Cenveo, Airgas price deals, trade up; Alltel up further as Verizon deal is official; funds add $264 million

By Paul Deckelman and Paul A. Harris

New York, June 5 - Cenveo Corp. and Airgas, Inc. were heard by high yield syndicate sources to have successfully brought new deals to market on Thursday, the latter issue upsized from the original plans. Both new bond issues were seen having firmed solidly in aftermarket dealings.

The sources also reported that Sequa Corp. had priced $711 million of bonds in a two-tranche offering.

In the secondary market, apart from the firm showing by the new Cenveo and Airgas issues, Alltel Corp.'s bonds were sharply higher for a second consecutive session Thursday, on the official announcement that Verizon Wireless, the second-biggest cellular phone carrier in the United States, had agreed to buy Alltel, the fifth largest, for $28.1 billion.

That sparked interest in other junk wireless operators seen as potential M&A targets, notably Sprint Nextel Corp. and its Sprint Capital Corp. subsidiary, which saw busy trading at higher levels in their bonds, as well as smaller niche players such as Leap Wireless International Inc.'s operating subsidiary, Cricket Communications Inc. and Leap's former - and perhaps, again, future - suitor, MetroPCS Communications Inc.

Apart from the wireless players, the market generally seemed firmer - even the big automotive benchmark issues of General Motors Corp. and GM's domestic arch-rival, Ford Motor Co., were noticeably better - this just two days after the struggling Detroit giants reported sharp year-over-year sales downturns.

Funds up by $264 million on week

And as trading was winding down for the session, market participants familiar with the high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday, some $264 million more came into those funds than left them. It was the 10th consecutive inflow, following the cash infusion of $25.6 million seen in the previous week, ended May 28.

Over that 10-week stretch, inflows have totaled $2.945 billion, according to a Prospect News analysis of the figures, far outweighing the $409.6 million of net outflows which had been seen over the three weeks immediately before that.

The results over the past 10 weeks have represented a sharp break away from the negative fund-flow trend which had dominated earlier in the year. With 23 weeks now in the books, inflows - after trailing outflows pretty much all year - have now begun to pull solidly ahead, with 14 inflows and nine outflows seen since the start of 2008, according to the Prospect News analysis.

That sustained recent inflow surge also more than completely erased what previously had been a sizable year-to-date outflow totaling $1.067 billion as of the week ended Wednesday, March 26, the last week in which a net outflow had been seen.

According to market sources, net inflows from the weekly-reporting funds since the start of the year, excluding distributions but including previous adjustments and revisions, are now estimated at $1.877 billion, up from $1.613 billion the previous week.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - 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, more recently, hedge funds.

A trader exclaimed "wow! Ten in a row" - the first time in a number of years that so many weeks of inflows have been strung together. Besides being 10 times the size of the prior week's relatively small inflow, the big inflow, coming against a backdrop of a junk market which had been struggling, or at least, just treading water over the last few sessions, "is big psychologically as well. You're going to see our market move higher [Friday] as well," he predicted.

Airgas upsizes, Cenveo four-times oversubscribed

Thursday's primary market session turned out a meaningful amount of news.

Airgas, Inc. priced an upsized $400 million issue of senior subordinated notes due Oct. 1, 2018 (Ba2/BB+) at par to yield 7 1/8%, which was on top of price talk.

Banc of America Securities, Goldman Sachs and JP Morgan were joint bookrunners for the debt refinancing deal from the Radnor, Pa.-based gas distributor.

Cenveo Corp. priced a $175 million issue of 10½% senior unsecured notes due Aug. 15, 2016 (B2/BB-) at par on Thursday.

The yield was printed at the tight end of the 10½% to 10¾% price talk.

The order book was approximately four-times oversubscribed, according to a source close to the deal.

Lehman Brothers ran the books for the bridge refinancing deal related to Cenveo's acquisition of Commercial Envelope Manufacturing Inc.

The source said that a significant portion of the deal was sold to accounts that had participated in the bridge loan and were rolling into the bonds, which paved the way for the tight-to-talk pricing.

The official said that deal was dominated by high yield money managers, and added that there had not been a significant hedge fund presence in the Cenveo transaction.

The par-pricing notes broke to 101 1/8 bid, 101 5/8 offered, the source added.

Sequa notes priced

Also on Thursday, an informed source told Prospect News that underwriters priced $711 million of Sequa Corp. notes due Dec. 1, 2015 (Caa2/B-) in two tranches.

The notes will be issued to the selling noteholders, Lehman Brothers, Citigroup and JP Morgan, pursuant to their option to receive notes in exchange for loans outstanding under the bridge loan facility which financed the LBO of Sequa by Carlyle Group.

The issuance includes $500 million of 11¾% senior cash pay notes and approximately $211.4 million of 13½% senior PIK notes.

The PIK notes provide for in-kind coupon payments through Dec. 1, 2009, and cash payments after that.

Sequa, a New York-based diversified aerospace and industrial company, will receive no proceeds.

New Airgas, Cenveo bonds firm smartly

A secondary market trader said that the Airgas deal "went extremely well," and said the deal had been "pretty much oversubscribed."

A trader first saw the new 7 1/8% senior subordinated notes due 2018 up around ½ point from their par issue price. A bit later on, another trader saw them up to 101 bid, and after that, yet another trader saw them going home at 101.25 bid, 102 offered.

A trader meantime saw Cenveo's new 10½% notes due 2016 having jumped out about ¾ point on the break from their par issue price earlier in the session. By the end of the day, several traders were quoting the new issue at 101 bid, 101.5 offered. A market source meantime saw the company's existing 7 7/8% notes due 2013 down ½ point at 86.5 bid.

One called new Cenveos "the best deal" in recent days, "even though a lot of people passed on it. They came priced to sell, and traded up." He said that while "a lot of people don't like the industry" - the Stamford Conn.-based company does commercial printing and produces forms and envelopes - the 10½% coupon drew many investors looking for big yields.

"Clearly," another trader said, "the two winners here are the Cenveos and the Airgases." He suggested that they might be benefiting from the "excess cash" in the hands of accounts which have flipped out of their Alltel bonds over the past two sessions at sharply higher levels, driven by the merger-and-acquisition news, and which are now looking to put some of those handsome profits to work rather than have that cash sitting around idle.

Iron Mountain better

Among other bonds which have priced this week, he saw some improvement in the Iron Mountain Inc. 8% senior subordinated notes due 2020, which priced Monday at par. Those bonds had fallen back a little by Wednesday to slightly below issue at 99.75 bid, 100.25 offered, but had climbed back up to bid levels around par-100.5 in Thursday's dealings.

He also saw Scientific Games Corp.'s new 7 7/8% senior subordinated notes due 2016, which priced at par on Monday and which have managed to stay just above that level, pretty much unchanged Thursday at 100.125 bid, 100.625 offered.

Ply Gems Industries Inc.'s new 11¾% secured notes due 2013 - which had priced Monday at 99.072, but had struggled just to stay above that level after that - "tried to make a bit of a recovery, because they were looking pretty soft [Wednesday]. However, at the end of the day, they were essentially unchanged around 98.5 bid, 99.25 offered.

Market indicators point north

Back among the established issues, a trader said, the widely followed CDX junk bond performance index was up by a ½ point Thursday, quoting it at 96¾ bid, 97 offered. The KDP High Yield Daily Index meantime rose 22 bps to 75.45, while its yield tightened by 7 bps to 9.35%.

In the broader market, advancing issues led decliners by almost a five-to-three margin. Activity, represented by dollar volume levels, rose about 30% from Wednesday's levels.

"The market was pretty firm," a trader said, "along with the stock market," which ignored yet another upturn in oil prices to instead focus on the excitement in the telecom sector generated by the Alltel deal, better-than-expected May same-store sales figures from major retailers like Wal-Mart, and a drop in the number of laid-off workers seeking jobless benefits - hopeful signs that perhaps the economy is not quite as badly off as feared. The bellwether Dow Jones Industrial Average zoomed by 213.97 points, or 1.73%, to 12,604.45, and the broader market indexes followed suit.

Given a boost by the sharply improved stock market, he said, "the [junk] market was firm all day, even though it was relatively quiet."

"The overall market had a much better tone today," another trader agreed.

"I think maybe part of it was that it was buoyed by the Verizon-Alltel acquisition, because with over $20 billion of Alltel debt outstanding, obviously high yield investors [selling those vastly improved bonds at much higher levels] will want to re-invest that.

"And there's the huge equity rally - the biggest in over a month - that's certainly a great backdrop to the improvement in our market, since high yield is, essentially, equity with a coupon. It clearly tracks the equity market more than the Treasury market."

He noted the fact that even the bonds of companies showing serious fundamental problems - sales-challenged GM and Ford, for instance - were caught up in the upsurge, riding the momentum higher despite facing daunting conditions.

"There's just so much of a technical influence," he said. "If someone is short, they can cover, and they do cover, and if someone is [too] long, they can get out of it. It's so much of a trading mentality. There's a dichotomy in the market" between some credits' fundamental values and the levels to which they are sometimes pushed - up or down - by such technically-driven movements.

Alltel again an all-star

For a second consecutive session, the big upside mover was Alltel, whose bonds had firmed smartly on Wednesday on news reports revealing that it was holding merger talks with Verizon Wireless and that a deal was near, and then continued upward on Thursday with the official announcement that the Little Rock, Ark.-based cellular carrier would, indeed, be acquired by its larger and better-rated competitor.

"Alltel's bonds jumped huge," a trader said. "Most of the focus by a lot of the accounts was on that."

Alltel's most actively traded issue was its 7% notes due 2012, which on Wednesday had jumped about 10 or 12 points to the 99 bid area; on Thursday, it kept right on going, in heavy trading, mostly round lots, pushing almost up to 106 bid before finally settling in at around 104.5, up more than 5 points on the session.

At the other end of the curve, a market source saw Alltel's 7 7/8% bonds due 2032 leap more than 15 points to around the 105 mark, also in very active dealings.

At another desk, a trader saw the '12s up 10 points on the session at 102.5 bid, 104.5 offered, and pegged its 7% notes due 2016 some 12 points higher on the day at 102 bid, 103 offered.

A trader said that "quite a few bonds traded." He said that even having risen on Wednesday to the high 90s from much lower levels, the 2012 bonds, for instance, "looked too cheap," since the ratings agencies are expected to raise Alltel's paper to match Verizon's investment-grade ratings once the merger is consummated. "So sure enough, they were up huge" on Thursday.

Under the terms of the deal announced Thursday morning, Verizon Wireless - 55% owned by Verizon Communications and 45% by U.K.-based Vodafone Group plc - will buy Alltel for $5.9 billion in cash and will assume approximately $22.2 billion of debt, most of which was incurred when Alltel, then a public company, was taken private just last November in a leveraged buyout by TPG Capital and Goldman Sachs Group Inc.'s GS Capital Partners.

Assuming the deal passes muster with the U.S. Justice Department and the Federal Communications Commission, the combination of Verizon Wireless' roughly 67 million customers and Alltel's 13 million subscribers would create the largest U.S. wireless provider in terms of subscribers, its 80 million customers dwarfing the current champ, AT&T/Cingular, which has about 71 million customers.

Sprint runs up on M&A positioning

The Alltel deal also had the effect of putting other junk-rated wireless operators into play as possible targets for merger or takeover activity, primarily Sprint Nextel. The Overland Park, Kan.-based Number-Three U.S. wireless operator/s 6% notes due 2016 - which because of the company's split rating (Baa3/BB/BBB- or Baa3/BB/BB+, depending on the issue) trade in both junk and investment-grade circles - were one of the most actively traded bonds of the day, with over $128 million having changed hands by late afternoon. They were quoted by a market source trading at around the 87.5 level, up about 4 points from where they were on Wednesday, while a trader at another desk said the bonds had moved up around 5 points on the day to that 87.5 point.

However, another source had those bonds having come off such peak levels and going out closer to 86 bid, up a little more than 2 points on the day.

Bonds of Sprint Nextel subsidiaries were also seen higher on the day in active trading, with a market source seeing the 6.90% notes due 2019 and the 6.875% bonds due 2028 of its Sprint Capital financing unit each up 3 points on the session, at 89 bid and 84 bid, respectively, and the old Nextel Communications Inc. 5.95% notes due 2014 up more than 3 points to around the 82 level.

A market source - who noted that the whole Sprint constellation had traded up in heavy dealings last week, way before the Alltel-Verizon news surfaced, mostly due to technical factors relating to the bonds' end-of-month movement from investment-grade indexes to junk indexes in the wake of Standard & Poor's downgrade to junk earlier in the month - said that with the end of May having come and gone, "the majority of the index technicals should be done." The latest surge in the bonds was purely "strategic M&A related."

Cricket, MetroPCS also move up

The notion that other larger players might want to expand their piece of the U.S. wireless pie or, in the case of big non-U.S. wireless companies, get a foothold in the lucrative American market, helped push up bonds of some of the smaller niche names, including San Diego-based Cricket Communications, whose 9 3/8% notes due 2014 were seen up 2½ points on the day at 99.5 bid.

Also higher was Dallas-based regional operator MetroPCS Wireless, whose 9¼% notes due 2014 gained nearly 2 points to 98.5. Ironically, MetroPCS offered to buy Cricket parent Leap Wireless International last fall in a $4.7 billion deal, but two months later took that offer off the table, claiming that it "had not been able to engage Leap in meaningful negotiations" about a deal. Leap meanwhile had already rejected the offer as inadequate.

Level 3 rises

A non-wireless telecom name seen better was Broomfield, Colo.-based internet backbone operator Level 3 Communications Inc., whose 8¾% notes due 2017 were up more than 2 points on the day to 91.5 bid, while its 9¼% notes due 2014 were also up nearly a deuce at 96 bid.

The bonds were seen having risen in response to bullish commentary on the company from the analyst community.

Autos cruise despite bad news

Apart from the telecom sphere, traders saw the GM and Ford benchmark bonds solidly better; one saw GM's 8 3/8% bonds due 2033 up a point at 68 bid, 69.5 offered, while its 49%-owned GMAC LLC loan finance unit's 8% bonds due 2031 also gained a point to 75 bid, 76 offered.

Ford's 7.45% bonds due 2031 were likewise a point better at 67.5 bid, 68 offered.

The better performance by the bonds - a testament to the newly robust junk market - followed bad economic developments for both companies earlier in the week, when GM reported a 30% year-over-year slide in domestic vehicle sales in May, while Ford saw its sales fall by 18% a year ago.

Smithfield stumbles as earnings tumble

But not all bad news could be ignored by the frothy market.

Smithfield, Va.-based meat processor Smithfield Foods Corp.'s 7% notes due 2011 and 7¾% notes due 2017 were each seen down a point, at 97 bid, 98 offered and 96.5 bid, 97.5 offered, on poor fiscal fourth-quarter earnings.

The top U.S. pig producer's profits nosedived by 94% from a year earlier, hurt by rising grain costs and falling hog prices.

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