Michaels up on numbers, CIT active as broad market quiet; Warner Chilcott details bond plans

By Paul Deckelman and Paul A. Harris

New York, Aug. 25 - Michaels Stores Inc.'s bonds firmed solidly in active trading on Tuesday after the Irving, Tex.-based art-supply retailer's fiscal second-quarter and first-half results painted a pretty picture for investors, showing a swing back to the black versus year-ago losses for both periods.

Traders also saw activity in such names as CIT Group Inc., SLM Corp., and the several hybrid securities issues from Wells Fargo Corp., as well as Watson Pharmaceuticals Inc.'s recently priced two-part issue.

However, despite increased volume figures, traders said the overall junk market was quiet for yet another day.

Primary-side activity was at a virtual standstill, although more details surfaced about drugmaker Warner Chilcott plc's planned financing for its $3.1 billion purchase of Procter & Gamble Co.'s global pharmaceuticals business, including the issuance of $1.4 billion of junk-rated senior notes.

Market indicators seen mixed

A trader saw the CDX Series 12 High Yield index - which had gained 1/8 point on Monday - surrendering that 1/8 point advance on Tuesday, finishing at 89 1/8 bid, 89 5/8 offered.

The KDP High Yield Daily Index, which had risen 7 basis points on Monday, edged up another 2 bps on Tuesday to end at 65.90, while its yield was unchanged, at 9.44%.

In the broader market, advancing issues - which led decliners for a fifth straight session on Monday, albeit by a very narrow margin - really, just a handful of issues - solidified their lead on Tuesday, as their advantage widened to around a seven-to-five ratio.

Overall market activity, reflected in dollar-volume totals, jumped 50% from Monday's pace.

A trader said that things were "pretty quiet - we got a few things done, but basically, the market seems like it's on a holiday here."

He said that "stocks didn't do anything, the [Treasury] bond market didn't really do anything. The corporate market was probably a little bit better, generally speaking, but it was very thin, with not a lot of people around and no really significant trading."

With everyone looking towards the three-day Labor Day holiday break, marking the unofficial end of summer - the holiday falls this year on Monday, Sept. 7, and will see all of the domestic financial markets in the United States closed, "my assumption is we're going to have two weeks of downtime here." He added that while there were "a few things going on here and there - basically, I think there's a lot of guys out playing golf, or a lot of guys on vacation."

A second trader saw things "pretty much unchanged."

But at another desk, a trader allowed how "it looks like Trace was fairly active," referring to the Financial Industry Regulatory Authority's bond-tracking service.

Michaels moves up on numbers

A trader saw Michael Stores' bonds better after the retailer reported earnings for the fiscal second quarter and fiscal first half ended Aug. 1 - with both showing improvement over the year-ago results.

"They were pretty good," he said, calling the 11 3/8% notes due 2016 up at least 3 points around an 84-85 context, versus an 81 level "a few days ago."

He said the numbers "were okay - though they're still highly levered, though."

Sales "were up a tiny bit - but EBITDA was up something like 16%."

He saw the company's 10% notes due 2014, which had been trading a few days ago and even on Monday in the 91-92 area, as having traded up to 93-94½ post-numbers on Tuesday.

At another desk, a market source saw the 10% notes at 94, calling it a three-point rise.

Yet another market source saw the 10s at 84 and the 11 3/8s at a shade over 85, with volume in each topping the $10 million mark at mid-afternoon.

Michaels reported a $2 million profit for the quarter, versus $30 million of red ink in the year-earlier period, and for the first half, it earned $6 million, versus a $50 million year-ago loss.

Net sales for the quarter rose 1.4% from a year ago to $807 million, although same-store sales - a key retailing industry performance metric - were down by 0.8%. For the first half, sales gained 1%, to $1.659 billion, although same-store sales declined by 1.4% from a year earlier.

Operating income for the quarter nearly doubled, rising $23 million to stand at $50 million, or 6.2% of sales, nearly double the year-earlier quarter's 3.4%. For the half, operating income was $114 million, or 6.9% of sales, up from $75 million, or 4.6% of sales, a year earlier.

Adjusted EBITDA for the quarter jumped by 16.4%, from year-earlier levels, or $12 million, to $85 million, and was up 12.9% during the first half, to $192 million.

The company's chief executive officer, John Menzer, credited "a corporate-wide focus on sales and creating a fun customer environment in our stores coupled with a strong emphasis on expense control" with the improved sales and operating results for the quarter.

Of interest to bond investors, Michaels said that its second-quarter debt level fell by $70 million to $3.964 billion, from $4.034 billion a year earlier. Interest expense dropped by $14 million in the quarter and $29 million in the first half, due to a lower average interest rate on the company's floating-rate debt and lower average debt levels.

Michaels' cash balance at the end of the quarter stood at $36 million, with $526 million of availability under its revolving credit facility. During the quarter, it made a $5.9 million amortization payment on its senior secured term loan.

Bon-Ton is better

In that same sector, Bon-Ton Department Stores Inc.'s 10¼% notes due 2014 were seen having gained nearly 3 points on the day to end at just under 64 bid.

The York, Pa.-based retail operator's bonds had risen last week after it released second-quarter results which included a narrower full-year loss projection than it had previously announced, aided by more productive cost-cutting and inventory management efforts.

CIT seen busy

A trader saw CIT Group as having the biggest volume, with several of the New York-based consumer lending company's issue showing up on the Most Active lists.

Its 4¼% notes due 2010 - which on Monday had shot up by 3¼ points to just under 63 - were seen giving back nearly 2 points of that gain to finish around 61 bid, though still well up from the levels just under 60 at which it had finished last week, a market source said.

Some of the company's other issues were even more actively traded, with a source seeing the 5.60% notes due 2011 bonds trading at 60 bid, with over $15 million having changed hands by mid-afternoon, and its floating-rate notes due in March of 2010 hanging in at 51 bid, on over $12 million traded. CIT's 7¾% notes due 2012 were pegged at 57 bid, and its floaters due in November 2010 at 59.

Also among the financials, American International Group Inc. paper was seen mixed, with parent AIG's 6¼% bonds due 2036 up 1½ points to the 57½ mark, but its International Lease Finance Corp. unit's 5.40% notes due 2012 down a point on the day at 81 bid.

At another desk, the AIG 6¼% long-term hybrid bonds due 2087 were at 42 bid.

Wells Fargo hybrids actively traded

Market sources saw the junk-rated hybrid preferred issues put out by the high-grade rated Wells Fargo and what used to be Wachovia Bank Corp., now a part of San Francisco-based Wells Fargo's burgeoning banking empire, as among some of the more active names.

For a second straight session, one source said, the Wachovia Capital Trust III floating-rate securities due 2042 were the most active issue, although the $20 million-plus volume seen by mid-afternoon on Tuesday was less than half of the $50 million-plus which had traded around on Monday. That paper was seen up more than 3 points on the session at 67½ bid.

Wells Fargo's own Wells Fargo Capital XII floaters due 2099 were quoted up about ¼ point at 87¾ bid.

Uncertainty spurs Sallie Mae activity

One of the traders said that SLM - or Sallie Mae as it is more commonly known - was the next most active name after CIT's paper.

Several other participants also saw the Reston, Va.-based education financing concern among the day's big traders - as per usual - though they noted that price movement was relatively nonexistent.

With the split-rated credit (Ba1/BBB-/BBB) drawing interest from both Junkbondland accounts as well as high-grade investors, a trader said about $35 million of the 8.45% notes due 2018 traded between 76 and 761/2.

"That's right where it's been, so nothing special there," he said.

Another trader also called the debt largely unchanged.

"It's been a little better in general," he said. "I think it moved up a little Friday and then a little yesterday. But today, it's unchanged for the most part."

Sallie Mae has been making headlines recently as it seeks to have a voice in the Obama Administration's student loan reform. But some market players are not seeing much progress.

President Obama is seeking to reform student loan lending and in July a bill was passed that would bypass lenders like Sallie Mae, allowing the federal government to loan money directly to college students. Though there has not been a definitive answer on that proposal - the bill still has to pass the Senate, which is expected to discuss the matter next month - the proposed lending standards have created just enough uncertainty for Sallie Mae to pause.

"We expect Sallie Mae will find a way to demonstrate its usefulness to the federal government, but the uncertainty over how legislation will affect the company's business model, combined with persistent credit losses in the private lending portfolio, warrant a cautious outlook in considering this credit," wrote Kathleen Shanley an analyst with Gimme Credit LLC, in a report to clients.

Sallie Mae is already in danger of losing its investment grade status - and it already trades on high-yield and distressed desks. Moody's Investors Service previously dropped its rating on SLM to Ba1 and Standard & Poor's is also considering a downgrade in its precariously high-grade rating.

Watson new issue still busy

And as it has for virtually the whole of the past week, another split-rated credit (Ba1/BBB-BBB-) was seen generating trading on both the high-grade and the high-yield side of the market - Corona, Calif.-based drugmaker Watson Pharmaceuticals Inc.'s $850 million two-part deal, which priced a week ago.

A trader saw its 5% notes due 2014 "anywhere between 100¾ and 101 1/8," although he noted that because the deal originally came off the high-grade desks at the participating underwriters and trades briskly among high-grade accounts, "they don't trade like high-yield bonds, they trade on a spread basis," making the levels "really about 100.71 and 101.08."

That $450 million of bonds priced last Tuesday at 99.589 to yield 5.095% -- or, on a spread basis, at 262.5 bps over comparable Treasuries - and have since moved up above the par level and stayed there on relatively busy volume. On Tuesday, a market source saw over $10 million having traded by mid-afternoon, still enough to land it among the most active names, although that was well below the $20 million-plus turnover seen in each of the previous several sessions.

He said the company's $400 million of 6 1/8% notes due 2019 at bid levels around 102½ to 102 5/8; those bonds had priced at 99.796 to yield 6.153%, or on spread, at 262.5, and like the five years, had firmed solidly in the aftermarket early on and continued to hold those gains in the subsequent days.

But also like the five-years, activity in the 10s, which last week had been in the $20 million-plus area, was dwindling this week, with a market source noting that it wasn't even among the most active bonds Tuesday.

Warner Chilcott details

The primary market remained becalmed, the official said, adding that new issue activity is not expected to resume until after the Labor Day weekend.

However, a whiff of issuance on the horizon surfaced Tuesday, as Warner Chilcott plc disclosed acquisition financing plans, and GC Impsat Holdings I Plc announced it would use debt financing to fund a tender.

Warner Chilcott came out with details on the financing for its purchase of Procter & Gamble Co.'s pharmaceuticals business, including plans for the issuance of $1.4 billion of senior unsecured notes, as well as a $2.75 billion senior secured credit facility.

The deal is expected to close by year-end.

The bonds are backed by a $1.4 billion one-year bridge loan, priced at Libor plus 800 bps with a 2.5% Libor floor and 50 bps coupon step-ups after each three-month period.

JPMorgan and Morgan Stanley are the co-lead arrangers and bookrunners on the bridge, with fellow bookrunners Barclays, Bank of America, Citigroup and Credit Suisse.

Impsat possible

Meanwhile Impsat said that it must do debt financing in order to complete a cash tender offer and consent solicitation for its $225 million of 9 7/8% senior notes due 2017 - a transaction that it announced on Tuesday.

The tender ends at midnight ET on Sept. 21.

Goldman Sachs, Credit Suisse and JP Morgan are the dealer managers.

Stephanie N. Rotondo contributed to this report.

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