Lucent gains more on earnings; Tower leads automotive lower; junk funds see $212.3 million inflow

By Paul Deckelman and Paul A. Harris

New York, Oct. 23 - Lucent Technologies Inc. bonds were higher for a second consecutive session Thursday on positive earnings data from the Murray Hill, N.J. -based telecommunications equipment maker, as well as the news that Lucent had cut debt by $500 million in the third quarter, continuing its efforts to turn itself around financially.

On the downside, Tower Automotive Inc.'s bonds skidded sharply lower after the Grand Rapids, Mich.-based maker of auto body frames and components for the Big Three took a big asset impairment charge and posted a sizable third-quarter net loss versus a year-earlier profit. Other auto-related bonds were seen lower.

But the troubles did not seem to hurt Keystone Automotive Operations Inc.'s 10-year offering, which priced at par and then traded up when it was freed for secondary dealings. Also clattering down the chute were an upsized deal from Genesis HealthCare Corp. and a quickly-shopped add-on by LNR Property Corp to its existing 7¼% senior subordinated notes, which themselves only made their debut a little more than a week ago.

Late in the day, market participants familiar with the weekly high-yield mutual fund flow statistics compiled by AMG Data Services of Arcata, Calif. told Prospect News that $212.3 million more came into the junk funds in the week ended Wednesday than left them - the fifth consecutive week in which net inflows had been seen.

In the week ended Oct. 15, inflows had totaled a substantial $768 million, including only those funds which report on a weekly basis, and not including distributions.

The mutual funds are seen as a key barometer of overall junk market liquidity trends. Over the past five weeks since the week ended Sept. 24, net inflows to the funds have totaled nearly $1.281 billion, according to a Prospect News analysis of the AMG figures.

Inflows have been seen in 27 weeks out of the 42 since the beginning of the year, and the cumulative inflow total has grown to around $17.53 billion - its peak level for 2003 - up from $17.318 billion the week before, according to the Prospect News analysis.

The continued ample liquidity has been seen as the catalyst for the active primary market seen for most of this year, as well as the strong secondary rally in that time.

"The high yield market seems to be fairly firm, especially given what has been going on in the investment-grade and equity markets," one sell-side official commented shortly after the news of Thursday's inflow circulated.

"It was rough this morning," added this official. "But it seems like we're doing okay into the close.

"It has been pretty quiet out there."

With regard to the fund flow number, when asked to comment this official was guarded.

"There is a lot of noise in those numbers," said the source. "It wasn't a big topic of conversation on the floor and people did not seem to be too focused on it."

The inflows are said to provide a partial measure of the cash positions of the high yield buy-side, which is presently a strong one, according to comments from numerous market sources.

A buy-side that has cash that it needs to put to work, sources add, creates heavy demand for new paper - circumstances that give rise to transactions which price at the tight end of price talk and occasionally are upsized.

Thursday's session saw a little of each.

Kennett Square, Pa.-based provider of healthcare services to the elderly, Genesis HealthCare both upsized its deal and priced it at the tight end of talk.

The company sold $225 million - increased from $200 million - of 10-year senior subordinated (B3/B-) at par to yield 8%.

Price talk was for a yield of 8%-8¼% on the deal that was led by Lehman Brothers, Credit Suisse First Boston and UBS Investment Bank.

Meanwhile, automotive equipment distributor Keystone Automotive also priced its $175 million 10-year senior subordinated notes (B3/B-) at the tight end of talk.

In a transaction led by Banc of America Securities and UBS Investment Bank, the notes priced at par to yield 9¾%, at the low end of the 9¾%-10% talk.

Earlier in the session terms were heard on a quick-to-market offering from LNR Property Corp., a $50 million add-on to its 7¼% senior subordinated notes due Oct. 15, 2013 (Ba3/B+).

The reopened deal priced at par, via Deutsche Bank Securities, which had also run books on the transaction that LNR Property completed just over a week ago. On Oct. 15, the Miami Beach, Fla. real estate investment, finance and management company sold an upsized $300 million.

The roadshow started Thursday for River Rock Entertainment Authority's $190 million of eight-year senior secured notes (B+). The company, which operates a Native American gaming complex in Sonoma, Calif., expects to price that deal on Nov. 4.

CIBC World Markets is the bookrunner.

Meanwhile, the roadshow starts Friday for Telex Communications Inc.'s offering of $125 million five-year senior secured notes via Jefferies & Co.

The Minneapolis-based manufacturer of audio and communications equipment plans to wrap up the roadshow on Oct. 31, according to a source close to the deal.

Information also surfaced during the session on a deal from Berry Plastics Corp., which announced in a press release that it intends to bring a $110 million add-on to its 10¾% senior subordinated notes due July 15, 2012.

The company is also obtaining a new $375 million credit facility via Goldman Sachs and JP Morgan, according to a source close to the loan transaction. The source added that a conference call on the loan was scheduled to take place on Thursday.

No timing or syndicate names for the bond deal were disclosed in the press release.

On July 17, 2002 the Evansville, Ind. manufacturer and marketer of injection-molded and thermoformed goods priced the original $250 million.

And Prospect News learned that IMS Meters Holdings Inc. is expected to bring new senior subordinated debt in addition to a new credit facility. The latter piece will be led by Credit Suisse First Boston and Goldman Sachs.

The metering firm intends to use proceeds to help support the leveraged buyout of Invensys plc's metering business.

When the new Genesis HealthCare 8% senior subordinated notes due 2013 were freed for secondary dealings, they got as high as 102 bid from their par issue price, and came off that peak level to end at 101.5 bid, 102 offered, in what a trader called "kinda thin trading."

The new Keystone Automotive Operations 9¾% senior subs due 2013 did even better, he said, climbing to 104 bid, 104.5 offered.

But that warm reception did little to make the existing bonds of auto component manufacturers and auto dealership companies feel welcome.

The sector had been getting pushed around recently amid indications that auto sales are still anemic - the carmakers have been forced to offer zero-coupon financing and other incentives to move vehicles off the showroom floors.

On top of that, Standard & Poor's downgrade this week of Daimler Chrysler's bonds to BBB and its threat to downgrade Ford Motor Co.'s BBB bonds down to BBB-, just one notch above junk for the biggest U.S. corporate debt issuer, helped to give the junk automotive sector a push in the wrong direction.

Leading the parade downward Thursday was R.J. Tower Corp. (Tower Automotive's financing arm), whose 12% notes due 2013 "got whacked," a trader said, after it released poor earnings results and then had what he termed a "disastrous" conference call with investors, although he didn't elaborate.

He saw the bonds fall as low as 84 bid, 86 offered before going out at 85 bid, 88 offered, still well down from prior levels which had been as high as 98 bid, par offered.

At another desk, Tower's 12s were quoted down nine points on the session at 88.5 bid.

Tower posted a third-quarter net loss of $101 million ($1.78 per share), including an asset-impairment charge of $122.7 million stemming from its decision to stop making frames for Ford's popular Explorer sport utility vehicle. A year ago, the company made $10 million (15 cents per share). Wall Street had been looking for about a 15 cents a share loss, but the massive charge made the loss far larger.

For the upcoming forth quarter, Tower predicted a 26 cents per share net loss, including 14 cents of restructuring charges - well above the seven cents per share of red ink the analysts have been forecasting.

Tower's troubles seemed to weigh on the whole of the automotive sector. Other names which were lower included Collins & Aikman Products Co. Its 11½% notes due 2006 had ended down a point at 74 bid on Wednesday and lost another two points Thursday to close at 72; the Troy, Mich.-based maker of interior components has recently been trading at lower levels in the wake of speculation it might lose some or all of the $1.2 billion of business that Chruysler puts its way.

Dura Operating Corp.'s 9% notes due 2009 were observed down a point and a quarter, at 91.25 bid, while its 8 5/8% notes due 2012 lost three points to 99.5. Dana Corp.'s 10 1/8% notes due 2010 were a point and a half lower at 109.5. TRW Automotive's 11% notes due 2013 were also down a point and a half, at 115.5

Among the auto dealership names, United Auto Group's 9 5/8% notes due 2012 were seen down two points at 107; and Sonic Automotive's 8 5/8% notes due 2013 and Group 1 Automotive's 8¼% notes due 2013 were both a point and a half down, at 106.5 bid and 107, respectively.

Outside the auto sphere, Tenet Health Care bonds - which had finished down around two to three points on the session Wednesday after the company released bearish guidance and warned it might fall into a credit facility covenant violation - continued to head south on Thursday, after Standard & Poor's downgraded the Santa Barbara, Calif.-based hospital operator's debt a notch to BB- . Its 6 7/8% bonds due 2013 were a point lower at 87.5 bid, 89 offered, while its 7 3/8% notes due 2013 were down a point and a quarter to 97 bid, 98 offered.

And Mediacom LLC bonds were "way low," a trader said, quoting the Middletown, N.Y.-based cable operator's 11½% notes at 104 bid, 105 offered, its 9½% notes at 94.5 bid, 95.5 offered, and its 8½% notes at 93.5 bid, 94.5 offered. The company's bonds have been sliding over the past few sessions, although nobody can put their finger on why this has been happening.

On the upside, Lucent - whose bonds firmed smartly on Thursday after the telecom equipment maker announced its first quarterly profit in three years and reiterated its projection that it expected to return to sustained profitability in 2004 - continued to gain on Thursday; a trader quoted its debt "up three or four points," with its 6.45% bonds due 2029 jumping to 76 bid from 72 and its 7¼% notes due 2006 up a pair to par.

Level 3 Communications Inc. bonds were "a little higher," a trader said, after the Broomfield, Colo.-based telecom fiber optic network operator reported a third quarter net loss of $247 million (38 cents a share), well below its year-ago loss of $299 million (73 cents a share) and reported positive free cash flow of $40 million, versus negative cash flow of $34 million in the second quarter. It also posted $116 million of EBITDA, much better than its guidance of $97 million to $102 million.

Level 3's benchmark 9 1/8% notes due 2008 were a point better, at 90.5 bid.

On the emerging markets front, Thursday, price talk of 8% area was heard on Indosat Finance Co. BV's upcoming $300 million of seven-year guaranteed notes (B2/B+), via joint bookrunners ING, Barclays Capital and Goldman Sachs.

Andrew Feltus, an assistant portfolio manager with Pioneer Investment Management, told Prospect News that although Indosat is being marketed in the U.S., the lion's share of the notes figures to be owned by Asian financial institutions.

Feltus further explained during a Thursday conversation that emerging markets offerings tend to be played by a triumvirate of investor types that render them deals distinct from transactions in the U.S. high yield market.

"Three groups basically drive the emerging markets and none of them are dedicated investors," Feltus said.

"One is comprised of the crossover buyers from high yield.

"Also," he added, "individuals are big players. Take a bond like Reliance Industries - an Indian company that has a bang-up telecom business, and also has a lock on the petrochemical business in India. It's a privately owned company. The family is rich. Any time they have extra money they go out and buy the bonds, which gets the money offshore and shelters it from taxes. It creates a continual demand for those bonds.

"But the biggest group is the banks, particularly Asian banks," Feltus specified. "You read about reserves being held by countries like China. A lot of that seeps into the Asian banking system and there is just a tremendous amount of liquidity and demand for Asian paper.

"So Indosat is not going to be a big U.S. high yield deal. It's going to be a big Asian bank deal."

As to the first group that Feltus specified, Prospect News has heard over the past 10 days that a considerable number of investors whose primary focus tends to be U.S. junk have crossed over and played recent emerging markets offerings.

According to Feltus, it is not difficult to understand why this is happening.

"You can look at company in the U.S. that is three-times leveraged and yields 7%," he said. "In the emerging markets it yields 10%.

"So if you're comfortable with the political risk, you get paid for buying a company that doesn't have a great address, at least relative to the financial risk.

"Look at Innova," Feltus suggested, referring to Mexican satellite television service provider Innova S de RL de CV, which priced an upsized $300 million offering at par on Sept. 12 to yield 9 3/8%.

"That bond yields 9 3/8%," he said. "Where is 'DISH?' That yields 6½%, DirecTV yields under six. Sky is 200-plus over - it's now an investment grade bond.

"Innova is sort of like the Sky of Mexico, but yielding 9 3/8%."

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