Encore, Neff, others price; Collins & Aikman gyrates on funding woes; funds see $178 million outflow

By Paul Deckelman and Paul A. Harris

New York, June 30 - The high-yield primary market continued to bat out new deals at a brisk pace Thursday, effectively clearing the near-term forward calendar on the last day of the first half of 2005 and the last full trading session this week (the market is scheduled to close at 2 p.m. ET Friday ahead of the July 4th holiday weekend, which will also see a full market shutdown on Monday, Independence Day).

Among the deals getting priced Thursday were bond offerings from Encore Acquisition Co., Neff Corp., Psychiatric Solutions Inc. and Portrait Corp. of America/PCA International Inc. There were also perpetual preferred stock deals priced by Hovnanian Enterprises Inc. and Scottish Re Group Ltd. The Encore Acquisition, Psychiatric Solutions and Hovnanian deals were all upsized to meet brisk buyer demand.

In the secondary market, trader said that Collins & Aikman Corp. bonds fell sharply at the opening on revelations of new financing problems for the bankrupt Troy, Mich.-based automotive components company. They bounced around at lower levels, but then came off those lows later in the session, to end only moderately lower. Collins & Aikman is in the process of trying to line up financing to replace that portion of its debtor-in-possession financing it was denied by its banks - and some of its customers may end up giving it even more money than it otherwise would have gotten, according to speculation making the rounds of some quarters of the market, a source said.

Overall sources marked the high-yield market slightly weaker on Thursday, on the back of stock prices that dove on the news that short-term interest rates were raised by the Federal Reserve and that the central bankers made no change to their outlook on the economy.

After trading wound down for the session, market participants familiar with the junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that some $177.6 million more left the high-yield mutual funds than came into them in the week ended Wednesday, continuing a choppy pattern over the past several weeks which has seen the funds zig-zag between inflows and outflows. In the previous week (ended June 22), for instance, inflows had totaled $56.3 million, while an outflow of $383.59 was seen in the week ended June 15, and inflows totaling slightly more than $1 billion had been seen in the two weeks before that.

Before that point, outflows totaling more than $6.7 billion had piled up in a 15-week losing streak, dating back to the early part of the year, according to a Prospect News analysis of the AMG figures.

The latest week's outflow marks the 20th time in the first 26 weeks of the year in which more money has left the funds than entered them, versus just six inflows in that time, according to the Prospect News analysis. Outflows total about $7.231 billion for the year so far, up from $7.053 billion last week, the analysis indicated.

The fund flows are a widely watched gauge of market liquidity trends. The recent infusion - with net inflows still totaling $580 million over the last five weeks - has helped to revive a junk bond primary market that seemed all but dead through most of May, and gave a boost to a secondary market that was staggering.

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 overall liquidity trends - and because there is no reporting mechanism to track the movements of other 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.

However a source from a high yield syndicate desk told Prospect News late Thursday that recent market activity does not reflect the woeful liquidity picture that might be inferred from the weekly AMG high yield mutual funds flows numbers.

"I guess it's sort of a barometer," the sell-side source suggested.

"But I can tell you that there is cash to be put to work out there."

The source added that increasingly cash flows into the high-yield asset class from sources other than the mutual funds, and mentioned insurance funds and pension funds as additional sources of liquidity.

Nevertheless, the source conceded, high-yield observers continue to wait with baited breath each Thursday for the AMG number to turn up.

June 2005 trumps June 2004

Thursday's business brought the month of June 2005 to a close with the market having seen $12.8 billion price in 49 dollar-denominated tranches.

That compares with June 2004 which saw only $11.5 billion price in 47 tranches.

Encore doubles size of drive-by

The quick-to-market junk market continued to churn on Thursday with Texas oil and gas exploration and production company Encore Acquisition Co. pricing an upsized $300 million issue of 6% 10-year senior subordinated notes (B2/B) at 98.16 to yield 6¼%.

The Credit Suisse First Boston-led debt refinancing deal came on top of the 6¼% area price talk and was double from a planned size of $150 million.

Neff comes wide of talk

Elsewhere Miami-based equipment rental company Neff Rental LLC, issuing in conjunction with Neff Finance Corp., completed a deal that it had taken on an investor roadshow.

Neff priced a $245 million issue of seven-year second-priority senior secured notes (Caa1/B-) at par to yield 11¼%, 25 basis points wide of the wide end of the 10¾% to 11% price talk.

Credit Suisse First Boston also ran the books for Neff's acquisition deal.

A contemplated floating-rate tranche, which would not have increased the size of the issue, did not materialize.

Upsized Psychiatric Solutions tight to talk

Also pricing on the heels of an investor roadshow was Franklin, Tenn.-based Psychiatric Solutions Inc.'s new issue of 10-year senior subordinated notes (B3/B-).

The upsized $220 million issue priced at par on Thursday to yield 7¾%, tight to the 7¾% to 8% price talk. It was increased from $150 million.

Citigroup ran the books for the acquisition deal.

A buy-side source told Prospect News of having put in for the new notes but walking away empty-handed when the allocations were made.

The investor added that such circumstances seem to suggest that the high-yield market has once again become hot, at least where defensive sectors such as health care are concerned.

PCA four-year note yields 14%

Finally on Thursday PCA LLC, issuing in conjunction with PCA Finance Corp. (Portrait Corp. of America) priced a $50 million issue of four-year senior secured notes (B3/CCC) at par to yield 14%, right on top of price talk.

Jefferies & Co. ran the books for the debt refinancing and working capital deal from the North Carolina based operator of photographic studios in Wal-Mart stores, and elsewhere.

Post July 4 calendar

In the wake of Thursday's transactions no deals remained on the forward calendar to be priced during Friday's abbreviated pre-Independence Day session.

However news was heard Thursday about two issuers planning roadshows.

Quiksilver, Inc., a Huntington Beach, Calif.-based maker of casual wear, will start a roadshow Wednesday for its $350 million offering of 10-year senior notes (expected B1/confirmed BB-), via JP Morgan.

And Spanish gaming and leisure firm Cirsa Capital Luxembourg SA will hold an investor conference call on Friday for its €130 million offering of seven-year bullets (B2/B), which are expected price early next week via Deutsche Bank Securities.

Psychiatric Solutions up in trading

When the new Psychiatric Solutions 7¾% notes due 2015 were freed for secondary dealings, they were seen around the 101 bid level, up a point from their par issue price earlier in the session. None of the other new deals that priced Thursday did so in time for any meaningful aftermarket activity, traders said, noting that some shops folded their tents early ahead of Friday's half-day.

However, the new Compression Polymers Holdings LLC 10½% notes due 2013, which priced on Wednesday at par, were, in the words of one trader, initially up "two or three points" on the break, before settling in later in the session at 101.5 bid, up from par.

However, nobody saw anything going on with the new 7¼% notes due 2013 issued at par Wednesday by Texas Industries Inc., or the new 10% notes due 2013 issued at par the same day by Chaparral Steel Co., a Texas Industries subsidiary.

Collins & Aikman drops

Back among the established issues, Collins & Aikman was the main road hog, with one trader describing them as having "gone on a wild ride," driven by negative news about the company's financing situation.

He said its 10¾% senior notes due 2011, after having closed at around 27 bid, 28 offered on Wednesday, opened lower on Thursday and fell as low as 21 early in the session, before coming back up a little to bid levels around 23-24, and then closing around 22 bid, 24 offered.

Another trader saw the bonds drop as low as an 18 bid, 21 offered context, well down from their previous levels in the mid-20s, but then rally back from that nadir to end bid around 22.5-23.5.

A trader at another desk pegged the bonds down six points at the opening, around 21 and then bounced back up to around 24.5, attributing the gyrations to the news that Collins & Aikman's banks have chosen not to provide the company with the other half of the $300 million debtor-in-possession financing initially agreed upon, thus forcing the company to put in an emergency motion last week for $30 million in bridge financing from its lending customers as a stop-gap measure, until it can line up some kind of replacement financing.

That information was contained in an 8-K filing that Collins & Aikman submitted to the Securities and Exchange Commission late Thursday - which in effect confirmed rumors that had made the round of the market late last week and earlier this week that the DIP loan was indeed in trouble.

The judge overseeing Collins & Aikman's reorganization, judge Steven W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan, in Detroit, approved that motion for the $30 million in unsecured emergency money from the company's lending customers, who were given administrative priority claim status for their investment, which bumps them ahead of most other creditors.

A market source said Thursday that it was his understanding that the money had come from two of Collins & Aikman's three biggest customers - General Motors Corp. and the Chrysler division of DaimlerChrysler.

But Collins & Aikman said in its filing that "[b]ecause the bridge financing will only satisfy the company's short-term needs, the company is seeking additional financing to replace the portion of the $300 million DIP loan originally contemplated that is no longer forthcoming and to satisfy its ongoing liquidity needs."

An insight to the thinking of its banks and other creditors can be gleaned from a reading of the objection which the official committee of unsecured creditors filed in response to Collins & Aikman's move to get the $30 million bridge financing from its customers and give that loan administrative priority claim status.

Their brief - while acknowledging the company's need for the money - opposed giving the bridge loan priority status, declared that "since the commencement of these cases, just over one month ago, the debtors [i.e. Collins & Aikman] have spent all of the $150 million of post-petition financing that they were authorized to obtain. It was consumed by debtors' operations - the direct result of burdensome and unprofitable contracts with the debtors' customers - the very customers that propose to provide the bridge financing with administrative priority."

The brief goes on to accuse the customers of having "no intention" of providing Collins & Aikman with "what they need most - new, profitable contracts that would ensure the continued viability of the debtors and inure to the benefit of the debtors, their creditors and their employees."

Collins & Aikman was originally supposed to have presented its request for access to the rest of the DIP money at a hearing Thursday in Detroit. However, in view of the new developments with the financing, that hearing was postponed until July 7 - about the time that the $30 million of bridge loan money is expected to run out.

"We a currently working with all of our major constituents to develop a longer-term financial mechanism that will allow us to continue to operate while we formulate an implement our business plan," Collins & Aikman's director of corporate communications, David Youngman, told Prospect News.

The informed market source, meanwhile said that it was his understanding that "the OEMs [i.e. the company's carmaker customers] are going to offer the company up another $200 million on a similar basis to the $30 million" - although he cautioned that this could just be rumor rather than solid fact.

"I expected them to burn through a lot of cash," he said of the already-spent $150 million in DIP money, "because they lost their liquidity source in the A/R [accounts receivable] financing in the fast-pay program - but this seems a little faster than we anticipated."

While some people might attribute the high DIP cash-burn rate to the pricing of resin - a key petroleum-based plastic used in the making of many of the interior components the company produces - "resin pricing across the board is coming down. It peaked, maybe, in the first quarter. So I'm not sure what's driving this [cash-burn]. I think a lot of people are kind of in the dark on this, still."

He suggested that J.P. Morgan, the lead bank in the DIP syndicate, may have had an issue "with the borrowing base [that would determine how much money would be lent to the company] and how much A/R is really available for the borrowing base." He said that he had read statements from the bank in the court filings that "they could not put together a borrowing base that would support much more than the initial $150 [million]."

Market mostly quiet

A trader said that overall, the market "had a pretty decent - but quiet - tone," and, petty much par for the course, ignored the expected and by now thoroughly predictable news out of Washington that Federal Reserve policymakers had raised short-term rates for the ninth time in a year with a quarter-point boost in the closely watched federal funds rate to 3¼%. The Fed also indicated that it would keep to its policy of raising interest rates at a "measured" pace, meaning more increases likely lie ahead.

"After the Fed released its notes," the trader said, "the 10-year [Treasury bond] dropped about eight basis points, and the stock market got hammered."

But he said that apart from the focus on story issues like Collins & Aikman, much of the trading activity in the market Thursday - and likely the previous couple of sessions as well - was "a lot of window dressing" for the end of the month of June, the second quarter and the first half.

"As a result of that, you don't know if the buying in high yield was genuine, or if it was just fictitious to dress up the portfolios, because a lot of your high yield portfolio mangers don't want to show that much cash - and they do have a lot of cash."

A trader at a medium-sized outfit said that as far as he could see, "the big shops were closed around 11 a.m., 12 o'clock [ET]. I tried to do some work [with them] and traders said everybody had left for the day."

With activity fairly quiet, things were "a touch, maybe a quarter point stronger across the board in most sectors, unless they had some sort of breaking news. Things were a little stronger, but with really limited activity, from gaming, to oil and gas and other guys. They were stuck in a range of maybe a touch stronger - but not much."

He had actually seen more trading of the window-dressing variety the previous couple of sessions. By Thursday, he said, "guys are done - they don't want to book trades today because they don't book until the new month - so they try to get everything done by two or three days prior to the last day."

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