Hollywood, Delta bonds climb; American Seafoods prices seven-year; funds see $43 million inflow

By Paul Deckelman and Paul A. Harris

New York, Oct. 14 - Hollywood Entertainment Corp. bonds were up solidly in Thursday's dealings, with investors applauding the news that the Portland, Ore.-based video rental chain's on-again, off-again buyout saga is apparently on again, as the company accepted a revised bid from its would-be suitor. Also on the upside, Delta Air Lines Inc.'s bonds were soaring into the wild blue yonder - particularly on the short end of the curve - after Delta announced that it was extending and improving its exchange offer to the holders of some of its debt.

In the primary market, American Seafoods Corp. was heard to have netted $125 million of proceeds from its sale of new seven-year discount notes while Citgo Petroleum Corp. was seen by syndicate sources to have upsized its upcoming issue of seven-years.

And after trading concluded for the day, sources familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services told Prospect News that the widely followed measure of wider junk bond market liquidity trends was up for an eighth consecutive time in the week ended Wednesday - although owing to the holiday-abbreviated week, the inflow was a modest $42.6 million.

That's in contrast to the week before, when $256 million more came into the funds than left them.

On a year-to-date basis, the picture remains decidedly negative, although inflows have now been seen in more weeks than there have been outflows - 21 to 20. Still, in that time, even counting the latest week's cash infusion, $3.615 billion more has flowed from the funds this year than has come into them, according to a Prospect News analysis of the AMG figures. But momentum seems to have swung into the black of late, with net inflows having totaled $1.499 billion in the eight weeks dating back to mid-August.

The figures include only those funds which report on a weekly basis, and exclude the effect of distributions. The fund flows are considered by many in the market to be a reliable barometer of overall market liquidity trends, even though the aggregate amount of money in the junk funds represents only a relatively small percentage of funds in the broader high yield universe.

One observer suggested that the number easily falls within "the margin of error," while another - a sell-sider - said that high-yield mutual funds may not be as representative of the shoppers in the current market as has been the case in the past.

Meanwhile, with the stock market continuing to ski the downhill slopes on Thursday, the high-yield primary chugged purposefully along, with over half a billion dollars' worth of bonds pricing in two deals.

And the Thursday session saw the forward calendar continue to build, although not as persuasively as most observers would seem to like.

An equity/junk disconnect

Late Thursday one investment banker, noting that the Dow Jones Industrial Average fell 1.08% to close below the 9,800 mark, commented that while bad news in the stock market seldom bodes well for junk, high yield at present seems to represent an exception to the rule

"There is a big disconnect going on right now," the sell-sider said. "The equity markets are getting whacked at the moment. Meanwhile the junk market is going great guns. If you brought a deal today it would blow out."

The key word in that sentence, the banker added, is "If."

True, a couple of big deals have been announced this week, including Boise Cascade LLC's $650 million two-parter, expected to price Friday, and Rockwood Specialty Group Inc.'s $625 million set to launch Monday. Nevertheless, given that yield-hungry investors are now reported to be showing up in junkland from all quarters - mutual funds, hedge funds, insurance funds, pension funds and elsewhere - the forward calendar is a disappointment, the sell-sider said.

"The calendar has built a little bit this week," the source allowed. "At the start of the week it appeared as though we were going to do about $1.5 billion, which has more or less been the run rate for the past couple of weeks.

"However it is quiet out there. The post-Labor Day supply never really materialized in the way that people were expecting.

"Today was one of those days when the guys from the sales force were coming in and asking 'What can we bring?'

"They are crying out for new issues."

Not like the March market

In this banker's estimate, at least two factors separate the present red hot high-yield market from the white hot one that prevailed in the spring of 2004.

One is interest rates, the sell-sider said. Last March the yield on the 10-year Treasury seemed to be on a descent toward 3.50%, although it never quite reached that mark.

"Today the 10-year Treasury is sort of flirting with 4%," the banker observed.

"So rates have gone up slightly. But given where people think rates are going there is still no better time to refinance than right now."

The other difference between the present market and that of spring 2004 is the available pool of issuers, the source suggested.

"The market has been so strong for so long that everyone has done their deals," the sell-sider observed. "There are not many more candidates for this refinancing drive-by trade because they have already done it."

Having lamented the slow buildup of the forward calendar, however, the investment banker assured Prospect News that high-yield underwriters - at least the ones that this source could speak for - are not sitting on their hands.

The new issue pipeline won't go dry, the source assured, alluding to business expected to turn up before October ends.

Meanwhile another sell-sider, well after the lights went down on the Thursday primary market, also forecast the appearance of more bond deals in the pipeline.

"A lot of this will be M&A business," said the source. "It takes longer for those deals to materialize."

$545 million in two deals

Thursday's session saw two deals price.

Dresser-Rand Co. sold $420 million of 10-year senior subordinated notes (B3/B-) at par on Thursday to yield 7 3/8%, in the middle of the 7½%-7¾% price talk.

Morgan Stanley, Citigroup and UBS Investment Bank ran the books for the acquisition financing from the Olean, N.Y., supplier of infrastructure equipment to the energy industry.

Elsewhere ASG Consolidated in conjunction with ASG Finance, Inc. (American Seafoods) sold $196 million of 0% seven-year senior discount notes (Caa1/B-) at 63.70 to yield 11½%.

The Seattle-based seafood company's preferred share-redemption and dividend-funding deal came at the wide end of the 11¼%-11½% talk. Banc of America Securities was baiting the hooks.

Citgo upsizes seven-year deal

Meanwhile the remainder of the Oct. 11 week took shape with Citgo Petroleum Corp. upsizing its offering of seven-year senior notes (existing ratings Ba2/BB) to $250 million from $200 million on Thursday.

Price talk is 6 1/8% area on the Lehman Brothers-led deal that is expected to price mid-day Friday.

And price talk is 9¼%-9½% on IT Holdings Finance SA's €185 million of eight-year non-call-four senior notes (B3/B+), expected on Monday via Merrill Lynch & Co.

One European source who was burning the coal quite late on Thursday advised Prospect News that the deal from the Milan, Italy-based holding company for fashion brands - including Versace, Dolce & Gabbana, and Roberto Cavalli - was going quite well.

The pipeline

Although the flow is less than players would presently like to see, news of substantial deals to come did surface on Thursday.

The roadshow starts Monday for Rockwood Specialties Group Inc.'s two-part $625 million offering of 10-year senior subordinated notes (B3/B-) in dollar and euro tranches.

Pricing is expected to take place during the week of Oct. 25.

Credit Suisse First Boston, Goldman Sachs & Co. and UBS Investment Bank are joint bookrunners for the acquisition-related offering that has been anticipated since late summer.

Meanwhile an Oct. 18-27 roadshow is set to run for National Mentor Inc.'s $150 million offering of eight-year non-call-four senior subordinated notes (B3/B-), via Banc of America Securities, JP Morgan and UBS Investment Bank.

The Boston-based provider of home and community-based services for individuals with developmental disabilities will use the proceeds to refinance debt redeem preferred stock.

Further into the future Texas Genco will bring $1.375 billion of bonds in late October to help fund the $3.65 billion acquisition of the company.

Goldman Sachs & Co., Morgan Stanley, Deutsche Bank Securities and Citigroup will run the books for the wholesale electric power generator.

Finally Hollywood Entertainment subsidiary Hollywood Merger Corp. announced it will sell $550 million in bonds late this year or early next.

The video chain owner will also obtain a $275 million credit facility via UBS Securities LLC.

American Seafoods edges down in trading

When the new American Seafoods zero-coupon/11½% notes due 2011 were freed for secondary dealing, "the fishies didn't do so well," a trader said, quoting the new bonds at 63.625 bid, 63.875 offered, versus their 63.70 issue price.

Hollywood Entertainment jumps higher

Back among the existing issues, Hollywood Entertainment put on a show for investors Thursday, with its 9 5/8% notes due 2011 quoted at 115 bid, up "a good six, seven, eight points" from recent levels the bonds have held, a trader said. He saw the notes get as good as 115.25 before coming off that peak.

At another desk, the Hollywood bonds had gotten as good as 116 bid, before easing from that high to end at 115.

Hollywood, which runs the second-largest U.S. video-rental chain after Blockbuster Inc., got rave reviews from the market in late March when it announced that it would go private in a management-led buyout that also included Los Angeles-based private equity firm Leonard Green & Partners LP. Over several sessions, the bonds firmed into the mid-teens from prior levels at or below par on the news that Green and the management group would buy out existing shareholders at $14 per share.

But the cheers turned to jeers in early August, when the company said that due to changing market conditions, it had been informed that Green believed that the financing condition to the consummation of the merger between the two companies would likely not be satisfied.

Management continued to insist that the deal was not yet dead, even as some shareholders urged the company to abandon the buyout notion. On Wednesday, Contrarian Capital Management, a Greenwich, Conn.-based fund controlling some 1.9 million Hollywood shares, asked the company to rethink a buyout, saying it was not in the best interest of shareholders, and urged a recapitalization transaction instead.

Thursday, however, brought the news that Hollywood had agreed to a revised buyout plan, although shareholders would receive less for their stakes - $10.25 per share, versus the earlier $14 figure - due to the changed market conditions. But that did not appear to faze the bondholders, who took the bonds back up to their previous highs.

Delta rises

Delta Air Lines bondholders were taking their company's bonds to the kind of levels they have not seen in many weeks, or even months, as the Atlanta-based air carrier has struggled to cut costs and stay out of bankruptcy.

It was the second straight day that company's bonds had been seen solidly higher. On Wednesday, the bonds rose on the news that the union representing Delta's 7,500 pilots had made a new offer to management, which is seeking $1 billion of permanent pay cuts from the captains to bring its cost structure more into line with those of its industry rivals. The pilots had previously offered only $705 million of pay concessions, which Delta rejected out of hand as inadequate. There was no word on the size of the new concession offer.

On Thursday, the bonds leaped skyward as Delta extended a debt exchange offer for another month and, more importantly, sought to woo balky bondholders with sweetened terms, including more newly issued notes for their existing senior unsecured notes and enhanced passthrough certificates, and, under some circumstances, company shares as well (see "Tenders and Redemptions" elsewhere in this issue for full details).

That pushed Delta's benchmark 7.70% notes due 2005 up about nine points on the session, a trader said, to 64 bid from prior levels in the 50s. He said that the news had its greatest impact on the short end of the curve; he quoted Delta's 8.30% notes due 2029 at 32.5 bid, a gain of about 3½ points on the session, while the 7.90% notes due 2009 ended at 38 bid, 40 offered, a two-point rise. The gains, he said, were "all on the debt swap."

At another desk, a market source pegged the 7.70s at 62 bid, up from 49 the day before, while the 7.90s rose to 37.5 from 36, although he believed they had made most of the jump to those levels from the upper 20s the day before, on the pilot proposal news. He saw the 8.30% bonds three points better Thursday, at 30 bid.

Another trader saw all of the company's bonds at slightly lower levels than the first source but still up substantially on the session, with the 8.30s "maybe up one or two [points]" to around 31 bid, the Delta 10% notes due 2008 "up a few [points]" to 40.5, and the 7.70s "up a lot more" to close above 60.

Remington higher

Elsewhere, a trader said that "the whole market in general was sloppy," although he said that "one notable exception" besides Delta was Remington Arms Co. Inc.

"I don't know if people are buying more guns," he joked, but the company's 10½% notes due 2011 were up a point, even though Moody's Investors Service downgraded the company's debt Thursday, dropping the senior unsecured rating to B3 from B2. The ratings agency cited "Remington's profit erosion since its leveraged recapitalization in fiscal 2003, which the company attributes to economic weakness and, more recently, to seasonal product mix shifts. Despite the sale of its Stren fishing line business for $44 million earlier this year, Remington has been unable to maintain credit measures appropriate for its prior rating category."

Moody's noted that "in particular . . . LTM June 2004 debt-to-EBITDA (adjusted for seasonal working capital) is around 7x and free cash flow is negative. In addition to the economic and seasonal impacts, profit and cash flows have been impacted by investments in new business initiatives in law enforcement/security which have uncertain returns."

Even with all of that bad news, though, the trader said, the Madison, N.C.-based gunmaker's bonds were up a point to 96.25 "on pretty good size, as the market breathed a sigh of relief," apparently on the belief that the ratings could have been dropped more than just a notch.

He said the bonds "way back when" had been at 98, but then gradually declined into the mid-to-upper 80s. Recently though, "they've been on a steady climb up here. There was a sigh of relief [Thursday], when they were up another point."

That relief might not last however. In its downgrade announcement, Moody's warned that "[a]lthough management has recently indicated a more optimistic outlook for the business, Moody's remains concerned about second half operating performance given ongoing commodity price pressures and weakening consumer spending trends. Further rating downgrades are likely in the event that Remington is unable to stabilize earnings over this period and return to positive free cash flow generation. In addition, the ratings could be negatively impacted if the company increases its debt burden to fund unexpected strategic initiatives."

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