Argosy, upsized Ply Gem price; Level 3 dives on outlook; funds break streak, lose $1.57 billion

By Paul Deckelman and Paul A. Harris

New York, Feb. 5 - Argosy Gaming Co. brought a quickly shopped issue of new 10-year notes to market Thursday while Ply Gem Inc. was heard by syndicate sources to have upsized its scheduled offering of new eight-year notes. But three of the day's five new issues came wide of price talk, perhaps symptomatic of a primary sector that may finally be coming back down to earth after soaring to lofty heights the previous month.

In the secondary market, Level 3 Communications Inc. bonds were seen sharply lower, after the Broomfield, Colo.-based telecommunications fiber optic network operator reported a narrower fourth-quarter loss - but said that revenues and earnings would remain under pressure in a "challenging" environment, at least for the first half of this year. Level 3 was only the most prominent of a number of high yield names which were seen down points on Thursday amid a general sense of market malaise.

And with high yield recently in the doldrums - really ever since the Federal Reserve signaled that an interest rate rise somewhere down the line, maybe sooner rather than later, was not out of the question - it was inevitable that before long, funds which had found their way into the once red-hot market would start drying up as investors looked elsewhere.

And sure enough, late in the session, after trading had wound down for the day, market participants familiar with the weekly high yield mutual fund flow statistics compiled by AMG Data Services of Arcata, Calif. reported that in the week ended Wednesday, there was a net outflow - and a giant one at that, of $1.568 billion, a sharp reversal of the $251.87 million inflow in the week ended Jan. 28.

The fund flows are seen as a reliable barometer of overall market liquidity trends, even though the mutual funds comprise only a portion of the money in the total high yield universe.

Wipes out year's inflows

The latest week's outflow not only brings to an abrupt halt a sizzling winning streak which had seen inflows reported in each of the previous four weeks of 2004, the previous 12 weeks in a row and 18 weeks out of the previous 19, during which time the junk funds showed a cumulative net gain of over $5.2 billion; the mammoth hemorrhage of cash from the junk funds in the most recent week more than offset all of the inflows which had been seen so far this year. Counting the latest outflow, $193 million more has left the junk funds this year than has come into them, according to a Prospect News analysis of the AMG statistics, counting only those funds which report on a weekly basis and excluding distributions.

Net inflows had totaled $20.126 billion for all of 2003, and that hefty momentum had continued into the start of 2004, although market participants had noted that after a respectable inflow of more than half a billion dollars in the first week of the year, the inflows had been steadily dropping off, with last week's AMG number about half of that first week's gain.

"The inflows have been so anemic" of late, said a trader who had predicted a sizable outflow number beforehand. "They've been horrible. Two hundred million, $100 million, what's that? Before, we had been getting billions so that's kind of slowed too."

He suggested that at least some of that cash had found its way back to the equity markets - for the simple reason that the junk market was unlikely to be able to replicate the stunning returns in the 30% area seen in 2003. "Who knows? They're withdrawing some cash and flipping it around."

Another trader, acknowledging that even though the junk market has struggled for the past week or so, there seems to have been no real letup in the pace of new issuance, suggested that following the latest week's outflow, "they'll stop. They'll stop them.

"Probably a lot of deals get pulled with this number - and it's what we need. We need to get the Street clean of merchandise again, because they own too much stuff, and they just can't handle it."

A primary market sell-side source, speaking late Thursday, pointed to three of five deals that priced during the session, and said that they foreshadowed the day's overarching news story: the $1.57 billion outflow.

The three deals, from Argosy Gaming Co., General Communications, Inc. (GCI) and Ply Gem Industries all priced wide of their price talk, said the source, who had been closely tracking the fortunes of the offering from Alaskan telecommunications firm, GCI.

GCI prices as number hits

General Communications priced an upsized $230 million of 7¼% 10-year senior notes (B2/B+) at 98.264, to yield 7 ½%, wide of the 7%-7¼% price talk but increased from $200 million.

Deutsche Bank Securities was the bookrunner.

"The deal was pricing just as the [funds flow] number hit the tape," said the source. "At that point people started scrambling."

However, the sell-sider specified, GCI likely did the smart thing by completing its transaction on Thursday, even though it came 25 basis points wide of talk. An outflow of the magnitude of the $1.57 billion number, which sources said had been reported late Thursday by AMG Data Services, could have implications for deals positioned on the now hefty forward calendar as business to be transacted in the days and weeks ahead.

Unlucky numbers

Numerologists might note that Thursday's reported massive outflow from the high yield mutual funds trailed 13 consecutive weeks of inflows, the most recent being a $251.9 million inflow for the week ending Jan. 28.

To find the most recent negative flow prior to the one reported Thursday one must turn a considerable number of calendar pages, back to the week ending Oct. 29, 2003 when the market saw a quite modest $1.1 million outflow.

Argosy, Ply Gem also wide of talk

The sell-side source quoted above said that an even stronger indicator that the coast was far from clear in junkland was the Argosy Gaming deal, because gaming is a sector thought to enjoy broad favor among junk investors.

On Thursday the company sold $350 million of 10-year notes (B3/B+) at par, to yield 7%.

The Alton, Ill. gaming firm's refinancing deal, led by Morgan Stanley Dean Witter, came wide of the 6 5/8%-6 7/8% price talk.

The third among Thursday's wide pricing deals came from Kearny, Mo.-based exterior building products manufacturer Ply Gem Industries, which sold an upsized $225 million of eight-year senior subordinated notes (B3/B-) at par to yield 9%

Price talk on the acquisition financing deal, led by UBS Investment Bank and Deutsche Bank Securities, was 8½%-8¾%.

"Knee-jerk reaction" to Fed

Another sell-side source who spoke to Prospect News, late Thursday said that while the outflow from the high yield mutual funds which report on a weekly basis was certainly dramatic, it would be premature to issue a "falling sky" warning.

"I think you can attribute this outflow to a knee-jerk reaction to last week's Fed meeting," the sell-sider said. "The best evidence I can give you as far as that goes is the Treasury market, which has begun to smooth out.

"I don't think this outflow necessarily signals anything. It could just be a temporary phenomenon - a reaction to the possibility of an eventual new interest rate scenario."

Inverness, Pinnacle fare better

The early birds appear to have had the least difficulty securing their respective worms, during Thursday's session.

The first terms that circulated the market were those for Inverness Medical Innovations' $150 million of eight-year senior subordinated notes (Caa1/B-).

That deal, led by UBS Investment Bank and Merrill Lynch & Co., priced at par, to yield 8¾% - at the tight end of the 8¾%-9% price talk.

And Pinnacle Foods Holding Corp. priced a $194 million add-on to its 8¼% senior subordinated notes due Dec. 1, 2013 (B3/B) at 103.596, resulting in a 7 5/8% yield to worst, according to market sources.

The deal, led by JP Morgan and Citigroup, came right at the 7 5/8% area price talk.

Calendar continues to build

Three prospective issuers stepped forward during Thursday's session.

British engineering firm Invensys is expected to offer between £625 and £650 million of seven-year senior notes.

The deal, which will be led by Deutsche Bank Securities, is expected to launch next week.

The roadshow runs Feb. 9-13 for Russel Metals Inc. and RMI USA LLC's $175 million of 10-year notes (Ba3/BB-) via Citigroup.

The Toronto-based metals distributor will use the proceeds to refinance debt.

And the roadshow starts Tuesday for AMF Bowling Worldwide Inc.'s $150 million of six-year senior subordinated notes (B3/CCC+), coming via Merrill Lynch & Co. and Credit Suisse First Boston. The deal is expected to price on Feb. 19 or 20.

Talk on Ormat, Time Warner Telecom

Price talk of 8%-8¼% emerged Thursday on Ormat Funding Corp.'s planned $190 million of senior secured notes due 2020, expected on Friday, via Lehman Brothers

And price talk and size ranges emerged Thursday on Time Warner Telecom, Inc.'s $800 million two-tranche deal, which is expected to price on Monday.

The Littleton, Colo.-based provider of managed network solutions plans to sell $300-$400 million of seven-year non-call-two second priority senior secured floating rate notes (B1/B). The price talk is for a yield in the Libor plus 375 basis points area.

The company is also offering 400-$500 million of 10-year non-call-five senior notes (B2/CCC+). Price talk on the fixed rate notes is 9%-9¼%.

Lehman Brothers and Morgan Stanley Dean Witter are joint bookrunners

Argosy slips in trading, Qwest off

When the new Argosy Gaming 7% senior subordinated notes due 2014 were freed for secondary dealings, they were heard to have settled in to bid levels around 99.75, slightly below their par issue price earlier in the session.

And the new Pinnacle Foods 8 ¼% senior subordinated notes due 2013, which priced at 103.596, were seen having firmed slightly to 104.25 bid.

The new Qwest Communications International Inc. bonds, which priced a week ago in a mammoth $1.775 billion three-part offering, struggled for several sessions and then were heard to have improved on Wednesday, were seen having moved back down in Thursday's dealings.

A market observer saw the Qwest 7¼% senior notes due 2011 as having dipped back down to 96.75 bid from 98 on Wednesday; its 7½% senior notes due 2014 fell back to 95 bid from 97 on Wednesday, while its floating-rate tranche due 2009 - so far, the best performer of the three - was likewise easier, at 97.375 bid, down from Wednesday's 98.5. At another desk, those floaters were quoted offered at 99, but with no bids seen.

The Denver-based regional Bell operating company's established bonds were also lower; its LCI 7¼% notes due 2007 were pegged at 92 bid, down from 94, while its Qwest Service Corp. 14% notes due 2014 were seen at 123 bid, "going down over the last couple of days," the observer said.

Level 3 "ugly, ugly, ugly"

But the disaster of the day among the established bonds was Level 3, whose notes "got killed," a trader said, while another characterized them as "in three words - ugly, ugly, ugly."

Level 3's benchmark 9 1/8% notes due 2008 were seen having fallen to 87 bid from 94.5 on Wednesday, while its 10½% notes due 2008 dropped as low as 90 from 98 previously and its 11¼% notes due 2010 likewise lost eight points on the session to end at 92.

The company's bonds dropped after it reported a fourth-quarter net loss of $121 million (18 cents a share), considerably narrower than the loss of $313 million (73 cents a share), a year ago. Analysts had been looking for a loss of about 32 cents per share.

But that good news was overshadowed by the company's less-than bullish outlook for this year. It said that "challenging" market conditions would likely be unchanged throughout the year, with pressure on its revenues, especially in this first half.

Level 3 projected that communications revenue for the full 2004 year will likely decline by a high-single-digit percentage from the levels seen in 2003, when communications revenues totaled $1.95 billion.

Especially troublesome, company executives noted, is the fact that America Online - Level 3's largest managed-modem customer - recently said it planned to cut purchases of dial-up internet capacity. Level 3 estimates that this loss, as well as overall declines in the sector, will cut annual revenue by as much as $150 million.

Equity investors were as perturbed as bond buyers were at the bearish projections, taking Level 3's Nasdaq-traded shares down 70 cents (12.48%) to $4.91, on busy dealings of 52 million shares, about eight times the norm.

Charter falls

Elsewhere, Charter Communications Inc.'s 8 5/8% notes due 2009 were seen having fallen as low as 85.25 bid, 86.25 offered, from recent levels around 91, while its bank debt was quoted off "like a quarter of a point, " a trader said.

At another desk, the St. Louis-based cable system operator's 10¾% notes due 2009 dipped to 90.75 bid from 92.75 on Wednesday and its zero-coupon notes lost three points to close at 73.

UnumProvident plunges

Borderline investment-grade issuer - and potential fallen angel - UnumProvident Corp.'s bonds were seen quoted sharply lower, after the Chattanooga, Tenn.-based disability insurer reported a net loss on Tuesday of $347.2 million ($1.18 a share) versus net income of $102.2 million, (42 cents a share) a year ago.

Moody's Investors Service put the company's Baa3 rating on review for a possible downgrade, although Standard & Poor's indicated that its BBB- rating is safe, for the moment.

Unum's 6 3/8% notes due 2005 were seen down nearly five points, at par bid, 102 offered; its 7¼% bonds due 2028 were "the disaster du jour" a trader said, pegging them at some 13 points under recent levels, at 88 bid, 90 offered. He also saw the company's 7.405% notes due 2038 more than 11 points down at 80 bid, 84 offered.

Emerging markets suffer severe Fed-itis

While the U.S. junk market has softened over the course past four or five session, the emerging markets have been getting hammered, sources told Prospect News on Thursday.

Brasil Telecom SA's $200 million 10-year notes deal (Fitch BBB-), via Citigroup, had been anticipated last week to come in the mid-to-high eights. A buy-side source told Prospect News Thursday afternoon that the deal is now being talked at 9½%.

"Take a look at what has happened to Brazil in the last couple of days," the investor said. "The whole market has been down every day.

"The benchmark Brazilian bond, the 2040, was just under 119.5, a month ago. A week ago they were 111. Today they are 105.5.

"The broad market hit a low on a spread basis of 384. It's trading about 444 today."

The investor said that the specter, raised by the Federal Reserve, that it may eventually hike interest rates, "really shook up the market."

"Brazil isn't the risk here," the source said. "The evidence of what is going on proves that: it didn't sell off because Brazil had bad news, it sold off because the Fed started making noises and people started getting nervous about global liquidity.

"The high yield market is down over the past week or so too," the investor noted.

Another emerging market source, this one from the sell-side, also said that Brazil, in particular, has lately been taking its lumps.

"Brazil has widened out a lot," said the official. "They brought their 2034 earlier this year at 374 basis points and it is now at a 494 spread.

"That makes pricing something like Brazil Telecom pretty tough.

"Other Brazilian corps have been all over the place."

(Sara Rosenberg contributed to this article.)

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