Kabel Deutschland, five smaller deals price; MCI off; funds see $70 million outflow

By Paul Deckelman and Paul A. Harris

New York, June 24 - Kabel Deutschland GmbH was heard by high-yield syndicate sources to have successfully priced a two-part dual currency offering of 10-year senior notes Thursday. The $610 million dollar-denominated tranche was easily the biggest deal of a day that saw a slew of considerably smaller offerings also successfully come to market, for Pierre Foods, Paramount Resources, K2 Inc., Wornick Co. and FelCor Lodging Trust Inc. The latter deal was a quickly shopped add-on offering to the Irving, Tex.-based hotel industry real estate investment trust's existing 2011 floating-rate notes.

In the secondary market, the level of trading was described as light - but as one participant put it, "what there was - was strong."

He saw steelmakers' bonds continuing to "hum along," pulled northward by Oregon Steel Mills Inc.'s announcement earlier in the week raising the company's second-quarter outlook. On the downside, MCI Inc.'s bonds were quoted lower, possibly in reaction to the bearish guidance put out by rival long-distance telecom operator AT&T Corp.

After trading had wound down for the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that the funds had a net outflow of $69.5 million in the week ended Wednesday.

Even though mutual funds account for but a percentage of the total capital in the high yield universe, those in the know consider their movements a generally reliable barometer of overall junk bond market liquidity trends.

The latest week's outflow was the third in a row, on top of outflows of $126.5 million in the week ended last Wednesday (June 16) and $59.77 million in the week ended June 9.

In that three-week span, roughly $255.77 million more has leached from the funds than has come into them, according to a Prospect News analysis of the AMG figures.

For the year so far, outflows have been seen in 16 weeks, against just 9 inflows, and the cumulative net outflow rose to about $5.399 billion in the latest week from around $5.329 billion the week before, according to the Prospect News analysis.

And discarding the inflows seen in the first four week of the year, which were essentially a continuation of the unusually strong tide of liquidity seen throughout the 2003 fourth quarter, the depth of the liquidity drain since then becomes even more pronounced. Since the week ended Feb. 4 - which saw the first of two consecutive billion-dollar-plus outflows that abruptly shifted the momentum in both the high yield primary and secondary markets - inflows have been seen in only five of 21 weeks and outflows in the other 16, and the net capital hemorrhage from the funds since then has totaled some $6.77 billion, according to the Prospect News analysis.

"It didn't feel as though there would be a heavy bleed from the market," a sell-side official commented.

"We've had decent issuance this week. We had close to $1.6 billion price today. Things seem to be coming in the context of talk and at appropriate valuation levels.

"I was expecting a modest $50 million to $100 million inflow."

Cash from elsewhere

With high-yield mutual fund flow numbers having been parked in the red throughout the spring, Prospect News reasoned during its conversation with this official that money sufficient to support new issue business that has been far from dormant must be coming from sources other than the mutual funds.

"That's definitely the case," said the official.

"You have a lot of insurance companies and a lot of CDOs and CBOs coming in and buying this stuff.

"And there are a lot of hedge funds," the official added. "Our desk is talking to hedge funds day in and day out, both the primary side and the secondary side."

$1.6 billion of issuance

Counting an upsized two-part deal from Kabel Deutschland GmbH, which came in dollars and euros, one sell-side source tallied $1.6 billion of junk spread across seven tranches that priced during the Thursday session.

Two of the days deals priced in upsized amounts, two came at the tight end of price talk, while another two came on top of revised talk.

All in all, the sell-side official reflected, the high yield primary - over the past week as well as on Thursday - has not been operating like a market that is bleeding cash.

Kabel Deutschland upsizes

Thursday's big deal was an upsized €750 million equivalent issue of 10-year senior notes (B3/B/B+) in dollar and euro tranches from Kabel Deutschland.

Both tranches, via Deutsche Bank Securities and Morgan Stanley, came on top of revised price talk. The total deal was increased from €700 million equivalent.

The company sold $610 million at par to yield 10 5/8%, on top of the revised 10 5/8% talk, which had been reduced from the 10¾% area.

The company also sold €250 million at par to yield 10 ¾%, once again on top of the revised 10¾% talk, reduced from the 11% area.

The issuer, which is the largest cable network operator in Europe, will use the proceeds to help fund the purchase of former Deutsche Telekom assets Ish GmbH, Kabel BW and Iesy eKabel Hessen GmbH for €2.7 billion.

Mid-afternoon on Thursday a syndicate source told Prospect News that both tranches were well oversubscribed and that the bonds were trading well in the aftermarket.

A market source not on the Kabel Deutschland syndicate said that there had been some pushback from investors that resulted in a covenant change involving a par put.

"I heard that they tweaked the covenants a little bit in the end," the source said. "In the offering document they had disclosed that they had three small acquisitions all lined up. And they were trying to market a document off of the pro forma results, basically including those three acquisitions as part of the offering.

"There was a little pushback on that. So finally they included a put in the covenants, allowing the bondholders to put the notes back to the company at par if the acquisitions don't close."

The source added that the price talk revisions came approximately two hours before the deal priced.

"I think once they got people comfortable with the covenants they were able to price it at the appropriate level," the source said.

K2 sells upsized issue

Meanwhile Carlsbad, Calif. sporting goods manufacturer K2 Inc. priced an upsized $200 million of 10-year senior notes (Ba3/BB) at par to yield 7 3/8%.

JP Morgan ran the books for the acquisition financing that came at the tight end of the 7 3/8%-7 5/8% price talk and was increased from $150 million.

A trio of $125 million deals

Three issuers completed $125 million transactions during the June 24 session.

Calgary, Alta.-based oil and gas exploration and development company Paramount Resources Ltd. sold $125 million of 10-year senior notes (B3/B) at par to yield 8 7/8%.

The UBS Investment Bank-led acquisition deal came at the wide end of the 8 5/8%-8 7/8% price talk

Meanwhile Pierre Foods, Inc. sold $125 million of eight-year senior subordinated notes (B3/B-) at par to yield 9 7/8%, on the tight end of the 10% area talk.

Banc of America Securities and Wachovia Securities were joint bookrunners for the LBO deal from the Cincinnati producer of cooked branded and private label protein, bakery products and microwaveable sandwiches.

An informed source told Prospect News that in addition to pricing at the tight end of talk, the book for Pierre Foods was more than three times oversubscribed.

And the last of the trio of $125 million deals was priced by Cincinnati-based packaged food products concern, The Wornick Co., which priced its seven-year senior secured notes (B2/B+) at par to yield 10 7/8%.

Jefferies & Co. ran the books for the acquisition financing, which came at the wide end of the 10¾%-10 7/8% price talk.

A buy-side source told Prospect News that the Wornick book was three times oversubscribed.

FelCor's drive-by add on

In quick-to-market action Thursday, FelCor Lodging LP priced a $115 million add-on to its senior floating rate notes due June 1, 2011 (B1/B-) at par.

The yield remains at six-month Libor plus 425 basis points.

Deutsche Bank Securities ran the books for the Irving, Tex.-based lodging REIT.

A market source noted FelCor is completing a tender.

"A portion of the tender for the 9½% senior notes of 2008 was to be funded by a draw-down of the bank facility, or cash on the balance sheet," said the source. "That is now being funded by this add-on."

The original $175 million issue, which had been downsized from $350 million, priced on May 17.

Belden & Blake hits the road

News of one roadshow start was heard during Thursday's session.

Marketing got underway for Belden & Blake's offering of $192.5 million of eight-year senior secured notes.

Goldman Sachs & Co. is running the books for debt refinancing deal from the North Canton, Ohio natural gas and oil exploration, development and production company.

And finally, price talk of 9¾%-10% emerged Thursday on Sicpa Group's upcoming €160 million of seven-year senior notes (B-), which are expected to price on Friday via Credit Suisse First Boston and BNP Paribas.

Paramount up in trading

When the new Paramount Resources 8 7/8% senior notes due 2014 were freed for secondary dealings, they were "up a point right out of the gates," according to one market source.

A trader elsewhere, however, didn't see that kind of explosive action, pegging the new bonds up only a quarter to a half point, at best.

And he said that the Calgary, Alta.-based energy company's existing 7 7/8% notes due 2010 traded down to 97 bid, explaining that the new deal came at the wide end of pre-deal market price talk, and so the existing bonds retreated "because there has to be some relative value" in the new paper.

Steel strong

Back among existing issues which were not impacted by any new-deal news, the trader saw movement in a few issues on what was otherwise "a pretty listless day."

He was especially impressed with the strength seen in the steel sector. The steels have been firming for a couple of sessions after Oregon Steel said on Tuesday that it now expects net earnings to exceed $1.20 per share, exclusive of any further labor dispute settlement adjustments. That's a big improvement over the forecast it put out just last month of earnings in the $1 to $1.20 range.

And the Portland, Ore.-based steel mill operator also announced some belt tightening, idling its large-diameter steel pipe factory in Napa, Calif. indefinitely due to lagging demand.

Since then, the company's 10% notes due 2009 have been on the rise and on Thursday they were up yet another point to 106 bid.

Meantime, the trader said, AK Steel Corp. bonds were "the highest we've seen in three months," with the Middletown, Ohio-based steelmaker's 7 5/8% notes due 2007 trading up to 92.75 bid, its 7¾% notes due 2012 rising to 90 bid and its 9% notes due 2009 firming to 97.5.

C&A Products, Delco Remy up

Other industrial names he saw doing better included Troy, Mich.-based automotive components maker Collins & Aikman Products, whose 11½% notes due 2006 had firmed to 98.5 bid from prior levels at 96, while its 10¾% notes moved up to 100.5 bid from 99 previously.

Anderson, Ind.-based automotive electrical systems maker Delco Remy International Inc.'s bonds were up half a point to three quarters, with its 8 5/8% notes due 2007 trading up to 102 and its 11% notes due 2009 half a point better at 106.25. The trader believes the latter issue is the target of some market speculation, because "people thing they're going to take it out."

Levi gains

And one more name he saw better Thursday was Levi Strauss & Co. Inc., up on renewed market buzz about a possible sale of its Dockers' khaki clothing unit or another subsidiary. He had no details but said there was talk that another clothing industry player had lined up a lot of financing and might be preparing to make a bid for Dockers, which could fetch anywhere from $500 million to $1 billion for the San Francisco-based apparel maker.

Levi's 11 5/8% notes due 2008 firmed to 97.5 bid from prior levels around 96.25, while its 7% notes due 2006 and 12¼% notes due 2012 were each up half a point at 94 bid and 96 bid, respectively.

But at another desk, Levi was quoted as having actually eased, the 7% notes dipping to 93 bid.

A trader there saw activity in Paxson Communications, quoting the Florida-based television station owner and content provider's zero-coupon notes as high as 87.25 bid, about two points ahead of recent levels.

Rite Aid higher

Also on the upside, he said, was Rite Aid Corp.'s 7.70% notes due 2027, which were up two points at 88.5 bid.

Another market participant, though, saw The Camp Hill, Pa.-based drugstore chain operator's bonds up half a point at best after the company released favorable fiscal first quarter earnings and said it had bought back a small amount of debt after the just concluded quarter (see related story elsewhere in this issue).

He estimated Rite Aid's 7 1/8% notes due 2007 - of which $27 million out of about $210 million were bought back - up half a point at 101.75.

MCI slips

And the market source saw erosion in MCI's bonds, with its 6.688% notes due 2009 dropping to 92.125 bid from 93.25 previously. Its 7.735% notes fell to 89 from 90.25, while its 5.908% notes retreated to 96.75 from 97.25 previously. There was no specific news on the Ashburn, Va.-based long distance carrier, and the retreat may have been related to general investor pessimism about the sector's prospects after one-time industry monopolist AT&T cut its outlook and announced that it would stop marketing its services to new customers in seven states where it now operates.

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