Hercules, iStar, Jo Diamond, KCS price; Goodyear off; funds see $208 million outflow

By Paul Deckelman and Paul A. Harris

New York, March 25 - Hercules Inc. was heard by high yield syndicate sources to have priced an issue of 25-year bonds Thursday - a departure from the usual tenors in the seven- to 10-year range although the deal had a put in year 10 which made it look more like a regular junk structure. Also pricing were scheduled calendar deals from KCS Energy Inc. and Diamond Jo LLC, as well as a quickly emerging deal from iStar Financial Inc. - making its third visit to the capital markets this month, its fifth this year and sixth since Dec. 8.

In the secondary arena, traders reported a generally low level of activity, with market participants still hugging the sidelines and trying to sort everything out. Features included a fall of several points in Goodyear Tire & Rubber Co. paper, although there was no fresh news seen out on the Akron, Ohio-based tiremaker, and a retreat in Tekni-Plex Inc. notes, although there again no news was seen.

Late in the day, market participants familiar with the high yield mutual fund flow numbers compiled weekly by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday about $208.2 million more left the junk funds than came into them. It was the second consecutive weekly outflow, following on the heels of the $264.8 million bleed seen in the week ended March 17. In those two weeks, net outflows totaled $473.0 million, counting only those funds which report on a weekly basis and excluding distributions.

Inflows have still actually been seen in seven weeks out of the 12 since the beginning of the year - but after a strong start during the first few weeks of 2004, continuing the liquidity surge that dominated the fourth quarter of 2003, the recent trend has turned decidedly negative.

Five outflows have been seen in the last eight weeks, according to a Prospect News analysis of the AMG figures, including back-to-back outflows of over $1 billion recorded on consecutive weeks in early February. During that eight-week stretch, net outflows have totaled around $2.802 billion, according to the Prospect News analysis.

For the year to date, the total net outflow grew to $1.428 billion in the latest week from $1.22 billion the previous week, according to the analysis of the figures.

Although the mutual funds make up only part of the total assets in the high yield universe - other money sources include insurance companies, pension funds, endowments and retail investors - their behavior is viewed by many in the market as a reliable indicator of overall liquidity trends in the junk market.

Following the inflows seen in the first weeks of the year, and then the two giant consecutive outflows, the pattern of subsequent fund flows since then has been choppy, with a week or two of inflows alternating with a week or two of outflows.

This has been reflected in the pattern of high yield secondary market performance, as measured by the weekly indexes compiled by the major investment banks; following a strong start early in the year that coincided with the continued inflows, those indexes have mostly shown an inconsistent pattern through February and March, zig-zagging up or down more or less in tandem with the fund flows.

In the primary market, January's red-hot new issuance pace of some $15.7 billion of new paper issued in 56 deals - more than twice the January 2003 total - appears to have cooled somewhat, in conjunction with the liquidity pullback, although deals are still getting done at a fairly brisk - although more sustainable - pace.

And although sources reported a flatness to Thursday's session in high yield, the pace of the primary market picked up in terms of volume.

iStar Financial Inc. brought yet another deal, this time a $250 million drive-by. And terms emerged on deals from three other issuers.

Issues to keep coming "shockingly tight"

One sell-side official who spoke to Prospect News shortly after the news of the outflow hit the market conceded that the news could be taken as one of several signs that high yield is softer than it was two weeks ago.

However, the source warned that it is far too early to start counting the junk bond market out.

"Year-to-date we're something like $2 billion out" as far as fund flows are concerned, the sell-sider said, for openers.

"And it's true that there is still a lot of supply out there," the source added.

"The past two weeks have been weaker in high yield. Secondary levels are off and there is not as much momentum in the primary market. And I think that still holds true today.

"But that doesn't mean whatsoever that the market is closed.

"With any softening, if the market is sliding into negative territory it gives the buy-side a little bit of pull. At the margins it gives the buy-side the opportunity to push for covenant changes or to push pricing to the wide end of price talk. It gives them a little bit of clout.

"But these deals will still price at extremely tight levels," the official contended, "levels so tight that they will shock people just a few years from now."

iStar Financial, part VI

New York City-based finance company iStar Financial Inc., which focuses on the commercial real estate market, made its sixth pass at the high-yield market in five months on Thursday.

The company sold $250 million of 5 1/8% seven-year notes at 99.825 to yield 5.155% in a quick-to-market transaction. The notes priced at a spread of 195 basis points over Treasuries, at the tight end of the 195-200 basis points price talk.

JP Morgan ran the books.

iStar's recent spate of deals got underway last Dec. 5, when the company priced an upsized offering of $500 million of senior notes in two tranches.

Then on Jan. 15, iStar priced an upsized quick-to-market issue of $350 million due 2009.

On Feb. 25 it priced an upsized offering of $125 million of perpetual preferred shares.

And on March 2 the New York City firm priced a quick-to-market $250 million issue of 10-year senior notes followed by $150 million of floating-rate notes on March 5.

Hercules, Diamond Jo, KCS Energy complete deals

Also pricing Thursday were three deals that came with roadshows.

Hercules Inc. sold $250 million of 25-year putable senior subordinated notes (Ba3/B+) at par to yield 6¾%, wide of the 6½% area price talk.

Credit Suisse First Boston ran the books for the refinancing deal form the Wilmington, Del.-based specialty chemical manufacturer.

Meanwhile Diamond Jo, LLC and OED Corp. sold $233 million of 8¾% eight-year senior secured notes (B2/B+) at 98.596 to yield 9%.

Jefferies & Co. ran the books on the deal from the Dubuque, Iowa gaming company, which came at the wide end of the 8 7/8% area price talk.

And Houston-based independent oil and gas exploration and production company KCS Energy, Inc. priced an upsized issue of $175 million of eight-year senior notes (B3/B-) at par, to yield 7 1/8%. the deal was increased from $150 million.

That print was inside of the 7¼%-7½% price talk, with Credit Suisse First Boston running the books.

El Pollo Loco to pluck $40 million more

Another issuer that had done a junk deal in the not-too-distant past returned Thursday with a drive-by discount note offering.

Price talk is 12% area for EPL Intermediate Inc.'s approximately $40 million proceeds of zero-coupon for life senior discount notes (Caa1/CCC+) due 2010.

The issuer is the holding company for Irvine, Calif. quick service chicken restaurant chain El Pollo Loco, Inc.

Jefferies & Co. is the bookrunner on the dividend-funding deal which is expected to price on Friday.

Last December the operating company priced $110 million of notes due 2009 (B2/B), to yield 9¼%.

Meanwhile, price talk is 11¼%-11½% on Radnet Management Co., Inc. (Primedex)'s $150 million of eight-year senior notes (Caa1/B), expected to price on Friday afternoon via Citigroup.

Mueller to market deal

One roadshow start was heard during the Thursday session.

Marketing begins Monday for a two-tranche offering from the Mueller Group Inc., according to a market source.

The deal is expected to price during the week of April 5.

The Decatur, Ill.-based producer of flow control products intends to sell $100-$200 million 7.5-year senior secured second priority floating-rate notes (B3/B-). The floating-rate notes will come with 18 months of call protection.

The company is also offering $200-300 million of eight-year senior subordinated notes (Caa1/B-). The fixed-rate notes come with four years of call protection.

Credit Suisse First Boston is the bookrunner.

Better mood in trading

In the secondary market, "there was a little better tone," a trader said, "but the day was a real yawner. The amount of activity we saw was absolutely non-existent."

Another trader agreed that the market was "kinda quiet, with very little activity."

The first trader noted that while the various indexes of junk market performance were up about three-eighths of a points, spreads narrowed as government paper widened out and the stock market recovered strongly after getting pounded over the previous several sessions, all of these positive developments did little to spur the junk bond market forward.

"People are still being very cautious, playing very defensively, and it really is amazing, they're really afraid," he said.

"You must have a lot of leveraged positions out there that are under water - because the market just acts awful. Considering the news and the economic stuff that's coming out, I wouldn't think that the market would be doing as bad as it is.

"And these outflows aren't helping either," he added, talking about the latest AMG number. "Every week it's another outflow. So that's not helping the situation."

Goodyear down 4

Looking at specific names, Goodyear was lower, with its 7 7/8% notes due 2011 quoted down four points on the day, at 78 bid. No one saw any news out on the tiremaking giant.

There was likewise no news seen out on Somerville, N.J. -based plastics and packaging manufacturer Tekni-Plex - but a market observer saw the company's 12¾% notes due 2010 dipping to 104 bid from prior levels around 107.5.

Elsewhere, J. Ray McDermott's 11% notes due 2013 were quoted unchanged Thursday, at 93 bid, the level to which they had moved down to over several sessions after having traded at par.

Moody's Investors Service downgraded the New Orleans-based oilfield services and construction concern's ratings to Caa1 from B3 previously, citing "a continuing lack of liquidity and very weak financial performance due to losses related to a large EPIC Spar project, a project in Argentina, and an FPSO project."

The Moody's downgrade followed a similar March 19 downgrade by Standard & Poor's, which cut the company' s corporate credit rating to CCC+ from B-. Neither ratings downgrade affects the ratings of J. Ray's parent company, McDermott International.

Trump Hotels & Casino Resorts Inc.'s bonds, which had climbed on Wednesday on a sharp rise in the name's shares amid speculation that the Atlantic City-based gaming company's fortunes would benefit from its equity infusion recent agreement with Credit Suisse First Boston, were unchanged to slightly higher Thursday.

The Trump Atlantic City Funding 11¼% first mortgage bonds due 2006 were seen unchanged at 85 bid, while the Trump Holdings & Funding 11 5/8% notes due 2010 were half a point better at 101 bid.

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