Pathmark jumps on equity investment; AmeriQual, Insurance price; funds see $1.49 billion outflow

By Paul Deckelman and Paul A. Harris

New York, March 24 - Investors were buying Pathmark Stores Inc. bonds and shares Thursday as if it were a "10 for $10 Dollar Days" sale with double coupons after the Carteret, N.J.-based supermarket operator announced that it will receive a $150 million equity investment. Also up sharply were Collins & Aikman Corp.'s heretofore battered bonds and shares, a rise fueled by market rumors that the automotive components maker is trying to line up new financing. Toys "R" Us Inc. bonds, however, gave back most of the big gains they had notched Wednesday on expectations that the bonds will be tendered for as part of the pending acquisition of the toy-store chain by a leveraged buyout syndicate.

In the primary market, two deals were heard to have priced in an abbreviated pre-holiday session, coming from AmeriQual Group LLC and for IAAI Finance Corp. - i.e. Insurance Auto Auctions Corp. - the latter offering restructured with the addition of another year to the maturity and the call protection.

And well after trading had wrapped up for the day - and the week - market participants familiar with the weekly high-yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that $1.49 billion more left the funds than came into them in the week ended Wednesday - the sixth consecutive week in which the funds have bled money, including the $680.5 million outflow seen the previous week, ended March 17.

In those six weeks, net outflows have totaled about $1.733 billion, according to a Prospect News analysis of the AMG figures. The fund flow numbers are considered a measure of junk market liquidity trends.

Outflows have now been seen in nine weeks out of the 12 since the start of the year and the 15th in the last 17 weeks. The year-to-date 2005 cumulative outflow ballooned to some $3.658 billion from $2.168 billion the week before, according to the Prospect News analysis. The figures exclude distributions and count only those funds that report on a weekly basis.

"I believe this underscores what we have been seeing throughout the week," one sell-side source commented, adding that prospective issuers who have not already done so will no doubt soon notice that high yield no longer seems to be a bond issuer's market.

"I think a number such as this goes a long way in explaining some of the difficult executions that we have seen this week," the official added.

However the liquidity of the high-yield asset class is said to hinge primarily on sources other than high-yield mutual funds. And, interestingly, an emerging markets trader speaking to Prospect News on Wednesday professed the belief that money from non-dedicated crossover funds is presently making its way into high yield from the even more beleaguered emerging markets.

Even before the fund flow data was disclosed, sources told Prospect News on Thursday that the high-yield market went from bad to worse during the abbreviated week leading up to the three-day Easter weekend.

Already soured by news about the deteriorating prospects for General Motors Corp.'s debt, which the market heard on March 16, the Federal Reserve's Federal Open Market Committee landed a worse blow to the market on March 22 as it warned of inflationary pressures at play in the U.S. economy, and the rising interest rates that may turn out to be the remedy.

Friday's primary market session saw two issues price for just over a quarter of a billion dollars. One came restructured and wide of price talk, the other came at the wide end of talk.

Thursday's deals

Two issues priced Thursday.

Iaai Finance Corp. (Insurance Auto Auctions) priced a $150 million issue of restructured eight-year non-call-four senior unsecured notes (Caa1/CCC+) at par to yield 11%, wide of the 10½% to 10¾% price talk.

Prior to pricing, the note was changed from a seven-year non-call-three senior subordinated structure.

Deutsche Bank Securities and Bear Stearns & Co. were joint bookrunners for the acquisition financing from the Westchester, Ill., provider of automotive total loss and specialty salvage services.

And AmeriQual Group, LLC, issuing in conjunction with AmeriQual Finance Corp., priced $105 million of seven-year senior secured notes (B1/B+) at par to yield 9%, on the wide end of the 8 7/8% to 9% price talk.

Jefferies & Co. ran the books for the acquisition deal from the Evansville, Ind., supplier of shelf-stable food rations for the U.S. Department of Defense.

That brought the holiday-shortened week of March 21 to a close having $1.7 billion of new issuance in 10 tranches. That compares with the $3 billion in 11 dollar-denominated tranches that priced during the five-session week of March 14.

The week to March 24 ended with $32.7 billion having priced in 119 tranches year-to-date. Hence the 2005 market continues to fall further behind 2004, which had seen $39 billion price in 158 tranches at the March 24 close.

Stile/Masonite to regroup

Thursday did produce at least one bright spot in the primary market.

The bond financing backing Kohlberg Kravis Roberts & Co.'s acquisition of Mississauga, Ont.-based building products company Masonite International Corp. remains in the market, a syndicate source told Prospect News shortly before the market closed on Thursday.

"The company is going to regroup with the capital markets people on Monday," the source said.

Several market sources had told Prospect News on Wednesday that the company had backed away from its $825 million two-tranche deal due to adverse market conditions.

The syndicate source, speaking before the Thursday early close in the bond market, said that it remained to be determined whether or not the deal would retain its previously heard structure and price talk.

Pogo up in trading

Owing to the relative thinness of activity and the quick exit of market players before the early close (2 p.m. ET) Thursday ahead of Friday's full market close for the Good Friday/Easter holiday, traders saw no secondary market activity for either the Ameriqual issue or the Insurance Auto Auctions bonds.

Traders did quote Pogo Producing Co.'s new 6 5/8% senior subordinated notes due 2015, which had priced Wednesday at 99.10, as having firmed to 100.25 bid, 100.75 offered.

They also saw the new 155 East Tropicana LLC 8 ¾% senior secured notes due 2012 at 99.5 bid, par offered, the same level to which those bonds had eased late Wednesday after pricing earlier in the session at par.

And the new Abitibi-Consolidated Inc. 8 3/8% notes due 2015, which had priced Tuesday at par and then fell to 98.5 bid, 99.5 offered on the break, remained in that same context Thursday, just as they had Wednesday.

Pathmark soars

Back among the established issues, Pathmark's 8¾% notes due 2012 "went up a lot" on the company's equity infusion news, a market source exclaimed, quoting the bonds at 99 bid, well up from a 95 closing price on Wednesday.

A trader at another desk had them up even more, estimating that they had gone home Wednesday at 94 bid, 95 offered, before getting as good as 99.5 bid, 100.5 offered, and finishing the day still at 99 bid, par offered.

Pathmark's Nasdaq-traded shares jumped $1.44 (32.14%) to finish at $5.92, on volume of 4.8 million, a whopping 24 times the usual turnover.

The bonds and shares got a giant boost after Pathmark announced that Yucaipa Cos., a Los Angeles-based private equity firm founded by billionaire supermarket mogul Ron Burkle, will buy 20 million newly issued shares, or about 40% of Pathmark's stock, and will also purchase 25.1 million stock rights with exercise prices of $8.50 or $15 a share.

Upon completion of the deal, which is expected to close sometime in the summer, Pathmark's board will be comprised of six current or new independent directors, and five additional directors nominated by Yucaipa.

Also as part of the deal, Yucaipa agreed to provide consulting services to Pathmark for five years.

Besides being able to benefit from Burkle's considerable supermarket management expertise - he successfully merged his Fred Meyer store chain into nationwide supermarket giant Kroger Co. several years ago - Pathmark will use the infusion to upgrade many of its roughly 140 existing stores in New York, New Jersey and metropolitan Philadelphia.

The money-losing grocery chain had announced in December that it was exploring options that included a sale of the company.

Pathmark and Yucaipa may reveal further details about their new arrangement on a Monday morning (10 a.m. ET) conference call.

In a research note Thursday, respected supermarket industry analyst Jonathan H. Ziegler of J.M. Dutton & Associates in El Dorado Hills, Calif., noted that while he was "somewhat surprised that no solid offer had come forth for this well-situated chain of large-box supermarkets, we were gratified" by the announcement of the Yucaipa investment deal.

Ziegler noted that among the "number of positives" about the deal is the fact that Burkle's company "is an extremely sophisticated investor in the supermarket space and has earned generous returns

on its many previous investments in the industry," including the Fred Meyer-Kroger deal and the previous sale of the Ralph's chain to Fred Meyer, and its sale of the Dominick's store chain to industry giant Safeway. He also said that having Burkle and his team aboard in a management consulting role "should add some valuable insight for Pathmark on strategic decisions."

On top of that, the analyst pointed out that "a key reason Pathmark's comps [year-over-year sales comparisons] were not as buoyant as we would have liked was the lack of contribution to sales growth from new and remodeled stores. We believe that this [$150 million] injection should help drive a new growth trajectory."

Acknowledging that some investors "are likely to be disappointed that the company was not sold in its entirety," Ziegler drew an analogy to the residential real estate market, declaring that "rather than sell the entire company today as a fixer-upper at a fixer-upper price now, the Yucaipa investment can be viewed as presenting the opportunity to possibly sell the company in the future as a full remodel."

Toys "R" Us falls back

Also in the retailing sphere, Toys "R" Us bonds - which had shot up solidly Wednesday on market expectations that those bonds will likely be tendered for as part of the company's pending buyout by a Kohlberg Kravis Roberts & Co.-headed LBO syndicate - were seen to have come in sharply Thursday, in the wake of a clarification the Wayne, N.J.-based toy retailer issued late Wednesday, seeking to downplay the notion of a coming bond tender.

A market source quoted the company's 7 7/8% notes due 2013 as having come back down to 93.5 bid from 96.5 late Wednesday, and saw its 7 3/8% notes due 2018 drop back four points on the day to 88.25 bid. Its 8¾% notes due 2021 retreated to 93 bid from 96.875 previously, while its 7 5/8% notes due 2011 lost 1¼ points to end at 98.

Following the strong rise in its bonds Wednesday - five to seven points across the board - amid the general market expectations that they will be tendered for as part of the KKR-led buyout process, Toys "R" Us felt compelled to formally issue a statement in which it cautioned irrationally exuberant bondholders that it "currently has no plans to make a tender offer for any of its outstanding debt securities." It reminded the market that under the planned buyout by the investment group, Global Toys Acquisition, LLC, the company is required to tender for the outstanding bonds "only at the request" of Global Toys Acquisition - and said that so far, it "has not received any such request from Global Toys Acquisition, LLC and does not know if such a request will be made."

Collins & Aikman gains

Back on the positive side, Collins & Aikman bonds, and its shares as well, were speeding higher Thursday, apparently pushed up by the financing rumors in the absence of any other positive news.

The company's bonds were "up significantly," a trader said, on some "strange rumblings." He saw the 12 7/8% subordinated notes due 2012 open at 41.5 bid, 42.5 offered, about the same level at which they had closed Wednesday, and then "ran up" as high as a 51-52 context intraday, before they "retracted a little" to close at 47 bid, 48 offered, still up more than five points on the session. He saw the company's 10¾% senior notes due 2011 open at 80.5 bid, 81.5 offered, climb to a peak of 85.5 bid, 86.5 offered, and then finish at a more moderate 83.5 bid, 84.5 offered.

He cited market rumors that "there was supposed to be a conference call," apparently with the company's bank lenders, sparking "rumors that they were trying to do a second-lien bank facility."

Another trader mentioned the market speculation about Collins & Aikman supposedly trying to line up the second-lien financing as the explanation for a rise in the 103/4s to 83 bid, 85 offered from 79 bid, 81 previously - after first having pushed as high as 86 - while the 12 7/8s firmed to a close at 48 bid, 50 offered from 42 bid, 43 offered earlier.

A market source at another shop saw the 10¾% notes firming four points on the day to 84, but saw the 12 7/8s up just two points to 44 bid. However, another source, at another desk, quoted the latter bonds around 50 bid, a gain of more than seven points all told.

The company's New York Stock Exchange-traded shares zoomed 35 cents (34.65%) to $1.36 on volume of about one million, twice the norm.

Sources in the bank-debt market also heard the rumors about the possibility of a second-lien financing but had few if any details about it. Unlike the bonds the company's bank debt was unchanged on the day and "pretty much quoted around par."

On its March 17 earnings conference call, in which Collins & Aikman disclosed an accounting problem which may force it to restate results back to 2003, announced that it had filed for a 15-day extension of its financial reporting deadline with the Securities and Exchange Commission, and warned that it would still likely not be able to get its results in by the extended deadline, the company said that it would be meeting with its bank lenders during the week just passed. But it said this in the context of a discussion of seeking lender waivers to reporting deadline requirements in its loan covenants, and did not indicate at that time that it was seeking any new financing.

Meanwhile, some investors trying to figure out why the company's stock was up nearly 35% on double the normal volume were exploring a different - and intriguing- theory, as there was some discussion on investment-oriented internet bulletin boards of the possibility that Collins & Aikman rival Lear Corp. might make what one poster suggested would be an "all-cash" offer for Collins.

Skeptics, however, gave the notion of a Lear bid for Collins short shrift, noting that Lear - which, like Collins, manufactures automotive interior components - already has plenty of manufacturing capacity in a slow market for its products, and is looking to move away from a low-margin commodity business like low-tech auto components, not get deeper into it.

And referencing recent speculation market speculation that Collins' problems might ultimately even lead to a bankruptcy filing - speculation ridiculed by Collins & Aikman boss David Stockman on the conference call - the skeptics also asked rhetorically: why should Lear pay good money to buy its competitor now - when it could in theory pick up whatever assets it fancies out of Chapter 11 for pennies on the dollar?

Charter up on note swap

Elsewhere, Charter Communications Inc. bonds were "up a decent amount," a source said, after the St. Louis-based cable operator announced that it had convinced some institutional holders of its 8¼% notes due 2007 to swap their bonds for new bonds carrying a slightly higher interest rate, but with a 2014 maturity and a higher position in the capital structure.

That sent the remaining 81/4s up to 96.5 bid from 92.75, while its benchmark 9.92% notes due 2011 rose to 78.5 from 75.75. Charter's 11 1/8% notes due 2007 firmed to 82 bid from 79.5, and its 8 5/8% notes due 2009 ended at 79, up from 76.25.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.