Secondary rally continues, but in muted form; M/I Homes, PetroQuest price add-on quickies

By Paul Deckelman

New York, June 3 - The high-yield secondary market continued to have a firm feel to it Friday, traders said, although activity was somewhat muted compared to the positively robust ambiance of the previous several sessions. One possible factor was a turndown in both stocks and Treasuries, which had been setting the pace in the previous sessions.

One of the big financial news stories of the day was L-3 Communications' planned $2 billion acquisition of Titan Corp., but there was not much impact in junkbond land, with the former's bonds understandably seen down a little, but virtually no activity detected in Titan, a bond which rarely trades, market participants said.

In the primary sphere, the pattern of the past several sessions continued - smallish, hastily shopped drive-by deals. In this case, both the M/I Homes Inc. and PetroQuest Energy Inc. transactions were add-on offerings to recently sold bond issues.

One deal did join the forward calendar, as Medical Services Co. was heard by syndicate sources to be preparing to sell $150 million of six-year senior secured second-lien notes. The deal will be marketed to potential investors via a roadshow slated to begin on Tuesday and to last through June 15, with pricing expected shortly afterward. Banc of America Securities will run the books, with JP Morgan also in the syndicate.

The Jacksonville, Fla.-based company - the second-largest procurement provider of ancillary health care products & services to workers' compensation payors in the United States - plans to use the deal proceeds to help repay some of the debt that was incurred when it was bought out by management and an equity sponsor in March.

That $150 million deal is fairly small by the standards of the high-yield market - but it looked positively gargantuan compared with the respective sizes of the two deals which priced, both as quickly marketed add-ons.

PetroQuest Energy Inc. announced the pricing of a $25 million add-on to its $125 million of 10 3/8% senior notes due 2012, which were sold on May 6.

The add-on issue priced at 99 to yield 10.578%. The Rule 144A/Regulation S deal was brought to market by sole book-running manager Credit Suisse First Boston, plus JP Morgan and Raymond James.

The Lafayette, La.-based independent oil and gas exploration and production company said that proceeds of the deal would be used to fund acquisitions and for general corporate purposes.

The day's other pricing was also an add-on, for M/I homes Inc., which priced a quickly shopped $50 million addition to its existing 6 7/8% senior notes due 2012.

The Columbus, Ohio-based homebuilder's Rule 144A additional notes were heard by high-yield syndicate sources to have priced at 98.510 to yield 7.152%, via sole bookrunner Citigroup.

The original 6 7/8s priced on March 17.

Neither new deal was seen to have made to the aftermarket, due to their extremely small liquidity. "They were probably just put away and never did trade," a market source said."

Deals continue recent pattern

The two sudden deals followed the pattern seen throughout the holiday-shortened week, which saw drive-bys from such recognizable names as Beazer Homes USA Inc., Station Casinos Inc., and TECO Energy Inc. Station's was an add-on to an existing issue.

A trader said that he didn't think that "you'll see all the CCCs coming to market in the short term. I think you'd have to see things stabilize to continue to trend up for that stuff to hit. People are a little wary."

However, he continued, "In the short-run, we'll see drive-bys from the guys we all know and love" - meaning recognizable names like Beazer, Station and TECO - "that have good cash flow, the strong single-Bs and the double-B's."

Then, he opined, "if it holds in there, you'll start seeing more of the roadshow stuff with some of the weaker credits."

All of that, he said, would be predicated on a mighty sizable if - if the market "hangs in there, which I'm kind of doubtful of. But we'll see."

Day starts well

The trader characterized the overall junk market as "continuing where it left off last night [Thursday] and continue rallying."

He said things "kind of petered off by the end of the day, but [the market] was probably unchanged or most of it was slightly up, a point or a point-and-a-half for most stuff."

Another trader said that Friday was "a strong day to start generally, after the employment number came out - but late in the day it started fading back and the market just turned right around. Treasuries sold off and so did the stock market." Stocks fell after the Labor Department reported that non-farm payrolls, a key measure of job growth and by extension, economic health, increased by just 78,000 last month - well below the 175,000 most economists had been looking for. Treasuries initially surged on this indicator that the economy is not as robust as previously thought, but gave back those gains on profit-taking later in the day.

Without the strong props of the equity and Treasury market to underpin it, the trader said, "high yield took a little dip at the end of the day, down a quarter, half a point, a point at the end of the day, across the board."

Amkor rally ends

Even the big movers of the past couple of sessions seemed to be pretty much spinning their wheels Friday. While Amkor Technology had firmed smartly earlier in the week on a combination of news that the West Chester, Pa.-based high-tech company's lenders had agreed to more covenant flexibility, and a Lehman Brothers analyst's projecting that the company should return to profitability during the second half of 2005 - versus earlier forecasts of the second half of 2006 - on Friday, the second trader said, Amkor's bonds, like its 10½% notes "were maybe down half a point" on the day. He saw that issue, for instance, after ending Thursday at 80.5 bid, 81.5 offered, trade down to 79 bid, 81 offered. At the end of the day, he said, they were left offered at 81, likely down half a point to a point.

L-3 dips on acquisition news

L-3, he said, was "a little weaker on fears that they might take on more debt" to fund the upcoming purchase of Titan, a San Diego-based provider of specialized services to the U.S. defense and intelligence communities.

Sure enough, New York-based defense electronics contractor L-3 outlined plans to fund the acquisition largely through bank debt and debt securities during a conference call (see related story elsewhere in this issue).

The trader saw L-3's bonds trading down, with is 7 5/8% notes due 2012 ending at 105 bid, 106 offered and its 6½% notes due 2014 in a "98-99ish" context, also off.

The first trader saw the 7 5/8s dip to 104.75 bid, 105.75 offered, down about half a point, while its 6 1/8% notes due 2013 were also half a point down at 98.25 bid, 99.25 offered.

As for Titan, it 8% notes due 2011were not seen trading, even though logic might dictate that they would rise on takeover news. The notes were last seen on Thursday trading around 107 bid.

"We assume they went the other way [from L-3's downturn]" the second trader said, "but they rarely trade. They've been tucked away, like, forever."

Auto gains halt

Outside of that big-deal news, not much seemed to be happening. Even the automotive supply sector, which had been speeding upward the past several sessions, seemed to be stuck in neutral, or even reverse.

A trader saw Delphi Corp.'s bonds, which had been quite strong over the previous several sessions, "kind of trailing off," with the Troy, Mich.-based auto electronics company's 6½% notes due 2013 at 75.5 bid, 76.5 offered, down from 77 bid, 78 offered previously, and its 7 1/8% notes due 2029 unchanged.

Visteon Corp.'s 7% notes due 2014 lost a quarter point to 85.5 bid, 86.5 offered.

Meanwhile Exide Technologies' 10½% notes due 2013 were a quarter point lower at 82.25 bid, 83.25 offered.

Those bonds, and the company's shares, had firmed smartly over the previous several sessions - a trader noted that the bonds were "in the mid-70s on June 1" - on the news that the Lawrenceville, N.J. -based battery maker was meeting with its lenders Thursday to amend its credit facility. There had been some hopes among investors that an announcement of better credit terms might come Friday, but nothing had happened by the time trading ended.

The market's lackluster tone was a little surprising, participants said, coming on the heels of Thursday's report that junk bond mutual funds, a key liquidity measure, showed a $976.2 million inflow - the first inflow seen in 16 weeks, following cumulative outflows in that time totaling some $6.7 billion.

A trader said that the way the market had been trading over the previous few sessions, a big inflow was no real surprise.

"Yeah, felt it. You definitely knew. It wasn't all short-covering, although there has been a fair amount of that going on market-wide. You felt like there were some people actually putting some money to work."

However, he cautioned that big as it was, the $976 million - the biggest inflow seen since September 2003 - was only "one number in one week. We'll see what next week's number is and if we can get three in a row, which I doubt seriously.

"I don't know how long this rally is going to hang in there," although he did concede that "I don't know - people are putting money to work.

"I thought we were going to be continuing the correction through summer, but I guess this is more than a little bounce, so we'll see where it goes from here."

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