Toys "R" Us tender boosts '21 bonds; Visteon continues to gain

By Paul Deckelman and Paul A. Harris

New York, May 27- The announcement that Toys "R" Us Inc. will tender for its $200 million of 8¾% debentures due 2021 sent those bonds soaring about 10 points, into the high 90s, livening up an otherwise typically dull, abbreviated pre-holiday session Friday. However, The Wayne, N.J.-based toy retailer's other bonds - which are not being tendered for - were up only slightly on the news.

The primary market, meantime, hung out the "gone fishing" sign, with no pricings seen by the time trading officially wrapped up at 2 p.m. ET ahead of the three-day Memorial Day holiday break, which also saw a full market close on Monday.

Toys "R" Us was clearly the most significant mover of the day, with a trader quoting the 83/4s as having jumped from 87 bid, 88 offered on Thursday to 97.5 bid, 98.5 offered in Friday's dealings.

It was "the only thing that I saw that was exciting today," he said.

"I heard some decent size traded in that name," he continued, "but beyond that, the day itself has been a non-event."

He saw not much movement in the company's other bonds, calling its 7 5/8% notes due 2011 unchanged at 90 bid, 92 offered, while its 7 7/8% notes due 2013 were up "a touch stronger, about a point better," at 89 bid, 91 offered.

"They traded up originally, when the news came out, up a couple of points." he said, "but they've actually settled in" at levels not much changed.

By that same token, he saw the 7 3/8% notes due 2018 initially firm to 82 bid, 84 offered, before coming off that high to end at 78.5 bid, 80.5 offered, unchanged.

The 6 7/8% senior notes due 2006 "don't move," and stayed anchored around 101 bid, 102.5 offered.

Another trader quoted the 8¾% debentures up nine points on the day at 95 bid, with no offerings seen at his desk. Once the bonds made their initial jump, he said, there wasn't much activity after that. "Who's going to sell them at 95?" he asked.

Under the terms of the tender, the company is offering $950 per $1,000 principal amount for the bonds, with an additional consent payment of $30 per $1,000 for those who tender their bonds and consent to proposed indenture changes by the June 10 consent deadline, for total consideration of $980 per $1,000 principal amount of bonds tendered. (See related story elsewhere in this issue for full tender offer terms).

A market source quoted the '21s as having firmed 10 points on the day to 97.75 bid. He saw the company's other bonds up slightly in the session, with the 7 5/8s having firmed ¾ point to 92, the 7 7/8s half a point better at 90 and the 7 3/8s also half a point better at 80.75.

Yet another source saw a mixed bag among the issues not being tendered for; while the 2013 bonds were up better than a point to 89.5 bid, the 2018 bonds were down half a point at 78.5.

Toys "R" Us said that the tender had been requested by the entity that is buying the company via a leveraged buyout transaction, Global Toys Acquisition LLC, which is led by acquirers Bain Capital Partners LLC, Vornado Realty Trust and Kohlberg Kravis Roberts & Co.

When the deal was announced in mid-March, the Toys "R" Us bonds firmed smartly across the board on investor expectations that the different classes of notes would be taken out - but that rally ended abruptly when the company indicated that it had no immediate plans to tender for any bonds, and said that such tenders could only be mounted at the specific request of Global Toys Acquisition.

Last month, it did announce plans to tender for the $402.5 million of senior notes due 2007 that underlie its equity security units, a transaction that was completed earlier this month.

Dillard's, Rite Aid higher

Also in the retailing area, Dillard's Inc. 7.130% notes due 2018 were being quoted in some quarters up two points to 94 bid, although there was no fresh news seen out about the Little Rock, Ark.-based department store operator.

Rite Aid Corp.'s notes were also a little better, its 9¼% notes due 2015 up a point at 93.5 bid.

Visteon rally continues

Elsewhere, Visteon Corp. bonds were seen once again firmer Friday, continuing their positive momentum, generated on the announcement earlier in the week that the Van Buren Township, Mich.-based automotive components maker, and its former corporate parent, Ford Motor Co., had agreed on a restructuring deal for Visteon that takes two dozen unprofitable plants off its hands.

A market source saw Visteon's 8¼% notes due 2010 as having firmed to 93.75 bid from Thursday's close at 92, while its 7% notes due 2014 were perhaps half a point better at 85. Visteon's 7.95% notes, slated to be repaid on Aug. 1, were unchanged at 100.25 bid.

A trader at another shop quoted the 81/4s at 93.5 bid, 94.5 offered, while the 7s were at 84 bid, 86 offered.

Earlier in the week, Visteon and Ford announced that they had signed a memorandum of understanding, calling for the money-losing Visteon to transfer ownership of 20 unprofitable U.S. plants and four Mexican facilities back to Ford, which spun Visteon off in 2000.

In addition to those transfers, the Visteon plan also calls for the termination of the current leasing arrangements for approximately 17,400 Ford-UAW employees, relief of Visteon's remaining liability related to Ford-UAW post-retirement health care and life insurance benefit obligations, including about $1.5 billion of previously deferred gains, and reimbursement by Ford of up to $550 million of further restructuring actions.

Ford will also provide Visteon with a $250 million secured loan to refinance the 7.95% bonds, with the loan to be repaid at the closing of the transaction. Visteon will in turn issue to Ford warrants to purchase 25 million shares of its stock at an exercise price of $6.90 per share.

Krayton jumps on earnings

Krayton Polymers LLC's 8 1/8% notes due 2014, normally a little-traded issue, were being quoted several points higher at 99 bid, up from 94.5, a market source said, after the Houston-based chemical manufacturer reported first-quarter net income of $3.1 million on revenues of $207.2 million - a substantial improvement over the year-ago quarter, when the company had a net loss of $7.9 million, on revenues of $180.8 million. It attributed the gains to a 22% increase in average prices.

However, Krayton said that is last 12 months adjusted bank covenant EBITDA - a measure used to determine compliance with its bank debt covenants - totaled $96.7 million at the end of the quarter, a decrease of $10.9 million from the year-ago period. It said the decrease reflects higher raw material costs during the last nine months of 2004 that were not, as yet, being offset by increases in the prices Krayton charged its customers, which did not begin to take effect until the 2004 third quarter.

Krayton also said that its $23.1 million in cash and cash equivalents at the end of the quarter was about half of what it was at the end of the 2004 fourth quarter on Dec. 31 due to the seasonal first-quarter buildup in inventories and the interest payment it had to make on the 8 1/8 notes. Even so, Krayton said in announcing the results, it remained "very comfortably in compliance with all debt covenants, which allows us to focus on running the company and improving profitability."

Lyondell unchanged

Fellow Houston-based chemical operator Lyondell Chemical Co.'s bonds were seen little affected by the news that the union that represents hourly employees at the big Texas petroleum refinery that Lyondell jointly operates with Citgo Petroleum Corp. has refused the companies' requests to simply extend the current labor pact, which is scheduled to expire in February - meaning Lyondell and Citgo will have to go back to the bargaining table with the United Steel Workers union and negotiate a new deal, and face the possibility of a strike if one cannot be worked out.

The USW had originally agreed on an industry-wide basis to extend the current contract - but stipulated that plant owners could not then also bring up local issues at their individual plants. After Lyondell and Citgo each expressed the desire to bargain about local issues at their Houston plant when offering the extension to the workers there, the union withdrew its offer to extend the current contract past its scheduled expiration date.

Nonetheless, Lyondell's bonds "didn't look like they had any movement," a source said, quoting its 9 7/8% notes due 2007 at 102.5 and its 10 7/8% notes due 2009 at 103, each unchanged on the day.

Primary quiet

Sources reported tending to "administrative" and other duties during Friday's abbreviated session, as the high-yield market wound its way down toward the three-day Memorial Day weekend.

No news came out of the new issue market, sources said.

That brought the week of May 23 to a close having seen approximately $1.15 billion price in six dollar-denominated tranches, easily topping the previous week's $525 million in three tranches.

The May 23 week thus became the biggest in terms of issuance since the final week of April which saw $1.33 billion of issuance across nine dollar-denominated tranches.

Whence the late-May rally?

In the run-up to Memorial Day one source had the high yield marked up seven trading days in succession, with "real money" appearing to have come back into the market. Also, the source said, there appeared to be a lack of selling into the rally.

The source even suggested that "risk aversion," perhaps the main theme of the May junk bond market, may be ebbing.

On Friday Prospect News asked Diane Keefe, portfolio manager of the Pax World High Yield Fund, whether risk aversion seemed to be on the wane.

Keefe referred to research she had read by Bear Stearns high yield strategist Mike Taylor which, Keefe said, indicates that the asbestos credits and distressed credits have been leading the late-month rally.

"So the risk-aversion phenomenon seems to have reversed itself," Keefe added. "Maybe people are feeling that if no big public announcements have been made about hedge funds blowing up the correlation trade is not such a big worry."

Prospect News followed by asking Keefe whether the late-May rally might reasonably be expected to be followed by a build up of the virtually vacant new issue calendar.

"If the rally sustains itself for another couple of weeks you have to wonder whether we will get a torrent of supply," she replied.

"But I haven't seen it.

"There has not been much at all on the new issue calendar. And with spread widening of 150 basis points in a two-month period while the economy is still at an over 3.5% growth rate, issuers are wondering why, if it was so good that it was trading at 300 off in March, is the GM downgrade really that serious a knock to cause it to trade off so much?

"These people who are coming to market are making a 10-year decision to fix out rates," the Pax World portfolio manager added.

"I don't blame them for saying 'What's the rush?'"

Sell the rumor, buy the fact

Nor was Keefe the only source Friday who mentioned the market-altering force of the downgrades of General Motors Corp. debt to junk.

One sell-side source observed that when Fitch lowered its rating on GM bonds to junk on Tuesday, just as the rally was getting its legs moving, it appeared to have barely caused a ripple.

It could be an example, the source added, of the classic "sell the rumor, buy the fact" strategy.

Bear Stearns high yield strategist Mike Taylor told Prospect News on Friday that at least the Fitch downgrade of GM provides some clarity.

"Investment grade accounts were selling GM after S&P downgraded, after Moody's downgraded and after Fitch downgraded," Taylor commented in an email message.

"I believe that selling will take place into quarter end when high-grade indices will be re-balanced. The Fitch downgrade clarifies that GM/GMAC debt will remain excluded from the Lehman Aggregate index (generally considered to be the investment-grade benchmark) once new inclusion rules take effect on July 1st."

Slowing leak of funds

Discussion also surfaced during the slow Friday session regarding the liquidity of the high yield asset class as reflected in the weekly funds flow numbers reported by AMG Data Services. The most recent $226 million outflow for the week to May 25 continues a record-breaking string of 15 consecutive outflows.

However the May 25 week's number, $226 million, is exactly half of the previous week's $452 million outflow.

And sources on both the buy-side and sell-side have been commenting that as high yield rallies, it seems as though the outward tide of cash may be turning.

One sell-sider said on Friday that the $226 million outflow for the week to May 26 was the smallest outflow since the week that ended April 13, which saw a drain of $196 million.

Virtually vacant calendar

As the market pauses for the Memorial Day holiday it does so leaving only one junk bond deal thought to actually be in the market.

Equity Inns Partnership LP (Equity Inns Inc.) is offering $65 million of seven-year senior unsecured notes (B1/B+), via Morgan Keegan.

No terms on the deal emerged on Friday, according to an informed source.

That same source, on Thursday, said that the Germantown, Tenn.-based lodging REIT hopes to get the deal done for a yield of around 7%.

Homebuilding and real estate were prominent themes in the primary market during the week of May 23.

On Wednesday Los Angeles-based homebuilder KB Home priced a $300 million issue of 6¼% 10-year senior notes (Ba1/BB+) at 99.051 to yield 6.379%. The UBS Investment Bank-led deal priced at a spread to Treasuries of 230 basis points, right on top of the price talk.

Then on Thursday Ventas Realty priced an upsized, restructured $350 million issue of senior notes in two tranches (Ba3/BB).

The Louisville, Ky.-based healthcare real estate investment trust priced an upsized $175 million issue of 10-year senior notes at par to yield 7 1/8%, on the tight end of the 7¼% area price talk.

Ventas Realty also priced an upsized $175 million tranche of five-year bullets at par to yield 6¾%, tight to the 6 7/8% area talk.

Two sources on Friday told Prospect News that the Ventas deal had gone well.

One of them was Pax World portfolio manager Keefe.

"Ventas traded to 102, which is a good rally," Keefe said. "It is 5.2-times leveraged, so it's not like a low leverage situation. But people are comfortable with the real estate sector."

When asked if she had any color on the above-mentioned Equity Inns deal Keefe responded in the negative, specifying that she does not look at deals under $100 million.

Beyond the Equity Inns $65 million deal the forward calendar was a void, as the Friday session wound down.

However, primary market sources say, there is a backlog of deals - some of them massive LBO transactions that must get done - sitting on the sidelines waiting for sustained market improvement.

One of them is the $3 billion senior unsecured and senior subordinated notes portion of the financing for Solar Capital Corp.'s leveraged buyout of SunGard Data Systems Inc.

A source told Prospect News on Friday that the bond deal is expected to come out right after the Fourth of July.

SunGard's proposed $5 billion credit facility, which is also part of the LBO financing, is thought to still weeks away from launch to the general market.

JP Morgan and Citigroup are joint lead arrangers on the credit facility.

Keefe sells into EM rally

Finally, capital markets sources have lately taken note of how emerging markets has enjoyed a sustained rally while, until the most recent week, junk has been undergoing a correction of an estimated 150 to 180 basis points.

One source noted Friday that EM debt funds posted inflows $63 million during the week to May 25, the third consecutive weekly inflow - this happening in the face of the above-mentioned sustained string of outflows from high yield.

And Brazil's benchmark sovereign bond due 2040, the most liquid emerging market paper, was seen rallying to with a few basis points of its all-time high.

One buy-side source, speaking on background, told Prospect News that, amazingly, emerging markets rode the rising tide with high yield but when high yield sold off emerging markets continued to rally.

Pax World's Keefe, whose portfolio contains Brazilian corporates but not sovereigns, told Prospect News that she has been taking advantage of the rally in Latin American emerging markets debt to dust off the "For Sale" sign.

"I've noticed incredible strength in Latin corporates and sovereigns while Asian corporates and U.S. corporates traded off a lot," she said.

"So I've been lightening up on my Brazilian corporates.

"The rally is based upon how strong Brazil is, with its strength in the basic materials commodities segments.

"Its macro economy is driven by its supplier relationships to China. The robustness of that is considered to be such an advantage that people are thinking that the sovereign is going to get upgraded.

"That's fine," Keefe added. "But when you can sell a Brazilian corporate and go into a double-B rated U.S. high-yield company for close to an even yield I'm going to do that all day long."

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