Metaldyne bonds jump on buyout report, Vertis up as well; funds see $153 million outflow in week

By Paul Deckelman and Paul A. Harris

New York, Aug. 31 - Metaldyne Corp.'s bonds - which have been on a firmer trend for the past week on merger and acquisition speculation about the Plymouth, Mich.-based auto parts maker - shot up sharply on Thursday on a news report that the company will be acquired by a Japanese parts maker for as much as $1.28 billion.

That report, and the big boost in Metaldyne's bonds that followed, also gave a lift to such other names in the auto parts parking lot as Visteon Corp. and Lear Corp., traders said.

One auto name which really wasn't going anywhere was Ford Motor Co., the market apparently not very impressed by the troubled Number-Two domestic carmaker's announcement that it will look to sell part or all of its relatively small Aston-Martin luxury sports sedan operation.

Outside of the automotive area, the subordinated bonds of Vertis Inc. were seen up several points on a report that the Baltimore-based publishing company was in talks with several sector peers to be bought out.

A high yield syndicate official said that the broad market traded 1/8 point to as much as ¼ point higher on very light volume, Thursday.

The source added that volume throughout the pre-Labor Day week has been very light.

Meanwhile the primary market produced no news during the last full trading day of the week, heading into the Labor Day holiday break (The Bond Market Association has recommended a 2 p.m. ET shutdown Friday and a full-day market close on Monday).

However primary market watchers tend to be keen to get their hands on whatever evidence is available regarding the liquidity of the high-yield asset class.

Funds see outflow

Late Thursday such evidence emerged.

As activity was winding down for the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday, $152.9 million more left the funds than came into them, reversing the $140.5 million inflow seen in the previous week, ended Wednesday, Aug. 23.

However, even with the latest week's outflow, inflows have still predominated lately, seen in four weeks out of the last six, during which time net inflows have totaled $435.2 million, according to a Prospect News analysis of the figures. Inflows have also now been seen in six weeks out of the past nine - a rarity in a fund-flow landscape so far this year that has been almost completely dominated by outflows. Over those nine weeks, net inflows have totaled $532 million, according to the Prospect News analysis.

But the latest redemptions leave the funds that report to AMG on a weekly basis at negative $3.16 billion year-to-date.

However the funds that report on a monthly basis remain in the black year-to-date, having seen $2.27 billion of inflows thus far in 2006.

Year-to-date aggregate flows, tallying numbers from both the weekly and monthly reporting funds, ended the most recent period at negative $895 million.

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 hedge funds.

Metaldyne motors upward

Clearly the standout issue of the day was Metaldyne, particularly its 11% subordinated notes due 2012, which zoomed into the mid-90s from prior levels in the mid-to-upper 70s, propelled by a report on the widely seen Bloomberg news service - which, in turn, quoted a report on Nikkei English News, a Japan-based newswire - indicating that Metaldyne will be bought by Asahi Tec Corp. for as much as $1.28 billion. Asahi is controlled by New York investment firm Ripplewood Holdings, LLC.

A spokeswoman for Metaldyne, Tina Kozak, the company's manager of communications and public relations, told Prospect News that "it is a news story - it is not a press release" and that there had been no official word on such a deal from Metaldyne or either of the other two companies, Asahi or Ripplewood.

"We're always looking for opportunities to grow the business," she said - but added that Metaldyne does not comment on financial market speculation or on M&A activities.

While acknowledging the company's disclaimer, a trader said that "the company did not announce it - but it's apparently true."

He quoted the 11s as being "up big" at 91.5 bid, 93.5 offered, which he called a 17-point leap from Wednesday's closing levels, while Metaldyne's 10% senior notes due 2013 were 5 points better on the day at 99.5 bid, 100.5 offered.

"Buy the rumor, sell the fact," he said, invoking the traditional market adage about speculative activity. "Both issues have change-of-control puts at 101," which would require the company to buy those bonds back at that price in the event of a change-of-control, he said. However, he raised the possibility that the company might "try to get around" the language.

Another trader, who saw the 11s jump as high as 96 bid from their prior levels in the 70s, before settling in around 94 bid, 95 offered late in the day, while the 10s went to par, also said that "there are issues over this change-of-control put - whether the wording [of the indentures mean that such a deal] will trip the covenants that would allow you to put the bonds."

He didn't know specifically "if the wording allows them to structure the deal to not have to put the bonds, or leave them outstanding. I'm sure that there's some dialogue in trading going around about that."

He added that "right now, everyone's thinking that the predominant thought is that these bonds have a change-of-control put that would allow the bondholders to put them to the company," although he acknowledged that the covenants might be worded in such a way that the company might be able to avoid tripping them.

At another desk, Metaldyne's subordinated bonds were seen having closed Wednesday around 79, and then having opened a few points down from that level on Thursday, and having traded in a mid to upper 70s context on only moderate activity until around 3 p.m. ET, when the Bloomberg news report hit the tape - and right after that the bonds jumped into the 90s, with heavy volume for the remainder of the session, swinging from lows around 90 to highs at 96 before finally settling in around 94 - although there was some light activity, with smaller trades in the 80s very late in the day, a source indicated. The 10s meanwhile had spent most of the day in the mid-90s before jumping to levels in the par area around 3 p.m. ET and then staying there.

Yet another trader pegged the bonds at 92.5 bid, 94.5 late in the day, up from 79.25, calling it a 13 to 15 point rise, while seeing the 10s at 99 bid, 100.5 offered, up from 93.5 bid, 94.5 offered.

Metaldyne tows auto names up

The trader opined that the Metaldyne news - or speculation, if you prefer - "seemed to spark buying in the other auto parts names." Specifically, he said "Visteon and Dana [Corp.] might have moved up on this."

He saw Visteon's 8¼% notes due 2010 at 99 bid, par offered, up 1½ points on the day, while the Van Buren Township, Mich.-based former Ford parts unit's 7% notes due 2014 were up 1½ points "or maybe even a bit more" at 91 bid, 92 offered.

He calculated Dana's 6½% notes due 2008 at 80 bid, 81 offered, up 1¼ points on the session, while the bankrupt Toledo, Ohio-based auto components maker's 5.85% notes due 2015 were ¼ point better at 70 bid, 71 offered, while its 7% notes due 2028 rose ½ point to 74 bid, 75 offered.

And he saw Lear's 8.11% notes due 2009 at 97.75 bid, 98.75 offered, a 1 point gain, while the Southfield, Mich.-based automotive interior and seating components manufacturer's 5¾% notes due 2014 were up 1 point to 1¼ points at 82.5 bid, 83.5 offered.

The rise was by no means universal; the trader saw bankrupt Troy, Mich.-based automotive electronics manufacturer Delphi Corp.'s 7 1/8% notes due 2029 unchanged at 79.75 bid, 80.75 offered, while its 6½% notes due 2009 were actually down ¼ point at 87.75 bid, 88.75 offered.

Another trader agreed that many auto parts names were "up a point on the Metaldyne news."

He singled out Visteon's 7s, quoting them at 90 bid, 91 offered, and also seeing Lear and Dura Automotive Systems Inc. a point better.

The bonds of the latter company, a Rochester Hills, Mich.-based auto parts maker, were seen up between ½ point and 1½ points, with its 8 5/8% senior notes due 2012 rising to 73.5 bid, 74.5 offered from prior levels at 72 bid, 73 offered, a trader said, while its 9% subordinated notes due 2009 firmed to 15 bid, 16 offered, a ½ point gain.

Ford spins wheels

An automotive name seen having traveled little or no distance on the day was Ford, whose 7.45% notes due 2031 were essentially unchanged at 78 bid, 78.5 offered.

Ford's bonds, and those of its financing arm, Ford Motor Credit Co., have been firming over the past week on news stories that have fueled speculation that the carmaker may make major moves to get itself out of the money-losing ditch into which it has driven - among them, the possible sale of a stake in Ford Credit, the possible sale of its money-losing Jaguar operation, Ford possibly partnering up with European and/or Japanese rivals like General Motors Corp. is trying to do, and the controlling Ford family possibly taking the company private, giving it more flexibility to address its problems without having to report to public shareholders. However, the company announcement Friday that it would seek to sell part or all of its Aston-Martin operation to raise capital for its other divisions did little or nothing for the bonds.

While the sporty Aston-Martin gained world-wide fame as the dependable vehicle in which legendary movie spy James Bond sped away from danger in films such as Goldfinger, Thunderball and, more recently, Die Another Day, a trader said selling it would not do very much to let Ford speed away from its current financial danger.

"It's too small. They need to sell a bigger piece," he insisted.

The Ford announcement made no mention of possibly selling Jaguar, a prestigious, but money-losing part of the company's Premier group, which also includes Aston-Martin, Land Rover and Volvo. News reports last week indicated that Ford was in talks to sell Jaguar to an investment group headed by former Ford CEO Jacques Nasser - the man who got Ford to buy the pricy European brands in the first place when he ran the company from 1999 to 2001 - but there has been no official confirmation of such negotiations.

Ford Motor Credit's 7 % notes due 2013 were down ¼ point Thursday at 92.5 bid, 93 offered. Ford arch-rival GM's 8 3/8% benchmark notes due 2033 were meantime unchanged at 83 bid, 83.75 offered, while its General Motors Acceptance Corp. financial unit's 8% notes due 2031 were down ½ point at par bid, 100.5 offered.

Vertis up on M&A report

Outside of the auto arena, a trader said that Vertis' bonds were getting a boost from a DebtWire story indicating that the company was in talks on its possible acquisition with a consortium of other publishing companies, including Quebecor Inc. and R.R. Donnelley & Sons - the latter itself the recent subject of unsuccessful buyout talks with several private equity firms, according to published reports.

He saw the company's 13½% subordinated notes due 2009 up 3 points on the session at 92 bid, 94 offered, while the senior 10 7/8% notes due 2009 were up ½ point at 101 bid, 102 offered, which he said was "no big deal."

A market source had seen the Vertis 131/2s up about a point on Wednesday to 89 amid a generally stronger showing for such other print names as well as Primedia Inc., American Media Operations Inc. and Houghton Mifflin Co., all up half a point to a point.

A spokeswoman for Vertis, reached by Prospect News, had no comment on the reported acquisition talks.

Jean Coutu juniors back up

Jean Coutu Group Inc.'s recently volatile 8½% subordinated notes due 2014 were seen about 1½ points better Thursday, moving up to 95.5 bid late in the day, a trader said.

He compared that bonds' situation to the Metaldyne story, since here too, he said, there was some dispute over whether the bond's indenture requires a company buyback in the wake of the Canadian drugstore operator's recently announced plan to sell its Eckerd and Brooks drugstores to Rite Aid Corp. in a $3.4 billion deal.

That announcement last week initially caused the 81/2s to shoot up 4 or 5 points to par bid levels, but they fell back to lows around 92 after the companies said that the $850 million of bonds would be assumed by Rite Aid rather than bought back by Jean Coutu. That dismayed some large bondholders, spurring speculation that they may get together to challenge the company.

"You're going to see constant volatility in that bond," at least until the situation becomes clearer, the trader said. He said that "one of the large bondholders is putting together a committee of large bondholders, restricting the group to investors that own at least $15 million [of the] bonds. There is a belief out there" that they could try to challenge the company.

"There's a belief out there that there are covenants that would force the company to allow you to put the bonds, but nobody has been able to point to anywhere in the indenture" that would confirm that.

"The company says that everything in the indenture meets the tests that would allow them to keep the debt in the structure that's there," although ultimately "the only change is you substitute Rite Aid for Jean Coutu."

He raised the possibility that the reported bondholder group might be trying to pressure the company to offer holders a consent fee in exchange for dropping their objections to the deal as an alternative to the 101 put, but said he had no real information one way or another.

Jean Coutu's other bond issue, its 7 5/8% notes due 2012 - which have indenture covenants that make it pretty clear that the bonds will be taken out using the proceeds from the asset sale, unlike the more murky wording of the 81/2s' indenture - continued to hold steady at the anticipated 105 takeout level to which they jumped on the news last week of the Rite Aid deal, and at which they have stayed ever since.

Sea Containers bobs up

Elsewhere, a trader said that Sea Containers Ltd.'s 7 7/8% notes due 2008 were up 1½ points at 86.5 bid, 87.5 offered, but cited no news on the Bermuda-based maritime and railroad transportation operator. Instead, he said that its other bonds with fatter, more attractive coupons, such as its 10¾% notes due 2006 and its 10½% notes due 2012 had recently firmed, but the 7 7/8s "lagged behind" because of their smaller coupon and now were "playing catch-up" with the other issues.

A trader said that away from the news-driven moves in such names as Metaldyne and Jean Coutu, "the market was mostly unchanged to better - I think there were more buyers, and I don't think there was anyone around to sell anything, or any impetus to sell anything. So if you had something to do, you were usually looking for an offering.

He said that apart from Metaldyne and Jean Coutu, "the market was probably slightly better bid for, but with not a lot of trading."

The $100 billion issuance mark

Meanwhile primary players are looking ahead to the post-Labor Day market.

According to an analysis of Prospect News data, year-to-date high yield issuance at the end of August stood at just over $85 billion.

The month of August saw issuance topping $10.7 billion in 26 dollar-denominated tranches.

Those figures represent a tally of junk-rated, dollar-denominated, Rule 144A or SEC registered offerings.

A high yield syndicate official, whose institution attempts to weed out emerging markets deals from the tally, said that year-to-date issuance at the end of August stands at $79 billion.

With recent forecasts from Prospect News primary sources for issuance from Sept. 5 through the end of the year ranging from a low of $15 billion to a high of $37 billion, this source, who tallied $95 billion of total issuance for all of 2005, said that 2006 appears to be on track to top 2005 in year-over-year total issuance.

The official went on to say that 2006 is almost certain to top the yearly average issuance of $83 billion, going back to 1992. Again this source's institution counts all junk-rated, dollar-denominated deals, but weeds out emerging markets deals.

Should issuance for the remainder of 2006 come in toward the higher range of sources' estimates, say $25 billion to $30 billion, the year should clear the $100 billion issuance threshold.

According the syndicate official's count if issuance does top $100 billion it will be the fifth time, going back to 1992, that the high-yield new issue market has topped $100 billion.

The other years it did so were 1997, 1998, 2003 and 2004.

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