Another $951.9 million of cash joins already red-hot market; AES announces launch of $1 billion

By Paul A. Harris

St. Louis, April 24 - Sources in the high yield turned in a nearly-unanimous verdict on Thursday: the junk bond market is presently on fire, evinced by extremely tight-pricing new issues, and by existing paper being bid to _____ levels in the secondary. For a descriptive word to fill in the blank you might choose from the following list, supplied by traders on Thursday: "insane!" "crazy!" "nuts!" "unbelievable!"

"I have triple-C Rite Aid paper that's trading at par," said one incredulous trader at the end of Thursday's session. "The Rite Aid 111/4s of 2008 are trading at 107. Six months ago they were trading at 65.

"You wake up in the morning and the market's up a point. It's up two points. It's just crazy."

Bond-craving investors, sources said Thursday, are driving a tide of bonds that are trading up whether the news headlines are positive or negative.

The paper of Lucent Technologies Inc. advanced on Thursday, even though the earnings news released Wednesday was anything but good, while Level 3 Communications Inc., which did post good news, advanced somewhat more impressively.

The point, sources said, is that the huge amount of cash flowing into junk is presently serving as a supercharging force that drives up bond prices.

And that force showed no sign of relenting; late Thursday news circulated the market that high-yield mutual funds took in yet another load of cash. According to Arcata, Calif. -based AMG Data Services there was a $951.9 million inflow, sources said.

One sell-side official working late Thursday evening expressed delight at the news of the inflow.

"As a sell-side guy I have to say it's encouraging. It's wonderful. I think it's going to continue to propel the current technicals in the marketplace that are creating opportunities for issuers to price deals at incredibly attractive levels.

"We just have to keep finding quality issuers to go out there and issue paper."

The latest inflow, for funds that report weekly and excluding distributions, is the ninth straight week in which more cash has come into mutual funds than left. Net inflows for the year are now $10.859 billion, according to a Prospect News analysis of the AMG figures, which are closely watched in the junk bond market both for their inherent value and as a pointer to overall liquidity trends.

On the primary side, Thursday, meaningful relief for cash-heavy junk investors came squarely into view as Arlington, Va. energy company AES Corp. announced the launch of $1 billion of 10-year notes to fund a tender for some of its outstanding notes and pay down bank debt. On that news the company's existing paper firmed in the secondary.

One deal priced during Thursday's primary market session. Investors buttoned up $175 million of eight-year bonds from FastenTech, Inc. in a quick-to-market transaction that priced at par to yield 11½%

And in other drive-by action, Thursday, Cinemark USA, Inc. flickered in with a roughly $200 million add-on to its 9% senior subordinated notes due Feb. 1, 2013 - to be featured as a Friday matinee transaction.

Shortly after the conclusion of Thursday's session one junk bond trader began a conversation Prospect News by making a confession.

"I'm not a portfolio manager, and most people are probably thankful that I'm not," the secondary source said. "But this market is insane. People again today were just lifting offerings.

"I think I would use this opportunity to get out of things I couldn't get out of four or five months ago - stuff that's up 20 points. And I would just say 'Thank you.'"

For instance, the source said, there's no need to butter up investors in order to sell notes from Land O'Lakes, even though the Arden Hills, Minn.-based agriculture co-op reported slightly lower sales for the first quarter of 2003, blaming slumping commodity markets and the continuing imbalance in dairy processing capacity and milk supply in the Upper Midwest.

"The earnings were disappointing," said the trader. "But the bonds traded as high as 69.5, yesterday. They get offered at 64 today for one brief second, down five. But they closed 67/67.5: boom, right back up."

Or take Lucent, which Wednesday reported yet another quarter of red ink, blaming it on its increasingly tight-fisted network-operator customers. The telecommunications equipment manufacturer reported a loss of $553 million for the quarter that ended March 31, compared with $535 million for the same period a year ago.

"I wish someone would give me the opportunity to lose that kind of money and still stay in business," the trader quipped. "But they went up three points yesterday, and probably another two points today until finally some profit-taking hit.

This source had Lucent's 6.45% notes due 2029 trading as high as 73.5, and closing at 71 bid, 71.5 offered. Its 71/4s of 2006, which were as high as 94 bid, 94.5 offered, closed offered at 93.

"Those were off their highs of today but they're still up four or five points against earnings," the trader said.

Yet another market source had Lucent's notes "up a couple," quoting the 7¼% notes of 2006 at 93 from 92, and the 6.45s of 2029 at 72.5, up from 70.

Another trader, meanwhile, had the Lucent 7¼% bonds of 2006, "which is pretty much the most liquid issue in the retail secondary market," around 92 bid, 94 offered.

"You saw some trades take place around the 93 level," the source added.

"Nortel was really flying today," this source said. "That sector was the one that really moved."

He saw Nortel Networks' 6 1/8% notes due 2006 as high as 99 bid, par offered, solidly up from their opening level of 95 bid, 97 offered, although they backed off a little to end the session 97 bid, 98 offered.

At their highs, the trader said: "That's up 10 points in three days.

"There's no paper around," added this trader. "The new deals are not coming fast enough. You're just seeing too much cash in the market and they're continuing to buy the secondary market like crazy.

"There is single-B and triple-C paper out there that is trading 6½%-7%, 150-200 basis points over Treasuries. At some point this is going to reverse and it's going to be a mess."

Asked to scrounge for one name that was seen trading off, Thursday, this source said: "It's just unbelievable. There are always the guys that have problems, of course, that trade off.

"Levi, which had the news of the accounting problem a week ago, traded off 20 points on that news. It's now back up 10 points over the past week.

"The real distressed issues, like the Flemings, which are pretty much just dead, even those are trading up. Stuff is trading in the 20s and the 30s, up one or two points. It's a bond orgy."

So, Prospect News asked the traders, did the bonds of companies that have posted good new rise with more vigor than the bad news bonds?

For example, Level 3 announced it had reversed a loss and earned $119 million in the first quarter, with a little help from one-time settlement payments and the acquisition of Genuity Inc. For the quarter ended March 31, the company said net income equaled 22 cents a share on revenue of $1.25 billion. In the same quarter of 2002, the net loss was $90 million, or 25 cents per share, on revenue of $386 million.

"Level 3 had good news," one trader conceded. "Those bonds popped up a point or two, but you don't know if it's the good news, or if they're just getting swept along with the market."

Meanwhile in the new issue market the event that stopped the presses on Thursday was AES' announcement that it was coming with $1 billion of 10-year second priority senior secured notes (B+). The roadshow begins Friday on the Citigroup deal which is expected to price late in the week of April 28.

And the company indicated the deal could go bigger. It said it is currently tendering for $525 million of its existing notes and paying down $475 million of bank debt. But they tender has already received $1.42 billion of response. AES said the size could be increased, depending on how big its new bond deal goes, up to a maximum tender amount of $1.3 billion.

Terms emerged Thursday on a quick-to-market offering from FastenTech which sold $175 million of eight-year senior subordinated notes (B3/B-) The notes priced at par to yield 11½% via JP Morgan and Lehman Brothers.

Meanwhile another drive-by appeared Thursday from Plano, Texas-based Cinemark USA, Inc. The movie theater operator expects to price a $200 million area add-on to its 9% senior subordinated notes due Feb. 1, 2013, on Friday, via Lehman Brothers. Price talk is 106.75-107.25.

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