Rite Aid falls on soft December sales; Southwestern, Solutia plan bond deals; funds see $3 million outflow

By Paul Deckelman and Paul A. Harris

New York, Jan. 3 - Rite Aid Corp.'s bonds were under the weather on Thursday, as the Camp Hill, Pa.-based drugstore chain operator - along with larger rivals Walgreen Co. and CVS Caremark Corp. - reported softer-than-expected December sales owing to a milder-than-expected flu season and the impact that cheaper-priced generic drugs had on its prescription sales.

Elsewhere, General Motors Corp. bonds and those of domestic arch-rival Ford Motor Corp. were both lower as the carmakers also reported very weak December sales numbers, capping off one of their worst sales years in a long time.

Trump Entertainment Resorts Inc.'s bonds were down, along with the company's shares, though nobody saw any fresh news out on the Atlantic City, N.J.-based gaming concern.

From out of the distressed-debt precincts came word that another junk issuer - Eagan, Minn.-based casual dining operator Buffets Inc. - had failed to pay the Jan. 1 coupon on its bonds. But unlike the bonds of homebuilder Tousa Inc., which actually rose several points on Wednesday on the news of the missed coupon payment as they began trading flat, or without their accrued interest, the Buffets bonds slid badly, the difference reflecting the expectations of their respective bondholders as to the possibility of ever seeing that interest money again - or in the case of Tousa's holders, maybe more their hopes than their rational calculations.

One source suggested that the missed payments will only serve to amplify warnings of rising default rates which surfaced throughout the fourth quarter of the year passed.

In the primary arena, players were still trying to get back on track after an extended holiday-time hiatus stretching back to mid-December. But there were signs that the new-deal calendar will be building, among them the market talk that Southwestern Energy will hit the road next week to market $400 million of 10-year bonds, while bankrupt chemicals manufacturer Solutia Inc. plans to float a similar-sized tranche of eight-year notes as part of its exit financing as it leaves Chapter 11 soon.

Fund flows down $3 million

Meanwhile, a market source familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, $2.9 million more left those funds than came into them.

While small enough to almost be considered flat, it was, technically speaking, the third consecutive weekly outflow, on top of a cash exodus of $150.5 million in the week ended Dec. 26 and the $204.1 million outflow seen in the previous week ended Wednesday, Dec. 19. As of that full reporting week of 2007, ended Dec. 26, the year-to-date outflow total among the weekly-reporting funds stood at $2.75 billion.

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 only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Into the future

Pressed for primary market news, one sell-side source said that the forward calendar has lately become something of a moving target.

And the direction it has been heading is toward the future, the sell-sider added.

"Some of these deals had been November-December business. Then they became January business or early 2008 business.

"Now you're starting to hear that some of them are expected first quarter business."

Elsewhere junk market sources continued to assert that the primary market news flow will become more purposeful next week, once all the oars are manned.

Southwestern launches $400 million

Nevertheless, the second market session of 2008 did produce some news on the new issue front.

Southwestern Energy Co. will begin a roadshow on Monday for its $400 million offering of 10-year senior bullet notes (expected ratings Ba2/BB+), with pricing expected late in the week.

JP Morgan, Banc of America Securities LLC and RBS Greenwich Capital are joint bookrunners for the Houston-based company's debt refinancing deal.

And Solutia Inc. plans to begin a roadshow for its $400 million offering of eight-year senior notes (expected ratings B2/B) a few days after next Monday's bank meeting for its $1.6 billion credit facility, according to Susannah Livingston, Solutia's director of investor relations.

Citigroup, Goldman Sachs and Deutsche Bank Securities are leading both the bank and bond portions of the financing, which will be used to fund Solutia's exit from Chapter 11 bankruptcy.

Market indicators off as volume rebounds

Overall, a trader saw the widely followed CDX Index of junk market performance down ½ point to 94½ bid, 94¾ offered, while the KDP High Yield Daily Index slid 0.28 on the day to 77.26, its yield widening 7 basis points to 8.85 bps.

In the broader market, declining issues led advancers about five to four, while overall activity, as measured by market dollar volume, jumped some 61% from Wednesday's sleepy first session of the new year.

"Things were picking up a little," a trader said. "People were coming back to the market" - although some participants still expressed the view that there would probably be no real activity until this coming Monday, when everyone who had part of this holiday-shortened week off would be back.

Rite Aid needs a remedy

Among specific established names, Rite Aid's bonds and shares both fell as investors swallowed bitter medicine - the news that the company's December sales, and those of some of its sector peers, were lower than expected.

A trader saw Rite Aid's 7½% notes due 2015 ending down 2 points at 88 bid, 90 offered. A market source meantime saw those bonds ending just below 89, down more than 2 points from their most recent close at the end of last year.

A market source saw Rite Aid's 8 5/8% notes due 2015 down 4 points to 76.5, while another source pegged those bonds at 76, down nearly 4 points on the session.

The company's shortest-dated issue, its 8 1/8% notes due 2010, fell about 3 points on the day to just below 97, while its longer-dated 9½% notes due 2017 fell to around the 77 area, down more than 4 points, in heavy large-block trading, a source said.

An even bigger mover price-wise, also in very active dealings, was the company's 9 3/8% notes due 2015, which were seen by one source at 77.625, down more than 8 points from Wednesday's close, although another pointed out that the notes were trading Wednesday for much of the day around the 83 level, making for only a 5 point drop.

Rite Aid's New York Stock Exchange-traded shares meantime plunged 41 cents, or 15.24%, to $2.28, on volume of 40.4 million shares, nearly four times the nom.

The bonds and shares slid after Rite Aid reported that its same-store sales - the key retailing industry performance metric - fell 0.5% in December from year-earlier levels, due largely to a drop in front-end sales. While the company's total sales for the four-week period ended Dec. 29 rose 48% to $2.20 billion, versus $1.49 billion in the same period last year, the gain was attributable to the stores that Rite Aid has acquired since last year, including the Brooks/Eckerd stores in the Northeastern United States which it bought from Canadian retailer Jean Coutu Group in a transaction that closed in June. Those stores are not counted in the more closely-watched same store tallies, which includes only those stores open for a full year and are considered a better measure of a retailer's performance since it measures growth at existing locations rather than newly-opened ones.

Not counting the newly opened or acquired outlets, Rite Aid said its pharmacy same-store sales were flat, while front-end same-store sales - mostly non-medicinal products such as cosmetics and other health and beauty aids, photo film and finishing, candy, soda and other food items, clothing items, books, magazines and other such products - fell 1.2%.

It may be cold comfort to Rite Aid investors, but shares of its two larger rivals - Walgreen Co., the largest U.S. druggist by sales, and CVS-Caremark Corp. - were also down as those companies reported soft December numbers as well.

Analysts said pharmacy sales at all of the big drug chains, including Rite Aid, were impacted by a miler-than-expected flu season - a junk trader said that this was a "classic good news/bad news situation, where something that is good news for everyone else is bad news for bonds." Pharmacy sales were also seen impacted by the wider use of generic substitutes for brand-name prescription medications, and by the removal from drugstore shelves of some over-the-counter children's cold and cough medicines and warnings from the Food and Drug Administration about others because of concerns that the products could be misused and might lead to overdosing,

GM, Ford off on sales

Rite Aid and its sector peers weren't the only ones feeling the hangover from soft sales numbers. Bellwether automotive bonds were down as well as the major car manufacturers reported that sales slid in December - with no sign that 2008 will produce much improvement.

The sales numbers, a trader said, caused the carmakers' bonds and those of their affiliated financial units to "go down pretty steeply."

He saw GM's benchmark 8 3/8% bonds due 2033 down 1¾ points at 78.75 bid, 79.75 offered, while Ford's 7.45% bonds due 2031 were off 5/8 point at 72.75 bid, 73.75 offered.

Another trader quoted the GM bonds down 1½ points at 78.5 bid, 79.5 offered. However, another market source said that the GM benchmarks were down only ¼ point at 79.

A trader saw GM's 49% owned financing unit, GMAC LLC, also lower, its 8% bonds due 2031 off a point at 82 bid, 83 offered. GMAC's 6 7/8% notes due 2012 were being quoted down 1 point at 83.

GMAC's opposite number, Ford Motor Credit Co., was also seen lower Thursday, with a source seeing its 7.80% notes due 2012 down more than 2 points around the 86 level, and its 7 3/8% notes due 2009 down some 3 points to the 94.5 area.

The automotive bonds spun their wheels after Ford reported that its U.S. vehicle sales skidded 9%, closing out a miserable year which saw Ford suffer the embarrassment of losing its Number-Two ranking in U.S. auto sales - a perch which it held for most of the 20th century and all of the 21st, up until now - to upstart rival Toyota.

GM, meantime, remained Number 1 - but saw the Japanese auto giant gaining ground in its rear-view mirror as GM's own sales continued to slump on the year. In December, its U.S. sales dropped 5% overall; excluding heavier trucks, GM's sales were down 4%. Toyota was also seen on track to grab GM's crown as global sales leader for the year.

Back in the domestic market, GM's sales, and those of Chrysler Corp., were down 6% for the full year, while Ford's sales slid double that, and Toyota was posed to post a nearly 3% sales increase over 2006.

Buffets bonds get bombed

The market's disaster of the day was Buffets Inc., whose 12¼% notes due 2014 swooned to 28 bid, 32 offered from prior levels at 40 bid, 42 offered after the company missed the Jan. 1 coupon payment on those bonds.

A second trader saw the Buffets bonds 10 points lower at 28 bid, 30 offered. He said that there was little or no contagion to other restaurant names - the slide was very company-specific.

Yet another trader quoted the bonds down 8 points at 28 bid, 31 offered. He said that during Wednesday's session, "there was some slight confusion about whether or not they were going to make the coupon payment. There were rumors going around that they had, in fact, transferred the money to the [indenture] trustee. It started out [earlier Wednesday] that they had not made the transfer. Then there was a rumor at the end of [Wednesday] that maybe they had made the transfer, and then it was confirmed [Thursday] that they did not. People did not give the rumor [that they had made the transfer] much attention - but it was floating around - one of those situations where someone talked to a guy who had talked to a guy."

The first trader, noting that the missed coupon failed to give the bonds' nominal price a small boost as often happens when an issue begins trading flat, or without its accrued interest (that rise essentially reflecting bondholders' expectations that the likely recovery of their claim against the company in a bankruptcy or other restructuring, indicated in the bonds' market price, will now be increased by the amount of accrued interest from the missed payment that they are owed), said that he had read a report in which an analyst flatly declared that "if they have to file [for bankruptcy], the bonds are worth zero."

The third trader commented on the fact that while both Buffets and Technical Olympic had missed coupons, the former "got killed," while the latter bonds were still trading as though people expected to recover that interest somewhere down the line.

Calls to Buffets were not returned.

Tousa bonds hang in there

That trader meantime saw Tousa's 9% notes due 2010 unchanged at 45.5 bid, 46.5 offered, while the 10 3/8% notes due 2012 were down perhaps ½ point to 7.5 bid, 9.5 offered. Those were the two issues of notes on which the troubled Hollywood, Fla.-based homebuilder had missed its Jan. 1 coupon payments, instead invoking the standard 30-day grace period.

He said that the fact that the bonds rose on Wednesday when they began trading flat and had held onto those gains Thursday was a sign that the bondholders "still think they're going to recover the interest" on the bonds - although he allowed that maybe that belief was stronger among the holders of the more senior bonds than the subordinates, trading as they are in single-digits. He said that one of the other traders at his shop believes that eventually, the bonds will see a decrease in price - but right now, "it's kind of priced in."

Another trader saw the Tousa bonds about unchanged from their levels on Wednesday, with the 8¼% notes due 2011 at 44.5 bid, 45.5 offered, and said the company's other bonds were at "about the same" levels as Wednesday.

Trump, Quebecor off

A trader saw Trump Entertainment Resorts' 8½% notes due 2015 down about 1½ points on "no news," quoting the gaming company's bonds at 74.625 bid, 75.625 offered.

He said that the downturn was a little puzzling, in view of the fact that "all of the recent news has been good - they got their [$493.25 million] mortgage credit facility, and that's a good thing for them. It makes me wonder" what's up?

Another trader - who also did not know what exactly was happening with the company - quoted its bonds at 74.5 bid, 75.5 offered, down about 1½ to 2 points. He noted that Trump's Nasdaq-traded shares were down 38 cents, or 8.94%, at $3.87, and suggested that the bonds were taking their cue from the equity.

Elsewhere, a trader saw Quebecor World Inc.'s bonds "down a couple more points," its 6 1/8% notes due 2013at 73.5 bid, 74 offered.

The bonds slid in line with a plunge of 10.84%, or 18 cents, in its NYSE-traded shares, which slid to $1.48, as investors began looking carefully at the Montreal-based commercial printing company's end-of-year announcement that its senior lenders had given it a waiver till March 31 of compliance with certain financial tests in its lending agreement - in return for meeting some daunting conditions.

In order to get that three months of breathing room, Quebecor must obtain $125 million of new financing by Jan. 15, and must enter into a refinancing transaction by Jan. 31, which would consist of commitments or other arrangements satisfactory to the lenders which would reduce the Quebecor's current credit facility to $500 million by Feb. 29 and which would further allow the repayment in full of the its current credit facility and the concurrent termination of its North American securitization program by June 30.

Quebecor has been scrambling around, looking for financial alternatives, ever since its announcement last month that its efforts to sell its European operations to a Dutch company had fallen through when the would-be buyer's stockholders turned thumbs down on the $341 million purchase.

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