Bally steady despite coupon news; Calpine jumps; Clarke hits road; funds see $83 million outflow

By Paul Deckelman and Paul A. Harris

New York, April 12- The late-breaking news that Bally Total Fitness Holding Corp. will not make the scheduled coupon interest payment on its 9 7/8% senior subordinated notes due 2007 on Monday caused a small flurry of trading activity around the end of Thursday's session - but left the troubled Chicago-based fitness club operator's bonds essentially unchanged on the day.

Gains were meantime seen in the bonds of bankrupt San Jose, Calif.-based power generating company Calpine Corp. in tandem with a rise in the company's shares spurred by news reports that a number of large private-equity companies have been invited to submit offers to either buy Calpine outright or take a major stake in it.

The newly issued bonds of United Surgical Partners International Inc. were seen to have held the gains notched in initial aftermarket activity after those bonds had priced on Wednesday, while iPCS Inc.'s new notes, which priced almost at the end of trading Wednesday, too late for any meaningful secondary action, firmed from their issue price.

After Wednesday's busy primary session, during which nearly $1 billion of new paper had priced in three deals - the third member of the trio being a smallish offering of five-year notes for Innophos Holdings Inc. - primaryside activity on Thursday was way down, limited to the emergence of roadshow details on a deal for Clarke American Corp.

Outflow halts two-week inflow streak

And as activity was trailing off for the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday $83.8 million more left those weekly-reporting funds than came into them.

It was the first outflow seen after two weeks of sizable inflows totaling some $244.5 million, according to a Prospect News analysis of the figures, including the $129.5 million inflow seen in the prior week, ended April 4.

Those inflows had seemed to be putting the fund-flow numbers back on the overwhelmingly positive track they had followed in the first two months of 2007, when an aggregate total of $862 million had come into the funds, according to the Prospect News analysis. That stretch run had been interrupted by a choppy four-week period in March characterized by alternating weeks of outflows and inflows, none larger than $25 million.

Even counting the latest week's outflow, inflows have still now been seen in fully 11 weeks out of the 15 since the start of the year.

The latest outflow trims the 2007 year-to-date flows to $985 million, according to one source.

Meanwhile, the source added, high yield mutual funds that report to AMG on a monthly basis saw $261.7 million of inflows during the most recent reporting period, bumping year-to-date flows among the monthly reporting accounts to $3.054 billion.

Hence the aggregate year-to-date flows, which tally both the weekly reporting funds and the monthly reporting funds, were $4.039 billion to Wednesday.

When Prospect News suggested to one sell-side official that the present week's $82.8 million outflow is comparatively "flat-ish," the source responded that perhaps it is flat-ish, but not as flat as those reported for some recent weeks.

The source added that taking into account the $82.8 million outflow for the week to Wednesday, the four week moving average is positive $33 million.

This source expressed the belief that the market continues to focus less and less on the mutual funds numbers that AMG reports because they do not take into account institutional money and hedge fund money which is said to represent a huge portion of the liquidity of the high yield asset class.

Nevertheless, this source - as is true of many other market observers who speak with Prospect News - continues to watch the funds flow numbers that AMG reports each week on Thursday.

The fund-flow figures exclude distributions.

Bally ends up running in place

Back among the secondary names, Bally Total Fitness' 9 7/8% notes, which had held all day pretty much in a 79.5-80 context, were seen to have dropped as low as 74.5 in a hectic flurry of smallish downside trades right around the 5 p.m. ET market close, but then rallied back up to end pretty much unchanged around 80.

Those gyrations coincided with the company's announcement that, among other things, it will not make the scheduled $15 million coupon interest payment on the $300 million of subordinated notes that is due Monday.

A trader who saw the bonds going home at around the same 80 bid, 81 offered level at which they had opened said that he really had not seen too much trading in the issue, mostly owing to the lateness of the hour when the news first moved across the screens.

"You never know how we're going to open up [Friday] morning," he opined, although he said that the non-payment of the coupon may have been "already worked into the price of the bond.

"You would think that the first reaction [to the announcement] would be that the bond trades down on the news, but it's hard to say whether it was worked into the price."

More importantly, he said, since there has been speculation around for some time that the cash-strapped gym operator might choose not to make that semi-annual interest payment, it was his impression that the 9 7/8s had already been trading flat, or without their accrued interest, since about mid-March. "So now that they are now not making it, officially, the more you think about it, it's probably not going to affect the price too much.

"Maybe you had a few retail guys selling at first on the headline - but the fact that it's been trading flat since the speculation that they wouldn't make [the payment], about a month ago, would make me think that it's not going to move things a hell of a lot one way or another. It's more of an asset play."

Besides announcing that coupon payment would not be made on Monday, Bally said that has obtained a forbearance agreement from the lenders under its $284 million senior secured credit facility, which will run through July 13.

Under the agreement, the lenders have agreed to hold off on exercising any remedies under their credit agreement as a result of the defaults arising from the company's inability to provide audited financial statements for the fiscal year ended Dec. 31, 2006 and certain other financial information to the lenders, the cross-defaults under its bond indentures due to its inability to file its 10-K annual report with the Securities and Exchange Commission and the cross-defaults springing from the non-payment of the 9 7/8% coupon.

In fact, Bally is specifically barred from making that coupon payment under the terms of its forbearance agreement with the lenders, which would lapse should any principal or interest payment on the notes be made.

The terms of the agreement also require Bally to enter into forbearance agreements covering the defaults under its bond indentures with holders of at least a majority of the 10½% notes and at least 75% of the 9 7/8s by May 14. Bally said that it is in continued discussions regarding waiver and forbearance arrangements with those bondholders, and further said that it has learned that certain holders of both series of notes have formed an ad hoc committee and have retained Houlihan Lokey Howard & Zukin Capital Inc. as financial advisor and Akin Gump Strauss Hauer & Feld LLP as counsel for their negotiations with Bally.

Calpine powers up on equity bidding process

Elsewhere, Calpine's bonds were being quoted higher, apparently helped by news reports that nearly a dozen major private-equity companies have been invited to submit bids to take equity stakes in the bankrupt power generating company.

Calpine's 8 ½% notes due 2011 were seen up 2¼ points at 114.5 bid, 115.5 offered, a trader said -this on top of a gain of several points in the credit on Wednesday.

Those bonds were one of the most heavily traded issues Thursday, said another source, who pegged them at 114.625, up 2 points on the session.

"It's unbelievable, huh?" the first trader remarked, adding that "it keeps on going to the moon."

He linked the rise to the recent announcement that the company, which files monthly operating reports with the bankruptcy court overseeing its restructuring, would file its next report by the deadline, and "eliminate some claims. Everyone just started jumping on the bandwagon" on Wednesday and it continued Thursday.

He also noted that the company's shares "were skyrocketing", up 54 cents (22.04%) to end at $2.99 in Pink Sheets dealings, which he termed "something crazy," reacting to the news that heavyweight private-equity players like Kohlberg Kravis Roberts, The Carlyle Group and the Blackstone Group had been asked to bid on either buying the company outright or taking equity stakes in it.

At another desk, Calpine's 8¾% notes due 2007 were seen up a point at 115, on top of a similar-sized rise on Wednesday, while its Calpine Canada Energy Finance II 8½% notes due 2008 were seen up more than 3 points at 114.5.

A source saw Calpine's 7¾% notes due 2015 up nearly 7 points on the session at 113.875.

Fedders falters, Primus pops

Elsewhere, Fedders Corp.'s 9 7/98% notes due 2014 were seen by a trader down about 2 points at 43 bid, 45 offered, on "no news" about the Liberty Corner, N.J.-based air conditioner manufacturer, while another source pegged the bonds at 42.5 bid, down 3 points on the day.

A trader saw Primus Telecommunications Group's 8% notes due 2014 up 2 points at 65.5 bid, 66.5 offered, although he saw "nothing on the news front" about the McLean, Va.-based telecom company.

With Calpine leading the way, he said, "distressed was well bid for."

Remy roiled by rumors

Also among the distressed names, Remy International Inc.'s bonds were seen retreating amid market speculation that an upcoming coupon on the company's floating-rate notes due 2009 might not be paid. The default buzz prompted a drop of at least 3 points in the company's other bond issues, a trader said.

The 9 3/8% notes due 2012 closed around 24, down from the previous day's close at 29. The 11% bonds due 2009 - on which a payment is scheduled for next month - were pegged at 25.5, down from 28. The floaters see little activity and were last seen in the 99 context.

One source told Prospect News that all previous coupon payments had been made and she saw no reason why the upcoming payment would not.

Leah Campbell, a spokesperson at Remy, told Prospect News that she had no comment on whether the coupon will be paid, but did say a press release is expected to be issued next week on the issue.

The Anderson, Ind.-based automotive electrical systems maker recently announced that it was seeking to recapitalize and had entered into discussions with a majority of its noteholders. The company also said that it was no longer obligated to file reports under the Exchange Act, stating it would not file periodic reports or its 10-K with the SEC. The earnings report for the fiscal year 2006 are expected to be completed by April 30 and will be available on the company's web site.

Reynolds American on fire after upgrade

Away from the distressed credits, Reynolds American Inc.'s bonds were seen markedly better in active trading, with its 7 5/8% notes due 2016 jumping about 1 3/8 points to 107.825.

That followed Standard & Poor's announcement of a ratings upgrade to investment grade for the North Caroline-based tobacco giant, whose senior unsecured debt will now be rated at BBB-, up two notches from BB previously.

Rite Aid aided by positive guidance

Traders saw Rite Aid Corp. bonds gain as the Camp Hill, Pa.-based drugstore chain operator reported quarterly numbers and put out positive guidance.

The company's 7.70% notes due 2027 were up a point at 84.5 bid, 85.5 offered, while its 8 5/8% notes due 2015 were ½ point better at 96. Its 6 7/8% notes due 2013 were a point better at 89 bid.

Company president and chief executive officer Mary Sammons said that pharmacy sales should strengthen in fiscal 2008 as Rite Aid begins converting the roughly 1,850 Brooks and Eckerd stores that it is buying from Canadian operator Jean Coutu Group over to Rite Aid branded stores. That sale is expected to close next month. Rite Aid will close 24 stores in nine states to meet government anti-trust requirements.

New iPCS notes move up

The new bonds priced Wednesday by wireless telecom operator iPCS were seen having moved up, with the first-lien senior secured notes due 2013 at 100.75 bid, 101.125 offered and the second-lien secured notes due 2014 at 101 bid, 101.5 offered, a trader said, both up from their respective par issue prices.

He also saw United Surgical Partners' 8 7/8% senior subordinated notes and 9¼% senior sub toggle notes, both due 2017, at 101.25 bid, 101.5 offered. Both tranches priced at par on Wednesday and then moved up a point in initial aftermarket dealings.

Broad market steady

Sources marked the broad high yield market unchanged on Thursday.

A syndicate official said that credit default swaps were 5 to 10 basis points wider in the morning but ended the session unchanged.

Meanwhile the Banc of America Securities High Yield Broad Market Index was also unchanged on Thursday.

No issues were priced in the primary market. However timing emerged on a two-part $615 million deal from Clarke American Corp.

Clark American plans $615 million

Clarke American will begin a roadshow on Monday for its $615 million two-part offering of eight-year senior notes (Caa1).

The San Antonio-based financial products and services company is offering floating-rate notes which will come with two years of call protection and fixed-rate notes with four years of call protection.

Pricing is expected late in the April 23 week.

Credit Suisse, Bear Stearns & Co., Citigroup and JP Morgan are joint bookrunners for the acquisition financing.

KAR for Friday

Only one deal is expected to price on Friday - the week's biggest in terms of dollar-amount.

KAR Holdings, Inc. has downsized to $1.025 billion from $1.1 billion its three-part offering of high yield notes, shifting $75 million of the financing to its bank loan.

On Wednesday the Westchester, Ill., automotive specialty salvage services provider set price talk.

A $150 million tranche of seven-year senior floating-rate notes (B3/CCC) is talked at Libor plus 375 to 400 basis points.

A $450 million tranche of seven-year senior fixed-rate notes (B3/CCC) is talked at 8¾% to 9%.

Meanwhile a downsized $425 million tranche of eight-year senior subordinated notes (Caa1/CCC) is talked to price 125 basis points behind senior fixed-rate notes. The subordinated notes offering was downsized from $500 million.

Goldman Sachs & Co., Bear Stearns & Co., UBS Investment Bank and Deutsche Bank Securities are joint bookrunners.

On Thursday a source close to the deal confirmed what a buy-side source had related earlier in the week: that price talk on the senior fixed-rate tranche was driven down as the deal was being marketed to investors.

It had been pro formaed in the nines but ended up talked 8¾% to 9%, the source said, adding that the deal is on track to price Friday, and that no significant revisions are expected.

Stephanie N. Rotondo contributed to this report.

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