Junk market firm in light trading; market sees fund outflows for 11th straight week

By Paul Deckelman and Paul A. Harris

New York, Aug. 23 - High yield market prices were seen on Friday holding to the firmer levels to which they had risen over the previous several sessions, although activity was described as typically light for a Friday in the summer with the primary market mostly shut down. One of the few topics for discussion in the trading pits was the continued exodus of liquidity from the market, typified by the eleventh consecutive week of junk bond mutual fund outflows.

In the week ended Wednesday, $44.6 million more left junk funds than came into them, according to statistics released by AMG Data Services. The AMG numbers, which are based solely on funds which report flows on a weekly basis and which do not include distributions are seen by many in the market as a reliable barometer of overall junk market liquidity trends.

The trend has been negative all the way since the losing streak started during the week ended June 12. While the overall trend for the year remains narrowly positive - as of the latest week, inflows had been seen in 18 weeks out of the 34 since the beginning of the year, with a total cumulative inflow of $2.909 billion - since the outflow surge began in that June 12 week, a cumulative total of $2.535 billion has left the junk funds, according to a Prospect News analysis of the AMG figures. However, the $44.6 million outflow in the latest week is by far the smallest outflow total of that time period - perhaps a sign that the tide is about to turn.

The outflow "was a little surprising," a trader said, in view of the revival that the market has undergone. "People were expecting inflows since it seemed that the market had been moving up all week and there were a lot more buyers out there."

Since the inflow did not materialize this past week, he projected that "I would expect that [in the coming week] we'll see an inflow, since there was a lot of buying over the past few sessions."

The trader said apart from the AMG number "not much was happening. It was your typical summer Friday. Not really all that much changed. Everything that was up kind of stayed where it was. Things didn't get all that much better - but I didn't see anything getting worse either."

One issue which he did see as improved was Tyco International, whose 6 3/8% notes due 2006 closed at 84.5 bid, "up at least a point or so" on Friday and well up from its levels around 81 bid/84 offered at the beginning of the week. Its 6 3/8% notes due 2011 were quoted in the 81 bid area, well up from their closing levels last Monday at 76.

Tyco's bonds and shares rose on news reports that disgruntled shareholders were gearing up for a proxy fight to remove directors who had sat on the board during disgraced former CEO L. Dennis Kozlowski's reign and had apparently given the green light to the spending of large sums of the troubled company's money to fund Kozlowski's lavish lifestyle, including an $18 million New York apartment with a $6,000 gilded shower curtain and other extravagances. The Wall Street Journal recently reported that Tyco may have spent as much as $135 million during Kozlowski's tenure on such pricey properties, multi-million-dollar loans to Kozlowski which it forgave, donations to his favorite charities and other things. Kozlowski was forced to quit his post in June, just before he was indicted on tax evasion charges by New York authorities, who are also looking into whether the company may have been involved in any of his schemes.

Elsewhere, airline industry bonds were again on the rise Friday, continuing a trend which had begun earlier in the week when Continental Airlines announced plans for service cutbacks, added fees and other cost-cutting and revenue-raising measures. Holders of Continental debt and of the bonds of such rivals as Northwest Airlines, American Airlines and Delta Airlines, as well as the shareholders of those companies, apparently approved the idea of belt tightening by the carriers to bring their bloated costs down and try to restore them to some semblance of financial health in the difficult post-Sep. 11 atmosphere. The entire sector had taken a nosedive earlier in the month after US Air Group sought protection from its junk bond holders and other creditors and the nation's second-largest carrier, United Airlines, warned that it might have to do likewise if it could not win concessions from its labor unions and lenders.

On Friday, Northwest "kept their bid side going," said a trader, who quoted the Minneapolis-based carrier's 8 3/8% notes due 2004 at bid levels around 73-74 offered. He also quoted Delta's 9¾% notes due 2021 as offered at 69 - really not much changed from prior levels - and saw UAL's bonds maturing in 2003 as high as the mid-30s, while its 10.67% notes due 2004 were bid at 27, and acknowledged that that level "might be a little low."

At another desk, in fact, the 10.67s were quoted as having risen to 30 bid from 27 previously, while its 9 1/8% notes had moved up to 21 bid from 19. Northwest's 7 5/8% notes due 2008 were two points better, at 63 bid.

The power generating sector was another area which continued to gain strength, aided by positive news earlier in the week from Williams Companies, which reassured investors and analysts that even after planned asset sales, its pipeline and natural gas exploration profits would still rise for the year, and AES Corp.

AES Corp. was one of the companies seen benefiting from the Williams news as well as the news that the International Monetary Fund had okayed $30 billion of aid to troubled Brazil, where Arlington, Va.-based AES has significant exposure; later in the week, the company said that its Brazilian unit had made a $120 million commercial paper payment due Wednesday.

On Friday, AES's 9 3/8% notes due 2010 were up nearly four points to 52.5 bid; its 8 7/8% notes due 2011 were quoted two points better, at 49, while its 8 3/8% notes due 2007 - which had been quoted as low as the mid-teens earlier in August - were seen hovering above 30 bid. Meanwhile, sector rival Calpine Corp.'s 8 ½% notes due 2008 were four points better, at 53 bid, while its 8 5/8% notes due 2010 also closed at 53, up more than five points on the session.

Another area of strength Friday was the cable television sphere, which had firmed earlier in the week on consolidation buzz in the wake of the big deal between investment-grade cable giants AOL TimeWarner, AT&T Broadband and Comcast ; AOL will buy AT&T Broadband's 27% stake in TimeWarner Entertainment , clearing the way for Comcast to complete its acquisition of AT&T Broadband.

A key beneficiary of the consolidation talk has been Charter Communications, even though most observers think billionaire founder Paul Allen is unlikely to sell his baby - St. Louis-based Charter is the centerpiece of Allen's "wired world" strategy linking cable, telecommunications and Internet providers.

Whatever Allen's likely intentions, Charter's bonds continued to push upward. "It looks like they improved" Friday said one trader, who quoted Charter's benchmark 8 5/8% notes due 2009 as having firmed to 63.5 bid/65.5 offered from prior levels around 61 bid, while at another desk, the 8 5/8s were seen as high as 65 bid. Charter's 10¾% notes due 2009 got as high as 64 bid during the session, a gain of better than two points. Its 9.92% notes due 2011 firmed to 42 bid from prior levels around 40.5.

Another trader agreed that the Charters were in that 63-65 context "across the board. Then they traded up to 65 and just kind of died there" as the day's already light trading volume wound down.

Another domestic high yield cabler seen as a possible acquisition target in the wake of industry consolidation, Mediacom LLC, was firmer Friday, its 9½% notes due 2013 up three points on the day at 77 bid. Cablevision Systems - the company thought to be the most likely possible acquisition target in the junk sector - was not seen trading around Friday, as traders took a breather after a nearly 10 point upside move on Thursday.

European cable operator NTL's were seen about a point higher on Friday, at 16, but a distressed-debt trader said "there was not much to speak about" in the way of news or market activity in the U.K. cable operator's debt. Rival Telewest Communications plc's 9 5/8% notes due 2006 lost around two points Friday to finish at 14 bid.

Also in the communications area, a trader saw Qwest Communications International's bonds moving around. "They were up a little bit, then down a little bit, and ended down a bit."

However, another market source saw Qwest finishing slightly on the upside, its 7 5/8% operating company paper due 2003 firming half a point to 92 bid. Wireless telecommer Nextel Communications Inc., whose debt had been firming steadily over the past week or so in line with a general rise in the shares and bonds of the wireless sector, eased slightly, its bellwether 9 3/8% notes due 2009 dipping to 74.375 bid from Thursday's close at 76.5.

Telecom equipment supplier Lucent technologies Inc.'s paper was being quoted higher on news reports that the Murray Hill, N.J.-based manufacturer might be making big job cuts - the financial news website TheStreet.com put the size of the cuts at 15,000 positions, slightly less than a third of its current 50,000-person workforce, while The Wall Street Journal was estimating about a 10% reduction. Lucent itself - which has steadily cut its workforce down to its current size from over 100,000 employees two years ago - said in response that it had not determined a level for job cuts - but said the number would be considerably smaller than TheStreet.com's 15,000 guess, which Lucent called "ludicrous."

Lucent's 7¼% notes due 2006 were quoted three points better, at 63 bid, while its 7¼% notes due 2008 were around that same level. Its 6.45% bonds due 2028 and 2029, recently in the 40s, finished Friday at 53 bid/54 offered. However, Lucent shares lost eight cents (5.06%) in Friday's New York Stock Exchange dealings, to end at $1.50.

"The HY Market is in Summer Recess" read the subject box of an email message to the Prospect News high-yield primary market desk from a sell-side source during Friday's session - a session which another sell-sider needed only a scant two syllables to describe: "Quiet."

The only hard information to emerge was that during the week of Aug. 19 money continued to seep out of the high yield mutual funds - and primary desks too were a little surprised at the $44.6 million outflow; some market observers had told Prospect News throughout the week of Aug. 19 that outflows have showed signs of slowing and that they anticipate seeing money begin to flow back into the asset class.

Asked if the steady drain of cash dimmed the prospects of a meaningful build-up in the forward calendar after Labor Day one sell-side official pointed in an entirely different direction and said "No."

"We think it's going to be fairly strong, just based on the activity in the secondary market this week, which performed extremely well," the sell-side official said.

"If you have a couple of weeks like that I think you will see some build-up on the forward calendar."

This official mentioned three deals thought to be solidly "in" the market as transactions that could take place in September.

Those are Ferrellgas Partners LP's $170 million of 10-year senior notes (B1), a refinancing deal via Credit Suisse First Boston and Banc of America Securities; Meridian Automotive Systems, Inc.'s $250 million of 10-year senior subordinated notes via Credit Suisse First Boston; and Wynn Las Vegas LLC's $350 million of eight-year second mortgage notes via Deutsche Bank Securities Inc., Banc of America Securities, Bear Stearns & Co. and Dresdner Kleinwort Wasserstein. The Wynn deal, which is coming concurrently with an approximately $395 million IPO and $1 billion of credit facilities, will fund the Le Rêve entertainment and lodging development in Las Vegas.

Prospect News also learned late in the week of Aug. 19 that a shadow calendar is said to be building in the eurobond market. Sources said that food services distributor Brake Bros. plc is bringing an LBO financing deal of £175 million via JP Morgan and Credit Suisse First Boston, possibly to price mid-September, and that electrical distribution and industrial control and automation services-provider Legrand, SA is heading to market with approximately €600-€750 million via Credit Suisse First Boston, Lehman Brothers and RBS to fund its LBO by Kohlberg Kravis Roberts & Co. LP and Wendel Investissement - also heard to be Sept. business.

On Friday the Deutsche Bank Weekly High Yield Report stated that although the Deutsche Bank Global High Yield Index advanced 1.96% during the seven-day period between Aug. 15 and Aug. 22, activity in the primary market continues to be exceptionally slow.

"There was no new issuance this week," Friday's report from Deutsche Bank stated, adding that the above-proscribed seven-day period "marks the eighth consecutive week where we had less than $1 billion of new paper come to the market. Year-to-date issuance stands at only $43 billion, below the year-to-date default figure even after excluding companies like WorldCom, which were originally issued as High Grade."

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