Refco hauls junk further down; funds see $406.5 million outflow, PolyPipe plans £185 million

By Paul A. Harris

St. Louis, Oct. 13 - It took just two syllables to sink the high-yield market deeper into the mire on Thursday: Refco.

Sources marked the broad market off 1 to 1½ points on the session on speculation that the brokerage titan could sink as low as a company can go - and Refco's own bonds saw their value cut nearly in half.

And the primary market, which has plowed through the horse latitudes throughout the present week, produced a smattering of news - some positive, some much less so.

Elsewhere the high-yield mutual funds saw a $406.5 million weekly outflow for the week ending Oct. 12, as reported by AMG Data Services - the fifth straight.

It follows the previous week's modest outflow which, the source added, had been revised upward to $72.4 million from $69.4 million.

Outflows have now been seen in six weeks out of the last seven, and 12 weeks out of the past 14. During that latter time frame, net outflows have totaled approximately $3.152 billion - up from the previous week's $2.745 billion total, according to a Prospect News analysis of the data.

For the year so far, outflows have now been seen in 32 weeks of the 41 since the start of the year, against only nine weekly inflows.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high-yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and 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.

The figures exclude distributions and count only those funds that report on a weekly basis.

Refco's freefall

As sources recount, every time you turned around on Thursday there seemed to be more bad news about Refco.

The market got down to business knowing that the company's chief executive officer, Phillip Bennett, had been placed on indefinite leave trailing accusations of fraud, relating to $430 million in unpaid debts dating to 1998 which bring into question the numbers that the massive futures brokerage has reported during the past three years.

Later the company imposed a moratorium on withdrawals citing insufficient liquidity at subsidiary Refco Capital Markets.

The moratorium on withdrawals prompted Standard & Poor's to lower Refco's subordinated debt rating to CCC from B-. In doing so, S&P raised the specter of regulators standing between the company and Refco's creditors.

A trader, focusing on the company's 9% bonds due 2012 - which traded near 75 early in the session - told Prospect News that tracking the paper had been a wild and consuming ride.

"There were some dealers who did only one thing all day: trade Refco," the trader commented.

"They didn't have time for anything else."

The trader said the bonds went out Wednesday at 75 bid, 76 offered.

Some nasty rumors and a couple of newspaper articles early Thursday saw some bonds offered at 73 early in the morning.

"Then is was 68 offered," the trader said. "Then you saw a 40-50 market, and you knew something was up."

The source said that the bond briefly fell into the 30s, at which point there seemed to be an emerging perception that the paper was oversold, whereupon it bounced all the way back up to 54 bid.

"Then the news came out from Refco Capital that nobody can withdraw their money," said the trader. "Suddenly the bonds plowed back into the 30s, and stayed there for a while, eventually working their way back up to 33 bid, 36 offered."

The source concluded that the paper had moved up from the lows to "a high 30s, low 40s context by the close."

Another source concurred spotting it at 39 bid, 41 offered going out.

Suffice it to say that in email message exchanges and telephone conversations throughout the Thursday session sources tracked approximately the same dramatic descent in Refco debt.

One source summed up by messaging that the 9% due 2012 fell during the session to 38 from 75.

And the rest of the market with it

Elsewhere in Thursday trading, which was thinned by the Yom Kippur holiday, there were a few other standout stories.

One source mentioned Chicago-based Solo Cup Co., noting that its 8½% notes due 2014 were now trading in the 70s, and that investors seem to be focused on the company's ability to survive.

"Solo Cup was down three points on the day," said a trader late in the afternoon.

The trader saw the paper at 75.50 bid and added that it had been at 82.75 offered "a day or two ago.

"People are starting to discover that this company is 8.5 times to 9 times leveraged," the trader commented. "It's a low-margin business to begin with. Higher energy costs and competition will pose trouble for these guys."

Another trader saw the Solo Cup 81/2s due 2014 at 75.0 bid, 77.0 offered, down more than three points on the day, but wondered to what extent an overall weak market factored in.

"This is the only correction we've had since May," the trader said. "It's a pretty big slide, and there's some velocity in it."

The trader went on to say that junk was "too expensive to begin with," before being inundated by a convergence of too many negative forces.

"The market was still smarting from the airlines," the trader recounted. "Then you had Delphi. And of course you mix in worries about higher rates and higher energy prices.

"Then all of the sudden Refco falls from the heavens into your lap.

"Any negative surprise event is going to continue this trend."

Calpine feeling the squeeze?

Another name that appeared to shudder a bit in Thursday's negative light was that of San Jose, Calif., power generator Calpine Corp.

One source said that Calpine's court battle with Bank of New York and Wilmington Trust, the trustees for Calpine's first-lien and second-lien debt, should it drag out, could limit the company's ability to buy increasingly expensive natural gas. The source added that the $300 million preferred deal that Calpine recently priced gave the company's debt a little bit of a bounce, but it has since fallen.

A trader, meanwhile, saw Calpine's 8½% bond due 2008 at 60 bid, 61 offered late Thursday, down from the 65 context earlier in the week.

The trader noted that on the heels of completing the preferred deal the paper had been as good as 65.0 bid, 66.0 offered.

However this source was also quick to point out that Thursday's sell-off should be seen in the context of the weaker broad market.

That context also likely factored into the softness this trader had seen in DirecTV's 6 3/8% bonds, seen trading around 97.25, off about half a point.

However Thursday's sell-off did not take too big a toll on airline paper, with the exception of Northwest Airlines, which was a little weaker, a trader said, spotting it 27 bid, 28 offered, down half a point.

Recent issues also off

The sell-off also impacted some recent new issues, one trader said.

The source saw Unisys Corp.'s 8% senior notes due 2012 (Ba3/BB-), which priced at par in early September as part of an overall $550 million two-part offering, trading lower Thursday at 93.0 bid, 93.50 offered.

The trader also saw The Neiman Marcus Group Inc.'s 9% senior notes (B2/B-), which priced at par in late September, at 97.25 bid, 97.75 offered, also down on Thursday.

Meanwhile the Neiman Marcus 10 3/8% senior subordinated notes (B3/B-), which came at par in the same transaction, were trading at 95.875 bid, 96.375 offered on Thursday, also down.

Polypipe to start marketing

News of one roadshow start was heard on Thursday.

Pipe Holdings PLC, the parent company of U.K.-based Polypipe Building Products Ltd., will begin a roadshow Friday for its £185 million two-part bond offering, with pricing is expected next week.

The Doncaster, England-based building products manufacturer plans to sell £110 million of six-year senior secured first-lien notes, non-callable for three years (B) and £75 million of eight-year senior unsecured notes, non-callable for four years (CCC+).

Deutsche Bank Securities has the books.

Proceeds will be used to refinance a bridge loan used for the acquisition of Polypipe by Castle Harlan, Inc.

Two bite the dust

Elsewhere in Thursday's primary market the news was negative, however, as two prospective issuers pulled the plug on their deals.

Chinese conglomerate Fosun International Ltd. postponed its downsized $325 million to $350 million offering of seven-year senior notes (Ba3/BB-) on Thursday due to market conditions.

The offering had been downsized from $500 million earlier in the week. The notes, which were being sold in a debt refinancing transaction, had been talked earlier in the week at 9% area; preliminary guidance had been 8 ½% to 9%.

Morgan Stanley and Citigroup were managing the deal.

And quite late on Thursday a market source said that Comsys IT Partners Inc. will apparently not proceed with its $150 million offering of senior notes (B2/B-) via Wachovia Securities and Merrill Lynch.

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