Pathmark slides on loss, default warning; Rent-A-Center lower; funds see $128 million inflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 9 - Pathmark Stores Inc. bonds and shares were seen on the slide Thursday after the Carteret, N.J.-based supermarket operator reported an unexpected swing into the red in the latest quarter and warned that it could be in default on credit facility covenants. Also lower was Rent-A-Center Inc, which issued bearish guidance.

No bond issues priced in the high-yield primary during Thursday's session.

However as two new roadshow starts were announced - one dollar- and one euro-denominated - sources advised Prospect News that the new issue market is stepping out of its warm-up suit and will quite soon be bringing a number issuers, both U.S. and European, to the starting blocks.

Along with persistent rumors of a growing pipeline, sources said, the evidence for the pending buildup can be inferred from the liquidity of the asset class, seen to be improving on Thursday.

After trading had ended for the session, late-working market players familiar with the widely followed weekly high-yield mutual fund-flow statistics compiled by AMG Data Services Inc. of Arcata, Calif., told Prospect News that some $128 million more came into the junk funds than left them in the week ended Wednesday.

It was the third consecutive week of inflows, following the nearly $269 million inflow reported to have occurred during the previous week, ended Sept. 1. Over the past three weeks, inflows have totaled nearly $661 million, according to a Prospect News analysis of the weekly figures, more than making up for the $504.1 million of cumulative outflows seen in the previous four straight weeks, dating back to July 28. The fund-flow numbers are considered a key barometer of overall junk market liquidity trends.

Even with the not-unimpressive inflow total of the past three weeks, however, the year-to-date fund-flows number remains mired deep in the red at $4.264 billion, according to the Prospect News analysis, although that cumulative outflow was down from about $4.392 billion the week before. Inflows have been seen in 16 of the 36 weeks since the beginning of the year, with outflows in the other 20 weeks.

"It's the third straight week of inflows," one sell-side official observed. "We had $280 million, then $260 million, and now $128 million.

"The trend is definitely turning positive, but these are small numbers," the source continued. "On a year-to-date basis we're still around negative $4.1 billion.

"So mutual fund flows are still negative."

This official contended that the statistical significance of the weekly fund flow number may be diminishing somewhat in light of the present make up of the buy-side.

"I think the number is still meaningful, but I don't think that it is as meaningful as it used to be three years ago or five years ago," said the sell-sider.

"It's still a good barometer. But at the same time it's a lagging indicator.

"Five years ago we used to say that the high yield mutual funds represent 20%-25% of the high-yield buyer base. I don't think they're as relevant as that anymore. I think the high-yield mutual funds are becoming a smaller portion of the high-yield buyer base because of the influx of the insurance companies and the hedge funds, and all the other wise guys on the Street."

Look to the aftermarket

The sell-side official estimated that at present the high-yield mutual funds could represent less than 20% of the liquidity of the asset class.

"The best indicator of primary issuance is basically monitoring the secondary market a little closer," the source said.

"You want to know what the buy-side is doing - whether they're buying or selling. Right now that seems to be the best indicator of liquidity in the market."

Prospect News followed by inquiring whether evidence gleaned from the activity in the secondary market is presently telling a story that differs markedly from that which can be inferred from mutual fund flows.

"Right now the stories are very consistent," the source said.

"People have cash and they're going to put it to work."

Looking for calendar to build next week

Another sell-side official who spoke to Prospect News after word of the third consecutive inflow circulated the market was less equivocal about the news.

"People are excited about yield and there is a lot of money to be put to work," said the investment banker.

"There is a lot of money coming into the market. And everybody is looking forward to the anticipated build up in the new issue calendar, which is expected to really start coming out next week."

Sbarro rises

From the secondary vantage point, with sizable inflows seen over the past three weeks and not much shaking in the way of new issues, a trader said, "there's money to be put to work," and some of it is finding its way into previously ignored secondary market issues.

He noted, for instance, that Sbarro Inc.'s 11% notes due 2009 had pushed up to 91.5 bid, 92 offered from prior levels around 90 bid, 91 offered, and "I don't know why," in the absence of fresh news out on the Melville, N.Y.-based Italian-style fast food restaurant operator.

He noted the "lack of new issuance and cash to be put to work," and said that investors were "looking for big coupons - and Sbarro certainly fits the bill."

Amkor bounces back

He also saw Amkor Technology Inc.'s bonds "a little better," citing the West Chester, Pa.-based semiconductor products company's presentation before a Smith Barney technology conference as the likely catalyst in the rebound for the bonds, which had been easier over the past two sessions.

He quoted Amkor's 7 1/8% notes due 2011 "up three points from [Wednesday]" at 81.5 bid, 82.5 offered. At another desk, however, a trader saw the 7 1/8s at 79 bid and quoted the company's 7¾% notes due 2013 unchanged at 81 bid.

Pathmark plunges on earnings release

But the major movement of the day was to the downside, with Pathmark's 8¾% notes due 2012 quoted as having fallen to 93.5 bid from 100.75 previously, after the release of poor earnings figures and the warning that it may fail to meet the covenants on its credit facility at the end of the quarter, potentially putting it in default.

At another desk, a trader pegged the bonds considerably higher, at 98 bid - but allowed that since this was a morning quote "it's probable that the bonds continued to fall after that and ended much lower."

Other traders, however, said they hadn't seen the bonds all day.

Pathmark reported that it lost $1.6 million (five cents a share), in the second quarter ended July 31, a sharp deterioration from its a year-earlier profit of $6.2 million (21 cents a share). The loss caught Wall Streeters by surprise - analysts had been expecting earnings of about four cents a share.

Besides clobbering the bonds, the unexpected loss also hammered the company's Nasdaq-traded shares to the tune of $1.32 (18.41%), down to $5.85 on volume of one million shares, more than six times the usual turnover.

Pathmark blamed weaker consumer demand and tough competition for its loss, and said that with demand remaining weak it had to adjust its earnings estimates for the year downward, from break-even to perhaps 20 cents a share - well down from its previous earnings forecast of 28 cents to 47 cents per share.

Due to the lower earnings projections, the company said that it was likely that it would not be in compliance with certain credit facility covenants by the end of the current quarter.

Pathmark said it was in talks with its lenders, in hopes of coming up with a new credit facility with easier covenants, and closing on it within the next 30 days.

Rent-A-Center eases on lowered guidance

Another company presenting a gloomy forecast for the coming quarter was Rent-A-Center, which warned that higher gas prices would cut into expected earnings for the third quarter. The Plano, Tex.-based furniture and appliance rental chain operator said that it expects third-quarter earnings of 47 cents to 48 cents per share - down from the 58 to 60 cent range that it had previously forecast, with analysts projecting 60 cents a share.

The lowered guidance caused the company's Nasdaq-traded shares to fall $4.43 (14.46%) to $26.20 on volume of 5.9 million, more than 12 times the usual activity level.

However, the company's 7½% notes due 2010 were down more moderately, losing a point to end at 104.25.

Calpine gains

Back on the upside, Calpine Corp. - riding a positive wave that includes projections of record power demand in its home base of California, short-covering from previous declines and recent asset sales - continued to push upward on Thursday. The San Jose, Calif.-based power generator's 8½% notes due 2010 were quoted by a market source up a point at 80 bid and its 7 7/8% notes due 2008 rising to 64.5 bid, up a point.

At another desk, a trader the company's 8½% notes due 2008 up 2¼ points on the day at 66.25 bid, 67.25 offered, while its 8½% notes due 2011 were a point up at 64.5 bid, 65.5 offered.

A pair of roadshow starts

The primary market heard news Thursday of a pair of deals about to take positions on the starting line.

The roadshow starts Wednesday for Riddell Bell Holdings Inc.'s $140 million of eight-year senior subordinated notes (B3/B-), which are expected to price on Sept. 23.

Goldman Sachs & Co. and Wachovia Securities will be joint bookrunners for the acquisition financing from the new Irving, Tex.-based company which was formed from the combination of Riddell Sports Group Inc. and Bell Sports Corp.

Elsewhere European and U.S. roadshows will commence on Monday for Culligan Finance Corp. BV's planned €185 million of 10-year senior subordinated notes (expected ratings B3/B-), which is scheduled to price during the week of Sept. 20.

Citigroup, Banc of America Securities and BNP Paribas will be joint bookrunners for the acquisition deal from the Northbrook, Ill.-based manufacturer and distributor of water treatment products and bottled water.

"It looks like the market is kicking off again and the expectation is for a lot of volume to come through," a European sell-side source advised Prospect News on Thursday.

"Given the hot market conditions - with spreads continuing to tighten in face of large investor demand - deals pulled during the May upheaval may be coming back to the market place."

In particular this source pointed to Corus Group plc, which pulled its €500 million offering of 10-year senior notes due to market conditions on May 14, and Brenntag Finance GmbH which also cited market conditions as it postponed its €190 million offering of 10-year senior notes (B3/B) on May 13.

In the United States, Graham Packaging Holdings Co. said it plans to sell new senior and senior subordinated notes.

Citigroup will have the books on the Rule 144A bonds, according to a market source.

Proceeds will be used to fund the tender for $250 million of 8¾% senior subordinated notes due 2008, $75 million of floating-rate subordinated term securities due 2008, and $169 million of 10¾% senior discount notes due 2009.

The tender is being conducted in conjunction with the acquisition of Owens-Illinois' plastic packaging business for $1.2 billion in cash by the York, Pa., plastic container manufacturer.

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