Midwest Generation mega-deal prices; Pegasus pummeled; funds see $17 million outflow

By Paul Deckelman and Paul A. Harris

New York, April 15 - Midwest Generation LLC electrified the high-yield primary market Thursday, as the unit of California-based power generator Edison Mission Energy was heard by market sources to have sold $1 billion of new 30-year second priority senior secured notes. Other issuers seen having priced included Extendicare Health Services Inc., XM Satellite Radio Inc. and AGCO Corp., the latter a euro-denominated offering.

In the secondary market, Pegasus Communications Corp. bonds and shares were sharply lower in response to the Bala Cynwyd, Pa.-based TV programming distribution company's loss of a key court battle. Regal Cinemas Corp.'s bonds were being quoted as substantially higher levels after the company announced plans to take them out via a tender offer.

Late in the session, market participants familiar with the weekly high-yield mutual fund flow statistics compiled by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, $17 million more had left the funds than had come into them.

The nearly flat number is an apparent reflection on the relatively low level of market activity in the past week due to religious holidays, which produced a half-session this past Thursday, a full market close on Friday and reduced activity levels on Monday and Tuesday.

Even so, it represents a reversal of the positive trend seen in the previous week ended April 7, which saw an $88.4 million net inflow.

While inflows have been seen in eight weeks out of the 15 since the start of the year, the overall year-to-date trend is still decidedly negative, as strong gains recorded in the first four weeks of the year were more than offset by two straight weeks of billion-dollar-plus outflows in February, and a choppy pattern since then - inflows for a week or two, followed by outflows, then again by inflows, and so on, for a cumulative net outflow of $1.538 billion since the start of the year according to a Prospect News analysis of the AMG numbers, counting only those funds which report on a weekly basis and not including distributions. There has been a total cumulative net outflow of $2.904 billion in the 11 weeks since the large outflows began in the week ended Feb. 4, according to the Prospect News analysis.

Junk players watch the weekly AMG numbers as a reliable barometer of overall junk market liquidity trends, even though the funds make up only part of the money coming into the wider junk market universe. Since the AMG numbers began heading south in early February, secondary market performance, as gauged by indexes published by the major investment houses, has been uneven at best, generally zig-zagging up and down more or less in tandem with the fund flows.

However, high yield primary activity seems to have continued along pretty much unaffected by the weekly ups and downs, as investors look to put all of the accumulated cash they have to work and issuers look to borrow as much money as they can while interest rates remain at historically low levels. The result has been a busy, constantly growing calendar, and some pretty big deals.

In that vein, Thursday's primary market session unwound at a brisk pace as the investment banks priced just under $1.5 billion and €200 million in six tranches.

The biggest deal came from Edison Mission Energy subsidiary Midwest Generation, LLC, which sold an even $1 billion of 30-year bonds.

Meanwhile the forward calendar built notably, as timing and/or other information surfaced on five deals.

Feels like there is still cash out there to be put to work

Commenting on the $17 million outflow, one senior sell-side official simply stated: "That's nothing."

The official especially pointed to Thursday's transaction from Duluth, Ga.-based farm equipment maker AGCO Corp., which priced €200 million of 10-year senior subordinated notes (B1/BB-) at par to yield 6 7/8%, at the tight end of the 6 7/8%-7 1/8% price talk. Bookrunners were Morgan Stanley and Bear Stearns & Co.

"Granted it was a mainly European execution but it priced fine," said the official. "It was double-B on one side. It priced at 6 7/8%, tight to talk.

"I think there is a lot of concern about the way Treasuries are going," the sell-sider added, referring to the 10-year note's close at 4.40%.

"I think investors are trying to figure out where it goes from here. But all in all I think spreads are still relatively wide. And I think there is still room for spreads to tighten.

"And it feels like investors still have cash. They may be a little more cautious about where they put it but there is still cash out there that is going to be put to work."

Midwest Generation prices $1 billion

The day's biggest deal by far came from Midwest Generation, LLC and Midwest Finance Corp., which sold $1 billion of putable second priority senior secured notes (B1/B-) at par to yield 8¾%, wide of the 8¼%-8½% price talk.

Credit Suisse First Boston, Citigroup, JP Morgan and Lehman Brothers were joint bookrunners on the debt refinancing deal.

XM Satellite Radio Inc., of Washington, D.C. priced a far smaller deal - an upsized $200 million of five-year senior secured floating-rate notes (Caa1/CCC+) at par to yield three-month Libor plus 550 basis points. Price talk was Libor plus 550-575 basis points.

Bear Stearns & Co. ran the books.

Extendicare Health Services Inc., a Milwaukee-based long-term care services provider, sold $125 million of 6 7/8% 10-year senior subordinated notes (B2/B-) at 97.50 to yield 7.229%, towards the wide end of the 7%-7¼% price talk.

Lehman Brothers ran the books on the debt refinancing deal.

The Williams Cos. Inc., in conjunction with Credit Linked Certificate Trust II, sold $100 million of five-year senior unsecured floating-rate certificates of beneficial ownership at par to yield three-month Libor plus 325 basis points.

Citigroup ran the books for the Tulsa, Okla.-based natural gas transportation and storage company.

On April 6 The Williams Cos. Inc. and Credit Linked Certificate Trust sold $400 million of five-year fixed rate senior unsecured certificates of beneficial ownership at par to yield 6¾%.

Finally, Radnor Holdings Corp. sold $70 million of five-year senior secured floating-rate notes (B3/B) at par to yield three-month Libor plus 675 basis points.

Lehman Brothers ran the books for the debt refinancing deal from the Radnor, Pa.-based producer of foam packaging and specialty chemical products for the food service, insulation and protective packaging industries.

Fistful of new offerings

Information circulated Thursday on five new offerings in the high-yield pipeline.

A roadshow will get underway on Friday, April 23 for Emmis Operating Co.'s offering of $350 million of senior subordinated notes (expected ratings B2/B-), which are expected to take price on April 28.

Goldman Sachs & Co., Deutsche Bank Securities, Banc of America Securities and Credit Suisse First Boston will run the books on the debt refinancing deal from the wholly owned subsidiary of Emmis Broadcasting Corp., an Indianapolis-based diversified media firm with radio broadcasting, television broadcasting and magazine publishing operations.

Also, Polypore Inc. is expected to launch an offering of $200 million of eight-year guaranteed subordinated unsecured notes (Caa1) during the week of April 19 via JP Morgan.

The North Charleston, S.C. manufacturer of specialized microporous filtration products will use the proceeds to help fund Warburg Pincus LLC's acquisition of Polypore from The InterTech Group Inc. and GTCR Golder Rauner LLC, expected to be completed in the second quarter 2004.

An April 19-26 roadshow was announced Thursday for Sea Containers Ltd.'s $150 million of 10-year senior notes (B3/B), with Citigroup at the helm.

The Hamilton, Bermuda-based marine container lessor, passenger and freight transport operator and leisure industry investor will use the money to repay debt.

Waste Services Inc. will start a roadshow on Friday for $160 million of 10-year notes (B-), with pricing expected to take place on April 23.

Lehman Brothers will run the books on the deal from the integrated solid waste services company from Burlington, Ontario.

Finally, Regal Cinemas Bonds Corp., a subsidiary of Knoxville, Tenn.-based Regal Entertainment Group, will start a roadshow late in the week of April 19 for a $400 million offering of subordinated notes, via Credit Suisse First Boston.

A little more correcting

The news of a modest outflow from the high yield mutual funds would not have surprised a buy-side source who spoke to Prospect News on background, Thursday morning.

"I think the high yield still needs to do a little more correcting via a vis Treasuries," the investor commented. "I think we're going to see some outflows because of the push-up in Treasury rates. But I think it will be a mild correction.

"I think the market will stabilize by the second half of the year."

New deals near issue, XM up

When the new Midwest Generation 8 ¾% second priority senior secured notes due 2034 were freed for secondary dealings, they were seen little moved from their par issue price, finishing at bid levels around 100.25-100.375.

A trader quoted Extendicare's new 6 7/8% senior subordinated notes due 2014 as having opened at 98 bid when they were freed, up from their 97.5 issue price, and then "they traded below issue and slightly above issue." By the end of the day, he saw them straddling the issue price, at 97.25 bid, 97.75 offered.

A trader saw XM Satellite Radio's new senior secured floating-rate notes due 2009 offered at 102, but saw no bids for the satellite radio company's notes. At another desk, the notes were quoted bid up about a point from their par issue price on the break, to 101 bid, 101.5 offered, but a trader stressed that he himself "really didn't see anything except offered there [at 101.5]. I don't think there was anything to do in that in the afternoon."

A market source said that the Washington, D.C. -based satellite radio broadcaster's existing bonds "didn't look like they moved," quoting its 2009 senior discount notes at 95.5 bid and its 2009 and 2010 subordinated zeroes both at 58.

Pegasus drops

Back among the established issues, the source said that Pegasus bonds "dropped significantly" in response to the company's legal setback.

He quoted the company's 12½% notes due 2007 as having dropped to 85 bid from 89 previously, while its 9 5/8% notes due 2005 and 9¾% notes due 2006 were likewise down four points each at 84 bid and 85 bid respectively. Pegasus' 12 3/8% notes due 2006 were heard three points lower at 84 bid, while its 11¼% notes due 2010 were heard really down, dropping to 75 bid from 82 previously.

At another desk, a trader saw the bonds "only offered," with the 111/4s offered at 77, the 12 3/8s at 85 and the company's zero-coupon/13½% notes due 2007 were offered at 70, all down about six or seven points from levels they held just a few days ago.

"They need new lawyers," he observed, "they always lose everything."

After the financial markets had closed Wednesday, Pegasus announced that a Southern California federal jury had found that Pegasus had failed to honor the terms of a joint marketing agreement with satellite broadcast giant DirecTV, whose programs Pegasus distributes to its mostly rural customers. The jurors found that Pegasus should have reimbursed DirectTV for certain subscriber acquisition costs DirecTV had incurred "on Pegasus' behalf," and awarded DirecTV $51.5 million in the case, which Pegasus may appeal.

Pegasus equity investors were as distressed with the ruling as its bondholders; they took the company's Nasdaq-traded shares down $5.06 (16.75%) to $25.15, on volume of 817,000 shares, nearly four times the norm.

Despite the legal win, there was little movement in DirecTV's 8 3/8% notes due 2013, which "stayed put" at 113.25 bid, a market source said.

Delta lower as CFO goes

Elsewhere, Delta Air Lines Inc. announced that its chief financial officer, M. Michele Burns, will leave the Atlanta-based air carrier at the end of the month to take a similar position with Atlanta-based energy operator Mirant Corp., currently restructuring in Chapter 11.

News of Burns' impending departure - the second high-profile exit from Delta in as many months - sent the company's 8.30% notes due 2029 down 2½ points to 53 bid, 55 offered, a trader said, quoting its 7.70% notes due 2005 half a point lower at 86 bid, 87 offered.

Delta shares lost 72 cents (9.05%) to $6.98 in busy New York Stock Exchange Trading of 12 million shares, about two-and-a-half times the usual turnover.

And in the convertibles market, a sellside trader said that both of the company's convertible issues, the 8% notes and the 2 7/8% notes, were "very active and swatted hard," with the 8s losing more than three points to close at 71 bid, 71.5 asked and the 2 7/8s - on a full hedge - plunging more than seven points to close out at 19 points bid, 19.5 points asked.

The trader said that "this is not the time for the CFO to be leaving" - not with the Number Three carrier having reported another sizable quarterly loss on Wednesday, as it tries, so far with little success, to convince its pilots to take a huge paycut so Delta can bring its cost more in line with those of low-budget rivals making inroads in its core markets.

On top of that, Burns' departure comes just weeks after the announcement in March that then-Delta president Fred Reid had jumped to Virgin Airways to lead the formation of a new budget carrier in the U.S.

"Who's running the show [at Delta] is very important for the next six to nine months," the trader declared.

Also among the air carriers, Continental Airlines' 8% notes due 2005 were quoted at 95 bid, 96 offered, little changed; the Houston-based Number-Five U.S. airline said its first-quarter loss was $124 million ($1.88 per share) versus its year-ago loss of $221 million ($3.38 a share), but warned that sky-high jet fuel costs - now about $38 per barrel - jeopardize its previously expressed goal of breaking even for the year.

Northwest Airlines' 7 7/8% notes due 2008 were seen down about a point, at 79 bid.

Levi rises again, Regal up

On the upside Thursday, Levi Strauss & Co. bonds continue to firm, with a trader quoting the San Francisco-based jeans maker's 11 5/8% notes due 2008 as having advanced to 88.25 bid, 89.25 offered, from 86 bid, 87 offered on Wednesday.

And Regal Cinemas' 9 3/8% senior subordinated notes due 2012 were being quoted up around 119.5 bid, well above recent levels in a 112-113 context, following the announcement by the Knoxville, Tenn.-based movie theater operator that it will tender for those bonds, at a price to be determined (see Tenders and Redemptions elsewhere in this issue for full details).

Overall, a trader said, there was "not huge action, in either new issuance or secondary. But the market tone felt better."

Another trader agreed that the market was firmer, although he characterized things as "pretty quiet. We had a big sell-off [Wednesday], but we just reversed course [Thursday] and it was back up."

Much of the activity, he said, "was Street-driven - I didn't see a lot of customers involved. Flows were light pretty much across the board. There was nothing really notable to report."

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