Manor Care, Town Sports price deals; third straight mega-inflow of $1.17 billion; AK off

By Paul Deckelman and Paul A. Harris

New York, April 10 - Manor Care Inc. and Town Sports International priced new deals on Thursday - but the big news in the primary market seems to be the continued liquidity tide which has made the new-deal parade possible, as junk bond mutual fund inflows topped $1 billion for an unprecedented third consecutive week.

According to market sources familiar with the weekly high-yield mutual fund flow numbers issued by AMG Data Services Inc. of Arcata, Calif., mutual funds saw a net inflow of $1.165 billion in the week ended Wednesday. It marked the third consecutive week in the money coming into the funds exceeded the amount leaving them by 10 figures, following inflows of $1.202 billion in the week ended April 2, and the $1.02 billion inflow seen in the week ended March 26, counting only those funds which report on a weekly basis and excluding distributions.

Besides being the third straight week of mega-inflows, it was the seventh consecutive week in which the funds showed a net inflow. Inflows have now been seen in 10 out of the 14 weeks since the beginning of the year, with net inflows for the year rising to approximately $9.352 billion from the $8.187 billion net inflow total seen last week, according to a Prospect News analysis of the AMG figures.

Over the past seven weeks alone, approximately $7.774 billion more has flowed into the funds than has left them. In five of those weeks, including the three most recent ones, inflows have totaled over $1 billion.

Market participants attribute both the strong surge in new issuance, and the robust secondary market, both of which date back to around mid-October, to the extended run of weekly inflows, which began at around the same time. In addition to being significant in their own right, inflows are seen as a good proxy for overall market liquidity trends.

But one source who spoke to Prospect News shortly after the news circulated the market confessed to becoming slightly desensitized to the weekly reports of billion-dollar-plus inflows to junk.

"Inflow-schminflow," said the official. "You get used to it after a while.

"It's kind of like those billion-dollar deals we had: for a long time it seems like there weren't any, but so far this year we've had six.

"When the first one or two come you sound the trumpets. But soon you start to take it in stride."

One straight-out junk bond deal priced Thursday in the high yield primary market. Investors' heart rates rose just enough for health club operator Town Sports International to upsize its eight-year senior notes offering by $5 million. The company sold $255 million - up from $250 million - to yield 9 5/8%, at the tight end of 9¾% area price talk. Bookrunner wa Deutsche Bank Securities.

Some high yield accounts also assisted Manor Care, Inc. on Thursday, sources advised Prospect News. Although the $200 million 10-year notes were split-rated (Ba1/BBB), and priced off the investment grade desks, one source said Thursday that the paper - which came at 237.5 basis points over Treasuries, to yield 6.292% - was marketed to both high-yield and high-grade bond investors.

JP Morgan, Merrill Lynch and UBS Warburg were joint bookrunners on the Rule 144A notes which had come into the market with guidance of 262.5 basis points over Treasuries.

And some of both varieties of investors will be called upon Friday by Senior Housing Properties Trust, which figures to price a drive-by offering of $125 million 12-year notes (Ba2/BB+). Price talk of 8% area was heard late Thursday. The offering is being brought to market via UBS Warburg.

The deal from the Newton, Mass.-headquartered REIT, which is exclusively involved with senior living properties, is expected to receive attention from some high grade accounts in addition to junk investors.

Finally Thursday, price talk of 11½%-11¾% was heard on Brake Bros' £175 million of eight-year senior notes in sterling and euro tranches (B3/B-), which are is expected to price on Friday. Credit Suisse First Boston and JP Morgan are joint bookrunners on the Rule 144A deal.

When the new Town Sports 9 5/8% senior notes due 2011 were heard to have broken, they moved up to 101 bid from their par issue price, a trader said.

He also saw the new Manor Care 6¼% notes due 2013 as having traded up to about 100.75 bid from its 99.686 issue price.

Back among the established issues, even though the secondary market has firmed robustly as a result of the ample liquidity seen in the junk market, traders report that the market has been backing off from its previous high levels over the past few sessions, as new deals have taken more of the focus.

On Thursday, a major secondary mover was AK Steel Corp. - whose bonds were heard to have retreated as the company reiterated its intent of pursing what some investors feel may be a too-expensive battle against rival U.S. Steel for the assets of bankrupt National Steel Corp.

A trader said that Youngstown, Ohio-based AK Steel's bonds "traded up yesterday [Wednesday], because there was a belief that they were going to walk away from this deal, but clearly they are not yet walking away, so they were down today on their announcement" that the company had reaffirmed its $925 million bid for the assets of the bankrupt National Steel, even though it failed to reach an agreement with the United Steelworkers union by a court imposed deadline. Meanwhile, U.S. Steel, which did reach agreement with the USW, indicated that it would resubmit its bid for National's assets; the Pittsburgh-based steel giant is expected to increase its original $750 million bid, which was topped by AK's $925 million offer.

AK Steel indicated that it plans to get around its lack of a labor agreement by using sections of the bankruptcy code covering the rejection of collective bargaining agreements and the payment of insurance benefits to retired employees.

The trader said that AK's 8 7/8% notes, which had been trading at 92.5 bid earlier in the week, traded up to 95 bid "when it looked as though AK might walk away from this deal, but when it became apparent that was not the case," the bonds headed back down to 93.

At another desk, AK's 7 7/8% notes were heard to have retreated a bit to 92.875 bid from prior levels at 93.5.

AK's shares lost 16 cents (4.11%) in New York Stock Exchange dealings Thursday to $3.73.

U.S. Steel's 10¾% notes due 2008 were heard unchanged at 100.75 bid.

Elsewhere, the trader heard Calpine Corp.'s paper "down more sharply," before coming back up toward the end of the session, with the San Jose, Calif.-based independent power producer's senior notes dropping as low as 58 bid before bouncing off the lows to end around 61.

Calpine "got mowed again," another trader said, noting that while the bonds had come off their lows, they were still down some 10 points from their recent highs, which were hit last week as investors speculated that Calpine might be the next big merchant energy producer to announce a refinancing deal, following in the footsteps of AES Corp., El Paso Corp., Dynegy Inc. and other sector players. He said that Calpine had "run up big" so a downside move was probably to be expected.

Even a reported 9% rise in March same-store sales for The Gap Inc. did not lift the bonds of the San Francisco-based apparel retailer. Gap's monthly comparison of sales to its year-ago levels have been steadily rising since October - following two-and-a-half straight years in which the same-stores had been falling. But the bonds have appreciated smartly since the fall, and are tightly priced well above par, with Gap's 6.90% notes quoted Thursday in the 103.25 bid/104.25 offered areas, "off a touch," a trader said.

Elsewhere in retail, Dillard's Inc. reported a 12% drop in same-store sales in March from a year earlier, and its bonds softened accordingly, with its 7.15% notes due 2007 dipping a point to 97 bid/par offered. Its 7 3/8% notes due 2006 were also a point down, at 98 bid/par offered.

Rite-Aid Corp.'s bonds were little changed despite the Camp Hill, Pa.-based drugstore chain's report of a fourth-quarter loss. Its 7 1/8% notes due 2007 were unchanged at 91 bid/92 offered and its 7 5/8% notes due 2005 were at 96.5 bid/97.5 offered.

A trader said that some sellers did emerge, because "the levels [it is trading at now] are ridiculous,"

He noted the fact that its 11¼% notes due 2008 were in fact trading over par, at bid levels around 100.75-101. "Just two months ago or so, they were in the 70s, around 78 - but this is still a CCC credit. They're already too high."

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