Texas Competitive brings mega-deal; E*Trade gyrates on cash infusion; funds see $472 million outflow

By Paul Deckelman and Paul A. Harris

New York, Nov. 29 - Texas Competitive Electric Holdings Co. lit up the junk bond market Thursday by successfully pricing a massive $3.75 billion two-part offering consisting of cash-pay and PIK toggle notes, syndicate sources said. However, the new bonds displayed less wattage when they reached the secondary market, where they were seen trading around their respective issue prices.

Also in the new-deal sphere, First Data Corp. was heard to be marketing a $1 billion offering of senior subordinated notes, a portion of the financing for the company's giant-sized leveraged buyout.

In the secondary arena, E*Trade Financial Corp.'s bonds initially rose in heavy trading on the news that the New York-based on-line financial services company had lined up a $2.55 billion cash infusion from a group of investors. But while the bands shot up dramatically from the get-go, by mid-afternoon they had come down from their peak levels and eventually surrendered all of their gains, and then some.

Bon-Ton Stores Inc.'s bonds likewise gyrated around, also in heavy trading featuring many big-block transactions, after the York, Pa.-based department store operator reported a sharply wider third-quarter loss versus its year-ago red ink and sharply lowered its full-year earnings guidance, citing the continued soft retailing environment. Initial losses did not last and the paper was seen essentially unchanged on the session.

A high yield syndicate official commented that Thursday had been a busy day in the junk market, and added that the news was positive, with the secondary market up off the Monday-Tuesday lows.

Mid-afternoon this source spotted the CDX High Yield 9 index "wrapped around 951/2," up 1/8 to ¼ point on the day.

The official added that cash bonds had been trading better over the past two sessions.

Fund flows plunge deeper in the red

And as trading wound down for the session, market participants familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday, $471.7 million more left the weekly-reporting funds than came into them. It was the fourth straight weekly outflow, following the $241 million exodus seen in the previous week, ended Nov. 21.

It was also the fifth outflow in the last 10 weeks, versus five inflows, several of them fairly sizable - but the $1.345 billion hemorrhage seen over the past three weeks - including the massive $632.2 million outflow recorded in the week ended Nov. 14, the largest in two years - more than made up for those additions, which at one point had totaled nearly $1 billion. During that 10-week period, net outflows have totaled $448.3 million, according to a Prospect News analysis of the AMG figures.

That 10-week stretch of mixed inflows and outflows followed a lengthy string of outflows which had begun around mid-year, which completely wiped out the roughly $1.6 billion cumulative inflow that had built up over the first half of the year and which plunged the year-to-date fund flow numbers deeply into the red, where they remain to this day.

The 2007 cumulative outflow now totals $2.554 billion, up from the prior week's $2.072 billion, according to the analysis.

However funds that report on a monthly basis remain squarely in the black, having seen $6.559 billion of year-to-date inflows.

Hence the aggregate year-to-date flows, which factor in both the weekly reporters and the monthly reporters, also remain squarely in the black at $4.015 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 the funds 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.

Two LBO deals

In the primary market, the news centered on the hung LBO bridge financings.

Texas Competitive Electric Holdings priced $3.75 billion of senior notes in two tranches, in a deal that was driven by reverse inquiry, according to market sources on both the buy-side and the sell-side.

Elsewhere in the new issue market underwriters led by Citigroup were reported as being poised to sell $1 billion of First Data senior subordinated notes.

TXU returns

On Thursday Texas Competitive priced $3.75 billion of senior notes (B3/CCC) in two tranches.

The company priced $2 billion of 10¼% eight-year series B cash-pay notes at 95 to yield 11.216%.

In addition Texas Competitive priced $1.75 billion of 10½% nine-year PIK toggle notes at 93.25 to yield 11.747%.

Goldman Sachs & Co., Morgan Stanley, Citigroup, JP Morgan, Lehman Brothers and Credit Suisse were joint bookrunners for the issues, which are part of the financing for the LBO of TXU Corp., a Dallas-based energy company, by Kohlberg Kravis Roberts & Co. and Texas Pacific Group.

As the Texas Competitive terms circulated, sources from both the buy-side and the sell-side told Prospect News that the deal had been driven by reverse inquiry, and added that the Goldman Sachs fiscal year ends Friday, which providing plenty of motivation for the underwriter to get the debt off its balance sheet.

A high yield portfolio manager said that one account was heard to have taken down 60% of both tranches, while another took out $250 million of each tranche.

"They were being very cautious not to give any indication of who the big buyer was," the portfolio manager said, estimating that, all told, approximately $1 billion of the overall $3.75 billion was still for sale after the big buyers got up from the table.

The buy-sider added that it is by such methods that the broker dealers are lately attempting to move the risk overhang left over from the summer sell-off in the credit markets. "Bookrunners go out to all the big guys and get most of the deal done, then whatever is left is sold to the rest of the market," the portfolio manager said.

Freddie Mac sells preferreds

Also on Thursday, Freddie Mac raised $6 billion via the sale of its fixed-to-floating rate non-convertible non-cumulative perpetual preferred stock (expected ratings Aa3/AA-/A+) in a deal that generated a significant amount of interest among high yield accounts.

The shares, which priced at $25.00, will pay an 8 3/8% fixed-rate dividend for the first five years. After that the dividend will float at the greater of three-month Libor plus 416 basis points or 7 7/8%.

Lehman Brothers and Goldman Sachs & Co. ran the books for the deal, which was priced off the high grade desk.

An informed source told Prospect News that the preferred sale went very well.

"It was heavily oversubscribed, and allocations reflect that, the source added, noting that although there was significant interest among junk accounts looking to get into double-A rated paper paying 8 3/8%, the majority of the names in the book were from the investment grade bond universe.

First Data's $1 billion

Underwriters led by Citigroup were marketing $1 billion of First Data's senior subordinated notes on Thursday, according to market sources.

The notes are expected to price with a yield in the range of 13%, implying an issue price of approximately 91, according to one source.

The overall amount of First Data senior subordinated bridge financing is $2.5 billion, the source added.

On Oct. 16 underwriters priced a $2.2 billion tranche of First Data's 9 7/8% eight-year senior cash-pay notes (B3/B-/B-) at 94.796 to yield 10 7/8%.

Proceeds will be used to pay down the bridge financing used to fund the LBO of the Greenwood Village, Colo. financial services company by Kohlberg Kravis Roberts & Co.

Sequa deal

Primary market watchers continue to watch Sequa Corp.'s $1.2 billion seven-year term loan because the company's $700 million two-part offering of eight-year senior unsecured notes (Caa2/CCC+) is expected to follow the bank deal to market, depending upon how the bank loan trades.

The loan priced on Wednesday at 95, with a coupon of Libor plus 325 bps.

A source close to the Sequa financing said that at the Thursday close the loan was at 96 3/8 bid, and added that it had bounced around somewhat throughout the session, trading up to 96 3/8 bid in the morning, then falling back to a 96¼ bid context, before going out at 96 3/8 bid.

The source said that the bond deal is still on track, but added that the underwriters intend to be very deliberate with respect to marketing the bonds in order to make certain that when the bonds price, they trade well.

"The accounts definitely don't want to see this deal jammed into the market," the source said, adding that while the buy-side likes the credit the high yield market, at present, is "all over the place."

"They want to go back to the traditional mode of getting the bank deal off and letting it trade before they have conversations about relative value of the bonds."

The source anticipates that discussions with the buy-side will continue next week.

A record in trouble

Factoring in the $3.53 billion of proceeds generated in Thursday's Texas Competitive deal, dollar-denominated high yield issuance at the close of the session stood at $154 billion, according to Prospect News data - less than $3 billion away from surpassing the $157 billion issuance record set last year.

The First Data and Sequa deals, the only ones presently thought to be in the market, have a combined face amount of $1.7 billion.

Late last week market watchers told Prospect News that a new high yield issuance record, surpassing 2006, was unlikely given present market conditions.

And even though a seemingly paltry $3 billion was required to take the market into new record territory as the Thursday session wound down, sources remained hesitant to predict that a new record is all but an accomplished fact.

"It's touch and go," said one sell-sider.

Having said as much, however, this banker asserted that October and November in the primary market were not nearly as dire the headlines might lead one to believe, "especially given TXU."

The banker said that during the past six or seven weeks there were only five or six days during which deals were priced.

"That's consistent with the way this week has gone," the official added.

"Monday and Tuesday sucked. On Wednesday there were a couple of deals (Constellation Brands and Alliance Imaging). Today there was a deal [Texas Competitive].

"Tomorrow will probably be quiet.

"And most of the deals we are seeing are getting done are quick to market.

"That's the definition of a choppy market."

A trader who focuses on both high yield bonds and bank loans said that the Wednesday-Thursday rally in the junk market should be chalked up to Uncle Ben - Federal Reserve chairman Ben Bernanke.

"The sense that the Federal Reserve will again lower the Fed Funds rate has something to do with it," the trader asserted.

"It's also the absolute yield on Treasuries, so that you can do a deal like Constellation Brands on spread."

A high yield portfolio manager agreed, mostly.

The buy-sider said that right now high yield is tied to the equity markets, which are most recently positive, and to the fallout from the subprime mortgage mess. The latter is uniformly negative.

"The Fed announcement has sparked this rally," the investor asserted.

"On Tuesday you couldn't give away a bond. But the Fed talks, and the market is off to the races again.

"You still can't get the brokers to buy anything from you.

"They're still in lockdown mode until Monday, when their new fiscal year rolls around."

Texas Competitive bonds mostly seen little moved

When the new Texas Competitive Electric 10¼% cash-pay notes due 2015 and its 10½% toggle notes due 2016 were freed for secondary dealings, a trader saw both tranches of the new bonds trading fairly close to their respective issue prices at 95 and 93.25. He said the cash-pay bonds traded into a 95 bid, while the toggles were trading at 93 bid, 93.5 offered.

At another desk, a trader also saw the cash-pay bonds little moved at 95 bid, 95.25 offered. However, he said the toggle notes were outdoing the cash-pays, rising to 95 bid, 95.625 offered, adding "it looks like that's where they're going to hang out."

The second trader also saw the new Alliance Imaging Inc. 7¼% add-on notes due 2012, which had priced at 91.5 on Wednesday and then stayed around that level in initial aftermarket action, as having firmed on Thursday to 93 bid, 94 offered. Another trader called the bonds "up slightly" Thursday, ½ point better at 92.

The new Constellation Brands Inc. 8 3/8% notes due 2014, which priced at 99.344 on Wednesday and then moved up modestly to around the par level when they were freed for secondary dealings, were seen little moved, a trader said, at 100.125 bid, 100.375 offered. Another trader saw the bonds bid in the 100.25-100.5 area, noting that over the course of two days, they had gained a point versus their issue price.

Indexes pointing northward

Overall, a trader said, "the market felt a little bit on the firmer side." He said there was "decent two-way flow, with buyers and sellers on both sides of the market."

He said that "even at higher levels, we've seen guys looking to add, looking to buy paper. The Fed comments [Wednesday, interpreted by the financial markets as hinting at possible further interest rate cuts], and the run in the stock market, has given a lot of people a lot of confidence, so we're seeing our market move higher and moving in big size."

However, he said there were also "a lot of people" who were looking to hit bids "without looking at any offerings, trying to lighten up into the strength."

Another trader saw the widely followed CDX index of junk bond performance - which had gained a full point on Wednesday, in line with the big stock market rally - up just 1/8 point at 95 3/8 bid, 95 5/8 offered, on "pretty quiet" trading, relatively speaking. Among other market barometers, the KDP High Yield Daily Index was up 0.19 to 77.54, while its yield tightened 5 basis points to 8.64

Overall market volume rose about 7% from Wednesday's levels, while advancing issues outpaced decliners by a nearly six-to-five margin.

E*Trade gets short boost

One of the most heavily traded names of the day was E*Trade Financial, whose bonds "were all over the place" on the cash infusion news, a trader said.

He saw the 8% notes due 2011 going home at 80 bid, 81 offered, which he called up a point on the day, although he said the bonds had gotten as good as around 85 during the session, which he called a 6 point gain, but said that "they didn't get much higher than that." The bonds were trading "all around" the low-to-mid 80s for much of the day, he said.

Another trader said that there was "a bad short" in the 8s, which traded as high as 91, a 9 point gain on the day, before the bonds settled in the mid-80s, while the company's other two issues - its 7 3/8% notes due 2013 and its 7 7/8% notes due 2015 were up about 4 or 5 points at one point, "but it looks like it's all come back [down], with the issues ending no better than "a point or two."

He noted that "even the stock came back down," with the company's New York Stock Exchange-traded shares, which initially jumped 14% on the infusion news, surrendered those gains and finished down 46 cents, or 8.71%, at $4.82. Heavy volume of 245 million shares was seven times the usual daily turnover.

A market source saw the 8% 2011 notes - which had traded in an 80-81 context for most of the day on Wednesday before ending around 83 - jumping up to 87 bid at the opening Thursday on the cash infusion news and then getting as good as 90.5 during the session, before coming off those peak levels to settle back in around 85.5 during the afternoon. But from that point, the bonds were seen to have tumbled to around 80 late in the session, actually down 3 points from Wednesday's finish, pushed down by several very large trades at that lower level.

E*Trade's 7 3/8% notes due 2013 and 7 7/8% notes due 2015 replicated that up-down pattern, although both of them ended up off a point or so on the day, the '13s around 78.5 after having gotten as good as 84.5 and the '15s going out at 75.5, down from their zenith at 83.5 seen in early-morning trade. Trading was active in all three issues, although busiest in the 8s.

The bonds and shares churned around at mostly higher levels - before giving up those gains as the day wore on - on the news that the discount-brokerage - which has been hard-hit by losses to its mortgage-related securities portfolio - will get a $2.55 billion cash infusion from an investment syndicate led by Citadel Investment Group, and which includes Black Rock Inc. The investors will pay $1.75 billion for new 10-year notes and stock that will pay them a handsome annual interest rate of about 12.5% and give them an 18% ownership stake in the company and a seat on its board.

The deal also includes the $800 million purchase by the investor group of E*Trade's portfolio of asset-backed securities, which has a book value of $3 billion; the Citadel group is thus getting those securities for the equivalent of 27 cents on the dollar.

The deal is the latest of several large transactions in which financial companies reeling from the credit crunch and all of its associated troubles have found investors willing to bail them out with a large infusion of ready cash - in return for a sizable ownership stake and a fat yield on their investment.

Just this week, Abu Dhabi agreed to invest $7.5 billion in Citigroup, which will give the Persian Gulf nation's government investment fund stock paying the equivalent of an 11% dividend. There were also news reports Thursday that Chinese insurer Ping An was paying $2.7 billion to take a 4.2% stake in the Belgian-Dutch financial-services group Fortis. Earlier in the year, Bank of America rode to Countrywide Financial Corp.'s rescue with a $2 billion investment after the Calabasas, Calif.-based mortgage giant ran into trouble generating cash to keep funding its loans to customers, while Countrywide competitor Residential Capital LLC got a $1 billion capital transfusion from corporate parent GMAC LLC, which has recently raised the possibility of another cash infusion or some other type of strategic transaction to keep its problem-plagued mortgage unit afloat.

S&P still concerned

Despite the sudden windfall to the company, and its success in unloading its problem-plagued ABS portfolio, albeit at a steep discount, Standard & Poor's said that its B rating on parent E*Trade Financial and the BB- rating on its E*Trade Bank unit will remain on CreditWatch with negative implications, where they were placed on Nov. 13.

The agency said the big deal announced Thursday "does not provide a full resolution for long-term stability to capital, liquidity and franchise health."

S&P noted that E*Trade is still faced with daunting problems such as "materially increased leverage, lower earnings prospects, client asset attrition and changes in its securities and loan portfolios," as well as servicing the increased debt, that will be issued as part of the transaction, where sources of holding company cash may be limited,

While announcing its big deal with Citadel, E*Trade also said that Mitch Caplan, its chief executive officer since 2003, is stepping down, although he will remain with the company as a consultant and retain his seat on the E*Trade board. Donald Layton, a former vice chairman of J.P. Morgan Chase & Co, who up till now has been a strategic adviser at the brokerage, will become E*Trade's new chairman. Jarrett Lilien, now chief operating officer, will become acting chief executive.

Bon-Ton bounces around on numbers

Elsewhere, Bon-Ton Stores' 10¼% notes due 2014 came back from early losses to end around unchanged, despite the company's report of a sharply wider quarterly loss and its lowered outlook.

A trader said that there was "a lot of sideways trading" in the credit, which "fell in the morning, dropping about a point. It did come back in the afternoon to end about unchanged," at 79 bid, 80 offered.

"People expected worse" from the earnings report, bad as it was, another trader said, pegging the bonds at an opening low of 78.5 bid, 79.5 offered, down from 79.25 bid, 79.75 offered Wednesday. After that initial retreat, he said, "the bonds came back. A lot of shorts were being covered." He saw the bonds ending at 80.5 bid, 81 offered, which he called up a point.

Another market source said that the bonds opened at 80, around where they had finished Wednesday, fell as low as around 78, then arced as high as 81.5 before ending right where they had begun at an even 80, in very active trading.

Shareholders were much less forgiving of the bad numbers than bondholders were. While there was a little early upside movement in the company's NYSE-traded shares, perhaps on the feeling that things could have been worse, that mild euphoria quickly faded and the shares ended up plunging $2.57, or 19.29%, to $10.75. Volume of some 1.3 million shares was almost triple the norm.

Bon-Ton reported that it lost $19.4 million, or $1.17 per share, in the third quarter, nearly double its year-ago loss of $10.9 million, or 66 cents per share. The company cited soft and challenging conditions in the retail industry and severely cut its full-year profit forecast to $1.50 to $1.80 per share, well down from $2.75 to $2.90 per share that it had projected back in August.

Auto names better

Among the widely held industrial names, a trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 up 1½ points at 81.75 bid, 82.75 offered, while arch-rival Ford Motor Co.'s 7.45% paper due 2031 gained 1 point to 75 bid, 76 offered.

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