Charter pulls mega-deal, Funds zapped for $1.2 billion, Dex beams but reprices Friday

By Paul A. Harris

St. Louis, Aug. 14 - The junk bond market finished Thursday's session running on battery power as a massive electrical grid failure doused the lights (not to mention the air conditioners and computers) in New York City and throughout the northeastern U.S.

Nevertheless by the time the electricity went out the market had produced its share of news, both positive and negative, including a $1.2 billion discharge from the high yield mutual funds.

First the positive: throughout the session market sources advised Prospect News that investors appeared charged up by the Dex Media West LLC $1.315 billion of seven-year senior notes (B2/B) and 10-year senior subs (B3/B).

Terms were heard on the deal not long before the blackout, with the seven-year seniors pricing at par to yield 8 ½%, at the tight end of the 8 ½%-8 ¾% price talk, and the 10-year subs pricing at par to yield 9 7/8%, inside of the 10%-10¼% talk.

However, because of the blackout, the deal led by joint bookrunners JP Morgan, Banc of America Securities, Deutsche Bank Securities, Lehman Brothers and Wachovia Securities was expected to reprice on Friday, a source said.

Taking stock of the session's news as the shadow's lengthened on a bond market that was running on backup power, however, it was difficult to escape the conclusion that Thursday's negative news significantly eclipsed the positive.

Late in the session, just before Wall Street lost the juice, sources began bumping around email messages conveying news of a $1.2 billion outflow from the high yield mutual funds for the week ending Aug. 13, reported by AMG Data Services. That outage, combined with those of the three preceding weeks, tallies to a negative-$4.91 billion of weeks only flows for the past four weeks.

And even though the lights stayed on Thursday evening in St. Louis, it was troubled cable system operator Charter Communications, Inc., based in that city, which provided the session's other major negative jolt.

Shortly after Charter postponed its tender for over $5.2 billion of senior notes and senior discount notes, and $790 million of converts a company spokesman confirmed to Prospect News that Charter would be pulling the plug on its re-jigged and re-talked CCH II LLC/CCH II Capital Corp. $1.7 billion senior notes (CCC-) offering.

"The dynamics and fundamentals of the high yield bond market have changed materially since we commenced the (tender) offers July 11," said Charter president and CEO Carl Vogel in a Thursday press release. "The combination of a significant increase in the yield of the benchmark 10-year treasury and mutual fund outflows over the past few weeks made this transaction economically unattractive for the company. We continue to be committed to improve our capital structure over time and will revisit this and other transactions as market conditions improve."

The Charter deal, with Citigroup, Banc of America Securities and JP Morgan running the books, hit the market in late July as $1.7 billion in two $850 million tranches, one each from CCH I LLC/CCH I Capitol Corp. and CCH II LLC/CCH II Capital Corp. However according to market observers that structure proved to be the source of some confusion among buy-siders, not least because one tranche was subordinate to the other. Hence CCH II became the sole note-offering entity.

Having restructured, Charter may have continued to meet resistance, which would be one possible explanation why revised price talk was heard Wednesday: 10 1/8% area from 9 ¼%-9 ½% on the seven-year non-call-four notes, and 10 ¼% area from 9 3/8%-9 5/8% on the 10-year non-call-five notes.

At the end of Thursday's session, even by candlelight, it was Charter that was causing the chatter in the high yield.

"You didn't need the lights on to see that the big news of the day was Charter," one trader quipped as news of the postponement began circulating.

"All of the Charter bonds were lower," added the source, pointing to the 8 5/8% notes of 2009.

"Yesterday they were 76 bid, 77 offered," said the trader. "That's when people thought they were going to get this deal done.

"They opened Thursday at 72.5 bid, 73 offered, continued the source, explaining that at that point Charter had extended the tender so everyone thought they were still doing the deal.

"From that point the bonds got weaker," the trader took up the thread. "The last I saw after the news release a wide 67.5 bid, 72 offered."

The source also gave levels on the 9.92% discount note 2011, which like the 8 5/8 of '09 were also part of the tender offer. On Wednesday, said the source, the discount notes were 67 bid, 69 offered. They opened Thursday morning at 67 offered. At the end of session they were offered at 63.5 with no bid.

Another market source said "Charter's bonds got crushed," and recited levels similar to the above: the 9.92% discount notes 68.5 Wednesday, 62 Thursday; the 8 5/8% 75.5 Wednesday, 69 Thursday.

"What a nightmare!" lamented another trader. "Today was a very strange day. People were totally focused on the Charter deal. Because of the postponed tender tens of thousands of trades are going to have to be broken."

Hence two mega-deals, Dex and Charter, came before high yield investors during Thursday's session. Dex, although roundly said to be getting a sparkling reception, literally had the plug pulled on it, as the lights went out along the Eastern Seaboard. Charter, on the other hand, reached down and pulled the plug itself.

Among the lower voltage deals that remain in the new issue market as the week of Aug. 11 winds down, terms were heard Thursday on the deal from Maryland publisher The Sheridan Group. The company sold $105 million ($103,600,350 proceeds) of 10 ¼% eight-year senior secured notes (B1/B) for 98.667, to yield 10 ½%, bringing the Jefferies & Co.-led deal home at the wide end of its 10¼%-10½% price talk.

Among other pending deals Monitronics International Inc. issued revised price talk of 11 ¾% (from 10¾%-11%) on a downsized $155 million (from $200 million) seven-year non-call-four senior subordinated notes offering (B3/B-). The Dallas-based security alarm monitoring company's deal was reportedly being worked when the lights went out, and is expected to price Friday, via Banc of America Securities.

Oxford Automotive Inc. restructured its $240 million high yield offering on Thursday, and now plans to sell $240 million in two tranches of units comprised of senior secured second lien notes with warrants for 2% of the company (B3/B-).

The deal contains a $140-$170 million of fixed rate tranche due 2011, with a T+50 make-whole call for the first four years, then callable at a premium. Price guidance is 12 5/8% area.

The company also plans to sell $70-$100 million of floating rate notes due 2008, non-callable for three years. Price guidance on the floating rate notes is Libor plus 875 basis points.

The deal, via Lehman Brothers and Credit Suisse First Boston, is expected to price on Friday.

And Charter was not the only issuer to pull the plug on its deal during the session. Gristede's Foods, Inc. cited market conditions as it postponed its offering of $150 million of seven-year notes with warrants units (B3/B). The Jefferies & Co.-led offering was to have funded the acquisition of Kings Super Markets, as well as to repay the New York City-area supermarket chain's debt, and general corporate purposes.

Summing up, one secondary source in a location well away from the blackout said, "The overall market was spotty today. Liquidity was non-existent. You would ask people for bid-side levels, and they would come back wide."

Having said it, however, the source noted a pronounced presence of bargain hunters in the afternoon. "It was a food fight," said the source. "Toward the end of the day, I was seeing people coming in scooping stuff up. At 3:30 the market felt better. But I don't know how it's going to feel after the news of the outflow."

Among aftermarket levels that drew comments from news sources, Thursday, Oregon Steel Mills Inc. 10% of 2009 were heard early in session as having retreated about four points, to 73 bid, after the company posted its second quarter numbers. In the second quarter the company lost $51.9 million, which works out to $1.97 per share. A year ago they turned a $5.2 million profit, or $.20 per share. The figure for the latest quarter includes a $40.4 million asset impairment charge that charge works out to $1.53 per share. Aside from that charge they posted an operating loss in the second quarter of $12.5 million, versus operating income in 2002 of $17 million.

In the latest quarter they had Ebitda of negative $8.1 million. A year ago their Ebitda was positive $29.5 million.

Later in the day, however, a trader saw Oregon Steel paper improve: Wednesday 74 offered. "Going home Thursday at 76 offered, with no bid."

And a trader saw distressed Conseco bonds rising during the session. The unexchanged bond firmed to 39 bid, 41 offered, from 36 bid, 38 offered on Wednesday, the source said. Meanwhile the exchanged bonds went up to 67 bid, 69 offered from 66 bid, 68 offered on Wednesday.

"They filed their second quarter operating results in which they posted a narrower loss," explained the source.

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