Regal Cinemas prices upsized deal, Duane Reade slates; CIT 'dominates' trading; funds gain $329 million

By Paul Deckelman and Paul A. Harris

New York, July 9 - Regal Cinemas Corp. brought the first new issue of the week, the month and the third quarter - and, so far, the only one - to market late in the session on Thursday, pricing a quickly-shopped and upsized offering of 10-year notes. The Knoxville, Tenn.-based movie theater operator's new bonds hit the market too late for any kind of meaningful secondary activity.

High yield syndicate sources also heard that Duane Reade Inc. will sell new subordinated and secured notes, to fund a tender offer announced earlier Thursday for its $405 million face amount of outstanding floating-rate notes due 2010 and senior subordinated notes due 2011.

The latter bonds, meantime, traded up several points in busy dealings, actually rising above the takeout price envisioned in the New York-based drugstore chain operator's announcement.

But Duane Reade - and virtually everything else in the secondary market - was a sideshow Thursday, with the main focus being on CIT Group Inc., whose bonds gyrated wildly in heavy dealings, amid investor angst over whether the company will get the green light from federal regulators to issue government-backed debt to fund its needs - something which is by no means certain. The CIT bonds sagged badly in the early going, but were later heard to have bounced off their lows to end either only modestly lower or, in some cases, to actually close higher.

Elsewhere, Seitel Inc.'s bonds - which were beaten down in Wednesday's trading - were seen to have fallen several points further in the wake of bearish guidance from the Houston-based company, which provides geological and seismic services to oil and gas companies.

Junk funds show $329 million inflow

And as trading was finishing up for the session, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday some $328.9 million more came into weekly-reporting funds than left them.

It was the second straight inflow, continuing the rebound seen in the previous week, ended Wednesday July 1, when there was a $385 million net inflow to the funds. The $713.9 million which has come into the funds over the past two weeks has more than reversed the $110.1 million net outflow from the funds the week before that, ended June 24 - which had been the first such outflow seen since early March. In the interim, the funds saw an astonishing 14 straight weeks of inflows, totaling a record $9.1 billion, market sources said.

The inflow surprised some market players, who had been expecting to see an outflow, given the relatively lackluster performance which the secondary market has turned in this week - a sign, they said, that some investors were starting to pull back a little.

But including the latest week's total, inflows have now been seen in 16 weeks out of the last 17, according to a Prospect News analysis of the AMG numbers, totaling approximately $9.704 billion during that long stretch. With the year now just over half gone, inflows have been seen in 23 of the 27 week, versus just four weeks of outflows - the one seen in the June 24 week, plus three weeks of fund losses in late February and early March that totaled some $996 million, according to the analysis.

Counting the latest week's inflow number, the year-to-date net inflow for the weekly-reporting funds rose to $12.269 billion - a new peak level for the year so far, up from the old zenith of $11.94 billion seen in the previous week.

A market source also said that in the latest week there was $451.8 million inflow to the funds which report on a monthly basis rather than doing so weekly, which left the year-to-date cumulative inflow for such funds at $9.759 billion, up from the previous week's $9.307 billion.

The source further said that on an aggregate basis, consolidating the inflows for the weekly and the monthly reporting funds, a total of $22.028 billion more has come into the funds so far this year than has left them, up from $21.247 billion the week before.

That massive multibillion-dollar flow of funds into high yield is seen as the major catalyst for the relatively strong pace of new issuance and the solidly positive year-to-date returns that have been seen in Junkbondland for most of the first six months of the year and now into the seventh - except for a lull in both the primary and secondary spheres for several weeks that largely coincided with the aforementioned outflows.

The sustained inflows have helped the junk market bounce back nicely from last year's staggering 25%-plus loss and sharply reduced primary activity totals. Total returns so far this year - while down from the peak levels of an astounding 30% seen last month-remain strong, in excess of 29%, handily beating virtually every other major asset class, while the more than $60 billion of new high yield debt issued so far this year globally is running well ahead of the anemic pace of last year's primary tally.

EPFR sees inflows continuing

At another fund-tracking service, Cambridge, Mass.-based EPFR Global, analysts also noted that the junk funds had racked up their 16th week of inflows in the last 17, with the $683 million cash infusion they calculated bringing the total year-to-date inflow to $12.69 billion. In the previous week, it said the funds had seen an inflow of $329.3 million, with a year-to-date inflow total of $12.01 billion.

EPFR's senior market analyst, Cameron Brandt, noted that the junk funds, along with several other categories of fixed-income funds his company tracks - emerging and global bond funds, and U.S. bond funds - "continued to attract money in the early part of the third quarter as the possibility of inflation - or stagflation - garnered fresh attention in the wake of remarks by U.S. officials suggesting more stimulus spending may be on the table."

"Recent flow data shows some real concern about inflation," Brandt noted. He said that funds offering higher returns, such as high yield, and also including emerging market and U.S. municipal bond funds, as well as inflation-protected bond funds, both global and U.S., "are the ones currently in favor, while funds specializing in longer term debt or offering low returns are having a tougher time."

While the EPFR junk figures usually point essentially in the same direction as AMG's, the precise weekly and year-to-date numbers almost always differ somewhat due to EPFR's inclusion of some non-U.S. funds in its universe. Cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

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 comprise less of the total monies floating around the high yield universe than they used to - because there is no similar reporting mechanism to accurately track the movements of cash coming into the junk market from other, larger sources seen in recent years such as insurance companies, pension funds and hedge funds.

Regal multiple-times oversubscribed

The session's only new issue came from Regal Cinemas, which priced an upsized $400 million issue of 8 5/8% 10-year senior notes (B1/B-) at 97.561 to yield 9%.

The yield was printed on top of the price talk and the deal was increased from $300 million.

The deal was multiple-times oversubscribed and very well received, according to an informed source.

Credit Suisse and JP Morgan were joint bookrunners for the quick-to-market deal.

Proceeds will go to repay a portion of the company's credit facility.

The issuing entity is a subsidiary of Knoxville, Tenn.-based Regal Entertainment Group, a motion picture exhibitor.

Duane Reade possibly next week

Meanwhile Duane Reade Holdings announced plans to issue new senior secured notes and new senior subordinated notes to help fund a tender offer that launched on Thursday.

The new notes, which will be led by Goldman Sachs, with Banc of America Securities on the right, could come next week, sources say.

The size depends upon the results of the tender, one informed source added.

The tender is for $210 million of the New York City-based drugstore company's Libor plus 450 basis points senior secured floating-rate notes due Dec. 15, 2010 and $195 million of its 9¾% senior subordinated notes due 2011.

In addition to the bonds, the consent is being financed with $125 million of preferred equity from Oak Hill Capital Partners, LP.

The floating-rate notes are being tendered for at par. For the subordinated notes the company is offering 87.50.

$328.9 million inflow could be deceptive

Overall junk traded up on Thursday, according to a syndicate banker.

The Thursday session saw a resumption of the drive-by market, as Regal Cinemas priced an upsized $400 million issue of 10-year notes on top of the 9% price talk.

Thursday also saw a continuation of inflows into the high-yield mutual funds.

Nevertheless, in spite of all of this seemingly positive news, upbeat syndicate sources were in short supply on Thursday.

The buzz from the syndicate desks was that the junk market - its apparent technical strength notwithstanding - could be headed toward a typical slow summer.

There are reasons for issuers to wait for a little bit, one banker said, adding that earnings season is nigh, and summer in the high-yield is typically slow.

The high yield mutual funds saw another burst of cash.

The weekly reporting funds took in $328.9 million for the week to Wednesday, AMG reported.

Totalling the year-to-date inflows among the funds that report to AMG on a weekly basis, and those which report monthly, results in cumulative year-to-date inflows of slightly more than $22 billion, the largest levels since 2003.

"The inflows could be deceptive," the syndicate official contended late Thursday, adding that it is believed to largely represent retail money that has been rolling out of the lately dismal stock market and into junk.

Hence it could be relatively quiet ahead in the primary market, this and other sell-side sources said on Thursday.

Existing Regal bonds a no-show

Traders saw no activity in Regal Cinema's existing 9 3/8% senior subordinated notes due 2012.

Those bonds had not traded for several weeks, and were last quoted in the upper 90s, a market source said.

Duane Reade up on tender news

Before word spread late in the session that Duane Reade will be selling new bonds to fund its tender for its existing paper, that paper - or at least the $195 million of outstanding 9¾% senior subordinated notes due 2011 - were seen up solidly in response to that tender offer news.

The bonds - which are slated to be taken out for total consideration of 87½ cents on the dollar, payable to those holders who tender their bonds by offer's July 21 consent payment deadline - actually moved above that takeout level during the day's dealings.

The bonds were seen having firmed nearly 3 points on the session to just over 89 bid, on busy volume of around $10 million.

However, a market source said that the other current bond being tendered for, the company's $205 million of floating-rate notes due 2010, had not been seen trading around. Those bonds did trade at 86 earlier in the week, down from 93 - both levels well under the par total consideration holders are slated to get as part of the offer.

Market indicators turn mixed

Back among the established issues, the CDX Series 12 High Yield index - which had lost ½ point on Wednesday - was seen up by 5/8 point on Thursday, a trader said, at 82 5/8 bid, 83 1/8 offered.

However, the KDP High Yield Daily Index, which had lost 17 basis points on Wednesday, eased by another 4 bps on Thursday to end at 62.67, while its yield rose by 3 bps to 10.58%

In the broader market, advancing issues - which had lagged decliners for a third consecutive session on Wednesday - again stayed behind them on Thursday, although by only a relatively narrow margin.

Overall market activity, measured by dollar-volume totals, rose 17% from Wednesday's level.

CIT trading takes over, totally

Among specific issues, a trader said that CIT Group "was pretty much all that was trading," as market participants wondered whether the commercial lender would get FDIC approval to issue debt to meet its upcoming maturities under the agency's Temporary Loan Guarantee Program - or whether permission to issue the federally backed bonds would be denied, forcing the company into some less palatable alternative, like a coercive debt exchange, for instance. Those kinds of concerns had led Fitch ratings to downgrade CIT's ratings on Wednesday - and it was still reeling on Thursday.

The trader said that just looking at the transactions on Trace, "it was almost all CIT - on the whole first page of the Most Actives, that's it."

He saw the bonds "all over the place."

In fact, a market source at another desk pointed out that six out the top 10 most actives were CIT bonds of one sort or another, including the company's CIT Group Holdings 4¾% notes due 2010, which saw some $30 million having traded headed into the final hour, CIT Group Funding Corp. of Canada's 5.20% notes due 2015, with about $25 million changing hands, and the latter unit's 4.65% notes due 2010, which topped the $20 million mark.

The most active list was further honeycombed with numerous other issues of either parent CIT Group or its various subsidiaries.

Another trader said that the CIT paper was "obviously very active." He said the company's shorter issues "dominated" the day's activity. He said that "it was like a new issue - instead of being preoccupied with new issues, people were preoccupied with CITs on their trading desks."

He said that while here and there some other names were being traded, including the usual volume leader, Freeport-McMoRan Copper & Gold Inc. Also active were Peabody Energy Corp., as well as some Neiman Marcus Group, "after that, it was pretty much all CITs, mostly in the short end."

There was, he said, "a lot of selling in the morning - they beat it down hard, by several points, depending what maturity you were in." However, he said those same bonds, for the most part, "sort of came back hard" later in the day to end either about unchanged or down relatively modestly, "particularly in the shorter items" like the 2010, 2011 and 2012 issues.

For instance, he saw the company's 43/4s of '10 initially trading down to around the 72-73 level, before coming back up to the same 75-76 level at which they had already been trading, with "the bulk of the trading between 75 and 76," leaving the paper down about a point. "They were lower," he said - but not as low as they started out."

But he also pointed out that "these bonds have been going down about a point a day" - on Monday, he said, they were trading around 80, before coming down to the mid-70s levels at which they began the day's action.

He saw the CIT 7 5/8% notes due 2012 trading around 70 earlier in the week. On Thursday, they started around 65-66, traded down to round-lot levels around 61-62, and "now, they're ticking back up" to around 651/2, "probably only off ½ point or so on the day." He said that "people have been shorting them all week, and there was a flurry of activity - you were starting with high-grade guys getting out because they're concerned, and they beat it down this morning and then took it back up."

With so many issues and so much interest, CIT, he said, "dominated on volume - 10 out of the top 20."

CIT, yet another trader opined, "was huge today - hundreds and hundreds of names traded." He estimated that "all across the capital structure," the bonds opened up about 4 or 5 points lower, and then "they came back 2 or 3, 3 or 4 - to almost unchanged."

He too saw the 7 5/8% '12s start around 64-65, drop to 61-62 and end "right around 64-65."

He said that the new perception that CIT is "not too big to fail shakes everybody up, I guess."

Not everybody saw CIT bonds trading at lower levels; late in the session, a market source saw its 5.40% notes due 2016 up nearly 3 points on the day to 56 bid., while the Canadian unit's 5.20% notes due 2015 were as much as 2 points better at 57 bid, and the parent company's 5 1/8% notes due 2014 were a point better at 55.

AIG steady

Apart from CIT, a trader said that although American International Group Inc.'s "equities traded horribly," - this after a Citigroup analysts warned that the troubled New York-based insurance giant's shares might wind up worthless, given the risk of more losses from credit default swaps and management's haste to dispose of valuable key businesses at too-low valuations-he saw AIG's bonds "seeming like they were pretty steady."

For example, he saw AIG's subsidiary American General Finance's 4% notes due 2011 pretty much staying in a 68-69 context. "I did not see much change in that."

Another source, meantime, saw AIG- linked bonds mixed, with the parent's own 5.60% notes due 2016 down a deuce at 50 bid, but its International Lease Finance Corp. aircraft leasing unit's 5 1/8% notes due 2010 3 points better on the day at 91 bid.

Freeport still a busy credit

While the Most Active lists were dominated by CIT paper, Phoenix-based metals mining concern Freeport-McMoRan still did its usual brisk business. Its 8 3/8% notes due 2017 saw more than $30 million changing hands, placing it neck-and-neck with CIT for volume leadership, with the bonds up ¾ point on the day to 102 1/8 bid.

Freeport's 8 ¼% notes due 2015, however, was seen off more than a point, though on no news, at 101 1/8, on volume of $16 million late in the day.

Seitel slide continues

Houston-based seismic services provider Seitel's 9¾% notes due 2014 - which on Wednesday had moved sharply lower after it projected reduced second-quarter revenues - continued to head downward on Thursday.

A trader saw those bonds having lost an additional 3 points, bringing them down to 53½ bid, on "a lot of volume."

The bonds had slid on Wednesday down to the mid 50s from previous levels as good as 66 earlier in the week, after the company cautioned that it expects total revenue for the quarter ended June 30 to come in at $21.3 million -a 52% decrease from total revenue of $44.7 million for the same period last year. Cash resales for the second quarter of 2009 were $7.2 million, down 78% from the same quarter of last year.

It said that North American drilling activity continued to fall during the second quarter, with the average year-to-date rig count dropping by 38% compared to the year-earlier period - and warned that "we have seen no indications at this point that our industry environment will improve materially in the near term or that our resales will increase."

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