Intergy, Spheris price deals; Rite Aid bounces back from post-earnings dip

By Paul Deckelman and Paul A. Harris

New York, Dec. 17 - Intergy LP and Intergy Finance Corp. was heard by high-yield syndicate sources Friday to have priced an upsized offering of 10-year notes, while Sepheris Inc. successfully brought an eight-year offering to market, as the primary side wrapped up a busy week that put 2004 over the top as the second-busiest high yield new-issue year ever, eclipsing the $138 billion mark set just last year.

In the secondary market, Rite Aid Corp. - whose bonds were seen having retreated Thursday after the Camp Hill, Pa.-based drugstore chain operator reported disappointing third-quarter results - seemed to bounce back from Thursday's lows, to end up about where they had been before the numbers came out.

The high-yield primary market saw a total of $1.25 billion proceeds of deals price Friday in five tranches from three issuers, with Warner Music Group holding the biggest dance card: about $700 million in three tranches.

That brought the week to Dec. 17 to a close with the market having priced $5.625 billion in 27 tranches.

As reflected in the figures published by Prospect News, 2004 new issue market volume continues to distance itself from the 2003 levels. Year-to-date the United States market had seen $142.5 billion of dollar-denominated issuance, compared to 2003's $138.5 billion total.

Several market sources called to compare their own tallies, with various banks blending exchange-rate adjusted non-dollar issues to varying degrees. One source said that factoring in foreign issues, 2004 represents an historic level of high-yield issuance, topping 1998, which is roundly considered to be the year which, up until the present, saw the highest volume of issuance ever. (Prospect News' data does not go back as far as 1998.)

A heck of a year

One sell-sider on Friday took a minute to reflect that with one week to go before the end of the market year, 2004 has been "a heck of a year.

"This rally in high yield has been phenomenal," the source said. "The market has been open to issuers who in other circumstances would not have been able to get deals done.

"It's been a phenomenal year."

When Prospect News interjected that high-yield mutual funds have now seen four consecutive weeks of negative flows (most recently a $149 million outflow for the week to Dec. 15), as reported by AMG Data Services, the sell-sider replied that those negative flows appear to be of no consequence whatsoever.

"We are continuing to see a strong demand for high-yield paper from buyers who are not represented in those numbers at all," said the source.

"You have hedge funds, insurance funds, pension funds, CDOs and CBOs all needing to put cash to work in high yield.

"If you're gauging the liquidity of this asset class using the fund flow numbers you are simply not getting an accurate picture at this time."

2004 - the final page

Meanwhile no new deals were announced Friday, as sources along the sell-side line began looking to their holiday shopping lists, asserting that the week of Dec. 20 would come and go with very little business getting done.

"We still have two or three deals on the calendar," one source said, "and most of those are expected to price before Wednesday, it looks like.

"After that we're not looking for very much more to happen before Christmas. Drive-bys are possible, but people are going to start factoring in the diminishing amount of investor attention that's going to be available as the pre-Christmas week proceeds.

"No one's going to start a full roadshow at this point, with the expectation that they're going to finish it and price the deal before Christmas."

Warner's $700 million in three parts

Friday's biggest issuer was Warner Music Group, which brought a $700 million dividend-funding deal via Goldman Sachs & Co., Banc of America Securities and Deutsche Bank Securities.

WMG Holdings Corp., the issuing entity, sold $250 million of seven-year senior floating-rate notes at par to yield three month Libor plus 437.5 basis points, right on top of price talk.

WMG also sold $396.81 million of 10-year senior discount notes at 63.002 to yield 9½%, at the tight end of the 9 5/8% area price talk. The sale of the senior discount notes generated $250 million of proceeds.

In addition the company sold $200 million of 10-year senior floating-rate PIK notes at 98.00, to pay interest six-month Libor plus 700 basis points.

The sale of the PIK notes generated $196 million of proceeds.

One sell-side source not connected to the deal said the WMG got phenomenal execution.

Inergy upsizes to $425 million

Friday's largest single tranche came from Kansas City, Mo.-based retail and wholesale propane distribution company Inergy, LP, which is acquiring Star Gas Partners' propane operations.

Inergy, LP in conjunction with Inergy Finance Corp. priced an upsized $425 million issue of 10-year senior notes (B1/B-) at par yield 6 7/8%, on the wide side of the 6¾% area price talk. The deal was increased from $400 million.

Lehman Brothers and JP Morgan ran the books.

Finally, in a deal that one investor said had not gone well, Spheris Inc. sold $125 million of eight-year senior subordinated notes (Caa2/CCC+) at par on Friday to yield 11%, at the wide end of the 10¾% to 11% price talk.

JP Morgan and UBS Investment Bank were the underwriters of the debt refinancing issue from the Franklin, Tenn.-based medical transcription company.

Inergy steady in trading

When the new Inergy 6 7/8% notes due 2014 were freed for secondary dealings, they were seen straddling their par issue price, quoted at 99.975 bid, 100.25 offered.

There was no immediate word on aftermarket activity in the new Spheris 11% senior subordinated notes due 2012, which priced at par.

Levi sinks in trading

However, a trader said, the new issue of Levi Strauss & Co. 9 ¾% notes due 2014 "was a real pig." He saw the San Francisco-based apparel company's new notes, which had priced at par on Thursday, as having opened Friday's dealings offered at 102, with no bid. They quickly moved lower than that, he said, with "all trades taking place south of [the] issue [price]," with most happening in the 99.5-99.75 area. He saw the new bonds going home at 99.5 bid, 99.75 offered, down about half a point from where the bonds had been issued.

Meantime, a market source said, the existing Levi Strauss 7% notes due 2006 got no boost from the news that Levi had decided to expand its pending tender offer for the bonds so that it will look to buy back all $450 million outstanding rather than just $350 million, as originally announced (see Tenders and Redemptions elsewhere in this issue for full details). He saw those bonds actually a quarter-point lower at 104.25 bid. That was in line with an across the board easing of the outstanding Levi issues, with the 11 5/8% notes due 2008 seen falling back to 105.125 from 106 previously and its 12¼% notes due 2012 finishing off a half point at 112.5.

The trader, on the other hand, had seen the Levi 7s essentially unchanged from Thursday's close at 104.5

Rite Aid bounces back

He said that Rite Aid's bonds, after Thursday's drop-off "came right back."

For instance, he said, the company's 6 78% notes due 2013, an issue that retail (i.e. non-institutional) investors play, had been trading in a 90 bid, 92 offered context before Rite Aid came out with its numbers on Thursday morning. After the earnings were released, they dropped to 88 bid, 90 offered, but by Friday morning, had moved back up, to 90 bid "and looking for paper again."

He saw the notes ending the day at 90.5 bid, 91.5 offered.

"It dropped off, and then it bounced back," he declared.

However, at another desk, the Rite Aid bonds were being quoted as "pretty much unchanged. Yesterday [Thursday], they dropped, for the most part, a couple of points, but they were mostly unchanged [from Thursday's levels] today."

On Thursday, Rite Aid's bonds had been seen generally down 1½ to 2½ points, with the company's 6 1/8% notes due 2008 and 6½% notes due 2013 both seen down two points on the day at 93 bid and 85.75 bid, respectively. Rite Aid's 6 7/8% notes due 2013 were down even further than that, quoted at 88 bid, down 2½ points on the session, although the fall was not as pronounced in the two issues of notes scheduled to mature in 2005 - the 6% notes and the 7 5/8% notes, with the former at 101 bid, down 3/8 point, and the latter bonds also at 101, down 1/8.

Rite Aid on Thursday reported net earnings of $1 million (a one-cent per share loss) in the quarter, well down from year-ago earnings of $73.6 million (12 cents a share). The loss attributable to common shareholders, after payment of $8.7 million in preferred stock dividends, was $7.7 million in the latest quarter (once cent a share), versus $76.5 million (12 cents a share) a year ago. Revenues in the latest quarter were $4.10 billion, flat from a year ago. Analysts had expected the company to break even on revenues of $4.16 billion.

Adjusted EBITDA was $163.8 million or 4% of revenues compared to $177.5 million or 4.3% of revenues last year.

Mothers Work ends week higher

Elsewhere, the first trader said ironically, "it was a busy day in Whoville," but with really not much activity in Junkbondland, or at least in the sectors that were his bailiwick, such as gaming, healthcare and retailing/apparel.

In the latter sector, he said, there had been some movement during the week in Mothers Work Inc., the Philadelphia-based maternity wear designer and retailer. He said that the company "had some big news a couple of months ago - they were going to sell their stuff through Kohl's [department store chain], and then they got downgraded."

He said that the company's 11¼% notes due 2010 had been "a little active in the Street. This past week, they traded between 94 and 98. That's one that retail investors have been involved in and that we're watching."

He said the issue was finish up the week Friday at 96 bid, 97 offered, pointing out that "not too long ago, prior to the downgrade, people couldn't find the paper, they were 102 bid."

Standard & Poor's on November 29 cut the company's ratings to B from B+, with a negative outlook. S&P said the downgrade reflected Mothers Work's "weak operating results in the fiscal year ending Sept. 30, as well as reduced earnings guidance for fiscal 2005.

Standard & Poor's expects Mothers Work's operating performance to remain under pressure due to increased competition, despite incremental revenue contributions from the company's agreements with Kohl's Corp. and Sears, Roebuck & Co. The speculative-grade ratings reflect "the high business risk associated with Mothers Work's participation in the narrowly defined maternity segment of the apparel retailing industry, high debt leverage and the company's relatively small size," according to S&P.

That was enough to knock the bonds off their above-par pedestal and down into the 90s. But the trader said that "that's why I think guys are looking at it. If they loved it at 102, they're gonna love it below par."

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