CMS off as generating sector struggles; Levi holders blue; junk funds lose $7.8 million

By Paul Deckelman and Paul A. Harris

New York, Feb. 13 - CMS Energy Corp. bonds continued to fall for a second consecutive session Thursday, amid renewed investor concerns about the financial health of the utility/merchant energy sector. Also on the downside was Levi Strauss & Co.'s debt, in a session which most names remained anchored to their recent ranges and players uneasily hugged the sidelines, watching stocks again fall on renewed war jitters.

There was little primary-market activity, and the news that about $8 million more left U.S. high yield mutual funds in the most recent week than came into them was not expected to have much impact in Friday's abbreviated pre-holiday session (The Bond Market Association has recommended a 2 p.m. ET close Friday ahead of the Presidents Day holiday weekend, which will keep U.S. financial markets shuttered on Monday).

To be precise, outflows in the week ended Wednesday totaled $7.8 million, according to market sources familiar with the weekly fund flow numbers released by AMG Data Services of Arcata, Calif. The nearly-flat outflow number contrasts with the previous week's $503.5 million inflow.

In the six weeks since the beginning of the year, there have been three weeks of inflows, and three weeks of outflows, but the tally is hardly even; on the strength of a huge (over $1 billion) inflow recorded in the first week of the year, year-to-date flow totals show a comfortable $1.719 billion cumulative net inflow, down only slightly from about $1.727 billion the week before, according to a Prospect News analysis of the AMG figures.

The flow statistics are considered by many market participants to be a reliable barometer of overall liquidity trends in the approximately $600 billion high yield universe. The recent surge in fund inflows, which dates back to mid-October, is considered a key factor in the sharp rise in the previously battered secondary market since then, and in the revival of the primary market, which has seen four mega-deals of a billion dollars or more price so far this year, along with numerous smaller issues.

One sell-side official characterized the outflow as "small potatoes," and commented that it would register no impact upon the market.

However another sell-sider, speaking just after the news circulated the market, conceded that the outflow was minuscule but added that it might be seen as symptomatic of the market's recent performance.

"We've had a fair amount of softness this week, particularly Monday, Tuesday and Wednesday, which are obviously the drivers of those numbers," the sell-sider commented.

"I think it will be interesting to see what the funds flow will be next week."

As the equity markets did an impressive surface-dive on Thursday - the Dow Jones Industrial Average traded as low as 7,629 before closing at 7,750, just 8.30 points below the open - sell-side sources who spoke to the Prospect News primary market desk also reported seeing some softness in high yield.

Meanwhile another source from the sell-side told Prospect News Thursday that the recent gush of new paper - a torrent fed in large part by the three-tranche $2.4 billion Crown Cork & Seal Co. deal that priced on Tuesday - taken in combination with bad news from both the geopolitical and capital markets fronts is beginning to be felt in junk bonds.

"The market was strong and now I think you're seeing it soften up," this official told Prospect News.

"Secondary trading was down pretty good today. The Crown Cork & Seal bonds had been trading earlier in the week in a 102 context. Now you can't find buyers at par.

"The whole market just took a plunge today."

This sell-sider attributed most of the softness to nervousness on the part of investors over war, terrorism alerts and a stock market that seems to presently be in a steady descent.

"It's just the bad news," the source said. "The equity markets have been down more than 10% in the past four weeks. High yield has been flat-to-positive. And now high yield investors, although they're maybe not selling, seem to be deciding not to put any money to work.

"We've had $8 billion of issuance in the past two weeks," the source pointed out. "A lot of money was put to work.

"And cash is king at the end of the day. It's clear that we're going to war. No one wants to make a decision until there is some clarity about that."

Back in the secondary arena, CMS Energy's bonds "took a beating" Thursday, a trader said, after having already dropped more than four points in Wednesday's activity. No fresh news was seen out on the Dearborn, Mich.-based utility company; rather CMS was seen to be suffering from the overall malaise that's afflicted investors in the once-thriving sector.

The utility and merchant energy credits have been dragged down by a variety of factors, including Enron Corp.'s collapse and subsequent slide into bankruptcy; increased regulatory scrutiny of sector firms accounting in the wake of Enron's fall; a domestic electricity glut, brought on by over-building of plants during the industry's heady go-go years in the late 1990s; unwise investments aboard; and a big overhang of debt issued to fund the building and buying binge.

Apart from the overall unfavorable industry dynamics, which has forced it to sell pipeline assets and other properties in a weak market in order to cut debt, CMS itself continues to reel from revelations last year that it engaged in bogus "round trip" energy contract trades with other utilities that artificially inflated volume statistics but had no economic value. That led to a drastic management shakeup, and to push the company's shares and bonds down to their current levels.

The company's 9 7/8% notes due 2007 were quoted by the trader as having dropped to 78 bid/81 offered Thursday from an opening level around 83 bid/85 offered. Its 7½% notes due 2009 and 8½% notes due 2011 ended down two points on the session at 74 bid/76 offered, while its 6¾% notes due 2004 were down a point, at 86 bid/87 offered.

The rest of the sector was not quite as bad as CMS; Calpine Corp., for instance, reported a fourth-quarter loss of $18 million (five cents a share), versus a year-ago profit of $100 million (30 cents a share); the loss was largely attributable to one-time charges which the San Jose, Calif.-based independent power producer took in connection with agreements it made allowing it to cancel billions of dollars of orders for new equipment as it continued to scale back its construction program.

While Calpine shares were lower on the news, its bonds were little changed; a trader quoted Calpine's 8½% notes due 2011 at 42.5 bid/43.5 offered, "pretty much the same as yesterday [Wednesday], which was not bad, as things go."

He saw AES Corp.'s bonds also essentially unchanged on the day. "There wasn't a whole lot of movement in either of them," he opined.

At another desk, AES' senior bonds, like its 9½% notes were quoted at 64.5 bid/65.5 offered, up two points, while its subordinated bonds were little changed around 49 bid/50 offered.

AES' shorter-dated notes were also better, its 10% notes due 2005 a point better at 98.5 bid.

AES also had numbers out; the Arlington, Va.-based independent power generator reported a fourth-quarter net loss of $2.77 billion ($5.08 per share), while it had a profit of $44 million (eight cents per share) in the year- ago quarter.

But AES also predicted 2003 operating cash flow at the parent company of $1 billion and consolidated cash flow at the corporate level of $1.5 billion, both above analysts' expectations. AES also said it would pick up the pace of asset sales, further cut its consolidated debt by $1.3 billion this year, and post 2003 earnings of 50 cents a share, excluding one-time charges and other special items .

That heartened equity investors looking for some good news; AES shares were up a hefty 56 cents (19.79%) to $3.39.

Outside of the power sector, a trader saw "weakness in Levis," quoting the company's 11 5/8% notes due 2008 as having fallen to an offered level at 95.75 from prior two-sided levels at 97.5 bid/98.5 offered. Another agreed that the San Francisco-based blue jean maker's bonds "got beat up," pegging the 11 5/8s at 94 bid/96 offered, and its 12¼% notes as having fallen to 95.5 bid.97.5 offered from an opening at 98 bid/par offered. Levis 7% notes, which closed Wednesday offered at 89, were seen around 85 bid/87 offered Thursday.

The first trader, noting the backdrop of unsettling news - "you've got guys with grenades getting arrested" at the airport in London "and the Brooklyn Battery Tunnel being closed [for a suspicious looking package]. People are waiting around to get bombed. It was a sloppy market. Unless somebody had positive news, everything was half a point to a point lower."

Meanwhile the primary market produced little hard news Thursday.

Scottsdale, Ariz. homebuilder Meritage Corp. priced a quick-to-market $50 million add-on to its 9¾% senior notes due June 1, 2011 (Ba3/B+). The Rule 144A deal priced at 103.25, in the middle of the 103-103.5 price talk, via Deutsche Bank Securities Inc.

Also price talk of 11% area was heard on Tulsa, Okla. crude oil refiner Citgo Petroleum Corp.'s $550 million of eight year senior notes (B+), via Credit Suisse First Boston. Some market observers had expected that the deal would price before the end of the present week. However according to an informed source, the offering, with proceeds slated to fund a dividend to parent PDV America, Inc., a unit of Petroleos de Venezuela, SA, the national oil company of Venezuela, will continue roadshowing through Tuesday and price mid-day Wednesday.

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