 as low as the upper 40s from the upper 80s, the Salton bonds seemed to be trying to get off the canvas Friday, with the 103/4s pushing as high as 61 bid from 53 bid, 54 offered Thursday, while the 12 1/4s were five points better, at 55 bid, 56 offered, a trader said.

He cited the fact that the bonds had just gotten so oversold over the past several sessions, as well as the announcement that Leonard Dreimann, Salton's chairman and chief executive officer, had given the company a vote of confidence by buying 50,000 shares. Besides lifting the bonds that also gave the company's battered shares a boost of 63 cents (22.74%) to $3.40 a share, on New York Stock Exchange volume of 2.1 million shares, about nine times the norm. Still, just as the bonds are still well below where they were before the earnings news, the stock remains well below its pre-earnings level at $6.69 at last Monday's close.

Bond and stock investors alike apparently ignored Moody's Investors Service's announcement that it had cut Salton's senior implied rating to Caa1 from B2 and had lowered the company's senior unsecured issuer rating to Caa2 from Caa1, keeping a negative outlook for both, in the wake of the wider loss the company reported and its admission that it was in covenant violation.

Dex better on IPO news

Dex Media's bonds firmed smartly on the news that the publisher of telephone directories had filed a registration statement with the Securities and Exchange Commission for an initial public offering of $1.5 billion of stock in response to the company's plans to buy back a sizable chunk of debt under the equity clawback clause in its bonds' indentures.

A trader saw Dex Media' Inc.'s zero-coupon notes due 2013 move up to 61 bid from prior levels around 58 while at another desk a market source saw them rise to 61 from 59.5. He also saw Dex's 12 1/8% notes due 2012 a point better at 115 and its 9 7/8% notes due 2009 half a point better at 110.5.

The source saw Dex Media West's 8½% notes due 2010 rise to 107.5 bid from 106 previously and Dex West's 9 7.8% notes due 2013 firm to 109.25 bid from 107.

RJR gains

Also on the upside, RJR Tobacco Holdings' bonds "firmed smartly," a trader said, quoting its 7¼% notes due 2012 as having moved up to 94.5 bid, 95.5 offered from 92 bid, 94 offered on Thursday. Its 6½% notes due 2007 moved up to 98.5 bid, 99.5 offered from 97 bid, 98 offered on Thursday, while its 7¾% notes due 2006 were two points better at 102.5 bid, 103 offered.

The North Carolina-based cigarette manufacturer's bonds had been knocked for a loop Wednesday on the news that Florida's Supreme Court will review a lower court's ruling throwing out a $145 million award against its R.J. Reynolds unit and several other major tobacco companies in a cigarette liability lawsuit, but those bonds began to come off their lows Thursday, helped especially by Moody's declaration that the debt ratings of RJR and other defendant companies would likely not be affected by the legal developments in Florida, since the ratings service saw it unlikely that the state Supreme Court would overturn the lower court ruling.

On Friday, the trader said, "the bonds really woke up, and firmed smartly off their lows," although he acknowledged that the Reynolds paper was still off its recent highs of a week earlier, before the legal news from Florida had hit the tape.

Land O'Lakes lower

Downsiders, he said, included Land O' Lakes, with the Minnesota-based dairy products manufacturer's bonds having drifted down to 92 bid, 93 offered from levels around 95 bid, 96 offered the previous week, on fears of what higher milk prices might do to its production costs.

Cole National Corp.'s 8 7/8% notes due 2012 were heard unchanged from the level around 101.25 bid to which they had fallen Thursday, a two point loss, and its 8 7/8% notes due 2012 remained at 106; on Thursday, Cole, the operator of the Pearle Vision Centers chain of eyeglass stores, had said that it looked as though Moulin International, one of two bidders who have made unsolicited buyout offers to Cole, would not be able to come up with the financing for its bid, which is bigger than that of Luxottica, the operator of Pearle rival LensCrafters. On Friday, Moulin confirmed that it was having financing difficulties with its bid.

Nortel heading down

And Nortel Networks' 6 1/8% notes due 2006 were seen down a point at 96.5 bid, after the Brampton, Ont.-based telecommunications equipment maker said that federal prosecutors in Texas had subpoenaed company records as part of an ongoing criminal investigation. The documents requested by the feds include the documents include financial statements and corporate, personnel and accounting records from the start of 2000 to the present.

Nortel's 6 7/8% notes due 2023 were meanwhile seen down as much as five points on the session, at 78 bid.

Buying on weakness

Overall, though, a trader said that things were not as bad as they could have been on Friday. While "a lot of nervous money stayed on the sidelines," he said that after "everyone panicked over the AMG number, in the afternoon it solidified."

Another trader concurred that although trading was pretty thin, "you had a lot of people coming in and buying on this weakness - not too much different than what happened in August 2003, when you had that huge outflow number [$2.56 billion, the biggest ever outflow, versus the $2.145 billion outflow reported Thursday]."

Combined with the overall recent poor tone of the market, which he had earlier characterized as "very skittish and very volatile - people are concerned, to say the least" - he said that "maybe this is the washout that we've been looking for.

"Maybe we can do better from here."

Primary quiet but negative

One investment bank suggested to Prospect News late Friday morning that summer 2004 got an early start, as the primary market sat apparently becalmed, its oar-blades pointing to the sky.

During Friday's session one potential issuer, Oklahoma City-based climate control products manufacturer ThermaClime, Inc., demonstrated a willingness to take the temperature of the market.

ThermaClime started a two-week roadshow on Friday for an offering of $90 million of 10-year senior secured notes (B-), a debt refinancing deal via Jefferies & Co.

Elsewhere the news was uniformly negative. One market observer coined a metaphor using images from the age of chivalry.

"There were issuers out there who were trying to hurry up and get across the moat before the drawbridge went up," said the market observer.

"Well now the drawbridge has gone up and not everybody got across."

Two more postponements

On Friday Corus Group plc and Samsonite Corp. were left on the nether side of the moat as the joined the growing chorus of prospective issuers that have recently sung "Farewell for now," as they postponed deals and headed for the exits empty handed.

Corus stated "conditions in the debt markets have deteriorated materially in response to global events outside the control of the company," as it withdrew its €500 million offering of 10-year senior notes and its tender for the company's 5 3/8% bonds due in 2006.

Denver-based luggage and travel products company Samsonite also cited market conditions as it withdrew its $325 million offering of senior notes and senior subordinated notes on Friday.

Corus and Samsonite joined two companies in the euro market, Brenntag and Stena AB, which pulled their deals on Thursday, and New York City cosmetics firm Revlon, which pulled its $400 million offering on the same day.

One source told Prospect News on Friday that Brenntag never actually put out official price talk on its Goldman Sachs-led €190 million of 10-year senior notes (B3/B). Although the deal's roadshow was well attended, the offering was pulled Thursday as the market appeared to be deteriorating.

The source said that it became apparent that in order to get done Brenntag would have to come 100 basis points behind Debenhams' €172 million tranche, which priced Thursday at par to yield 9½%, wide of its 8¾%-9% price talk. Hence Brenntag walked away.

The most prominent reason for the market deterioration, according to sources: the $2.15 billion outflow from high yield mutual funds reported by AMG Data Services for the week ending May 12.

"This is the longest losing streak since August 2002," one sell-side official said Friday. "If you ignore the $88 million inflow [for the week ending April 9, 2004], we are talking about 11 consecutive outflows totaling over $4.5 billion, which is much bigger than the 11-week total that ended in August 2002, which amounted to $2.4 billion.

"What we have here is an early start to the summer."

"Great time" to buy

Portfolio manager Diane Keefe, whose Pax World High Yield Fund submits the companies it invests in to a series of social issues screens, told Prospect News on Friday that her fund did not see an outflow during the week that ended May 12.

"It's so ironic that people are selling, that $2 billion in market timing money is going out, because they've lost so much money," Keefe said Friday.

"As far as I am concerned this is a great time for institutions to get in. A lot of the higher quality high yield deals that were priced at 7% to 7½% are now more attractive from an investor's point of view.

"I was just looking at the Exco 7¼% notes. I couldn't buy those at a premium. Now they are offered at 98.75. The spread at issue was like 330. Now it's 325.

"So really the spread over Treasuries hasn't changed in most of this stuff, meaning that the risk-reward ratio associated with the underlying business hasn't changed. But the yield has gone up.

"So for anybody who has fixed obligations or a cash need to satisfy, all of the sudden they are able to get a lot more yield for the same risk, which is a good thing for investors."

Keefe said that she did not spend the week of May 10 on the sidelines. The Pax World High Yield Fund was a player in the deal from Warsaw, Ind.-based projection screens and presentation products manufacturer Da-Lite Screen Co. Inc. The company sold $160 million of seven-year senior notes (B2/B-) at par on Thursday to yield 9½%, in the middle of the 9 3/8%-9 5/8% price talk, via Morgan Stanley.

"We bought the Da-Lite Screen deal and it's up," Keefe said on Friday. "It was originally pro forma-ed at 7½%. And with the market chaos it was 9 3/8%-9 5/8% and we bought it.

"This morning it was 101.25-102.25.

"The leverage was low," she continued. "They have a leading market position. It's diversified. They sell these screens that high-end buyers get for their houses. But they also sell them to universities and medical centers - any place where a PowerPoint presentation is being given.

"I think 64% of their revenues come from the U.S. and another 24% come from Europe. So there's growth in the penetration of peoples' abilities to communicate using these simple graphs that you want to see in colorful presentations.

"The reason why it had to come so cheap is that the company had less than one-times leverage before paying out its equity holders, which is bringing it up to a four-times leverage.

"But for us, if it's under five and we think it's a growth business with high margins, we like it."

Keefe sees higher rates priced in

Although a sizable portion of the fixed income world began drumming a funeral dirge in late January, about the time that Alan Greenspan started to hint that historically low interest rates can't last forever, Keefe believes that at this point higher rates could be priced into junk, and possibly into emerging markets corporates, to which Keefe's portfolio has a 6% exposure.

"One economist I saw interviewed yesterday said that a lot of what we are seeing is the unwinding of hedge fund positions that were based on borrowing at a really low cost of capital and just playing the game of being a leveraged investor," Keefe related.

"And as the Fed Funds rate increases, everything that is based off of that rate is going to increase. So the hedge funds are going to have to de-lever.

"We were seeing most of that in emerging markets debt, which has stabilized, pretty much, over the past couple of days.

"I think high yield has been trying to rally in the mornings. And then emerging markets debt, or something else, causes it to trade off in the afternoons.

"I always look at the Brazil 10¼% of 2013. That was up this morning. And it was flat yesterday.

"So this economist was saying that not only have we priced in quite a few rate hikes this year. We've also priced in the idea that there are going to be quite a few rate hikes all through 2005 and 2006.

"I heard today that somebody thinks the Fed Funds rate will be at 2.5% at the end of this year, and 3.5% by the end of 2005. But that's already priced in.

"I'm not convinced that it's going to be a straight shot to 5% before we have any kind of rally here."

FelCor floater talk

Late in Friday's session a source told Prospect News that price talk of Libor plus 400-425 basis points had emerged on FelCor Lodging LP's planned $350 million of seven-year senior floating-rate notes (B1/B-), expected to price on Monday via Deutsche Bank Securities.

Pressed for details on other deals in the market for the week of May 17, the source said there appeared to be no new developments to report.

"It's pretty quiet out there," said the official, just after the close.

"Things appear to have stabilized somewhat. Levels in the secondary market look pretty much unchanged for the day.

"I think the primary market will continue to do about $2 billion of business per week," the source added.

"However I think it may be a while until we see the return of that $3-4 billion per week pace."

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