Stock surge bypasses junk market; funds show $120.9 million inflow

By Paul Deckelman and Paul A. Harris

New York, Jan. 2 - With the year-end holidays over, it was back to work for the high-yield bond market on Thursday - but you would never know it from the days' trading results, market participants said. Even as stocks surged powerfully on unexpected good economic news coming out of the manufacturing sector and Treasury issues fell accordingly, junk prices were being quoted as mostly unchanged, with little activity seen even in issues whose stock was on the upside. These included such names as Lucent Technologies Inc. and Calpine Corp.

Meanwhile, high yield mutual fund flows - considered by many to be a reliable gauge of overall junk market liquidity trends - ended 2002 on a positive note, with market sources saying that AMG Data Services of Arcata, Calif. was reporting a $120.94 million inflow for the week ended Tuesday, Dec. 31.

It was the third consecutive week in which inflows had been seen, following the $341 million inflow reported in the week ended Dec. 24, and the eleventh week in the last 12 which more money has flowed into the funds than has left them. Over the three-week span, net inflows have totaled approximately $803 million, according to a Prospect News analysis of the AMG figures, and have totaled approximately $4.867 billion since the recent inflow surge began in mid-October. Those figures include only those funds that report flow changes on a weekly basis and exclude distributions.

The last-quarter liquidity torrent is considered to have been the key catalyst behind both a sharp upturn in junk bond secondary market performance over the last 2½ months of the year, as well as a late new-issuance binge.

For all of 2002, according to the final Prospect News analysis of the fund flow figures, inflows were seen in 32 weeks and outflows in 20 weeks. The aggregate net inflow was to the funds for the year was approximately $8.016 billion.

"It's a good start," commented one market source.

Back in the secondary market, though, "not a thing" of significance was going on, a trader said. "It was a very quiet day. We traded some odd-lot paper, but there was no real movement in any market that I could see that had changed. There was very, very limited trading."

This was even true, he said, of Rite Aid Corp., which during last Friday's sleepy session had said in a filing with the Securities and Exchange Commission that it had agreed with its bank lenders on amending its senior secured credit line to allow optional repurchases of its publicly traded debt and its 12½% senior secured notes due 2006.

The Camp Hill, Pa.-based drugstore chain operator will have up to $300 million available for optional debt repurchases from now to the end of its 2004 fiscal year, provided that Rite Aid remains in compliance with the capital expenditures covenant of the credit line. During that same period, Rite Aid can also purchase an additional $150.5 million of its publicly traded debt with the net proceeds of additional debt issuances.

On top of that, Moody's Investors Service said during Tuesday's abbreviated pre-New Year's session that it had revised Rite Aid's credit rating outlook to "stable" from "negative;" the ratings agency said that it believes the No. 3 U.S. drugstore chain will have "sufficient liquidity to meet minimal obligations" on its $3.9 billion of debt for the next year.

Moody's currently rates Rite Aid's senior unsecured bond debt at Caa3 and its bank debt at B2.

The outlook change followed Rite Aid's recent announcement boosting its cash flow outlook through 2003, and reporting a sharply decreased third-quarter loss versus year-ago levels.

Even with that ratings agency good news, he saw "no real movement there from a week ago," with the company's 7 5/8% notes due 2005 hanging in around 91 bid/93 offered.

At another desk, a market source saw the Rite Aid bonds unchanged at 90.5

Another non-mover, the trader said, was the paper of Trump Atlantic City Associates, whose 11¼% first mortgage bonds due 2006 stayed around 78 bid, even on talk that the Atlantic City, N.J.-based casino operator might be looking to revive a $470 million mortgage bond deal that it had shelved last spring.

"Not much action there," he declared, even on the prospect that the new deal might be brought to market as early as later this month and the proceeds used to take out the company's 1¾% notes due this coming November as well as some other debt.

"We'll see how that transpires - but Wall Street really doesn't have a good taste with him," referring to company chairman Donald J. Trump.

The A.C. bonds, which would not be redeemed with the new-deal proceeds "didn't rally," he said, while the 11¾% "don't trade anyway. Only the 11¼ A.C.s actually trade around, everything else you see it once in a while. So it really wasn't a market burner."

Another desk saw the 11¾% notes unchanged on the day at 92.5 bid.

A market observer there saw "a little positive movement" in Charter Communications Holdings LLC debt, with the troubled St. Louis-based cable operator's 8 5/8% notes due 2009 at 45.5 bid. up from Tuesday's closing level around 44, while its 9.92% notes were half a point better at 35.5

This source did see some price movement to the downside in XM Satellite Radio Holdings Inc.'s 14% notes due 2010, which slipped to 65 bid from prior levels around 68; the Washington-based satellite radio broadcaster last week unveiled a plan to swap new 14% discount notes due 2009 for its current cash-pay 14s, with the interest on those bonds deferred until December 2005. News reports said that although bondholders are not thrilled at the prospect of losing interest payments for the next three years, analysts and other market participants believe they will reluctantly approve the transaction to give the company some breathing room. The offer requires the assent of holders of 90% of the $325 million of existing bonds.

But he saw no movement in Lucent Technologies bonds, despite gain of 12.7% - 16 cents - in its share price, to $1.42. The Murray Hill, N.J.-based telecommunications equipment maker's 7¼% notes due 2006 were unchanged around 56 bid, while its 6.45% notes due 2029 stayed in the lower 40s.

And there was likewise little movement in the bonds of independent power producers Calpine Corp. and AES Corp., despite strong gains Thursday in their shares and modest gains in those of some other merchant energy producers such as Dynegy Inc., Mirant Corp. and Williams Cos.

Calpine's shares jumped 70 cents (21.47%) to $3.96, while AES rose 22 cents (7.28%) to $3.24, as equity analysts expressed optimism that the sector - badly beaten down last year amid the continuing fallout from the collapse of Enron Corp, a slide in wholesale power prices and government investigations of allegedly bogus power contract trades.

But on the bond side, Calpine's 8½% notes due 2011 didn't budge from their recent level around 44.5 bid, while its 8 5/8% notes due 2010 were steady at 44. AES' 8 5/8% notes due 2011 remained bid around 58, while its 9½% notes, which had been around 59 bid/61 offered before the holidays, were quoted as having opened at bid levels in the 57-8 area, but a trader said "there was no real action there."

The first day of business following the turning of the year saw no new business announced in the high-yield primary market.

Several sell-side early-birds who had returned to their offices to straighten desks and sort through email messages - anticipating that the holiday-abbreviated week of Dec. 30 would provide time for such activities - spent a few minutes on the telephone with Prospect News during Thursday's "very quiet" session.

In addition to the positive flow of cash to high-yield mutual funds, sources also marked the noteworthy surge in equities in 2003's initial trading session, which saw the Dow Jones Industrial Average advance 3.19% on Thursday.

Nearly all sources who have spoken to Prospect News during the holiday period and in its wake have expressed the opinion that the volume of new high-yield issuance to a greater or lesser extent will hinge on a stable or advancing equity market.

Shortly after Thursday's run up in the stock market had run its course, one sell-side source told Prospect News that in and of itself one positive day - even a very positive one like Thursday - is of limited use with regard to forecasting new high-yield issuance.

"It depends on who you talk to," this source said. "For every bull out there telling you this is the beginning of a great year you have a bear telling you this is just another of those swings in the market."

This source attributed Thursday's stock market advance, in part, to numbers released by the Institute for Supply Management showing that its index of manufacturing activity moved to 54.7 in December from 49.2 in November, showing expansion of activity and prices in the manufacturing sector. The index was 48.5 in October and 43.6 in September.

"Outside of that manufacturing number it seems like retailing numbers are just going to be atrocious," this source commented. ShopperTrak RCT, a Chicago-based firm that tracks data from more than 30,000 retail stores across the country, estimated that retail sales at general merchandise, furniture, apparel and other related stores grew by just 1% last month compared with December 2001 - the lowest annual growth rate since September 2001.

Invited by Prospect News to compare forward calendars, this official allowed that anticipated junk bond deals from TRW Automotive, Loew's Cineplex, Dole Foods, Legrand and Trump Casinos could launch quickly.

This official said some observers had been expecting Trump Casino Holdings, LLC/Trump Casino Funding, Inc.'s $470 million of mortgage notes due 2011 - a deal similar to one postponed last May - to emerge when the new issue market heated up in early December. Underwriters for the upcoming offering are Credit Suisse First Boston and Deutsche Bank Securities Inc.

"Anything that was on the postponed list last year is anticipated in coming back to the market in short order," this source added. "Investors have a lot of cash and are looking to buy.

"There are a bunch of potential drive-bys in the favorable sectors," this official said, noting that "the broadcasting universe, the energy universe and a couple of others" could produce bursts of sudden business in the primary market.

Also on Thursday two high yield sell-side sources commented on the deepening complexity that the Bush administration faces in conducting foreign policy as the hostile-talking North Korean communist government ramps up its nuclear materials program and announces its intentions to pull out of the Nuclear Nonproliferation Treaty - all this in the face of the U.S. troop buildup in the Middle East, anticipating war with Iraq.

"There are a lot of crazy things out there," one source commented. "A lot of people are nervous. That might produce a tendency for some people to attempt to come into the market quickly.

"I just don't have a good feel for it yet."

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