Firm tone continues; asbestos names up as deal seen near; Cinemark brings $210 million add-on

By Paul Deckelman and Paul A. Harris

New York, April 25 - The high yield secondary market continued its winning ways Friday, with most issues either moving higher on company-specific news or at the very least, maintaining the status quo from prior gains, which have been fueled by a surplus of liquidity and a desire by investors to put that cash to work somewhere - anywhere.

Among the gainers Friday were AMR Corp., given a boost by the news that its flight attendants union had approved a package of $340 million in annual cost cuts, just hours after CEO Donald Carty had resigned, forced to bail out amid a messy flap over executive bonuses and pension protection plans. Also higher were Charter Communications Holdings, Crown Cork & Seal and Georgia-Pacific - the latter two possibly helped by indications that a deal may be near to limit asbestos liability concerns at major corporations.

In the primary market, Cinemark USA, Inc. successfully brought the curtain down on a quickly shopped, upsized $210 million add-on to its existing 9% senior subordinated notes due 2013.

Cinemark USA's deal was slightly increased from the announced size in the $200 million area. It priced the add on to its 9% senior subordinated notes due Feb. 1, 2013 at 107.25 for a yield to worst of 7.736%.

The Plano, Texas movie theater operator's deal, via Lehman Brothers, priced at the narrow end of the 106.75-107.25 price talk.

It also came at a far better yield than the 9% achieved on Feb. 6 when Cinemark priced the original $150 million deal.

In another drive-by add-on deal, Sealy Mattress Co. priced a further $50 million of its 9 7/8% senior subordinated notes due Dec. 15, 2007 (B3/B-). The deal came at 103 for a yield to worst of 8.564%. Goldman Sachs & Co. and JP Morgan were joint bookrunners.

Junk investors also took their wallets, Friday, to a split-rated bond deal from Kansas City, Mo.-based financial services holding company Americo Life Inc., which priced $125 million of 10-year 7 7/8% senior notes (Ba1/BBB-) at 98.816 to yield 8.05%. An informed source told Prospect News that there was significant high yield play in the offering, which came via Citigroup and priced on the high-grade desk.

Talk had been for a yield in the 8% area.

Also on Friday the market heard news on three pending deals. Apogent Technologies Inc. is heading to the high-yield market with $250 million of 10-year senior subordinated notes. Rent-A-Center, Inc. will hit the road Monday with $250 million of seven-year senior subordinated notes. And from the eurobond market sell-side sources saw an offering of €225 million in new 10-year notes coming from Italian eyecare firm Safilo SpA.

An informed source told Prospect News that Lehman Brothers will run the books for the Apogent deal and that it is "May business," likely pricing during the coming fortnight.

The roadshow begins Monday for Rent-A-Center's $250 million of seven-year senior subordinated notes (B1/B+). That offering, via Lehman Brothers, JP Morgan and Morgan Stanley, is expected to price late in the week of April 28.

Safilo's €225 million of 10-year non-call-five senior notes are expected to price in early May via Credit Suisse First Boston.

When the new Cinemark notes were freed for secondary dealings, a trader said, "it wasn't a really hot, smoking deal," with the new bonds firming perhaps half a point from their 107.25 issue price, to about 107.75.

Despite the activity, one primary market source labeled the week of April 21 "a snoozer," adding that while a steady stream of business came and went the buy-side was hardly provided with ample opportunities to unburden itself of the cash it has absorbed through an unbroken string of nine weekly inflows to the high yield mutual funds, the latest being the $951.9 million inflow reported for the week ending April 23.

But stay tuned for next week, sell-siders said, with a parade of deals totaling in excess of $3 billion of new business heading toward the block.

Meanwhile Prescott Crocker, the Evergreen High Yield Bond Fund manager, told Prospect News on Friday that the swollen tide of cash that has rolled into the high-yield market has some people sticking their necks out.

"Stuff in the risk arena - the triple-Cs, the non-rated credits - is way ahead of itself," the Evergreen portfolio manager stated.

"Everybody's lugging a big cash balance," he added. "A lot of people are convincing themselves that they should be chasing risk and I think that is where the great penalty lies: in the risk sector.

"It's a tight market. The fund flows are still there. But this thing is going to stop sometime and it's going to go 'bang,' right down, I'm convinced.

"Fundamentally nothing has changed. The only thing that has changed is that the marketplace is much more liquid and therefore much more open to providing for refinancing and restructuring. But the economy is soft."

Prospect News asked the veteran high yield fund manager whether he had ever seen cash flow into junk at the clip it is presently said to be speeding in.

Yes, replied Crocker, in 1991. During that year, trailing a recession in the U.S. economy, the average junk fund was reported to have gained 37.1%.

However, said Crocker, there are some important differences between 1991 and the present.

"In 1991, when we had this tremendous rush of money into the high yield, it was accompanied by an enormous rally in the stock market, and also by the valid expectation for a significant recovery in the economy. Neither of those things are existing right now.

"This time the market is really liquidity driven. If the marketplace just remained stable - which in a likely-to-recover environment could happen - the best return will be in high yield. Going forward, unless we have a reversal in the outlook for the economy - which remains in recovery outlook - the technicals will command the marketplace."

In secondary activity a trader said all told, while the market was generally firm, "today was kind of quiet. It's been pretty crazy [over the past few sessions], almost never ending," with loads of money chasing a limited amount of new deals. That's had the effect of pushing prices for existing paper up to levels that market participants have described as wild and crazy.

But on Friday, the secondary seemed to take a bit of a breather. The trader said even with another $951.9 million reported having come into high-yield mutual finds in the most recent week (considered a key barometer of overall market liquidity trends), the number "seemed to have been built into the market," and there was no surge in Friday's dealings.

"We didn't have much activity today in the way of upside trading, whether it was telecom, energy, airlines, retail or lodging. Everything seemed to be status quo. There was not a frenzy of buying the morning or this afternoon."

But while most names just held onto the gains that they've notched over the past several session, one which seemed to be turning back skyward was AMR, its flight attendants apparently appeased by the departure of Carty, who got most of the blame for the staggeringly bad timing of revelations that the parent of the nation's largest air carrier had put in place an executive retention bonus system that would have paid him and a handful of other top-level execs bonuses equal to twice their base salaries if they stuck around till 2005. AMR had also set up a trust to shield some of the pension money of several dozen senior executives from possible attachment by creditors in the event of a bankruptcy - all at the same time it was asking the flight attendants, its ground workers and its pilots to agree to $1.8 billion in annual cost cuts.

When the news became public, the furious unions said they would re-think their acceptance of the concessions, which the airline said were needed to avoid bankruptcy. The bonus plan was killed, AMR apologized and finally, on Thursday night, it announced that Carty had hit the silk, to be replaced by Gerald Arpey as chief executive. After that, the attendants union accepted an improved concession package, following the lead of the pilots and the ground workers.

The notion that AMR had managed to dodge a bullet by finally soothing the angry unions and getting their approval "surely helped" give its bonds a boost, the trader said, quoting AMR's 9% notes due 2012 and 2016 as having opened Friday "in the mid-30s," at 33 bid/36 offered; by the end of the session, he said, AMR's bonds were at 38 bid/42 offered, although the trader opined that he didn't know whether that was solely due to developments on the labor front or because "there have been a couple of big buyers of that paper. I think they're moving it up, or at least helping it to [move up]."

At another desk, AMR's paper was seen as having risen as high at 40 bid/43 offered from prior levels around 33 bid/35 offered.

On the equity side, AMR's New York Stock Exchange-traded shares jumped 36 cents (8.91%) to $4.40 on volume of 57 million shares, nearly six times the norm.

The trader also said that other airline paper pretty much held steady and hung onto previous gains but did not go any higher on the AMR news. He said that Northwest Airlines Corp. and Delta Air Lines bonds "had moved up the past day or so, but they were unchanged to maybe even a little bit softer today," with Northwest's 7 5/8% notes due 2005 getting as good as 66.5 bid/70 offered before backing off slightly to 65 bid/68 offered.

"There's only so much euphoria you can put into them," he said. "It's not as though the airline industry is suddenly out of the woods."

"Euphoria" was the word another trader used on Friday to describe the recent state of the junk secondary. ""It's just berserk," he added.

This trader saw particular strength in another facet of the transportation industry - shipbuilding and shipping company bonds. Sea Containers Ltd, for instance, he said, "has been on fire for the last month"; on Friday, the Bermuda-based shipping, railroad and hotels concern's 7 5/8% notes pushed up to 72 bid/73 offered from versus 69 bid/70 offered on Thursday - and 53 bid/54 offered around a month ago.

He also saw Teekay Shipping's 8.32% sinking fund notes moving up to 108.75 bid from 107.25 on Thursday, and wondered whether it was because of the individual company's attractiveness or "just this euphoria" in the market.

Back on dry land, Crown Cork & Seal's 7% notes due 2006 were more than five points improved Friday to 93.5 bid, while at another desk Georgia Pacific's 8 1/8% notes due 2011 were almost four points better at around the 98 level. The forest product company's 9½% notes due 2011 were called "up a couple points" to around the 103ish level, a market source said.

Nobody saw any specific news about either company. But both have acknowledged possible asbestos liability issues. And a lengthy article in Thursday's New York Times - which did not mention either company - said that "companies insurers, unions and Democratic and Republican senators are nearing an agreement in principle to end all asbestos lawsuits and instead pay people with asbestos-related diseases from a national privately financed trust," a plan subject to approval by Congress and the President.

Over the past three years, a number of other high yield issuers - including such names as Owens Corning, Federal Mogul and Armstrong World and USG Corp - have been forced to seek Chapter 11 protection under a threatened flood of asbestos-related claims.

Elsewhere, Charter Communications continued on the upside, its 8 5/8% notes firming two points to 64 bid.

One of the few downsiders Friday was AK Steel Corp., which released disappointing earnings results for the first quarter, posting a larger-than-anticipated loss; the Youngstown, Ohio steelmaker's bonds "got crushed," one market-watcher declared, quoting its 9 7/8% notes due 2009 down five points on the session at 92.75 bid and its 7¾% notes due 2012 also five points lower, at 91.5.

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