Surprise KB Home deal leads busy primary session; CIT drops below tender price; funds gain $722 million

By Paul Deckelman and Paul A. Harris

New York, July 23 - An unexpected, quickly-shopped bond offering from KB Home highlighted a very busy primary market on Thursday, which saw five deals collectively worth more than $1.1 billion of face value pricing. Besides KB, pricings were seen from Basic Energy Services Inc., whose offering had lingered in limbo for some weeks before being restructured on Wednesday; Reliance Intermediate Holdings LP; Greif Inc.; and Plastipak Holdings, Inc. The latter deal was upsized.

Great American & Pacific Tea Co., Inc. announced plans for a six-year issue of senior secured notes, concurrent with its issuance of convertible preferred notes to major investors Yucaipa Cos., LLC, controlled by supermarket billionaire Ron Burkle, and German grocery chain operator Tengelmann, in exchange for a big cash infusion. High yield syndicate sources heard the A&P deal hitting the road starting Friday, with pricing expected next week.

The sources also saw price talk emerge on South African paper company Sappi Ltd.'s dual-tranche issue of dollar- and euro-denominated notes, which may price on Friday.

And from Europe came word that Italian automaker Fiat SpA - fresh from its having swallowed up the good parts of U.S. carmaker Chrysler as part of the latter's recent bankruptcy reorganization - had priced a benchmark-sized issue of three-year bonds.

In the secondary market, Chrysler's more successful domestic rival, Ford Motor Co., reported better-than-expected second-quarter numbers - and expressed the hope that it will return to at least breakeven or maybe even turn a profit in 2011. Ford's bonds were seen smartly firmer on the news.

CIT Group Inc.'s bonds remained actively traded, with one of them even leading the Most Actives list - but traders saw less volume than the blowout activity levels seen over the last two weeks. The CIT floating-rate notes the company is tendering for fell to levels below the tender's planned purchase price - a sign that the tender offer may be in trouble.

Junk funds add $722 million

As trading was winding down 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, $721.5 million more came into weekly-reporting funds than left them.

It was the fourth straight inflow, continuing the trend seen in the previous week, ended Wednesday July 15, when there was a $98.2 million net inflow to the funds. A net of $1.534 billion has come into the funds over those past four weeks.

Including the latest week's total, inflows have now been seen in 18 weeks out of the last 19, according to a Prospect News analysis of the AMG numbers, totaling $10.524 billion during that long stretch. Before the most recent four weeks, the funds had seen a rare outflow of $110.1 million in the week ended June 24 - and before that, an incredible 14-week stretch of consecutive inflows, dating back to mid-March, during which time the funds grew by a record $9.1 billion.

With the year now a little more than half gone, inflows have been seen in 25 of the 29 weeks since it began, 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 $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 $13.088 billion - a new peak level for the year so far, up from the old zenith of $12.367 billion seen in the previous week.

A market source also said that in the latest week there was a $47.8 million outflow from the funds which report on a monthly basis rather than doing so weekly, in contrast to the previous week's $1.1 million cash infusion.

The outflow left the year-to-date cumulative inflow for such funds at $9.714 billion, down from the previous week's $9.76 billion total.

The source further said that on an aggregate basis, consolidating the inflows for the weekly and the monthly reporting funds, a total of $22.803 billion more has come into the funds so far this year than has left them, well up from $22.029 billion the week before.

Those 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 continue to grow - they were at an astounding 32% level as of the close Wednesday - handily beating virtually every other major asset class. Meanwhile, the nearly $70 billion of new high yield debt issued so far this year globally -- $56 million of it domestic - is running about 23% 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 18th week of inflows in the last 19, with the $860.1 million cash infusion they calculated -- the funds' best week since May, they said - bringing the total year-to-date inflow to $13.7 billion. In the previous week, it said the funds had seen an inflow of $152 million, with a year-to-date inflow total of $12.84 billion.

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. Any and all 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.

Fiat sees huge demand

The primary market got off to a swift start on Thursday, with Fiat Finance & Trade Ltd. SA pricing a €1.25 billion three-year deal that played to €10 billion of demand, sources said.

The 9% eurobonds (Ba1/BB+/BB+) priced at 99.367 to yield 9¼% on Thursday in Europe.

The coupon came 50 basis points inside the 9½% coupon guidance.

Banca IMI, Barclays Capital, Calyon Securities and Unicredit (HVB) were joint bookrunners.

Parent Fiat SpA, a Turin, Italy, will use the proceeds to refinance debt and for general corporate purposes.

The deal saw 500 accounts placing orders for more than €10 billion, sources said.

The order book was open for approximately an hour, said an informed source.

KB Home drives by

KB Home priced an upsized $265 million issue of 9.1% eight-year notes at 98.014 to yield 9.45% on Thursday, according to an informed source.

Citigroup ran the books for the drive-by deal, which was upsized from $250 million.

Proceeds will be used to fund the tender for the company's 6 3/8% notes due 2011.

The KB Home deal was priced off the high-grade desk, sources said.

The two-times oversubscribed deal traded to par ¼ bid, par ¾ offered, late Thursday, versus the 98.014 issue price.

Greif brings $250 million

Elsewhere Greif Inc. priced a $250 million issue of 7¾% 10-year senior notes (Ba2/BB+) at 96.637 to yield 8¼% on Thursday.

The yield was printed on top of the yield talk, while the issue price came within the context of the 3 to 4 points of discount talk.

Banc of America Securities/Merrill Lynch, Deutsche Bank Securities and JP Morgan were joint bookrunners for the debt refinancing and general corporate purposes deal from the Delaware, Ohio-based producer of industrial packaging products.

Reliance atop price talk

Reliance Intermediate Holdings also priced a $250 million deal.

The Oshawa, Ont., heating and cooling firm's issue of 9½% 10-year senior unsecured notes (Ba2/BB-) priced at 95.298 to yield 10¼%.

The yield was printed on top of the price talk.

Credit Suisse ran the books.

Approximately C$103 million of the proceeds are to be invested in the company's wholly owned subsidiary, Reliance LP, in the form of additional equity, with the balance to fund transaction costs as well as a distribution to Reliance Intermediate's owners.

Basic Energy restructures deal

Basic Energy Services priced a restructured $225 million issue of 11 5/8% five-year senior secured notes (Ba3/BB-) at 94.621 to yield 13 1/8% on Thursday.

The yield was printed at the tight end of the 13¼% area price talk.

Goldman, Sachs was the left lead bookrunner. Banc of America Securities LLC and UBS Securities LLC were joint bookrunners.

The Midland, Tex.-based oilfield services company will use the proceeds to repay its revolver.

The deal was restructured earlier in the week. Prior to that Basic Energy was marketing $225 million of eight-year senior unsecured notes, which it offered with four years of call protection.

Plastipak a blowout

Plastipak Holdings priced an upsized $175 million issue of 10 5/8% 10-year senior notes (B3/B) at 97.739 to yield 11%.

The yield came at the tight end of the 11% to 11¼% yield talk, while the issue priced rich to the 2.5 points of discount talk.

JP Morgan, Banc of America Securities LLC/Merrill Lynch & Co. and RBS Securities Inc. were joint bookrunners for the debt refinancing and general corporate purposes deal from the Plymouth, Mich.-based manufacturer of plastic packaging containers.

The Plastipak transaction was a blowout, a source close to the deal said.

Sappi for Friday

Sappi set price talk for its $500 million equivalent two-part offering of five-year senior secured notes (Ba2/expected BB) on Thursday.

The €250 million to €300 million euro-denominated tranche is talked at the 13¼% area, and the $250 million to $300 million dollar-denominated tranche is talked at the 13½% area. Both tranches are expected to price with approximately 5 points of original issue discount.

The overall deal has the potential to upsize to $650 million equivalent, according to a source close to the transaction.

Pricing is set for Friday.

Proceeds will be used to pay off near-term debt maturities.

A&P roadshow starts Friday

Finally Great Atlantic & Pacific Tea Co. will start a roadshow on Friday for its $225 million offering of six-year senior secured notes (expected ratings B3/B-).

The deal, which is being led by sole bookrunner Banc of America Securities LLC/Merrill Lynch & Co., is expected to price late next week.

Simultaneous with the closing of the notes offer, A&P will issue $175 million of 8% mandatory convertible preferred stock.

Proceeds will be used to repay the existing credit facility and for general corporate purposes.

New KB Home bonds better

When the new KB Home 9.1% due 2017 were freed for secondary dealings, a trader said that the issue was "wrapped around par" at 99½ bid, 100½ offered, up from 98.014 where the Los Angeles-based builder had priced them earlier in the session.

A trader said the deal "came out of nowhere." He observed that "when a homebuilder can come to market the world is safe again. That they could actually get a deal done - well, we haven't heard that one for a while."

He said "it really shows how much cash and demand there is out there," if homebuilders - among "the names and sectors that have been kind of orphaned and shunned, are all of a sudden back in the new issue market -- and the market is open for them."

No grief for new Greif bonds

A trader saw the new Greif Inc. 7¾% notes due 2019 at 98¼ bid, 98¾ offered - up from the 96.637 level at which the company priced them earlier in the day.

Market indicators stay strong

Back among the more established issues, the CDX Series 12 High Yield index - which had gained 3/16 point on Wednesday - jumped by 1 3/8 points on Thursday, a trader said, to end at 87½ bid, 87¾ offered.

The KDP High Yield Daily Index, which rose 19 basis points on Wednesday, was moved up by another 45 bps on Thursday to end at 64.69, while its yield tightened by 12 bps to 9.83%.

In the broader market, advancing issues - which had led declining issues on Wednesday for a fourth straight session - stayed ahead of Thursday, widening their bulge to nearly two to one.

Overall market activity, measured by dollar-volume totals, rose 12% from Wednesday's level.

A trader said that "generally, the market is better, to varying degrees. There's no adverse news out there, as far as I can tell. Accounts seem to have more cash to put to work than they had before."

That having been said, however, he called Thursday's market "frustrating" because "it's a one-way street - all in the same direction. Too many buyers and not enough sellers."

A trader said the focus of the secondary market was "earnings, earnings, earnings," as well as CIT.

Besides Ford, he said, Host Marriott Corp. and Starwood Hotel & Resorts "continued to creep higher after their numbers this week."

He said that "with the big inflow number, we definitely continued to see better buyers out there.

"We expect to see the new issue calendar keep heating up."

Ford firmer on financials

A trader said that Ford "did a little better today, post-earnings - they had been pretty quiet ahead of the numbers," but once the earnings had been announced, "we definitely saw bonds better by at least a point, in active trading." Some of the bonds, he said, were up "1 or 2 points."

A market source at another desk saw the Ford 7.45% notes due 2031 trading around 70, in active dealings, versus 67 on Wednesday.

The Dearborn, Mich.-based Number-Two domestic carmaker's 6 5/8% bonds due 2028 were being quoted up as much as 6 points at the 65 level.

The Ford bonds firmed after the company reported a $2.3 billion second-quarter net profit, or 69 cents per share - a far cry from its year-earlier $2.7 billion loss, or $3.89 per share.

On an operating earnings or loss basis, excluding unusual one-time factors, Ford lost $638 million, or 21 cents per share - far less red ink than the 50 cents per share loss which Wall Street had been expecting.

Ford attributed its better showing to its progress in cutting bloated overhead costs, as well as gains it realized from the big debt buyback the carmaker successfully carried out earlier this year, which saw its debt levels shrink to $26.1 billion from $32.1 billion previously.

"While the business environment remained extremely challenging around the world, we made significant progress on our transformation plan," Alan Mulally, Ford's president and chief executive, said in a statement. "Our underlying business is growing progressively stronger as we introduce great new products that customers want and value, while continuing to aggressively restructure our business and strengthen our balance sheet."

Breakeven in 2011?

"Ford delivered a very solid quarter, and our transformation plan remains well on track," added Lewis Booth, executive vice president and chief financial officer. "We strengthened our balance sheet, reduced cash outflows and improved our year-over-year financial results despite sharply lower industry volumes."

Lewis said that the carmaker - which last posted a net profit for the full year in 2005 - expects to at least hit the breakeven mark in 2011, and foresees an operating profit that year.

Still, at least one market watcher noted that it was too soon to tell if the improved figures meant the company was back on track.

"In its second quarter results, Ford delivered exactly what we wanted to see - lower cash burn," wrote Gimme Credit analyst Shelly Lombard in an afternoon comment. "But it's still too early to tell whether Ford has got its swagger back since some of the improvement was due to market share and price gains that Ford probably picked up at General Motors and Chrysler's expense while they were in bankruptcy.

"Obviously the more Ford can minimize its cash burn, the better the chance it can get through this recession without government assistance," Lombard continued. "If nothing else, Ford's improved results should make it easier for the company to reduce leverage by tapping the capital markets in the future."

Ford's auto-loan financing unit, Ford Motor Credit Corp.'s 7% notes due 2013 gained more than 2 points to the 86 level. But at another shop, a market source noted a slight downturn in the Ford Credit 7 3/8% notes scheduled to mature on Oct. 28, to 99½ bid.

CIT slightly less busy

A trader said that CIT bonds were "off [Wednesday's] lows by a little bit, but we haven't seen nearly as much activity in it as there has been" all of last week and this week.

Trading in the New York-based commercial lender's bonds was still brisk - the floating-rate notes due Aug. 17 were once again the busiest junk bond of all, with a market source seeing nearly $40 million having changed hands at mid-afternoon, with additional trades later on. But CIT dealings seemed to be "winding down," the trader said, from the frantic and frenetic levels of previous days, including several sessions last week which saw more than $1 billion in assorted CIT bonds changing hands.

"I think that the guys who needed to get out are pretty much out," he declared. "The guys who hedged them up are doing whatever trades they need to do, but the level of activity is certainly down" from that of recent days.

He saw the August floaters - which on Wednesday had come down 2 points to around the 83 bid level, just a little above the 82.5 price at which the company said it will buy the bonds back under its recently announced tender offer - "a little lower," falling to the 80 bid level, below the tender offer takeout price.

A second market source saw those bonds fall as low as 78 bid during the session.

Apart from the August floaters, the company's bonds were seen mixed, with its 4 1/8% notes coming due in November dipping 1½ points to the 58 area, and its Canadian financing arm's 5.60% notes due 2011 losing ½ point to end at 63.

But some CIT issues did post solid gains, with the 5% notes due 2015 up more than 5 points to 55 bid, and its 7 5/8% notes due 2012 nearly 5 points better at just under 55.

Another trader said that CIT remained a major focus - along with "earnings, earnings, earnings."

Apart from CIT, American General Finance Corp., a unit of American International Group Inc., as once again active, as its 5.20% notes due 2011 were seen having gained more than 2 points to end above 67.

Stephanie N. Rotondo contributed to this report.

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