Market sleepwalks through pre-holiday session, notes funds outflow; three deals join slate

By Paul Deckelman and Paul A. Harris

New York, May 24 - The high yield market took it slow Friday in an abbreviated pre-holiday session, and while participants took note of sobering mutual fund-flow statistics which showed the largest weekly liquidity outflow since mid-February, nobody was really around to react much to it.

In the primary arena, three deals wearing diverse stripes appeared Friday: a straight-up Rule 144A junk bond deal from IESI Corp., an add-on from TransDigm Corp., and a split-rated offering from Kennametal Corp. that will be marketed to both investment- and speculative-grade investors.

However the big news Friday pertained an unmistakable punctuation mark in a three-month run of nearly uninterrupted inflows of cash into the high yield mutual funds.

The subject box of one of Friday's first e-mail messages to the Prospect News high yield primary market desk read "SIGNIFICANT OUTFLOW," and the accompanying message from a sell-side source carried the information that AMG Data Services had reported an outflow of $479.7 million from high-yield mutual funds for the week ending May 22.

One sell-side source commented that it was the largest week-only outflow since the market saw a $487.9 million outflow during the week ending Feb. 13.

"What we've seen over the past four weeks is a change in market value," the official said. "Over that period we have seen some decreases in the market value of assets under management, which kind of makes sense. There has been kind of a negative tone to the market with the WorldCom hangover that has been suffered."

Two sell-side sources who spoke Friday with Prospect News suggested that the outflow also conceivably represents investors taking a breather.

"I think it's just your basic redemptions," another sell-side source said.

A trader called the outflow "pretty sizable" but noted that as far as any impact on bond prices was concerned it was a typical holiday weekend tree-falling-in-a deserted-forest situation - "no one was really around to care."

However, he cautioned, while the loss of money from the mutual funds "was not enough to spook anybody yet, a couple of weeks of that, though" would make junk marketeers sit up and take notice.

The latest week's outflow was only the fifth in the 21 weeks since the start of the year, and overall year to date, the mutual fund flow numbers - seen by many as a reliable proxy for overall high yield market liquidity trends - remain overwhelmingly positive. Even with the sizable outflow seen in the latest week, approximately $5.176 billion more has come into the junk funds since the beginning of the year than has left them.

"One week does not a trend make," the trader noted - but "get three or four weeks with a half a billion [dollars of outflows] apiece, and the tone will change considerably.

Despite the outflow, the week just gone managed to include a single day, Wednesday, which saw $1 billion of new bonds price.

Biggest among them was Venetian Casino Resort, LLC/Las Vegas Sands, Inc.'s offering of $850 million of eight-year second mortgage notes (Caa1/B-) priced on May 22 to yield 11% via bookrunner Goldman Sachs & Co.

In addition, Sybron Dental Specialties priced $150 million of 10-year senior subordinated notes (B2/B) to yield 8 1/8% via joint bookrunners Credit Suisse First Boston and Lehman Brothers.

Several sources on the sell-side noted that Sybron, by pricing at 8 1/8%, matched the lowest yield achieved for a first-time issuer's offering of single-B senior subordinated notes.

In a conversation Friday with Prospect News one portfolio manager said that Sybron was the only credit that had been of interest. This investor had put in for Sybron but went home empty-handed.

"I looked at Sybron and got zeroed, which almost never happens to me," the buy-side source said. "The rest of the stuff I'm just staying away from.

"Sybron's not the greatest company in the world, but given what's out there, and the demand for good deals - or reasonable deals - Sybron would make sense.

"It's an acquisitive company," the portfolio manager added. "They're going to keep making acquisitions. They could make some big acquisitions. They'll be back in the market. Management seemed pretty much marketing-oriented. They didn't come off as being really financially sophisticated or operations-oriented. They came off as marketing guys."

Factoring in the $1 billion that priced on Wednesday, the week of May 20 saw $1.7 billion in proceeds price, with additional deals from Trico Marine Services, Roundy's Supermarkets and TriMas Corp.

In last Friday's primary market activity news of three deals was heard.

Haltom, Tex. waste collection company IESI Corp. will likely price a junk bond deal for $150 million of 10-year senior subordinated notes (B3/B-), via joint bookrunners Credit Suisse First Boston and Salomon Smith Barney during the week of May 27.

Details emerged on an deal announced late Thursday by TransDigm Inc., a Richmond Heights, Ohio-based supplier to the aerospace industry. It figures to price a $75 million add-on to its 10 3/8% senior subordinated notes due Dec. 1, 2008 (B3/B-) during the week of May 27, via joint bookrunners Deutsche Bank Securities and Credit Suisse First Boston.

In addition to IESI and TransDigm, the week of May 27 is scheduled to see pricings of deals from H&E Equipment Services, Inc., which is offering $275 million of 10-year senior secured notes (B3/B) via joint bookrunners Credit Suisse First Boston and Banc of America Securities; Wyndham International, Inc., which is selling $750 million of six-year senior secured notes (Caa1/B-) via joint books JP Morgan and Bear Stearns; and Asbury Automotive Group, Inc., which is slated for $200 million of 10-year senior subordinated notes (B3/B) with Goldman Sachs running the books.

All told five deals are expected to price during the week of May 27, for a total of $1.45 billion.

And Prospect News learned from a syndicate source Friday that split-rated Kennametal Inc.'s sale of $300 million of 10-year senior notes (Ba1/BBB) will be marketed to both high grade and high yield accounts. The roadshow starts Thursday, with the deal expected to price during the week of June 10. Goldman Sachs and JP Morgan are joint bookrunners.

In the secondary, traders reported an extremely low activity level, as most desks officially closed up shop at 2 p.m. ET in line with The Bond Market Association's recommendation; truthfully, though, what little activity there was had been concluded long before that time. The market remained closed Monday, along with other U.S. financial marts, for the Memorial Day holiday.

The session proved to be a welcome breather after an unexpectedly busy pre-holiday week, which culminated Thursday with the successful revolt by disgruntled Adelphia Communications Corp. lenders, shareholders and bondholders, who deposed Adelphia's founder and long-time ruler, John J. Rigas, and members of his family; the Rigases were ousted from control of the troubled cable television operator's board and management team and were forced to turn over at least $1 billion of assets to help the company stave off possible bankruptcy.

But while the bonds surged on Thursday in apparent response to the upheaval - which ended half a century of control by the Rigases - there was little or no followthrough on Friday.

"I would have hoped that we would have some additional news coming out of Adelphia - they're supposed to be in front of the banks to try to get their covenant violation waivers - but so far, we haven't seen anything," a trader said. "Apart from that, there ain't nuthin' going on."

He saw their bonds unchanged from Thursday's levels, and characterized activity in the credit as "little better than zero" - a situation which he said essentially prevailed throughout most of the market. "It's a dead day. People are very glad to cut out and call it a week."

At another desk, Adelphia's 10 7/8% notes due 2010 were quoted at 77 bid, its 9¼% notes due later this year were offered at 86 and its 9 7/8% notes due 2007 were offered at 77.5 bid, all around the levels they held late Thursday. "It looks like it's widened out a little bit," a trader said, "but everything is just this shortened Memorial Day weekend trading. Everything is just a little bit wider."

When participants return from their three-day break, they may ponder the deepening revelations of the extent of the intricate - perhaps even Byzantine - ties between the Rigas family and Adelphia. Friday's Wall Street Journal reported in a lengthy front-page article about what it called the "vast network of business relationships" between the family and the company, noting that some investigators probing the company's finances call it "one of the largest cases of insider dealings ever seen at a public company."

Those tangled ties came to light in late March, when the company disclosed some $2.3 billion of off-balance-sheet obligations related to Adelphia guarantees of loans to partnerships controlled by the family.

In the company's announcement Thursday of the Rigases surrender of their board seats and executive positions, it put the amount of the family's repayment obligations at $3.1 billion, including advances paid by Adelphia to the Rigases for all manner of non-cable investments, including the family-controlled Buffalo Sabres pro hockey team , a half-built golf course, and timber rights to a parcel of land near Adelphia's home base in Coudersport, Pa.

"It looks like they may have used the company as their own ATM machine," one market participant quipped, while another likened it to "a banana republic."

Apart from Adelphia, there also was only limited activity in the other major communications names that dominated the week's activity, WorldCom Inc. and Qwest Communications International.

WorldCom, fresh from its successful effort to line up a new $1.5 billion facility secured by customer bills (and now working on getting its lenders to go for a $5 billion lending package) was heard to have risen about half a point Friday on the short end of the curve, a trader quoting its 7 7/8% notes due 2003 at 84.5 bid/85.5 offered. Its 6¼% paper due 2003 was seen at 80, up a point on the day, and its longer-dated 8 1/8% notes due 2031 were at 40. The Clinton, Miss.-based telecom giant's widely traded benchmark issue, its 7½% notes due 2011, were a point better at 47.5 bid.

Qwest paper, meantime, seemed to be holding its own despite the not-unexpected ratings downgrade to junk levels earlier in the week by Standard & Poor's.

A trader who described the Denver-based telecommer's debt as the main focus Friday at his shop, said there was a fair volume of market interest, particularly at the shorter end of the curve, but not a lot of price movement.

He saw particular interest by accounts in the Qwest operating company paper, such as the 6 3/8% notes due this Oct. 15, which were trading around 98 bid/99 offered, "just tighter [than recent levels.] It almost seems like people are focused on it. It trades at a premium to the holding company paper, because it's supposedly closer to the assets. If anything, I've just seen people sharpen their pencils, and we've been able to tighten those markets a little more. "

He characterized the parent holding company paper, such as the Qwest Capital Funding 5 7/8% notes due 2004 and the 7¼% notes due 2011, as just wider (in terms of bid and offered levels), and mostly unchanged on the day, pegging the 71/4s in the 73 bid/75 offered area.

The trader said there had really been little in the way of a sell-off - certainly much less erosion than one would have thought - following the S&P downgrade, which cut Qwest's unsecured paper two notches, to BB, from BBB- previously. The short-dated operating company paper, in particular, he said, "seems to cover its interest expense on its own, and it's closer to the assets."

Outside of the communications world, Crown Cork & Seal paper was seen unchanged at recent levels, its 6¾% notes due 2003 hovering around 90 bid and its 8% notes due 2023 hanging in at 66, despite the news earlier in the week that the Philadelphia-based packaging company planned to sell $150 million of shares in its Constar International Inc. beverage container subsidiary in an initial public offering, and would raise further fresh cash for its offspring with a $200 million 10-year bond offering and a $250 million two-part credit facility.

CMS Energy Inc. announced that Chairman William McCormick resigned, in the midst of the continuing controversy over bogus "round trip" power trades between the Dearborn, Mich.-based power producer and trader and several industry rivals - trades which give neither company any economic benefit, but which artificially inflate both companies' trading volume statistics. It also said that it has appointed a special committee to look into the trades, and further said that it would restate its results from 2000 and 2001, when some $4.4 billion of such trades - the bulk of its power trading revenues for that period - took place.

CMS shares were up 61 cents (3.4%) to $18.31 on the news, and its bonds didn't do badly, either - a trader called them "not too bad, maybe even up a point," with its 9 7/8% notes at 102 bid/102.5 offered.

Another trader saw the bonds open at 101.25 "right out of the chute" and then tighten up to the 102 level, agreeing with the proposition being bandied about in the media that the departure of McCormick (along with the earlier resignation of the executive actually in charge of the trading unit), the naming of the investigatory committee and the move to restate the earnings could be seen by investors as signs that the company was serious about getting on top of the problem quickly and getting its house in order.

On the new-deal front, a trader quoted Roundy's Supermarkets' new 8 7/8% senior subordinated notes due 2012 at 101.25 bid/101.5 offered, up from Thursday's par issue price, but off from the highs they hit around 102 on the break Thursday.

He saw Trico Marine Services' new 8 78% senior notes due 2012 at 100.25 bid/100.75 offered, up from their 99.196 issue price Thursday and up slightly from their closing level Thursday around par. Trimas Corp.'s new 9 7/8% senior subordinated notes due 2012 moved up smartly to 101.75 bid/102.25 offered from Thursday's 99.214 issue price, although activity was muted. The trader also saw Venetian Casino Resorts LLC/Las Vegas Sands' new 11% second mortgage notes due 2010, which priced Wednesday at par, at a robust 102.25 bid/102.75 offered.

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