Charter, Chesapeake drive-bys lead the way; funds see $475 million outflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 11 - Charter Communications Inc., Chesapeake Energy Corp. and Revlon Inc. - all of them well-known high-yield issuers - dominated activity in the market Thursday, with a series of quickly shopped, opportunistically timed "drive-by" deals. However, when the session's new issues moved over to start trading in the secondary market, the star of the day was the relatively little-known Ahearn Rentals Inc., whose new bonds were heard to have firmed nearly two points in aftermarket trading.

The new issues were about the only thing going on in a sleepy secondary, where even legitimate news - such as Whirlpool Corp.'s increased, "binding" bid for Maytag Corp. - failed to do much to move bonds off dead center.

That was also true for the slew of companies who were out with quarterly earnings - traders saw little in all of those results to motivate either buyers or sellers.

And after trading had wound down for the day, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that $475 million more left the funds in the week ended Wednesday than came into them. It was the fifth straight week in which an outflow had been seen - including the minuscule $3 million seen in the previous week (ended Aug. 3), and the first really sizable bleed during that time, seeming to cement a sudden weakening trend in the widely followed market liquidity trends gauge.

Before that retreat began in early July, the market had for some time been pursuing an indecisive course of alternating weeks in which an inflow would be followed by an outflow, which in turn would be followed by another inflow. That zig-zag pattern, which began in the week ended June 1, followed a lengthy period in which outflows had been seen week upon week, for a total of $6.7 billion, according to a Prospect News analysis of the AMG data. Breaking out of that negative gridlock sparked a revival of both the junk primary and secondary market, from the doldrums seen at the tail end of the losing streak in late May.

But the party may now be over; in the past five weeks, outflows have totaled $647.7 million, according to the Prospect News analysis of the AMG data.

Taking a longer-term approach, outflows have now been seen in 25 weeks of the 32 since the start of the year, against only seven weekly inflows. Cumulative net outflows for the year total around $7.687 billion, according to the Prospect News analysis, up from about $7.212 billion last week.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

Mulling the news, one source commented: "I would not have thought the market would be quite as strong as it is, but I've heard that insurance companies are reallocating more money to high yield, which would not show up in the funds flows.

"That makes the market strong, and enables some of these companies to come."

Overall sources marked the junk market unchanged to as much as a quarter higher on Thursday, as a scorching primary market swung into action.

Four tranches from four issuers, including three quick-to-market deals - two of which were add-ons - priced for a total of $1.070 billion of proceeds.

Two came on the tight end of talk, one on the wide end, and one wide of talk.

Chesapeake sans covenants at wide end

The session's biggest deal came from Oklahoma City-based independent natural gas producer Chesapeake Energy Corp., which priced a $500 million issue of 6½% 12-year notes (Ba3/BB-/BB) at 98.977 to yield 6 5/8%, at the wide end of the 6½% to 6 5/8% talk.

Banc of America Securities, Bear Stearns & Co., Lehman Brothers and UBS Investment Bank were joint bookrunners for the debt refinancing deal.

A buy-side source who spoke on background said that the company apparently paid up for issuing a 12-year bond devoid of covenants.

Another source, specifying that the company's stock was trading at an all-time high on Thursday, told Prospect News that the deal was seeing considerable play from insurance companies.

A hot market for Charter?

A name as familiar to the high yield market as "Jay Leno" is to late-night TV, Charter Communications, Inc., showed up Thursday with a drive-by deal that some observers had been expecting. Issuer CCO Holdings, LLC priced a $300 million add-on to its 8¾% notes due Nov. 15, 2013 (B3/CCC-) at 98.001 to yield 9.096%.

The add-on priced at the tight end of the 97.75 to 98.001 price talk, and generated $294 million of proceeds. Sources took note of the issue price because, had the bonds come cheaper, the add-on would not have been fungible with the original issue, a factor that would have had implications for the liquidity of the new paper.

JP Morgan, Credit Suisse First Boston and Banc of America Securities ran the books.

The original $500 million issue priced at par on Nov. 4, 2003, so of course Charter paid up for the add-on.

The other company that completed an add-on Thursday was Revlon Consumer Products Corp., which priced an $80 million tap of its 9½% senior notes due April 1, 2011 (Caa2/CCC) at 95.25, resulting in a yield of 10.637%, according to a syndicate source.

The price talk was 95.50.

The sale generated $76.2 million of proceeds.

Citigroup ran the books.

One buy-side source who had not taken part in either Charter or Revlon mulled the deal terms and observed "You can tell it's a hot market.

"Charter does a deal to pay their coupons. In any other market the bonds would fall 20 points."

Earlier in the day a source told Prospect News that the when the news of the add-on hit the existing bonds appeared to hold in.

"They did the right thing," the buy-sider continued. "When you can get free money, take it."

As Prospect News polled its contacts late Thursday there was little color available regarding the book size for the deal, or who played. One source suggested the hedge funds were likely involved, and added that mainstream accounts often are restricted when it comes to paper that has a triple-C rating.

When contacted by Prospect News the St. Louis-based cable TV and internet broadband company declined to comment.

Ahern upsizes, comes tight to talk

Finally on Thursday, the only deal to come after having traveled the investor roadshow circuit was done by Las Vegas-based Ahern Rentals Inc., a first-time issuer.

The equipment rental company, which operates in the southwestern United States, priced an upsized $200 million issue of eight-year second-priority senior secured notes (B3/B-) at par to yield 9¼%.

The CIBC-led debt refinancing deal came at the tight end of the 9¼% to 9½% price talk and was increased from $175 million.

Sources told Prospect News that the order book contained $1 billion.

A source close to the deal said that although Ahern was a first-time issuer the equipment rental sector has seen considerable traffic thus far in 2005, and listed:

* Sunstate Equipment LLC which priced $125 million at par on April 1 to yield 10½%;

* Ashtead Holdings plc which priced £120 million at par on April 8 to yield 12%; and

* Neff Rental LLC which priced $245 million at par on June 30 to yield 11¼%.

"It's a sector that has a lot of established paper," the source commented.

"This company is more regionally focused than some of the big guys like United Rental and NationsRent.

"But this is a nice comparable to those other transactions."

Intcomex for Friday

Only one deal is parked on the forward calendar as business that is expected to price on Friday.

Intcomex talked its $130 million offering of five-year second-priority senior secured notes at the 11¼% area on Thursday.

Banc of America Securities has the books for the debt refinancing, dividend funding and general corporate purposes deal.

Chesapeake, Ahern up in trading

When day's biggest new deal, Chesapeake Energy's 6½% notes due 2017, were freed for secondary market dealings, they moved up to 99.75 bid, 100.125 offered, a trader said, up from their 98.977 issue price earlier in the session.

"They were up there," he said, "trading a good amount of bonds."

He saw the new Charter 8¾% notes due 2013 at 98 bid, 98.5 offered, right around their 98.001 issue price late in the session.

But the big mover was Ahern, whose 9¼% notes due 2013 jumped to 101.125 "right out of the chute" after they were freed, and pushed up to 101.375 bid, with no offers, the trader said.

Another trader saw those Ahern bonds do even better, at 101.75 bid, 102.25 offered.

He saw Chesapeake a point better, at 99.75 bid, par offered, while Revlon's new 9½% add-on notes due 2011, which had priced at 95.25, moved up to 96 bid, 97 offered.

"There's demand for a lot of these new deals, right off the bat," the first trader said. That's even the case, he said, for a less high-profile name such as Ahern, which traded up smartly, even if the Las Vegas-based equipment rental company doesn't have quite the same cachet with junk marketeers as a Charter, a Chesapeake or a Revlon might.

"The market's still pretty firm out there," he said, with money waiting to be put to work.

Airlines little changed

Back among the existing issues, though, there wasn't much happening on a languid, steamy summer day.

For instance, traders saw little or no movement in the bonds of airline issues, which have been a problem spot of late, with mounting investor fears that Delta Air Lines Inc. or Northwest Airlines Corp. might soon be forced into bankruptcy by a combination of sky-high fuel costs (crude oil prices, an indicator of jet fuel price trends, briefly touched $66 a barrel before settling at $65.80 - still a record high), heavy pension obligations, big debt loads, stiff competition from the low-cost carriers, and, in the case of Northwest, thorny labor problems.

Even the news that Delta and rivals Continental Airlines and the bankrupt United Airlines will raise fares to try to recoup some of their increased costs failed to stir anyone up.

"I didn't see too much in the airlines," a trader said, quoting Delta's 10% notes due 2008 around the same 18.75 bid, 19.75 offered context that the troubled Atlanta-based Number-Three's bonds held on Wednesday.

"There's definitely trading out there," he said, "but we were not involved."

Another trader said the bonds of both Delta and Northwest "were trading out there - where they were. There was trading, but no price movement, with the Delta benchmark 7.70% notes due 2005 around 25, and its 8.30% notes due 2029 around 16-17.

Maytag steady

Apart from the airlines, there was little or no movement seen in Maytag's 5% notes due 2015, even on the news that appliance industry leader Whirlpool had upped its offer for its Newton, Iowa-based rival for a third time, this time to $21 per share, or about $1.7 billion ($2.7 billion including debt assumption), clearly topping an earlier $14 per share ($1.13 billion) bid from Ripplewood Holdings, which had originally been endorsed by Maytag's board.

Despite the latest developments, a trader saw the bonds "pretty much unchanged," at 92.75 bid, 93.75 offered.

Another trader saw the bonds at 93, about unchanged.

Granite unchanged

Earnings seemed to be not much of a catalyst either, traders said, with very few issues reacting to the latest quarterly numbers or company executives' comments on conference calls.

A case in point was Granite Broadcasting Inc., whose 9¾% senior secured notes due 2010 were seen hanging in around the same 93-93.5 context they had previously been at, despite what one trader called "a terrible [conference] call."

He declared that the New York-based television station ownership group's business "is going nowhere. There's no prospects for it picking up substantially in the next six months."

He noted that the company "has $20 million in restricted cash that will go to pay their coupon [on the bonds, due Dec. 1], and the guy said on the call that any asset sales they do, they can't use the proceeds to pay interest. So they're going to have to restructure, within the next six months, is my guess."

On that conference call, which followed the release of second-quarter numbers showing a slightly wider net loss from year-earlier levels, Granite executives stressed that they are looking to make "changes to our asset mix in order to improve our capital structure and liquidity" - but they offered little in the way of specifics, such as what assets might be shopped, to which possible buyers, and for how much potential proceeds.

The company executives also indicated that there shouldn't be any problem in making the upcoming Dec. 1 coupon payment on the 9¾% notes, even if no asset sale is made before then - but they admitted that moving into 2006 liquidity would be a matter of concern (see related story elsewhere in this issue).

The trader didn't see the bonds Thursday, guesstimating them at having traded around 93.5 bid 94 offered the last couple of days.

"My guess is it was probably a couple of guys covering shorts ahead of the call. Why are these things still in the 90s - especially if they're selling assets? That's just going to eat into your asset value for recovery, going forward. They continue to just burn cash - while what they need to do is stop the clock and get themselves rightsided in terms of their balance sheet."

If the bonds do go anywhere from the current 93-94 level, he said, "they'll probably trade lower."

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