Intelsat comes back to the well; Hollywood up on takeover battle; funds see $118 million inflow

By Paul Deckelman and Paul A. Harris

New York, Feb. 3 - Intelsat Ltd. made its second visit to the junk bond market in as many weeks Thursday - unpleasantly surprising participants as it brought in a quickly shopped $305 million issue of 10-year discount notes. Proceeds will be used to pay equity holders a dividend, but the return trip annoyed many players who had bought into its $2.55 billion mega-deal only last week.

The issue was one of more than half a dozen coming to market during the session, including scheduled calendar deals from Select Medical Corp. - the largest offering of the day - and PQ Corp., as well as quickly emerging drive-bys from Las Vegas Sands Corp., Mohegan Tribal Gaming, Time Warner Telecom Holdings Inc. and Constar International Inc., in addition to Intelsat. Late in the session, a damper was thrown over the pricing parade, when Atlantis Plastics Inc. was heard to have postponed its planned offering of seven-year bonds due to market conditions.

In the secondary sphere, bonds of Hollywood Entertainment Corp. pushed solidly higher as industry leader Blockbuster Inc. sweetened its previously announced hostile takeover offer for the Wilsonville, Ore.-based Number-2 U.S. video rental store chain, trumping - at least for the moment - a smaller offer that Hollywood had already accepted from Movie Gallery Inc., the third largest U.S. video-rental operation. Hollywood meanwhile also announced the abrupt resignation of its chairman and chief executive officer, Mark Wattles, whose own bid to take the company private was overtaken by the bidding war between Hollywood's two major competitors.

And after the curtain had pretty much fallen on the day's dealings, market participants familiar with the weekly high-yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that $118.5 million more had come into those funds than had left them in the week ended Wednesday.

That represented something of a reverse after three straight weeks of outflows totaling some $1.47 billion, according to a Prospect News analysis of the AMG figures, including the $759.5 million net outflow seen the previous week, ended Jan. 26.

The outflows are watched as an indicator of overall market liquidity trends, although some quarters do not consider them as significant as they used to be, since the junk funds make up only a relatively small portion of the total high yield universe, with insurance companies, endowments and other institutional investors now swinging more weight.

Even with the inflow in the latest week, outflows have still been seen in three weeks out of the five since the start of the year and total $1.212 billion, although that year-to-date total is down from $1.331 billion the week before. 2004 saw a total cumulative outflow of $3.26 billion, according to Prospect News's calculations.

The numbers measure only those funds that report on a weekly basis, and exclude distributions.

One sell-side official said that "a number like $118 million doesn't tell you much.

"But a look at the deals that got done today will tell you that there is definitely cash to put to work."

Issuers were "pushing the envelope" in the busy Thursday primary market session that saw approximately $2.3 billion proceeds price in eight tranches from seven issuers.

Four of those issuers came with drive-by deals.

Select Medical at tight end of talk

The session's biggest issuer was EGL Acquisition Corp., which will be merged into Select Medical Corp. following the acquisition of the company.

The $660 million issuer of 10-year senior subordinated notes (B3/B-), which had been marketed via a full roadshow, and thus numbered among the minority of Thursday's issuers, priced at par to yield 7 5/8%, at the tight end of the 7¾% area price talk.

Merrill Lynch & Co., JP Morgan and Wachovia Securities were joint bookrunners.

Gamers Mohegan, Las Vegas Sands drive through

Investors continued to demonstrate positive feelings for the gaming sector on Thursday, sources said.

Mohegan Tribal Gaming Authority of Uncasville, Conn. priced the biggest, selling $400 million in two restructured tranches.

The casino owner-operator priced an upsized $250 million of eight-year notes (expected Ba2/confirmed BB-) at par to yield 6 1/8%, on top of the 6 1/8% area price talk.

Mohegan also priced a downsized $150 million issue of 10-year senior subordinated notes (Ba3/B+) at par to yield 6 7/8%, on the wide end of the 6¾% area price talk.

The senior notes were upsized from $200 million while the senior subordinated piece was reduced from $200 million.

Citigroup, Banc of America Securities and SG Corporate & Investment Banking were the bookrunners for the debt refinancing deal.

Also from the gaming sector, Las Vegas Sands Corp. priced $250 million of 6 3/8% 10-year senior notes (B2/B) at 99.089 on Thursday to yield 6½%, wide of the 6¼% area price talk.

Goldman Sachs & Co. ran the books for the debt refinancing issue.

Las Vegas Sands, along with Time Warner Telecom both brought deals wide of price talk on Thursday, making them the sixth and seventh issuers to bring bonds wide of talk in the past seven sessions.

One source told Prospect News that this plethora of deals pricing wide of talk is likely not attributable to market technicals, such as inflows and outflows to and from high-yield mutual funds, or hikes in short-term interest rates, or the phases of the moon.

"In some cases aggressive issuers are coming with levels where they want to get the deal done," the sell-side official commented.

"Nevertheless deals are still getting done at tight levels," the source added, noting that Las Vegas Sands, with single-B ratings from both Moody's Investor Services and Standard & Poor's, printed a notably low 6½% yield on its new bond.

The source said that the accounts conceivably have somewhat more leverage one full month into 2005 than was the case in the middle of last December owing to the technical forces now in play in high yield.

"But we're still seeing an eagerness to play new issues in order to get yield," the sell-sider said.

The other issuer to price a deal wide of price talk on Thursday was Time Warner Telecom, which did a $200 million add-on to its 9¼% senior notes due Feb. 15, 2014 at 100.25, resulting in a 9.2% yield to worst.

The print was ¼ point wide of the 100.5 to 101.5 price talk.

Morgan Stanley and Lehman Brothers were bookrunners for the deal, which the company brought to fund capital expenditures.

The Littleton, Colo.-based company's original $200 million issue priced on Feb. 10, 2004.

The envelope, please

Perhaps the deal that widened the most primary market eyes on Thursday came from Pembroke, Bermuda, satellite communications company Intelsat.

Zeus Special Subsidiary, an intermediate holding company of Intelsat, sold $478.7 million of 10-year senior discount notes (B3/B) at 63.787 on Thursday to yield 9¼%, at the tight end of the 9¼% to 9½% talk.

The quick-to-market deal, via Deutsche Bank Securities, generated $305.35 million of proceeds.

Proceeds will be used to fund the repurchase of certain preferred shares held by the shareholders of Intelsat's parent, Zeus Holdings Ltd.

One investment banker not involved in Thursday's Intelsat transaction noted that it was less than a fortnight ago that Intelsat Bermuda Ltd. priced $2.55 billion in three tranches of senior notes (B1/B+/B+) in order to help fund the $5 billion acquisition of Intelsat by Zeus Holdings Ltd., a company formed by Apax Partners, Apollo Management, Madison Dearborn Partners and Permira.

"This is really pushing the envelope," the source commented. "When deals like this one are in the market it tells you that there is cash to be put to work."

PQ downsizes, inside of talk

Another eye-popper that the sell-side was mulling as the dust settled on Thursday's session was a downsized $275 million of eight-year senior subordinated notes (B3/B-) from Berwyn, Pa.-based chemicals and engineered glass materials company PQ Corp.

The notes came at par to yield 7½%, 12.5 basis points inside of the 7¾% area talk, via Credit Suisse First Boston, JP Morgan and UBS Investment Bank.

"Why does a company downsize a deal that prices inside of price talk?" asked one sell-side official on Thursday night. The source, who had not been involved in the transaction, also noted that PQ Corp.'s new 7½% bonds had traded up smartly when released in the secondary market.

Finally on Thursday, Constar International priced $210 million of seven-year senior secured floating-rate notes (B2/B) at par to yield three-month Libor plus 337.5 basis points.

Citigroup ran the books debt refinancing deal from the Philadelphia-based producer of plastic containers for food, soft drinks and water.

Atlantis Plastics bites the dust

Amid the melee of drive-by deals on Thursday, one prospective issuer backed away from the high-yield primary market.

Atlantis Plastics Inc. postponed an offering of $125 million of seven-year senior subordinated notes (Caa1/CCC+), citing market conditions.

The Atlanta-based manufacturer of specialty plastic films and custom molded plastic products said it will seek to obtain a $220 million credit facility as an alternative to refinancing its senior secured debt and funding special dividend to shareholders.

Bear Stearns & Co. had been leading the bond deal.

In the run-up to Thursday market sources told Prospect News that the company had downsized the deal to $105 million and had restructured it into a senior secured note.

One source said that the original pro forma on the bond deal was a yield of approximately 9%, which the company had pushed out to 9½% area before pulling the offering.

Atlantis Plastics followed one week behind Carteret, N.J.-based independent food distributor Di Giorgio Corp., which postponed its $150 million offering of eight-year senior notes (B2/B-) on Thursday, Jan. 27.

PQ up in trading

When the new PQ 7½% senior subordinated notes due 2013 were freed for trading, they were seen having firmed smartly from their par issue price earlier in the session to levels as high as 102 bid, 103 offered. The bonds, a trader said, "were smokin'."

However, he added, the same could not be said for Las Vegas Sands' new 6 3/8% senior notes due 2015, which had priced at a discount to par, at 99.089, and then "were not much better off the break," firming slightly to 99.25 bid 99.375 offered.

Another trader, who opined that the gaming operator's new issue "did not do so well," saw the bonds dip to 98.875 bid, 99 offered on the break, before recovering a little to 99 bid, 99.25 offered.

He saw Select Medical's 7 5/8% notes due 2015 firm to 101.25 bid, 101.625 offered from their par issue price.

And he saw Cincinnati Bell Inc.'s new 7% senior notes due 2015, which priced late Wednesday at par, straddling that price Thursday at 99.75 bid, 100.25 offered. The company's 8 3/8% senior subordinated notes due 2014, which priced Wednesday at 102 as an add-on issue, had retreated to 101.25 bid, 102.25 offered.

Intelsat new bonds up, old down

But the most interesting issue of the day among the newly priced notes was Intelsat, which he described as "pretty unpopular" - both because the Bermuda-based satellite operator had just tapped the high-yield market for $2.55 billion on Jan. 24, not even two weeks ago, but also because the proceeds of the new deal will be used to pay an equity dividend, sparking resentment among bondholders that the company is being more levered up so that owner Zeus Holdings Ltd. can essentially take money out of the company and put it in the pockets of its shareholders, never a popular proposition among debt investors to begin with.

Despite that stated unpopularity, however, the trader quoted the new deal as having moved up to 64.75 bid from its 63.787 issue price.

However, holders of the existing bonds expressed their displeasure, by getting out.

Intelsat's 7 5/8% notes due 2012 were seen falling to 90.75 bid from 92.25 on Wednesday, while its 6½% notes due 2013 dropped to 83.25 from 84.75, and its 5¼% notes due 2008 were a quarter point down at 93.75. All three issues are structurally subordinated to the new bonds.

The bonds issued last week by Intelsat Bermuda Ltd. were also seen lower Thursday, even though they rank senior in the capital structure to the new deal. The Bermuda 8¼% senior notes due 2013 lost a point to end at 104 and the 8 5/8% notes due 2015 were likewise a point easier at 105, while the floating-rate notes due 2012 retreated to 102.25 bid from 103.5 on Wednesday.

Hollywood Entertainment higher

Back among the more established bonds, Hollywood Entertainment's 9 5/8% notes due 2011 were seen having traded up about three points on the session, with the bid quoted anywhere from 111 to 112, depending on who was quoting them.

One trader who saw the bonds trading in a 111-112 context said they got a "better bid from Blockbuster, bonds up a little stronger today."

Noting the fact that the bonds had first shot up early last year when resigning CEO Wattles first brokered his buyout deal with Leonard Green Partners and then came back down when the deal appeared to revive, only to come back up when the Green deal came back in slightly better form, sparking a bid from Blockbuster and a counter-offer from Movie Gallery, he observed that "this crap is getting old with these guys. They were this high the first time around, so this is one you have to keep an eye on, because every time they put a better bid, the bonds go a little stronger; then the deals fall apart and they drop off four or five points."

Dallas-based Blockbuster improved its original bid of $11.50 per share in cash to $11.50 in cash plus $3 in Blockbuster stock per Hollywood share, or $14.50, for a total bid of $985 million. Hollywood had already agreed to Movie Gallery's offer of $13.25 per share in cash, or $900 million total. Both suitors also said they would assume the $350 million of outstanding Hollywood bonds.

MCI dips, rises on Qwest bid

Also on the merger and acquisition front, MCI Inc. bonds - which had been steadily rising the past week on speculation that the Ashburn, Va.-based long-distance operator might be bought by one of the regional Bell operating companies - were seen to have initially retreated when a bid finally emerged, since it came from the financially weakest of the four RBOCs that provide local phone service in the U.S., Qwest Communications Inc., which is offering to buy the Number-2 long distance company for $6.3 billion.

MCI's 8.735% notes due 2014 had over the course of several days had pushed all the way up to closing levels around 111 from prior levels around 104 last week, spurred by takeover speculation surrounding its larger rival, AT&T Corp. - which was eventually borne out when one of the RBOCs, SBC Communications Inc., agreed to buy "Ma Bell," the former corporate parent of all of the RBOCs, a group which also includes Verizon Communications Inc. and BellSouth Corp.

However, they plunged to levels at Thursday's opening of as low as the 108-109 area, before bouncing off their lows to come nearly all the way back and end essentially unchanged, again in the 111-111.5 area, perhaps buoyed by news reports that said that the largest and financially best situated of the of the RBOCs - Verizon - had also been in at least preliminary M&A talks with MCI.

Most activity in MCI was seen in the 2014 bonds; MCI's 7.688% notes due 2009 were seen essentially little changed on the day at 104.5 bid, 104.75 offered, while its 6.908% notes due 2007 were steady at 102.5.

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