Charters bonds better; Swift Transportation puts on the brakes; Portola continues upward move

By Stephanie N. Rotondo

Portland, Ore., April 18 - The week ended on a high note for the high-yield market, following a trend set by its equity counterpart.

"Everything is fine," a trader said. "The whole market was a-running today."

Market players called the overall marketplace at least ½ point better on the day.

"The market was definitely firm," said another source. "I would say a good ½ point, if not more."

Charter Communications Inc.'s stock has not fared well of late - it has traded under $1 for 30 days - but its bonds are steadily moving upward. The level of the cable provider's equity resulted in the company receiving a letter of noncompliance from Nasdaq Stock Market. However, the company's corporate debt gained as much as 3 points during Friday's session.

Swift Transportation Co. Inc.'s debt was under pressure during Thursday's session. But come Friday, the bonds ended unchanged to lower, though the trading volume was not as much as the previous day. It was still unclear what had prompted the move, but some sources speculated that industry-wide concerns worrying investors.

Meanwhile, Portola Packaging's bonds continue to edge up, despite the "disappointing" numbers the company posted earlier in the week. One trader said the company's bonds were 5 points better over the week, and up another point on the day in Friday's session.

The retail sector was also seen firmer overall. While Blockbuster Inc. and Linens n' Things were not seen "overly active," their debt gained about a point. Burlington Coat Factory Warehouse Corp.'s bonds also traded up, as the company held its quarterly conference call.

Traders: More market strength

The market's overall firmness was characterized by the CDX index, which gained a point to 96 5/8 bid, 97 1/8 offered. The KDP High Yield Daily index was likewise better, up nearly a point to 75.30, while the yield narrowed to 9.34%.

Traders reported the marketplace was at least a half point better, depending on the issue, with some calling the increase more.

One trader said there was "some selling into strength," while another noted that there had been "decent buying all week."

"The market definitely had a firm tone this morning," a trader said, "following the direction of the equities." The trader added that trading activity died down in the afternoon, speculating that some of the New York players "cut out early" to enjoy one of the first nice days of Spring.

"Everybody's sort of back in buy mode," another trader said.

The stronger tone was further seen in certain benchmark high-yield issues, the trader said, such as Harrah's Operating's 10¾% notes and First Data Corp.'s 4½% notes due 2010. The trader said Harrah's bonds closed up 1½ points to around 84, while First Data's debt ended at 88.5 bid, 89 offered compared to 86 bid, 86.5 offered in the previous session.

Charter bonds move up

Charter Communications' paper also fared better during the firmer session, despite news that the company received a noncompliance letter from Nasdaq.

A trader deemed the 11% notes due 2015 a point better at 76.5, while the company's newer 10 7/8% notes gained ½ point to end at 105.5.

At another desk, a trader saw the 8¾% notes due 2013 at 91.5. He noted that just two days ago the bonds were closer to 90. The trader also saw the 11% notes at 76 bid, 77 offered, versus levels around 74.5 in the previous session.

Charter received a letter from Nasdaq, which stated that the company's class A common stock was not in compliance, as it has traded below $1 for 30 consecutive business days. Charter can regain compliance if its stock trades at or above the $1 mark for 10 consecutive days by Oct. 13. The equity will continue to trade on the market for the time being.

The company's stock closed Friday up 3 cents, or 3.33% to 93 cents.

Charter has scheduled its quarterly conference call for May 12 at 9 a.m. ET. The company will release its first-quarter results at 8 a.m. ET that day.

Charter Communications is a St. Louis-based cable television provider.

Swift's notes put it in park

Speculation of trouble in the truckin industry might have been what caused Swift Transportation's bonds to fall in the previous session. But whatever the catalyst, the company's debt bucked the market's trend Friday to close unchanged, if not lower.

One trader, who noted that the 12½% notes due 2017 "got hammered" in the previous session, said the bonds maintained their 39 bid, 40 offered level.

Another trader called the name Thursday's "big disappointment," but also called the notes unchanged at 39.5.

But another source quoted the bonds one point lower at 38.5 bid, 39 offered.

On Thursday, one market source opined that perhaps investors were concerned about whether a May 15 coupon payment would get paid or not. Still others wondered if there was industry news that might have caused the decline.

But it is no secret that the trucking sector has fallen on hard times, like many other sectors. Rising oil and gas prices - crude oil hit $116 a barrel while the national average for gas prices topped $3.50 a gallon Friday - has played a large role, as has weakened consumer spending. As consumers tighten their belts, retailers are holding less inventory - giving transportation firms less to cart around.

Swift Transportation is a Phoenix-based transportation provider.

Portola continues to gain

Despite what one trader called "disappointing" numbers reported earlier in the week, Portola Packaging has seen its debt gain as much as 5 points over the past five sessions.

One trader said the 8¼% notes due 2012 inched up another point during the last trading day of the week to close at 56.5 bid, 57.5 offered. Yet another source quoted the bonds at 57 bid, 58 offered, up from the previous session's closing price of 55.25.

On Monday, Portola posted a 4.6% increase in sales for the second quarter at $66.6 million. However, the company's net loss widened to $5.1 million, compared to a net loss of $3.3 million the same quarter in 2007. The company attributed the lower numbers to lower gross margins, which were impacted by higher resin costs, among other things.

Still, on Thursday, one source told Prospect News that while the numbers were weaker, "we still like them."

Another trader said the gains in the debt could be attributed to short covering.

"The lower the dollar price, the more the volatility," he said. "I think this is just a reflection of short covering."

Portola Packaging is a Batavia, Ill.-based manufacturer, marketer and designer of plastic packaging components for the cosmetic, fragrance and toiletries markets.

Retailers firmer

After a surge in trading activity on Monday, Blockbuster's 9% notes due 2012 died down over the week. But a trader said that, as the overall market turned upward, so did the movie rental chain's debt, which closed around 83.

Linens n' Things floating-rate notes due 2014 also crept up, ending the day at 42 bid.

Burlington Coat Factory held its quarterly conference call to discuss its financials Friday. The company reported its results earlier in the week, and were considered to be decent, despite an almost 6% decline in comparative same store sales.

A trader said the discount retailer's 11 1/8% notes due 2014 edged higher to 82.5.

Among other names in the sector, Claire's Stores Inc.'s 9 5/8% notes due 2015 gained a couple points to close around 61, while its 10½% notes due 2017 were likewise better at 52.5.

Broad market mostly stronger

Community Health Systems Inc.'s 8 7/8% notes due 2015 ended the week at 103.5 bid, 103.75 offered, after starting the week closer to 102.5. Meanwhile, Tenet Healthcare Corp.'s 9¼% notes due 2015 gained three-quarters of a point to 97 bid, 97.5 offered.

Delphi Corp.'s bonds remained unchanged around 35, a trader said.

Residential Capital LLC's 6 3/8% notes due 2010 were seen 3 points higher around 60.

Six Flags Inc.'s 9 5/8% notes due 2014 and 9¾% notes due 2013 were quoted 1 to 2 points better at 60 bid, 61 offered, while the 8 7/8% notes due 2010 were 3 to 4 points firmer in the mid-70s.

A trader called Realogy Corp.'s 12 3/8% notes due 2015 "quite active" at 54.5 bid, 55.5 offered, versus levels around 52.5 in the previous session.

Neff Corp.'s 10% notes due 2015 closed 1 point better at 49 bid, 50 offered.

North American Trading's 10% notes due 2012 closed up 2 points to 83 bid, 86 offered compared to 80.5 bid, 82.5 offered previously.

Primary health improves

With no primary market developments to report on Friday, one investment banker turned to the two deals in the market and asserted that both are evidence that during the past month the apparent health of the high-yield market has become more robust.

The deals, both of which are expected to price in the week ahead, include Calgary, Alta.-based waste management company CCS Inc.'s $312 million offering of senior unsecured notes due Nov. 15, 2015, a bridge refinancing via Goldman Sachs and Deutsche Bank Securities, and tribal casino enterprise FireKeepers Development Authority's $325 million offering of seven-year senior secured notes (B), a project financing via Merrill Lynch.

"I don't think that a month ago anyone in capital markets would even think of bringing these deals," the banker said.

Likewise the Berry Plastics Corp. deal that priced during the April 14 week, the banker added, referring to the Evansville, Ind., injection-molded plastic manufacturer's upsized $680.6 million issue. Berry sold three-month Libor plus 475 basis points first priority floating-rate senior secured notes due Feb. 15, 2015 (B1/BB-) at 94.25 last Wednesday.

Berry Plastics was also a bridge refinancing, the source recounted.

"Sentiment has definitely improved in the high yield," the banker remarked.

"For right now, though - and probably for the coming month - it would be good if issuance were to remain moderate, say, a billion a week," the banker added.

"The last thing that needs to happen right now is for the market to become flooded with new paper."

Berry Plastics, which raised $641 million of proceeds with its issue of secured floating-rate notes, was one of two U.S.-based issuers to do junk deals during the past week.

Earlier in the week Steel Dynamics, Inc. priced an upsized $125 million add-on to its 7¾% senior notes due April 15, 2016 (Ba2/BB+) at par.

Berry Plastics and Steel Dynamics combined generated $766 million of proceeds.

Bid for the backlog

Elsewhere on Friday news continued to rumble through the leveraged markets that the hung LBO backlog is moving.

Sources told Prospect News that there is a perception in the bank loan market that its share of the backlog is now below $100 billion, while one source estimated that the high yield bond portion remains at no less than $50 billion.

Prospect News asked this source, a sell-sider, why the bank loan portion appears to be moving at a significantly greater clip than the bond portion.

"There's a bid in the Street for the hung bank loans, and they have been selling right and left," the source said.

"You hear about CDW at 83, and Chyrsler in the high 60s or low 70s.

"A lot of the more conservative high yield accounts, which are being careful about losses, are now looking at the loan overhang."

The sell-sider asserted that the loan risk is more attractive, for one thing, because historically the average recovery rate on a defaulted loans is about 80%, while the recovery rate on unsecured junk bonds is much lower.

"Suppose you buy 20 hung bridge loans at 80, and four of them default, which would represent a 20% default rate," the sell-sider said.

"You expect to get $0.70 to $0.80 on the dollar on the ones that defaulted.

"The other 16 loans will eventually be taken at par or close to par, and you get a terrific return."

However, the source warned, there is a certain amount of risk in the assumption that the recovery rate for the loan risk will be maintained at the historical models.

"You could question whether the default rate for covenant light deals that are seven-times or eight-times leveraged might actually exceed 20%," the source said.

"However, for a lot of people these risks seem reasonable, which is why bids have lately gone up above 90."

Prettier versus uglier

The sell-sider said that while standard operating procedures with respect to the backlog have yet to be developed, some of the procedures that the dealers are using to move that risk are becoming apparent.

For example, the source said, one method of cleaning it up is a "total return swap."

"The hedge funds and private equity funds take the risk, but only fund 25%," the sell-sider said.

Using a hypothetical $100 million hung bridge loan as an example, the source said that the hedge fund or private equity fund that wanted to participate in that risk might only have to come up with $25 million.

"The underwriter finances the other $75 million," the source claimed.

"So, for example, the hedge funds and the private equity funds might be buying Libor plus 700 bps paper, while borrowing at Libor plus 200 from the bank."

The result, said the source, is that the bank has a par credit on its book, instead of a hung LBO bridge loan at 80.

"They're replacing an uglier thing with a prettier thing, but it's not as though the hedge funds and private equity shops are actually putting up all the cash.

"They're playing on a leveraged basis."

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