Junk market benefits from good earnings, stock rise; fund flows back in the black

By Paul Deckelman and Paul Harris

New York, Oct. 17 - Junk bonds had a better tone to them on Thursday traders said, helped by the continued rise in the equity markets and better-than-expected earnings reported by a number of major corporations. However, players said that while the overall tone was better, no real features stood out.

The market's tone is expected to continue to improve, aided by the report that high-yield mutual funds showed their first net weekly inflow after three straight weeks of outflows that collectively saw over $1.7 billion bled from the junk funds. The mutual fund flows are watched by many junk players as a key barometer of overall market liquidity trends.

A market source said Arcata, Calif.-based AMG Data Services reported a $206.7 million inflow to high-yield mutual funds for the week ending Oct. 16.

News of new issuance in the primary market was heard again on Thursday as Constar International, Inc. pulled the cork on its registered deal, announcing a roadshow start on Monday. Also terms were heard on the mezzanine tranche from St. Louis scaffolder Brand Services, Inc.

Looking at recent market activity, portfolio manager Curt Barrows, who manages the Nationwide High Yield Bond Fund with Karen Bater, said: "It's been incredibly quiet."

"There has been talk of new issuance. There's a calendar. But there really hasn't been a lot of activity.

"I think people are kind of waiting in the weeds and trying to figure out what's going on."

Earlier in the week a sell-side source told Prospect News that the accounts were thought to be sitting on approximately 9% cash, which this source characterized as being "as high as it has been for some time."

Barrows, however, said that his cash position was nowhere near that high.

"We wouldn't go over 5% as a rule, anyhow, and we're not even that high," the portfolio manager said.

"But we also have a more stable shareholder base, so we don't have timers or anything like that," he added, noting that the record-setting $1.56 billion inflow into high-yield mutual funds reported for the week ending Aug. 28 could have been timer money, as others from both the buy- and sell-sides have advised Prospect News that it was.

"I think there is cash out there," Barrows said. "And I think at some point when people get some conviction this market will turn. It's just a matter of when."

Speaking as the stock markets were winding down a session that saw the Dow Jones Industrial Average close its fifth advancing session in the last six, up 239 points, Barrows noted that equities are doing better. He added that gradual improvement in the economy could do high yield no harm.

"You also have the potential of military action at the first of the year, which makes people nervous, although I'm not sure it really should," he added.

Barrows, who declines to comment on credits that are in the high market, said that the new issuance he might consider buying does not presently seem to be for sale.

"We're not seeing a lot of new money come in to invest, so we're not under a lot of pressure," he added. "There are a couple of accounts that we have that buy better quality names - three-B and four-B names. That's what we'd be interested in. But at this point we're not seeing that issuance."

In Thursday's primary market activity one roadshow start was announced. Constar International, Inc.'s registered $200 million of ten-year senior subordinated notes (B3/B) will start roadshowing Monday, according to a syndicate source who added that the deal is expected to price in early November.

Proceeds from the deal, via Salomon Smith Barney and Deutsche Bank Securities, will be used to help fund the spin-off of Constar from Crown Cork & Seal and to repay debt to Crown Cork & Seal. Crown Cork & Seal will in turn use the proceeds to repay a portion of its outstanding debt.

Also on Thursday, terms emerged on Brand Intermediate Holdings, Inc.'s mezzanine tranche of $35 million of 11-year senior subordinated notes (NR), which priced at par to yield 13% via Credit Suisse First Boston and JP Morgan.

The notes have a 13% PIK coupon until 2007 and are cash-pay thereafter.

And a sell-side source told Prospect News on Thursday that Rexnord Corp., a Milwaukee-based supplier of power transmission components, drives and conveying equipment, is expected to bring approximately $225 million of new issuance to help fund the LBO of the company from Invensys plc by The Carlyle Group.

The financing, which includes a $435 million credit facility led by Deutsche Bank and Credit Suisse First Boston, is expected to close by the end of November.

Back in the secondary market, trading was described as quiet, although "with a little better tone," a trader said, noting the psychological boost the market got from the equity upturn and better results reported by such companies as Dow Jones Industrial Average bellwether International Business Machines Corp.

Over the past week, stocks have been up strongly, and on Thursday the Dow climbed 239.01 (3%) to 8275.04, paced by IBM, as well as Eastman Kodak Co. and United Technologies Corp.; the three companies were responsible for almost half of that gain. The S&P 500 added 19.18 (2.2%) to close at 879.20, while the Nasdaq Composite Index jumped 39.87 (3.2%) to 1272.29.

The recent upturn in stocks can only help to restore investor confidence in the high yield market, said the head of high yield research for CIBC World Markets Corp., Edward P. Mally.

"When I look at the relationship between price action in the equity markets and price action in the high-yield market, the high-yield market right now appears to be lagging. While it has shown a positive trend" over the past few days, "there's still a significant amount of ground to retrace in high yield. But obviously the correlation between equities and high yield would point to positive things in high yield, given the upward move in equity prices" (see related story in this issue).

The better tone helped Charter Communications bonds, with the cable giant's 8 5/8% notes due 2009 quoted up about 2½ points on the session at bid levels in the 54-55 area. A trader saw the benchmark issue having pushed as high as 55 bid from prior levels at 52 bids/53 offered before easing off that peak to end at 54 bid/56 offered.

"There was also some life in the tower sector," another trader said, quoting Crown Castle International's 9 3/8% notes due 2011 two points better, at 65 bid/66 offered.

A trader said that Nextel Communications Inc. bonds were up half a point to a full point "in some areas." Nextel's 10.65% notes due 2007 gained two points to end at 85.75, while its zero-coupon notes due 2008 were 1½ points better at around the 78 level.

At another desk, a trader commented that "there's some stuff trading. The market's cautiously firmer. A lot of the liquid stuff is firmer; cautious though, not running up big time."

As an example, he cited "the Nextels and all the on-the-run stuff; the gaming stuff. Whatever's liquid and decent. Not that Nextel's all that great in terms of quality, but it's still 70 or 80 cents on the dollar. In our market that's not that bad these days."

He also saw Charter as having "firmed kind of across the board," but added that "nothing's really running up big."

One issue which may have been an exception to that rule was Sealy Mattress Co.'s 9 7/8% notes due 2007, which firmed about four points to around the 84 level after the High Point, N.C.-based mattress and bedding company's corporate parent, Sealy Corp. Announced late Wednesday after the markets had closed that during the third quarter it earned $8.4 million versus a $21.7 million year-earlier loss, although much of the year-ago red ink came from a charge to write off investments in affiliates.

Adjusted EBITDA was $43 million, up from $40.2 million a year earlier.

Also on the upside - although only slightly, was Foamex International Inc., whose bonds and shares had been crushed on Wednesday after the Linwood, Pa.-based maker of foam rubber products warned that it would show a loss in the third quarter, due to higher raw materials costs; analysts had been looking for the company to earn 18 cents per share profit.

After having fallen as low as the mid-teens Wednesday from prior levels in the 70s, Foamex's subordinated debt, such as its 13½% notes, managed to firm to 22 bid. But a market source said its senior bonds, such as its 10¾% notes, which had fallen to about 50 bid from prior levels at 78, were little changed. "There was a bounce, but only in the junior stuff," he said. "Maybe the market thought that the junior stuff had been oversold."

Another trader, however, saw the 10¾% notes trading as high as 55 bid from earlier lows around 47 bid/53 offered. The bonds later came off that peak to end around 54 bid/57 offered, up several points on the session, he noted, but still far below the levels they held before the earnings warning Wednesday.

On the downside, Aurora Foods Inc. bonds were quoted languishing in the mid 40s from recent levels near 60 bid. No fresh news was seen about the St. Louis-based maker of Duncan Hines cake mixes, Mrs. Paul's frozen fish specialties, Log Cabin pancake syrup and other brand name packaged food products.

No immediate junk market reaction was observed following the announcement that Sirius Satellite Radio Inc. had reached agreement with its investors on a recapitalization plan that will convert $700 million of debt and $525 million of preferred stock into equity of the satellite radio broadcaster. A trader opined that the recapitalization "probably was anticipated" and had already been built into the price levels. He saw the company's 14½% notes due 2009 at 21 bid/23 offered and its zero-coupon/15% discount notes due 2007 around 19 bid/21 offered, unchanged from recent levels.

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