Primary holds spotlight as Hovnanian, Corrections, Jafra price; airlines jump on Merrill boost

By Paul Deckelman and Paul A. Harris

New York, May 2 - The high yield new-deal sphere once again pretty much dominated the interest of market participants Friday, as the primary-side basked in the warm glow following the pricing Thursday night of AES Corp.'s $1.8 billion two-part mega-deal.

With its cash bins reportedly stuffed to the bursting point, the high yield market saw three deals priced Friday - a pair that had come with roadshows and one, from Red Bank, N.J. homebuilder K. Hovnanian Enterprises, Inc., that was slapped up in front of the investors during the session.

Hovnanian priced $150 million of 10-year senior subordinated notes (B2/B+) to yield 7¾%.

Friday's two transactions that priced after conventional marketing regimes involved Corrections Corp. of America, which locked up a 7½% interest rate from junk bond investors with its $250 million of new eight-year bonds, and beauty care products-maker Jafra Cosmetics International, Inc. and Distribuidora Comercial Jafra, SA de CV which did up an upsized $200 million of eight-year notes to yield 10¾%.

Friday also saw a pair of new deals surface. One is a quick-to-market offering from Flextronics International Ltd. which hopes to cash in on the market's high voltage cash current on Monday, when it will price $400 million of 10-year notes. The other is from French specialty chemical firm Rhodia, which will begin the roadshow for €700 million equivalent of eight-year senior subordinated notes in euro and dollar tranches during the week of May 5.

Secondary activity largely revolved around trading in the new bonds of AES and other issuers; among the established names, the airlines were seen gaining altitude on market perceptions that with the main military phase of the war in Iraq now having ended - so said the President on Thursday - the worst may be over for the beleaguered sector, whose troubles go back more than two years, but which has really been reeling ever since 9/11. Merrill Lynch upgraded the shares of Continental Airlines Inc. and some of its peers, causing the bonds and shares of the whole group to take flight.

Late Friday, as the market continued to digest the news that high-yield mutual funds had taken in their tenth straight inflow - this one for $1.09 billion-one official from an investment bank told Prospect News that these are heady times for the sell-side.

"It's a good time," said the source. "The market is healthy and strong. There's too much cash around and not enough new paper.

"People are beginning to expect billion-dollar inflows, which is a little difficult to believe," added the sell-sider. "But people now expect the number to be north of $750 million each week."

One result, which has some investors lamenting, is that junk bond deals are coming "rich" - with yields that some market observers have half-jokingly taken to calling "moderate yield, as opposed to high yield."

"If you can get a deal with some yield you definitely play it," said the source. "Sometimes you're forced to play a deal that comes at 6½%, because 6½% versus having your money in some money market fund at 4%, or holding cash in your portfolio where you don't get anything, is obviously to be preferred."

During Friday's session, Corrections Corp. of America sold an off-the-shelf $250 million of eight-year senior notes (existing ratings B1/B) at par to yield 7½%. The Nashville-based private jailer's deal came at the tight end of the 7½%-7¾% price talk via Lehman Brothers. It was increased from $200 million.

In addition Jafra upsized to $200 million from $175 million its eight-year senior subordinated notes (B3/B-) and priced them at par Friday to yield 10¾%. The print on the new Jafra notes was at the tight end of the 10¾ %-11% price talk, with Credit Suisse First Boston.

And in drive-by action during the final session of the April 28 week, K. Hovnanian Enterprises, Inc. priced $150 million of 10-year senior subordinated notes (B2/B+) at par to yield 7¾%, via joint bookrunners Credit Suisse First Boston and Citigroup.

Source have advised Prospect News to watch out for the drive-bys, and one new one surfaced on Friday. Flextronics expects to price $400 million of 10-year senior subordinated notes on Monday, in a Rule 144A deal via Citigroup, Credit Suisse First Boston and Goldman Sachs.

And Rhodia is expected to begin the roadshow for €700 million equivalent of eight-year senior subordinated notes in dollar and euro tranches early in the week of May 5. That offering, via Goldman Sachs, Bear Stearns and BNP Paribas, is expected to price during the week of May 19.

Regarding business set to come during the week of May 5, price talk of 9%-9¼% was heard Friday on Oxford Industries, Inc.'s upcoming $175 million of eight-year senior notes (B2/B), expected to price on Tuesday via Merrill Lynch.

The market also heard timing on Medex, Inc.'s $150 million of 10-year senior subordinated notes (B3/B-), which are poised to start roadshowing during the May 5 week. The offering, with bookrunning from Lehman Brothers and Wachovia Securities, is expected to price mid-week during the week of May 19.

Finally on Friday, with Corrections Corp. having been sprung from the forward calendar, Boca Raton, Fla. private prison operator Wackenhut Corrections Corp. announced that it would bring new debt to help finance the repurchase all 12 million shares of common stock held by Group 4 Falck A/S, its 57% majority shareholder, for $132 million in cash, in a Friday press release.

The firm also said it has committed financing from BNP Paribas that will involve a restructuring of the existing credit facility.

Closing is expected by the end of June 2003.

The company declined to return a Friday telephone call from Prospect News. No underwriters or other details were available at press time.

When the new AES bonds were freed for secondary dealings, both tranches shot up to above 102 bid from their late-Thursday par issue prices, with the 8¾% notes due 2013 trading in a 101-102 bid range most of the day before ending at 102 bid/102.5 offered; a trader saw the 9% notes due 2015 trading in a 101.5-102.5 context before closing out at 102.5 bid/103 offered.

Another trader called the deal "well received" and said the notes had "bounced around a bit" before ending the session north of 102.

The first trader declared that "new issues were the theme of the day" in the secondary trading pits, with a fair amount of activity in the new AES paper, and activity in some of the other newbies as well. He saw Hovnanian's 7¾% senior subordinated notes due 2013 having firmed slightly to 100.5 bid/101 offered from their par issue price, but said the new Jafra bonds jumped up to 103.5 bid/104 offered after having priced at par.

Rent-a-Center Inc.'s new 7½% senior subordinated notes due 2010, which had priced at par on Thursday, were meantime at 102 bid/102.5 offered.

"Having another $1 billion inflow certainly helped" to lift most of the new-deal paper, he noted. The $1.09 billion more that came into high yield mutual funds in the week ended Wednesday than left them, as reported by AMG Data Services, was the tenth straight weekly inflow - and the sixth week in the last ten in which the inflow number has topped $1 billion. The previous week's $951.9 million inflow almost made that seven out of 10. For the year as a whole, inflows have now been seen in 13 weeks out of the 17 since the beginning of the year, with net inflows - excluding distributions and counting only those funds which report on a weekly basis - totaling some $11.95 billion, according to a Prospect News analysis of the AMG statistics. Those fund flow numbers are watched by many junk players as a reliable proxy for overall high yield market liquidity trends.

With all of that liquidity enabling issuers to bring new bonds to a paper-starved market at ridiculously tight yields, while even low-rated existing issues have been lifted to levels approaching par, "the market is bulletproof right now," a trader said. "Four months ago or so, if there was a hint of bad news about a credit or a sector, nobody wanted to get involved. Now, if there's bad news - ho hum," with the market presumably figuring that more liquidity is on the way to keep the party going.

"These are [junk] bonds," he continued. "They can't go much above 110. They've got to run out of steam sometime. It's scary seeing something go up four, five points at a clip. Think 'gravity'."

A wonderful example of the current market's seeming euphoria - a word heard on the lips of traders and analysts alike in recent weeks - is the airline sector. Just a few short weeks ago, it was in the dumps, dragged down by the bankruptcy of UAL Corp.'s United Airlines and the troubles of American Airlines parent AMR Corp. With war seen as likely, and the possibility of further terrorism against the vulnerable airlines, as well as escalating fuel prices and a falloff in both business and recreational travel due to security concerns and a soft economy, the airlines were hitting all kinds of market turbulence.

But on Friday, Continental Airlines' 8% notes due 2005 were in a rapid climb, firming to around 80 bid/82 offered from Thursday's levels around 70 bid/72 offered.

The trader offered that "there were a few tidbits of news out" about the Houston-based carrier (whose shares likewise zoomed $1.94, or 19.68% to $11.80, on New York Stock Exchange volume of 9.1 million shares, more than four times the norm). He noted news reports that Continental might sell its majority stake in Express Jet Holdings Inc., for instance.

But certainly the biggest boost came from an equity upgrade for Continental - as well as rivals Northwest Airlines and Delta Airlines, among others - by Merrill Lynch. The Big Bull moved the shares of those three airlines - as well as Alaska Airlines and Frontier Airlines - to "buy" from "neutral," sparking strong stock gains in all of them.

Merrill Lynch analyst Michael Linenberg acknowledged that the sector still has some risk to it - but he said in a research note that: "At this juncture, we feel the bankruptcy threat has diminished for most airlines and believe that as a result, most airline share prices may be able to finally break out of a trading range that they have been confined to since the fall of 2002."

The analyst said that said risks such as high fuel prices, war, airport security concerns and additional bankruptcies (besides UAL and US Air Group) that existed just a month ago have been somewhat mitigated. With expectations for the sector already low, he also opined that avoidance of a catastrophe might be seen as a positive by investors.

Besides Continental, Northwest's bonds were moving skyward, its 8 3/8% notes due 2004 pushing up to 86 from around 84 on Thursday and its 9 7/8% notes due 2007 getting as good as 70 from prior levels around 64.

The trader also saw Delta Airlines' 6.65% notes due 2004 rise to 93 bid from 89. At another shop, a trader pegged Delta's 7.70% notes due 2005 at 86 bid/88 offered from 79 bid/81 offered on Thursday.

Northwest's 8 7/8% notes due 2006 moved to 72 bid/74 offered from 65 bid/67 offered, he said, - and even AMR's bonds got in on the action, its 9% notes due 2012 ending at 49 bid/51 offered from 44 bid/46 offered (AMR was not one of the issues touted as recovering by Merrill Lynch's report).

"There were good jumps all around," the trader said, "and airlines were the place to be."

"I don't see it and I don't think the industry is out of the woods yet," the first trader said, "but airlines was pretty much where all the [secondary] attention was Friday."

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