Ispat Inland prices two-tranche deal; Portola slides on numbers; funds see $265 million outflow

By Paul Deckelman and Paul A. Harris

New York, March 18 - Ispat Inland ULC was heard by high yield syndicate sources Thursday to have priced $800 million of new bonds in a two-part offering. Primaryside activity was otherwise fairly quiet, with the attention of many bond investors riveted on the investment-grade market, where Pacific Gas & Electric Co.'s massive $6.7 billion multi-tranche offering priced, and then proceeded to firm smartly after being freed for aftermarket dealings. Apart from the Ispat Inland deal, junk market denizens spent the time frying smaller fish, such as the restructuring of Interactive Health Finance Corp.'s seven-year issue and the emergence of price talk on MTU Aero Engine Investments' upcoming euro-denominated offering.

In the secondary market, Portola Packaging Inc.'s bonds slid sharply on the heels of poor fiscal second-quarter results the San Jose, Calif.-based packaging producer had reported on Wednesday. Things were no better for holders of aaiPharma Inc., whose bonds were lower for a second consecutive session, apparently prompted by the Wilmington, N.C.-based pharmaceuticals maker's announcement earlier in the week that it would delay filing its 10-K report with the Securities and Exchange Commission.

Late in the day, market participants familiar with the high yield mutual fund flow numbers compiled weekly by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday $264.817 million more left the junk funds than came into them, reversing the trend seen over the previous two weeks, when net inflows totaled $442.6 million, including $307.9 million in the week ended March 10.

Although the mutual funds make up only part of the total assets in the high yield universe - other money sources include insurance companies, pension funds, endowments and retail investors - their behavior is viewed by many in the market as a reliable indicator of overall liquidity trends in the junk market.

While inflows have still been seen in seven weeks out of the 11 since the start of the year, the overall picture remains negative. According to a Prospect News analysis of the weekly AMG figures, the total cumulative net outflow for the year to date ballooned out to $1.22 billion in the week ended Wednesday, from $955 million the previous week, counting only those funds which report on a weekly basis and excluding distributions.

After a strong start to the new year, with inflows seen over the first several weeks, continuing the vigorously positive trend seen for most of the final quarter of 2003, the momentum shifted abruptly in early February, when outflows of more than $1 billion were recorded in two consecutive weeks. That completely wiped out the cumulative gains for the new year and establishing negative momentum. Since then, the pattern of the flows has been choppy, with up and down weeks alternating.

"The market felt heavy today," commented one sell-side official, considering the day's news.

"It seems as though we're not seeing executions this week that were as good as those that we saw last week."

Ispat prices sole issue

The one execution that the market did see Thursday came from the integrated steel company Ispat Inland, which priced $800 million of senior secured notes (Caa1/B-) in two tranches.

The East Chicago, Ill. integrated steel company sold $650 million of 10-year 9¾% fixed-rate notes at 99.212 to yield 9 7/8%. That print came in the middle of the 9¾%-10% price talk.

The company also sold $150 million of seven-year floating-rate notes at par to yield Libor plus 675 basis points. The floaters came wide of the Libor plus 625-650 basis points talk.

UBS Investment Bank ran the books on the steel-maker's debt refinancing deal.

Call changes seen indicating buyer pushback

The call structure on the Ispat floating-rate tranche was revised on Wednesday to non-call-two from non-call-one.

On Thursday another prospective issuer, Interactive Health Finance Corp., revised the call protection on its $85 million proceeds seven-year senior notes deal. The robotic massage chair producer and marketer is now offering investors an extra year of call protection so that now the notes will be non-callable for four years instead of the originally announced three years.

Interactive Health and Ispat, taken in conjunction with Riverdeep, which priced a seven-year non-call-three deal on Wednesday with a first call at par plus the entire coupon, indicate to a variety of market sources that there is some investor pushback at play in the primary market.

"You're definitely seeing more pushback and it seems like companies are a lot more willing to accommodate that," an investor told Prospect News on Wednesday.

"But rates are so low that if you give up an extra quarter to make your deal happen it doesn't kill you. A year ago some of these companies would have been refinancing at 13% or 14%. They're in single digits now.

"So if they have to put in a covenant or give a little in terms of call protection, when you're issuing paper at 8% it doesn't make that much difference.

"The opportunity for a company to refinance at these kinds of rates is not going to last forever."

A sell-side source had much the same color: "At rates like this call structure is not a deal-breaker."

The Interactive Health deal, meanwhile, is expected to price on Friday or Monday, via Jefferies & Co.

The company plans to sell its notes at a discount price of 85.0, with the yield being talked at 10¾%-11%.

The company had initially been in the market with an $80 million par bond issue.

Talk on week's remaining deals

Price talk of 8¼%-8½% was heard Thursday on Aker Kvaerner's planned €250 million of seven-year senior second priority lien notes (B2/Fitch BB), which are expected to price Friday in London.

JP Morgan, Barclays, Nordea and SG Cowen are underwriters.

Meanwhile Baxi Holdings Ltd. and Heating Finance plc issued price talk Thursday on their offering of £90 million of 10-year mezzanine notes (B2/B). The notes are expected to come with a coupon in the 8%-8¼% range and to price at a discount to yield 9½%-9¾%, with pricing expected on Friday.

Royal Bank of Scotland is the bookrunner.

And price talk of the 8½% area was heard on MTU Aero Engine Investments GmbH & Co.'s upcoming €240 million of 10-year senior notes (B2/B).

The books close on Friday, and the deal is expected to price Monday in London, via JP Morgan and Credit Suisse First Boston.

Boyd Gaming heard on the way

Finally on Thursday, although no new roadshow starts were announced, one source told Prospect News that Boyd Gaming Corp. is expected to come with new debt in connection with its announced merger with Coast Casinos Inc.

The refinancing package will be comprised of high-yield and new bank debt, with Deutsche Bank Securities leading both portions.

When the deal is done, likely in April, the debt of two companies is expected to be combined at the Boyd level.

New Pacific Gas deal gains

Junk players noted from afar the pricing of the new Pacific Gas & Electric deal, and the robust spread tightening seen when the new paper was freed for secondary dealings.

"Those spreads moved dramatically in," one trader said, noting that the 6.05% bonds due 2034, which had priced at a spread of 140 basis points over the comparable Treasury issue, tightened as much as 14 basis points on the session before finishing at 129 bps bid, 127 bps offered. The company's 4.8% notes due 2014, after pricing at 109 bps over, tightened to 99 bps bid, 96 bps offered; the 4.2% notes due 2011 improved to 93 bps bid from 104 bps; and the 3.6% notes due 2009 firmed to a bid of 83 basis points over Treasuries, from 94 bps at issue.

The San Francisco-based utility company - plunged into bankruptcy in early 2001 as a result of the California energy crunch - will use the proceeds from the deal to repay creditors and emerge from reorganization.

A trader noted that the company's current bonds, including its 5 5/8% notes due 2005, its 8¼% notes and long-dated 7¼% bonds "are all going to be called and all are currently trading around their call price."

Portola plummets

Portola Packaging's 8¼% senior notes due 2012 were seen having nosedived to levels as low as 91.5 bid, 93.5 offered from prior levels around 104.5 bid, 105.5 offered.

"They had absolute crap numbers," a trader declared, "and there was nothing in the conference call that would give you a lot of hope that business is going to recover any time soon."

The company was wrestling with a rise in raw materials costs, particularly resin prices, while "its top line was basically unchanged. EBITDA was negative $1.1 million, and if that's a run rate, it's down dramatically from where these guys were when they brought their deal in January." A year earlier, EBITDA was $5.7 million for the quarter.

Portola sold $180 million of the bonds at par back on Jan. 20 and they promptly shot up to above 104.5 bid when they broke, and pretty much stayed at those lofty levels until this week, tumbling back down following the numbers.

While sales were actually improved to $54.2 million in the fiscal quarter ended Feb. 29 from $51.1 million a year earlier, Portola had an operating loss of $4.5 million, versus operating income of $1.1 million a year earlier. It had a net loss of $10.7 million for the latest quarter, widening out from a year-earlier net loss of $1.1 million.

aaiPharma lower

Elsewhere, a market-watcher quoted aaiPharma's 11% notes due 2010 as having dropped to 91 bid from 92 on Wednesday, and saw those bonds as having come down from levels as high as 98 earlier in the week, when the company announced that it had filed a notice with the SEC that its 10-K annual report would be delayed. The filing date was thus extended to March 30 from the original March 15 deadline.

The company had previously indicated in a March 1 announcement that it was looking into apparent "sales abnormalities" connected with its Brethine and Darvocet product lines during the second half of 2003, and that the internal probe by a committee of independent directors could result in a delay in filing the 2003 10-K report.

Accounting-related issues were also in evidence at Paxson Communications Corp., whose 10¾% notes due 2008 were seen down half a point at 103.5 bid; the West Palm Beach, Fla.-based television station group owner said that it will be restating its financial results for prior years in order to correct its 1997, 1998, 1999 and 2000 purchase accounting for stock acquisitions.

However, Paxson said that its historically reported revenues, cash operating expenses and EBITDA will be unaffected by the adjustments.

Wireless weaker

A trader said that wireless telecommunications debt "in general seems to be heavier." While he saw Rural Cellular Corp.'s new 8¼% senior secured notes due 2012 "hanging in there" at 102 bid, up from their par issue price on Monday, "the balance of the sector seems weak."

He saw Nextel Communications Inc.'s new 5.95% senior notes due 2014 "basically unchanged" at 98.25 bid, 98.75 offered, but opined that "it just seems heavy."

Centennial Cellular "had good numbers, but the bonds are unchanged," while he said that Alamosa (Delaware) Inc.'s 8½% senior notes due 2012 were "a little softer" at 95.5 bid, 96.5 offered.

Tenet continues convalescence

On the upside, Tenet Healthcare Corp. - whose paper began moving up right after the Santa Barbara, Calif.-based hospital operator's Tuesday conference call - continued to strengthen.

The trader saw its benchmark 7 3/8% notes due 2013 at 88.5 bid,. 89.5 offered, up about a point in "thin" trading.

At another desk, those bonds were pegged as high at 89.5 offered, while Tenet's 6½% notes due 2012 were unchanged at 85.25 bid and its 5% notes due 2012 improved to 91.75 bid from prior levels at 90.

Following the conference call - in which the embattled company said it is proceeding with plans to sell 27 of its nearly 100 properties and use the proceeds to cut debt - "people have gotten a little more comfortable that they're not going to run out of money by the end of the year as was feared."

However, he sounded a cautious note, adding that "it's not over yet. There are a lot of 'ifs'," despite what he called "a long-winded presentation that didn't particularly impress me."

Airlines firmer

A trader said that the airline sector "was a little bit better," with Delta Airlines' 8.30% bonds due 2029 pushing up to 56.25 bid, 58 offered from prior levels around 54; he saw the Atlanta-based air carrier's 7.70% notes pretty much unchanged at 86. He also saw Northwest Airlines' 9 7/8% notes due 2007 86.5 bid, 88.5 offered, also stable.

Another trader said that the Delta bonds had "gotten drummed the other day," after Delta indicated that it would likely post a larger than expected loss, which was followed by Standard & Poor's cutting its corporate credit to B- from B+ previously; the ratings agency cited the difficulties Delta was having in wringing more cost concessions out of its pilots' union. The rise in the bonds, despite all of that negative news "was a relief rally."

Continental Airlines' 8% notes due 2005 meantime had pushed up to 84.25 bid, 85.25 offered from 83 bid, 84 offered.

The first trader noted that "there are three things that have negatively affected bond priced in the airline world - fuel prices, terrorism, especially since Madrid, and the numbers have been bad," such as the Delta earnings warning.

"If you take one of those three pillars of bad news out, such as terrorism," amid news reports that a key al-Qaeda figure, Ayman Al-Zawahri, said to be second only to Osama bin Laden himself, had been surrounded by Pakistani forces and might be captured, "you had a definite bid [Thursday]."

Apart from such isolated areas of interest, however, he said, the secondary market was relatively sedate.

"Sure there was a lot of activity," he quipped. "On the one hand, you had March Madness (the televised NCAA college basketball championship playoffs), and on the other, you had Pakistan and al Qaeda - but there just wasn't much junk bond trading going on though."

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