Quality Distribution prices add-on; Quebecor dives on failed asset sale; funds see $153 million inflow

By Paul Deckelman and Paul A. Harris

New York, Dec. 13 - Quality Distribution Inc. priced a $50 million add-on Thursday to its existing floating-rate notes due 2012 - pretty much leaving the 2007 high-yield primary cupboard bare, syndicate sources said, but for one last scheduled deal, a two-part offering for Helix Energy Solutions.

In the secondary arena, Quebecor World Inc.'s bonds were seen down around 5 or 6 points on the news that the Montreal-based commercial printer will not continue with a planned asset sale, the proceeds of which were to have been used to help clean up Quebecor's balance sheet.

Retailers were seen lower, the sector not helped by apparently strong numbers coming out of Washington; downsiders included such names as Toys 'R' Us and Claire's Stores Inc.

A high yield syndicate official said that the market had a firm tone on Thursday, but added that nothing in particular was higher on the day.

Fund flows up $153 million on the week

And as trading wound down for the session, market participants familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $152.85 million more flowed into the funds than left them - in contrast to the previous week, ended Dec. 5, when flows of capital into and out of the weekly-reporting funds were essentially flat, the $43,000 inflow seen as a mere drop in the bucket in the grand scheme of things. Nonetheless, it was an inflow, however small, and combined with the latest week's cash infusion, marks the second straight week of gains. That's a departure from the pattern seen in the weeks before that, when there had been four straight weekly outflows, going back to early November.

With 49 weeks now in the books, that latest inflow cut the 2007 cumulative outflow total slightly, to $2.39 billion from $2.554 billion. While strong inflows had been seen in the first half of the year, building up to some $1.6 billion, those inflows pretty much dried up beginning mid-year, coinciding with the subprime-induced market credit crunch, and the pretty much steady drumbeat of outflows since then - interrupted by occasional inflows - wiped out that big early bulge and left the fund flow figures deep in the red, at least for those funds which report on a weekly basis.

Meanwhile, funds reporting to AMG on a monthly basis saw a modest amount of redemptions during the most recent period: negative $62.5 million, slightly reducing their year-to-date inflows to $6.59 billion.

Hence with just 18 days remaining in 2007 the year-to-date aggregate flows, which tally both the weekly reporting and monthly reporting funds, is firmly in the black at $4.2 billion.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - 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, most recently, hedge funds.

Quality sells add on

In the primary market Quality Distribution did the day's only deal, and in doing it produced the day's only primary market news.

The Tampa, Fla.-based freight company priced a $50 million add-on to its three-month Libor plus 450 basis points senior floating-rate notes due Jan. 15, 2012 (Caa1/CCC) at 93.00.

The issue price came on top of the price talk.

Credit Suisse ran the books for the acquisition and debt refinancing deal.

The last deal

With the Quality Distribution transaction having cleared, sources told Prospect News on Thursday that there remains but one deal on the forward calendar for the remainder of 2007.

Houston-based Helix Energy Solutions is marketing a $500 million two-part senior notes offering (B3/B+) via Banc of America Securities

The energy company plans to place tranches of fixed-rate notes due 2015 and floating-rate notes due 2014.

Pricing is expected early next week.

Beyond Helix there are what one market source characterized as some "could-be, should-be, would-be" transactions, some of which are part of the LBO-related risk overhang.

Underwriters who have that risk on their books are maintaining a dialog with the buy-side with the object of determining a price at which the accounts might be willing to participate, sources say.

One investor commented that what seems to be generating the most movement, with respect to the LBO risk overhang, is "reverse inquiry," a process in which one or two accounts express an interest in a portion of the risk at a specific level, creating some momentum which the dealers can use to approach other accounts, hoping to kindle additional demand and thus build a book.

In such a fashion, in mid-November Alltel Communications priced a $1 billion issue of 10 3/8% 10-year senior PIK toggle notes (Caa1/B-) at 91.50, resulting in a yield to maturity of 11.84%, via Citigroup, Goldman Sachs & Co., Barclays Capital and RBS Greenwich Capital.

A buy-side source told Prospect News that the toggle notes deal appeared to have been driven by reverse inquiry, and was believed to have been taken down by an even half dozen of accounts.

Then in late November Texas Competitive Electric Holdings Co. priced $3.75 billion of senior notes in two tranches, in a deal that was driven by reverse inquiry.

Texas Competitive Electric priced $2 billion of 10¼% eight-year series B cash-pay notes at 95.00 to yield 11.216% and $1.75 billion of 10½% nine-year PIK toggle notes at 93.25 to yield 11.747%.

Goldman Sachs & Co., Morgan Stanley, Citigroup, JP Morgan, Lehman Brothers and Credit Suisse were joint bookrunners.

A high yield portfolio manager said that one account was heard to have taken down 60% of both tranches, while another took out $250 million of each tranche.

December, however, has produced very little news on the risk overhang.

Some sources in the investment banks assert that it is still possible that the market could see developments in the LBO-related risk before the end of the year.

However there is a building consensus that the next meaningful developments will take place in 2008.

Winter chill

In spite of a junk bond deal pricing on top of price talk, a "firm tone" to the market and a decent-sized inflow to the high yield mutual funds, optimism seemed to be in somewhat short supply among market sources on Thursday.

Pressed for news an hour after the session closed, one investment banker said: "People just don't seem to be doing anything right now."

Earlier a market watcher mentioned a Thursday report from Morgan Stanley in which its U.S. economics team lowered its 2008 growth forecast to 1.1% from 1.8%, and is expecting a mild recession in the first half of the coming year.

While no one seems to believe that the high yield market could have a banner year in 2008 should the U.S. economy dip into recession, opinion is divided as to how deeply a big slowdown would impact the junk market.

Among those already taking note as to where the lifeboats are positioned, some of the more dire forecasts, should recession take hold, include a primary market that sees next to no business until late February or early March, and an ultra-low issuance total for the entire year (one of these sources, pressed for a number, said $20 billion, a mere one-seventh of this year's roughly $155 billion).

However there is another contingent which insists that two forces will conspire to keep the 2008 primary market operating: ongoing coupon payments that investors will need to put to work, and a dependable parade of companies that need to refinance debt, which, say these sources, those companies will be able to do, albeit at prices considerably higher than those which prevailed during the first half of 2007.

Quality add-on unseen, Legends unchanged

Traders said that the new Quality Distribution floating-rate notes due 2012 were not seen at all in the aftermarket, owing to the small size of the add-on.

A trader meantime saw the new Legends Gaming LLC 12% senior secured floating-rate notes due 2012 trading at par bid, 101 offered, unchanged from the notes' par issue price Wednesday. He said that he had not seen the new 17% secured senior subordinated payment-in-kind notes due 2012, which also priced at par on Wednesday.

A trader said he saw the new SPX Corp. 7 5/8% notes due 2014, which priced at par on Monday, trading at 101 bid, 101.5 offered.

Indexes point lower

Back among the established issues, a trader saw the widely followed CDX junk-bond performance index unchanged in a "quiet" market at 95¾ bid, 96 offered. The KDP High Yield Daily Index moved lower throughout the day, finally ending down 0.21 at 78.06, while its yield widened by 6 basis points to 8.62%. In the broader market, declining issues outnumbered advancers better than five to four. Overall market dollar volume was up about 27% from Wednesday's muted levels.

Quebecor off on cancelled sale

A major mover on the session was Quebecor World, after the company announced its decision not to go through with its previously announced initiative to sell its European operations to RSDB Group for the equivalent of $341 million in cash, stock and debt. The cash would have been used by Quebecor to pay down its debt.

A trader saw the company's Quebecor World Capital 6 1/8% notes due 2013 down 4 points on the session at 76 bid, 78 offered, citing news of the failed sale. Another trader saw those bonds at 77 bid, 78.5 offered, while its other bonds were also languishing in the mid-70s, "all down several points."

A market source saw the 6 1/8s down 6 points, to the 75 level, while its 4 7/8% notes due 2008 retreated more than 4 points to close around 91.

Equity investors were also dismayed by news that the deal was off; Quebecor's New York Stock Exchange-traded shares at one point were down by as much as 40%, and ended up still plunging 40 cents, or 17.86%, to $1.84 on volume of 1.7 million, nearly seven times the usual turnover.

Quebecor said that it will not be proceeding with the sale of its European business to RSDB due to what it termed "the lack of support of the transaction from RSDB's shareholders," who turned the deal down even though it had been agreed to by RSDB's management and the equivalent of its board of directors.

Quebecor said that it "will continue to actively explore its strategic options for its European operations, including consolidation opportunities and other initiatives to enhance value." It further said in its statement that it is "currently evaluating and implementing a variety of options that should compensate for the sale proceeds that will no longer be realized as a result of this transaction not proceeding, including the implementation of new accounts receivable financing programs in Europe," and said that management, the board of directors and Quebecor's independent financial advisor "continue to actively explore and evaluate financing and other alternatives to further strengthen the company's balance sheet and liquidity."

Under the terms of the agreement announced on Nov. 7, the deal was valued at the equivalent of $341 million, to be paid in cash, shares and assumption of debt. The European unit was to have been merged with RSDB's own operations, and RSDB was to have given Quebecor World the equivalent of $213 million in cash, plus a $50 million 8-year note repayable from 2011 to 2015. RSDB was also to have issued 1.4 million new shares of the newly-merged company, RSQ, to Quebecor World, representing a fully diluted 29.9% of its share capital post-closing. RSDB was also to have assumed the Quebecor European unit's pension, legal, and other liabilities.

The defeated deal represented the second straight failed effort to improve the company's finances; last month, Quebecor World withdrew a refinancing plan under which it would have offered C$250 million of stock and $500 million of debt.

Trump slumps on lack of a deal

Elsewhere, the possibility that there will be no deal to sell Trump Entertainment Resorts Inc. pushed the Atlantic City, N.J.-based casino operator's 8½% notes due 2015 lower; a trader saw the bonds off 1 point at 77 bid, 78 offered, noting that "the company has some issues. They're refinancing their bank debt, and there's speculation that the company won't be sold."

There were two efforts this year to try to sell all or at least part of the underperforming gaming operator, both ending in failure. Most recently, Baltimore-based real estate developer Cordish Co. was reported to have been what were described as "serious talks" with Trump, but those negotiations fizzled out. Tightening credit markets and the company's restrictive debt covenants have been blamed as a factor in the failure to reach a deal.

Volatile trading in Tropicana

Ironically, Cordish and former Trump executive Dennis Gomes - also mentioned from time to time as a potential Trump buyer - are now being mentioned as possible buyers of one of the city's other casinos, the Tropicana, after state gaming regulators on Wednesday took the nearly unprecedented step of denying the property a renewal of its gaming license and then appointing a trustee to run it until it can be sold. That sent the bonds of its owner, Tropicana Entertainment LLC, on a wild ride - at one point, a trader said, the 9 5/8% notes due 2014 "were down by as much as 12 points, but the ended up only down 4 points," at 62.5 bid, 64.5 offered.

The New Jersey Casino Control Commission decided that Tropicana chief William Yung and his management team failed to prove they had the business experience, financial ability and good character to continue to hold a casino license. The company has been roiled by customer allegations of vermin and other major problems at the hotel and union complaints of massive layoffs, as well as officials' accusation that Yung failed to comply with regulatory procedures.

Along with the license denial, the gaming commission ordered that the property be transferred immediately to a trustee - a state judge - until a sale can be arranged. According to the company, proceeds from the Atlantic City sale will be used to repay debt under its credit facility, news which sent the company's bank debt soaring even as its bonds were tumbling.

The trustee is required to complete the sale of the Tropicana Atlantic City within 120 days of the transfer of the property to his control, although the commission has the ability to extend this period.

Tropicana Entertainment intends to appeal the Commission's determination through the New Jersey appellate court system.

If the company's appeal is unsuccessful by Dec. 19, it will be in default under its credit facility, and if lenders accelerate the bank debt, then the company will also be in default under its senior subordinated notes and Las Vegas term loan. The company said that it plans to continue to work with its credit facility lenders to prevent an acceleration from occurring.

There can be no assurance that the lenders will not accelerate, which could compel Tropicana Entertainment to seek alternatives, including a possible filing for bankruptcy protection.

In reaction to this news, Standard & Poor's lowered its corporate credit ratings on Tropicana Entertainment and its unrestricted subsidiary, Tropicana Las Vegas Resort & Casino LLC, to CCC from B and placed the ratings on CreditWatch with developing implications.

Retailers retreat despite numbers

Elsewhere, retailing names were seen on the slide - despite a government report indicating that retail sales shot up 1.2% in November, an unexpectedly strong performance by the economic measure. However, it should be noted that at least half of that gain was attributable to higher energy prices, which boosted sales revenues at the thousands of gas stations across America.

But even so, excluding declining auto sales, sales still climbed 1.8% - more than a full percentage point above analysts' expectations.

But that cheery news did little for a retailing sector nervous about a possible reduction in consumer spending, in response to the ongoing credit crunch and economic uncertainty. A trader said that "all of the retailers were lower, at least a point or more below where they were a week ago. They got no pop at all from the retail sales number. Everything was heavier."

He saw the 10½% bonds of Pembroke Pines, Fla.-based specialty retailer Claire's Stores trading as low as 58 bid, 63 offered, down from previous levels around 61 bid, 63 offered.

Other retailers taking it on the chin included Toys 'R' Us, whose 7 7/8% notes due 2013 lost 2 points to around the 80 level, while Dillard's Department Stores' 7.13% notes due 2018 were seen off more than 3 points at 86.

Stephanie N. Rotondo contributed to this report.

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