Claire's debt dives post-numbers; Constar bonds decline

By Paul A. Harris and Stephanie N. Rotondo

Portland, Ore., June 11 - As the high yield market took another downward turn Wednesday, Claire's Stores Inc. was the day's biggest loser after posting disappointing quarterly figures.

Traders reported that the retailer's corporate debt fell as much as 6 points during the session on the numbers, which included a 4% decline in net sales. The company's bank debt also slid, but not as much as the bonds.

Meanwhile, Constar International Inc.'s bonds also ended the session softer. According to traders, it was unclear if the paper had fallen in sympathy with the broader market or if something else was going on.

A sell-side source, pressed for a spot on the broad market, chose Ceridian Corp. bonds "because they are a liquid issue," and said that they were trading at 92½ bid on Wednesday afternoon, down from 93½ bid at the Tuesday close.

"It looks like the cash market got hit a little harder than the synthetics," the source added.

A quiet Wednesday

The sell-sider characterized the Wednesday primary market session as a "painfully slow" one.

Targa Resources Partners LP and Targa Resources Finance Corp. set price talk for their $250 million offering of eight-year senior notes (B2/B) at 8% to 8¼%.

The books will close Thursday afternoon, and the notes are expected to be priced after that.

Deutsche Bank Securities, Credit Suisse and Banc of America Securities are joint bookrunners for the debt refinancing deal.

Also expected to price Thursday is Sotheby's split-rated deal, which is being transacted off the high yield desk.

On Wednesday Sotheby's set price talk for its $150 million offering of seven-year senior notes (Ba3/BBB-) at the 7¾% area.

Banc of America Securities and Goldman Sachs are joint bookrunners for the acquisition and debt refinancing deal from the New York-base fine arts auctioneer.

Preference for floating-rate

A portfolio manager from a high yield mutual fund is taking a flier on Thursday's two deals.

This investor is positioning for both inflation and recession, and has a particular affinity right now for floating-rate debt.

"That may include bank loans," the investor conceded.

"We've been sneaking in and buying them."

For example, the buy-sider said, parts of the TXU Corp. Libor plus 350 bps term loan B, which priced last fall in three tranches - the B-1 and B-3 tranches at par, and the B-2 tranche at a slight discount - are lately for sale in the mid-90s. One source spotted the B-1 tranche offered at 94 3/8 late Wednesday.

"TXU has very good hard assets, and will do just fine over the long term with higher natural gas prices," the investor said.

"You can buy those things at L plus 350 in the mid-94s, depending upon which tranche.

"Why would you want an energy company junk bond at 7% when you can get this floating-rate instrument?

"If you believe that Libor is going up, which I do, it's a pretty good way to participate in the upside."

Positioning for inflation and recession

Meanwhile a high yield syndicate official, also attuned to the recent fusillade of headlines on the subjects of "inflation" and "recession," reflected on Wednesday that the 2008 market has generated a notable amount of senior secured paper, citing recent issues from Ply Gem Industries Inc., Hovnanian Enterprises, Inc. and Nortek, Inc.

According to Prospect News data more than 14% of the year's junk issuance, to date, has been secured paper.

The sell-sider reasoned that against an inflationary backdrop investors understandably are inclined to hug the upper reaches of the capital structure.

Now with the specter of inflation looming larger, the banker continued, the market is liable to see more floating-rate paper, and/or more defections, by junk investors, to the bank loan market from high yield, like the one described above by the high yield mutual fund investor.

"Interestingly the high yield market outperformed the loan market over the past three months, in most peoples' views, because the CLO investors have not stepped back into the loan market in a big way, whereas high yield has relied on long money players like Pimco and Franklin," the sell-sider said.

"And the hedge funds have always been participants in the high yield market."

Hence, the official said, given the absence of CLOs from the bank loan market the high yield investor base is comparatively better established, and the market has seemed to rally better than bank loans.

"It might be interesting to see now if money flows away from high yield into loans because of inflation and recession.

"Maybe that will help the loan market recover a little."

Also, the official added, it will be interesting to see whether high yield issuers and their underwriters, given indications that inflation is a clear and present danger, will start to bring floating-rate deals as the market closes in on the mid-point of the year.

The banker suggested that the answer to that question is liable to surface sooner than later.

A little disenchantment

To circle back to the high yield mutual fund investor, this buy-sider does not plan to play either of Thursday's deals, Sotheby's or Targa.

The investor had a look at Monday's deal from Sequa Corp., $711 million in cash pay notes and PIK notes, both of which priced at significant discounts, but ultimately passed, although allowed that both tranches were straddling issue price near Wednesday's close.

This money manager presently harbors some disenchantment with the high yield new issue market.

"Right now, for whatever reason, you're not seeing a lot of new issue pop," the investor said.

"A lot of deals have traded flat to down. DirecTV, EchoStar and Cablevision are ¼ point below new issue.

"The one exception is Airgas, and that one was priced too cheap. Right now it's 101 5/8 bid. That's a pretty good pop on a 7 1/8% coupon.

This source is looking for the high yield index to ease as recessionary forces continue to take hold of the U.S. economy.

"When companies start reporting lousy numbers bonds will sell off," the investor said.

"Recession is never priced into these bonds as much as you think."

The buy-sider believes that high yield accounts have worked down their cash balances but still have money to put to work.

"I think that the buy side is looking at what they buy before they buy it, whereas before they were just buying stuff because they thought it was going up," the investor said, adding that people are now building inflation and recession into a lot of their models.

Broad market still weaker

Back in trading, in sympathy with a declining equity market, the high-yield sector ended likewise softer. The CDX index lost 1/8 to end at 95 5/8 bid, 96 offered, while the KDP High Yield Index fell to 75.18 with a 9.44% yield, from 75.27 with a 9.41% yield.

Traders across the board categorized the day as "dead." One trader speculated that "accounts with cash are waiting on the sidelines."

Another trader said that liquidity concerns are increasing as the summer begins.

"People are getting what they can now before bids dry up in the summer months," a trader said.

As a high-yield conference was underway, that might have accounted for some people being away from their desks. But a source said that a storm Tuesday night wreaked some havoc in the New York-metro area, which also attributed to the lackluster day.

Claire's debt dives post-numbers

Claire's Stores took a dive after the company released its quarterly numbers late Tuesday.

One trader saw the bonds off slightly, its 9 5/8% notes due 2015 around 52.5 after opening at 53.5 bid, 54.5 offered. The 10½% notes due 2017 were seen down 2 to 3 points at 47.5 bid, 48.5 offered, versus opening levels of 52.5 bid, 53.5 offered.

Another trader said the Pembroke Pines, Fla.-based retailer's debt "really got beat up today," the 9¼% notes due 2015 trading between 61 and 64, the 9 5/8% between 52.5 and 55.25 and the 10½% notes - called "the most active of the three" - between 46 and 48.

Yet another source called the bonds down generally 4 to 5 points, "depending on which flavor." He pegged the 9¼% notes around 61.5, down 5 to 6 points, and the 10½% notes at 47 bid, 48 offered.

At another desk, a trader called the 10½% notes 6 points softer at 46 bid, 48 offered.

For the quarter, the company reported net sales of $327 million, down 4% from last year as same store sales declined.

Consolidated same store sales dropped 8.4% in the first quarter consisting of a 3.7% increase in average transaction value that was offset by a 12.5% decrease in the average number of transactions.

Adjusted EBITDA in the quarter was $34.3 million compared to $60.6 million in the 2007 first quarter.

Cash used by operating activities was $1.4 million during the quarter, compared with cash provided by operating activities of $20.3 million last year. This change in cash was primarily impacted by a decrease in operating income and an increase in interest paid on the debt incurred to fund the company's leveraged buyout, offset by a decrease in working capital.

"We are genuinely disappointed with our first quarter results. The challenging retail environment continues to impact our sales with mall traffic declining, and consumers' discretionary spending being crimped by large price increases in food and gasoline," said Gene Kahn, chief executive officer, in a news release.

"We began 2008 with an expense structure that anticipated same store sales growth. Given the current retail environment and economic conditions, we carefully reviewed our cost structure and estimate that we can save $40 million annually. We have begun to execute against a number of the identified opportunities and expect that we can save $15 million in this fiscal year, with the full annualized savings achieved in fiscal 2009.

"Our same store sales, while still negative, have shown improvement in the second quarter. We are encouraged that the new merchandise organization, combined with our cost savings initiatives, will drive improved performance during the second half of this year," Kahn added in the release.

Elsewhere in the sector, Burlington Coat Factory Warehouse Corp.'s 11 1/8% notes due 2015 fell a point to 84.5 bid, 85.5 offered.

"Retailers were down a little in sympathy with what was going on in the broader market, as well as Claire's," a trader said.

Constar bonds fall

Constar International's bonds ended the day weaker, but a trader was not sure what prompted the move. He speculated that a seller might have entered the market.

The trader quoted the 11% notes due 2012 at 54.5. Last week, the bonds had been 56 bid, 57 offered.

Another trader deemed the debt down a deuce at 54 bid, 55 offered.

In a research report released Wednesday, APS Financial analyst Scott Moxham placed a "speculative buy" on the 11% notes. In the report, Moxham stated that the company has had success in some of its higher margin custom products, offsetting declines in its domestic conventional products.

However, as a key contract is set to expire at the end of the year, Moxham noted that there is still some risk.

"However, management remains extremely confident that, based upon the status of current negotiations, the agreement will be renewed in the near future, possibly by the end of the second quarter," Moxham wrote. "Although investors should not ignore the risk associated with the expiration of the Pepsi contract, based upon various factors, particularly the longstanding relationship between the two companies and the geographical proximity of Constar plants to Pepsi plants, we believe the likelihood of a 100% loss of the business is low."

Philadelphia-based Constar is a manufacturer of polyethylene terephthalate plastic containers for the food and beverage industry.

Homebuilders, gaming lose ground

"Homebuilders remain active," a trader said, following ratings cuts in the sector earlier in the week from Moody's Investors Service and Fitch Ratings. The trader quoted KB Home's 6¼% notes due 2015 at 87 bid, 88 offered, versus 88 bid, 88.5 offered previously.

The trader also saw Hovnanian Enterprises Inc.'s 7½% notes due 2016 offered at 72.

"That's off a touch, but nothing drastic," he said.

At another desk, a trader saw Hovnanian's 8 7/8% notes due 2012 at 75 bid, 76 offered and Beazer Homes USA Inc.'s 8 5/8% notes due 2011 at 87 bid, 88 offered, both down a point.

In gaming names, Trump Entertainment Resorts Inc.'s 8½% notes due 2015 ended a point lower around 67.5, a trader said, after gaining in the previous session. Another trader placed the bonds at 67 bid, 68 offered, down 1½ points. Las Vegas Sands' 6 3/8% notes due 2015 fell 2 points to 87.5 bid, 88.5 offered.

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