Beazer brings upsized secured deal; Pilgrim's Pride pops on sale speculation; funds gain $284 million on week

By Paul Deckelman and Paul A. Harris

New York, Sept. 3 - Beazer Homes USA Inc. was heard by high yield syndicate sources to have priced an upsized issue of eight-year senior secured notes on Thursday, surprising some junk market participants with the timing of the quickly shopped offering, which priced during the normally quiet wind-down before the Labor Day holiday break.

Although there has been a dearth of new high-yield paper coming to market over the last several weeks - in contrast to the red-hot pace seen during the first part of August - the new Beazer deal did not spark a wave of pent-up demand buying after it priced. Quite the contrary - several traders said they had seen no trace whatsoever of the Atlanta-based builder's new notes.

Meanwhile, the company's established notes, which had moved up by several points on Wednesday in anticipation of the new deal - the proceeds of which will be used to fund the open-market purchase of existing senior bonds, or to replenish cash already used for that purpose - were heard to be holding those gains.

Elsewhere, Pilgrim's Pride Corp.'s bonds were flying around well above par on a news report that international meatpacking giant JBS SA might gobble up the biggest U.S. chicken producer, which is now restructuring under Chapter 11. The Wall Street Journal reported that JBS could announce a $2 billion-plus deal as soon as next week, which would bring Pilgrim's Pride out of bankruptcy and pay off its bondholders in full.

A trader saw Nortek Inc.'s bonds better after the Providence, R.I.-based building products company reached agreement with what it called a "substantial" portion of its bondholders on a debt-for-equity deal which will leave them essentially owning the company.

Junk funds up by $284 million

And as trading was winding down for the day, 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 $283.5 million more came into the weekly-reporting funds than left them.

It was the second consecutive gain, following the $350.7 million cash inflow seen in the previous week, ended Wednesday, Aug. 26, and was the ninth week in the last 10 in which inflows were seen, dating back to mid-June. Some $4.093 billion of net inflows have been seen during that stretch, according to a Prospect News analysis of the AMG figures, interrupted only by the $89.9 million outflow recorded in the week ended Aug. 19.

Counting the latest week's number, the year-to-date net inflow for the weekly-reporting funds rose to $15.647 billion, a new peak level for the year so far, eclipsing the old mark of $15.364 billion, which was recorded in the Aug. 26 week.

With 2009 now two-thirds over, inflows, including the latest weekly gain, have been seen in 30 weeks out of the 35 since the start of the year, according to the analysis, against just five outflows - the Aug. 19 retreat, a $110 million outflow in the week ended June 24, and three weeks of outflows in late February and early March, totaling $969 million. The inflows, on the other hand, include an incredible 14-week run of consecutive gains, dating from mid-March through mid-June, during which time the funds grew by a record $9.1 billion.

Such sustained inflows have helped the junk market come roaring back from last year's staggering 25%-plus loss and sharply reduced primary activity totals. Total returns so far this year total 40.096% as of Wednesday's close, according to the authoritative Merrill Lynch High Yield Master II index, up from 39.611% a week earlier, and handily beating virtually every other major investment asset class. Meanwhile, the $83.699 billion of new high yield debt issued so far this year globally as of Wednesday's close -- $71.878 billion of it domestic - is running almost 37% ahead of the anemic pace of last year's global primary tally. Domestic new issuance is almost 48% ahead of its year-ago levels.

EPFR sees inflows continuing

Meanwhile, another fund-tracking service, Cambridge, Mass.-based EPFR Global, which uses a different methodology, calculated a $425 million inflow for the week, well up from the $347 million gain seen the week before. The latest inflow was the 10th week in a row, its analysts said. It was also the 24th such cash infusion in the last 25 weeks.

The inflow brought the year-to-date total up to $17.41 billion from $16.99 billion the week before.

While the EPFR junk figures most weeks point essentially in the same direction as AMG's - last week was a rare exception - 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.

A trader said "I think we will be seeing some more inflows."

He noted that recently, "we've seen one week of outflows ($90 million in the week ended Aug. 19)."

"We thought [the inflow pace] was slowing down a little bit because it was $175 million, or $200 million, down from $900 million, or $800 million.

"All these big money managers have to put their money to work - they've got no other choice. You can't just sit on cash, you've got to put it to work. You just can't sit there and do nothing."

Beazer gets reverse inquiry

In the high-yield primary market Thursday, Beazer Homes USA, Inc. priced an upsized $250 million issue of 12% eight-year senior secured notes (B1/CCC+) at 89.50 to yield 14.215%.

The deal was increased from a face amount of $160 million.

Citigroup ran the books. Moelis was the co-manager.

The deal was driven by reverse inquiry, said a market source, who added that the order book was three-times oversubscribed, and allocations were severe.

New Beazer bonds unseen

Several traders queried by Prospect News said that they had not seen any kind of dealings in the new Beazer Homes 12% senior secured notes due 2017.

"I did not see one market in the Street, or in the house here, on any Beazers," one said, while a second agreed that there had been "no markets" in the bonds.

"I don't think we heard a peep on Beazer," a third said.

Among Beazer's existing bonds, a trader said he had seen activity in its 8 1/8% notes due 2016 trading, but added that "that was small - there was just small odd lots in the Street."

He added that "all of the Beazer paper was bid for, without offered," on Wednesday night, after news of the upcoming deal had gotten into the market.

On Thursday, he said, the company's 6 7/8% notes due 2015 were at 64-641/2, "bid looking."

He saw a seemingly strange quote for Beazer's 8 3/8% notes due 2012 - 77½ bid, 87 offered. "That's how wide they're making everything." He said that the bonds had traded as high as 81½ bid, on "a few million bonds."

Its 8 5/8% notes did trade at an 86½ context, on "a couple of million bonds, so that's up slightly."

The day's activity in the credit was "basically little volume, and just clean up odd lots here and there"

Market indicators turn firm

Back among the established issues, a trader saw the CDX Series 12 High Yield index - which had lost ¼ point on Wednesday - edging a little further downward on Thursday, by 1/16 point, to finish at 87 bid, 87 3/8 offered.

The KDP High Yield Daily Index, which was virtually unchanged on Wednesday, added another 7 basis points Thursday to close at 66.27, while its yield tightened by 16 bps, to 9.30%.

In the broader market, advancing issues - which led regained their lead over decliners on Wednesday, though by a slim margin of only a couple of dozen issues - solidified their advantage on Thursday, on top by a better than six-to-five ratio.

Overall market activity, reflected in dollar-volume totals, rose 16% from Wednesday's pace.

Despite the numerical rise in activity, a trader lamented that "it's dead out there."

It was "busy for the first hour or two," he said, before the activity level died down.

He said that besides the Pilgrim's Pride story, "the market seemed pretty much unchanged to up slightly, on a little bit of volume."

"I don't think it has been this slow since three years ago. The past two summers, we've been crankin', even going into Labor Day." This year, he said, the difference could be all of the increased volatility, driving some investors to the sidelines.

Another trader, while acknowledging that overall things were quiet because "it's a big vacation week," said that here and there was sizable activity, mostly to the upside. While he saw the big barometer issues like Community Health Systems Inc., Aramark Corp. and First Data Corp. "extremely quiet," he saw some volume in other credits, like the Toll Brothers Finance Corp. 5.15% notes due 2015, up ¾ point from recent levels to 96½ bid, on $25 million of volume, and the day's busiest issue, Qwest Corp.'s floating-rate notes due 2013, better by ½ point at 921/2, on $27 million. Tenneco Automotive's 8 5/8% notes due 2014 were up 2 points at 90 bid, on $7 million traded.

"So we had some pretty healthy upside gainers," he said. "The buyside should be laughing all the way to the bank."

The first trader also noted that "everything seems to be so well bid-for. The past three or four months everything has been 'what do you have for sale, what do you have for sale, what do you have for sale? This is my bid, I buy, I lift, I buy."

He predicted that "I think we're going to see some of that pressure hopefully come off in the next few weeks, when you see these accounts come in, and people will be saying 'what do I do? - How do I maintain my exposure in the next four months without really losing my shirt?

Chicken champ flies on buyout buzz

Pilgrim's Pride's bonds were sharply higher on the day in active trading in response to news reports indicating that Brazilian meatpacking giant JBS might acquire the bankrupt U.S. chicken processor.

The Wall Street Journal, quoting unidentified sources "close to the matter," reported that JBS "is set to announce as soon as next week" the purchase of Pilgrim's Pride out of bankruptcy for about $2.5 billion. The paper said that the deal was "in the final stages of negotiation Wednesday," and cautioned that it still "could fall apart."

A trader saw Pittsburg, Tex.-based Pilgrim's Pride's 7 5/8% notes due 2015 going out at 105 1/8 bid, up from par on Wednesday, with $11 million traded, while its 8 3/8% senior subordinated notes due 2017 ended at 104, well up from a prior round-lot level of 92¾ on Tuesday, on $10 million of volume.

A market source at another shop noted that the 7 5/8s had jumped as high as 108 bid before coming off that peak to end in a 105ish context, while the 8 3/8s got as good as 107 right at the opening, before going home at 101, up around 10 points on the session, although on a round-lot basis, the bonds were up about 11 or 12 points.

Analyst Aqeel A. Merchant at Knight-Libertas LLC in Greenwich, Conn., declared that the Pilgrim's Pride bonds "went through the roof" on the news, although they subsequently came down a little from their initial high points.

He noted that according to the Journal article about the possible merger, "what is going to get paid is $1.2 billion in secured debt and $1 billion in unsecured debt and accrued interest" -- the company has $400 million of the 7 5/8s outstanding and $250 million of the 8 3/8s - "so trading levels for both the unsecured tranches now reflect some of the interest accrued since May 2008, discounted for deal risk."

Merchant, who follows the food, beverage and restaurant industries for Knight Libertas, noted that although news of an impending deal between the two companies "has not been circulating around" -- the surprise factor produced the big run-up in Pilgrim's Pride bonds when that story hit the screens Thursday - neither was it a complete shock. For instance, the Journal account itself pointed out that JBS "for years has been on a global acquisition binge, designed to make it the biggest" player in the industry. "So it's not out of the ordinary that this company would make a move for [Pilgrim's Pride]," the analyst said.

He also noted that there had also been other recent rumblings in the financial press speculating that the bankrupt Pilgrim's Pride might be an acquisition target of either JBS or of its larger domestic rival Tyson Foods Inc.

However, Merchant explained, JBS emerged as a more likely suitor because "it would have been a little more difficult for Tyson to make a move for it, given that Tyson controls so much of the chicken market already, that it would have been an antitrust issue" with U.S. regulators. He estimated that Tyson and Pilgrim's Pride each control more than 20% of the U.S. chicken market, making any such combination likely to raise governmental red flags.

"That's not the case with JBS," he continued, since the latter company - while certainly no stranger to the U.S. meat processing market through its ownership of Swift & Co., "has no presence in the poultry industry," making it "a more likely candidate" to buy a major U.S. chicken concern than Tyson.

He noted further that JBS' U.S. entity filed an S-1 stock registration statement in July with the Securities and Exchange Commission, "so they could use the proceeds [from such an offering] to make an acquisition." He said that the $2.5 billion price mentioned in the Journal account "sounds reasonable -- and the offer could even be north of that."

The Journal further said that given the huge run-up in the company's bonds from their depths late last year, when the company filed for Chapter 11 - the senior notes hit a nadir of 17 in November and the subs languished as low as 1 cent on the dollar at one point in December -- some of the "big winners (or investors who at the very least will break even)" would include OakTree Capital Management, Calamos Advisors and Kornitzer Capital Management, which hold a mix of senior and junior unsecured bonds totaling about $1 billion.

Nortek heads north on news

A trader said there was "news on Nortek," which along with corporate parent NTK Holdings Inc., reached a restructuring and lockup agreement with a substantial portion of its bond holders to put into effect a restructuring of the company's debt. Nortek envisions the elimination of $1.3 billion from its balance sheet.

The trader saw Nortek's 10% senior secured notes due 2013 rising to 98 3/8 bid from 95¼ on Wednesday, on $5 million traded. Its 8½% senior subordinated notes due 2014 zoomed to 60¾ bid from prior round-lot levels around 51 earlier in the week, with $6 million traded.

A market source at another desk, also quoting the latter bonds at 603/4, called that nearly an 11 point gain.

Under terms of the agreement, holders of Nortek's 8½% notes will exchange their debt for substantially all of the equity of the company. Holders of NTK Holdings' 10¾% senior discount notes due 2014, Nortek's 9 7/8% series A and series B subs due 2011, and the lenders under NTK Holdings' senior unsecured loan agreement will also exchange their debt for equity. The debt under the 10% secured notes will either be modified and receive some portion of the equity of the company, or be reinstated. In either case, the original principal amount of the 10% notes of $750 million will remain outstanding.

Foxwoods quiet as state puzzles over 'sales tax'

Elsewhere, there was no fresh activity seen in Mashantucket (Western) Pequot Tribal Nation's 8½% notes due 2015 and its 5.912% notes due 2021, both of which had moved up solidly on Wednesday after the Connecticut-based Native American gaming operator had made Tuesday's scheduled interest payment on the latter bonds, avoiding the pitfall of an immediate default and buying the troubled tribe time to work through its financial problems, which include the need to restructure a $2.3 billion debt load.

The 81/2s, which had plunged to the low 20s last week from prior levels in the 40s on news of the looming debt problem, were steady Thursday around Wednesday's bounceback level of 31, while the 5.912s, which had fallen into the 30s but then rebounded Wednesday to around 50, held that level as well.

Officials in the Nutmeg State meanwhile expressed surprise and puzzlement Thursday at the news that the Mashantuckets had begun imposing an additional 1% sales tax on any merchandise sold in the shops at the tribe's big Foxwoods Resort Casino and MGM Grand at Foxwoods gaming palaces, as well as on hotel room charges there, tacking the extra 1% onto the 6% state sales tax to bring the tax bite to 7%.

Although the Mashantuckets, like most Native American tribes, are legally considered a sovereign entity, state regulators exercise control over the operation of Foxwoods and its in-state rival, Mohegan Sun - and they said that they had not been informed in advance that the tribe was tacking its own levy onto the state tax. The state's attorney general, Richard Blumenthal, said the move could be problematic if the tribe does not specify to customers that the 1% charge is tribal rather than part of the state tax.

A Foxwoods spokesman meantime denied that the sales tax surcharge was related to the resorts' current debt problems, saying it had been in the works for some months.

The more financially sound Mohegan, meantime said it has no plans to follow suit and impose its own extra tribal tax.

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