Basell prices downsized two-tranche deal; Northwest continues to tumble; funds see $3 million outflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 4 - Basell Polyolefins priced a slightly downsized two-part mega-deal Thursday, consisting of mirror tranches of dollar- and euro-denominated 10-year notes, which were heard to have traded well once they were freed for secondary dealings.

Also on the new-deal front, there was a smallish floating-rate note drive-by deal for New York's dominant drugstore operator, Duane Reade.

In the secondary arena, Northwest Airlines Corp. bonds - which moved lower on Wednesday mostly in reaction to the swoon in the bonds of rival troubled airline carrier Delta Air Lines Inc. - were seen falling several points in their own right Thursday, while Delta's bonds were only modestly weaker.

On the upside, Revlon Inc. bonds were seen initially firmer on the news that the New York-based cosmetics company had narrowed its second-quarter loss and announced several new-product initiatives. However, by the end of the day, most of the early gains had evaporated and the bonds were up only modestly.

And after trading had wound down for the day, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that about $3 million more left the funds in the week ended Wednesday than came into them.

Technically speaking, it was the fourth straight week in which an outflow had been seen, but it's been a downward move without very much conviction, as the only sizable bleed in that time has been the $104.8 million outflow seen in the previous week (ended July 20). The losing streak includes outflows of $52.5 million in the week ended July 13 and $12.4 million in the week ended July 6.

Over the past four weeks, outflows have totaled $172.7 million, according to a Prospect News analysis of the AMG data.

Since the week ended June 1, even though there have been a few more weekly outflows than inflows, a net total of approximately $490 million more has come into the funds than has left them, even counting the latest week's outflow, according to the Prospect News analysis. That surge has helped to revive the junk bond primary market and has given a boost to the secondary market as well.

However, before that, outflows had solidly dominated the first part of the year, including one 15-week losing streak, from mid-February through late May, in which more than $6.7 billion bled from the funds, which are seen as a measure of overall market liquidity trends.

Outflows have now been seen in 24 weeks of the 31 since the start of the year, against only seven weekly inflows. Cumulative net outflows for the year total around $7.212 billion, according to the Prospect News analysis, up from about $7.209 billion last week.

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.

One high yield syndicate official said that on the surface, judging by a spate of issuer-friendly transactions seen in the high-yield new issue market since mid-July, a substantial AMG weekly inflow number would have been a reasonable expectation.

However, the source added, issuance in the primary market on a year-over-year basis compared to 2004 is down substantially.

"The market doesn't really need new money to take care of the issuance we've seen," the source explained, adding that a sufficient volume of existing bonds have been called, and sufficient coupon payments are being made to provide the buy-side with cash to take out the lower volume of issuance seen thus far in 2005.

According to data compiled by Prospect News, the high yield primary market at Thursday's close had seen slightly less than $63 billion of dollar-denominated year-to-date issuance, $24 billion less than had been had priced by the same point in 2004.

The syndicate source also said that new money may be coming into the high yield asset class from institutional investors - hedge funds, insurance funds and pension funds. Allocations from those sources, the official said, are much more challenging to track than is the case with the high yield mutual funds.

Overall on Thursday, rising oil prices and falling stock prices took their toll on junk, according to one source.

"We have been flat most of the week and we're down today," commented the senior high yield syndicate official.

"Equities and jobs data are leading the concern," the source added.

Another sell-side source said the market was off by a quarter of a point on Thursday, and added that it appears that Friday may also belong to the sellers.

Meanwhile in the primary market, three tranches totaling $665 million and €500 million were priced by two issuers.

Basell goes well

Most of the market's attention was focused on the Nell AF Sarl (Basell Polyolefins) deal, which got a warm reception from investors.

The Netherlands-based chemical company priced a downsized €1 billion equivalent issue of 10-year senior notes (B2/B-) on Thursday.

In tranches of $615 million and €500 million, the bonds priced at par to yield 8 3/8%, on top of inwardly revised price talk. Initially the bonds had been talked at 8½% to 8¾%.

Merrill Lynch & Co. and Credit Suisse First Boston ran the books for the acquisition deal.

Of the initial €1.1 billion equivalent planned issue size, €100 million was shifted to the B and C tranches of the company's senior debt.

An investor told Prospect News that the order book for the bond deal was 1.5-times oversubscribed.

Another source said that the bonds traded up in the secondary market.

Duane Reade, at a discount

The only other primary market activity on Thursday came from New York drug store chain Duane Reade Inc. The company priced $50 million of three-month Libor plus 450 basis points senior secured floating-rate notes due Dec. 15, 2010 (Caa1/CCC+) at 95.50.

Banc of America Securities ran the books for the debt refinancing issue.

The company priced $160 million of with the same coupon, maturity and redemption features on Dec. 8, 2004 at par. For tax purposes, however, the notes that priced Thursday will not be fungible with those that priced last December, and will trade under a different Cusip number.

A quiet Friday ahead

The final session of the first week of August 2005 figures to see only one transaction in the primary market.

Lifecare Holdings Inc. is poised to price $150 million of eight-year senior subordinated notes (Caa1/CCC+) via Banc of America Securities and JP Morgan.

The deal is talked at 9% to 9¼%.

A high yield syndicate source said that no drive-by action is anticipated for the Friday session.

Basell higher in trading

A secondary market trader said that Thursday had been "a really slow day - and everything was new issues."

When the new Basell Polyolefins 8 3/8% notes due 2015 were freed for aftermarket dealings a trader said, the new bonds pushed up to 101.75 bid, 102.25 offered, well up from their par issue price earlier in the session.

The new Duane Reade floating-rate notes due 2010 were meantime estimated around 95.5 bid, 96.5 offered, after having priced earlier at 95.5.

Northwest drops

Back among the established issues, Northwest's bonds - which had fallen several points on Wednesday, and in the session before that, on what several traders had called "sector sympathy" along with the pounding the Delta notes had been taking, were seen leading the pack lower - or at least, leading Delta lower - with a trader quoting the problem-plagued Eagan, Minn.-based fourth-largest U.S. airline's benchmark 8 7/8% notes due 2006 down six points on the session at 56 bid, 58 offered.

Another trader saw those bonds at that same 56 bid, 58 offered, although he pegged the bonds down six points on the session, and saw Northwest's 9 7/8% notes due 2007 three points down at 44 bid, 46 offered, while its 10% notes due 2009 lost two points at 39 bid, 41 offered.

A market source saw the Northwest 7 7/8% notes due 2008 down 3½ points at 38.5 bid.

Northwest's Nasdaq-traded shares were off 18 cents (4.12%) to $4.19. Volume of 4.3 million was up slightly from the usual 3.8 million.

Northwest, which has lost hundreds of millions of dollars over the last several quarters and hasn't turned a quarterly profit in several years, is beset by the same problems all the other "legacy carriers" are - sky-high fuel costs (crude oil, a barometer of likely trends in jet fuel prices, pushed back over the $61 per barrel mark Thursday), intense competition from the upstart low-fare carriers, and big pension obligations that the mostly young low-cost companies don't have.

On top of that, Northwest has a nasty labor situation brewing, with the clock counting down to Aug. 20, after which members of the Aircraft Mechanics Fraternal Association can strike, although Northwest claims to have put a contingency plan in place that would allow it to continue operations uninterrupted.

Northwest - which claims to now have the highest labor costs in the airline industry - says it needs $1.1 billion in permanent wage and benefit cuts from its unions, including $176 million from the mechanics.

After a bargaining session Wednesday, AMFA said that Northwest has not budged off its previous proposal - which the union said would mean 53% of Northwest mechanics would lose their jobs because of outsourcing, and the rest would see their pay cut by more than one quarter. The union, in breaking off talks Wednesday night, termed that proposal a "non-starter," and an official of the labor group charged that "the company's strategy has always been to enter bankruptcy in order to get more concessions."

Bankruptcy talk has swirled around Northwest and around its somewhat more financially troubled rival, Atlanta-based Delta, over the past several sessions, following a Washington Post story which suggested that Number-Three carrier Delta and Northwest - clearly the shakiest major carriers not already bankrupt (like UAL Corp. unit United Airlines and US Airways Group) - are likely to seek Chapter 11 protection before new changes in the federal bankruptcy code making it less friendly to debtors take effect in mid- October.

Delta down again

Delta has been particularly hard-hit by the speculation, with its flagship 7.70% notes due 2005 having nosedived about 25 points over the past two sessions into the upper 30s. On Thursday, a trader said, Delta was "going down for the count," although he saw the bonds only falling a little. The 7.70s declined to 37 bid, 39 offered from 39 bid, 42 offered on Wednesday, while its 10% notes due 2008 and 7.90% notes due 2009 were each off a point, at 21 bid, 23 offered and 19 bid, 21 offered, respectively. He saw the company's 8.30% notes due 2029 "actually unchanged," at 18 bid, 20 offered.

Another trader saw those 8.30s down a point at 18 bid, 19 offered, while the 7.70% notes were 38 bid, 40 offered, down two points.

Delta's New York Stock Exchange-traded shares lost eight cents (3.45%) to end at $2.24. Volume of 7.5 million shares was half-again as much as the usual 5 million share handle.

Besides the speculation that Delta may file to beat the deadline on the federal bankruptcy law changes, investor opinion that a filing may be in the cards sooner rather than later was piqued anew by recent pessimistic statements by company chief executive Gerald Grinstein, and by a memo from Grinstein to Delta employees earlier in the week, in which he seemed to say that Delta might not be able to hold out much longer, absent held from Washington on pension costs and an amelioration of the carrier's high fuel costs.

Revlon better on earnings

Apart from the airlines, Revlon released second-quarter numbers Tuesday, showing a somewhat narrower second-quarter net loss versus a year ago. The company also outlined plans for two new product initiatives that it said would "significantly accelerate top-line growth and further build the Company's position in the mass-market color cosmetics category." It further announced its intention of issuing $75 million of new debt in the current third quarter, and increasing to $185 million the amount of equity it will sell. With most of the equity proceeds to be used for debt reduction (see related story elsewhere in this issue).

A market source saw the 8 5/8% subordinated notes of the company's Revlon Consumer Products Corp. initially firming about a point in response to the numbers, but then giving half of that gain back to end up half a point at 98.25 bid.

A trader agreed that Revlon "was up about a point this morning- but settled back down later on to end unchanged." That trader pegged the 8 5/8s at 97.25 bid, 98.25 offered.

Williams firm on results

The Williams Cos. bonds were seen steady to a little higher, after the Tulsa, Okla.-based energy operator reported a swing to a second-quarter profit of $41.3 million (seven cents a share), from a net loss of $18.2 million (three cents a share) a year ago. Williams also sharply increased its U.S. natural gas reserves, by 21% over previous estimates.

A trader said the company's 8 1/8% notes due 2012 were unchanged at 113.75 bid, 114.75 offered, while its 8¾% notes due 2032 were half a point better at 123 bid, 124 offered.

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