Activity pace ratchets down, with secondary rangebound; Universal City unveils $500 million deal

By Paul Deckelman and Paul A. Harris

New York, March 10 - The high yield market seemed to step back and take breather of sorts on Monday as it attempted to digest all kinds of input - from the second consecutive billion-dollar mutual funds inflow, reported late last week, to continued soft economic data, war jitters, and a big stock slide Monday.

Meanwhile, the new deal arena - which saw nine offerings price last week, including several quickly-shopped deals brought to market by opportunistic borrowers looking to strike while the iron was hot - saw its first session in two weeks in which no new deal was heard to have actually priced.

However the market learned that Universal City Development Partners will begin previewing an eight-year notes deal Tuesday, hoping to reel in $500 million from investors.

Also price talk and timing emerged Monday on several deals on the forward calendar.

Meanwhile the capital markets continued to see evidence of a phenomenon that several high yield sources have commented upon in recent conversations with Prospect News: a "decoupling" of the performances of the high-yield and equities markets, which are often said by observers to move in approximate parallel.

After the close of Monday's session Banc of America Securities reported that the high yield broad market advanced 0.22% during the session - a day which saw the Dow Jones Industrial Average relinquish 2.22%.

As of last Friday the Bear Stearns High Yield Index was reported to be up 5.50% since the start of the year while at the start of Monday's session the Wall Street Journal reported that the Dow Jones Industrial Average was down 7.21%, year to date.

In an email message to Prospect News Monday Marti Fridson, chief executive officer of the investment consulting firm FridsonVision LLC and formerly chief high yield strategist for Merrill Lynch & Co., commented that sooner or later junk and stocks can be expected to resume their approximate parallel movement. However at present Fridson sees no reason to expect that "sooner" is more likely than "later."

"It's important to keep in mind that this is not the first time that stocks and high yield bonds have ever moved in opposite directions," Fridson noted. "The high yield market is prone to large, short-run changes in liquidity. Those swings are big enough to offset the fundamental factors that usually cause the markets to move together. So far in 2003 the huge inflows of capital into high yield have been boosting liquidity and causing the market to rise while stocks have fallen.

"Sooner or later the fundamentals should bring stocks and high yield bonds into alignment," Fridson continued. "But there's no law about how quickly that has to happen. For the time being, investors see little upside in stocks, but they don't view the economy as so weak that they have to worry about a new surge in defaults. That's a prescription for cash to continue to go into high yield bonds and cause spreads to narrow, even as stocks languish."

With regard to defaults, in a report Monday, Standard & Poor's noted that the global default rate in 2003 will remain high, descending slowly through year-end, with a more perceptible improvement in 2004.

"The U.S. 12-month rolling average speculative-grade default rate has already shown improvement, now at 6.86%, down from its recent high of 10.20% in April 2002," the report noted. "In fact, U.S. industrial production, a good leading indicator of the U.S. speculative-grade default rate, has been steadily moving into positive territory since January 2002, suggesting that a further decline in defaults is likely. Projections for this year indicate continued weak growth in industrial production until fourth-quarter 2003. However, issuers are faced with an environment where banks are tightening lending standards, albeit to a lesser extent than in 2001. This potentially jeopardizes an important source of funding for issuers nearing default that may be unable to turn to the capital markets."

During Monday's session in the high yield primary market Prospect News learned that the roadshow starts Tuesday for Universal City's $500 million of seven-year senior notes, which are expected to price March 20 via bookrunners JP Morgan and Banc of America Securities and co-managers Credit Suisse First Boston, Scotia Capital and Wachovia Securities.

The market also learned Monday that roadshows are now underway on two Rule 144A deals coming via underwriter Jefferies & Co.: Barney's, Inc. $100 million of five-year senior secured notes (B3) - expected to raise $90 million of proceeds - and MTR Gaming Group, Inc.'s $130 million of eight-year senior notes. Both offerings are expected to price late in the week of March 17.

Also two deals were heard to be wrapping up roadshows, with pricing imminent.

Price talk is 7% - 7 1/8% on iStar Financial Inc.'s $150 million of five-year senior notes (Ba1/BB+/BBB-). The New York City-based finance company's deal, via bookrunner Deutsche Bank Securities, is expected to price on Tuesday.

And price talk of a yield in the 10¾% area emerged Monday on William Lyon Homes' registered offering of $200 million 10-year senior notes (B3/B-). The issuer is a Newport Beach, Calif. homebuilder and its deal, via bookrunner UBS Warburg and co-manager Salomon Smith Barney, is expected to price late Wednesday.

Back in the secondary sphere, a trader described the overall market as "pretty dead," with most of the issues he saw weakening on the session.

"There's just so much bad news around that if it wasn't for the inflows - God help us. I don't think it's so much a case of the inflows moving the market up as maintaining the status quo and helping the new deals get done."

Among the recent high fliers that he saw backing off on Monday was Lucent Technologies Inc.'s 7¼% notes due 2006, which retreated a point to 84.5 bid/85.5 offered, while Level 3 Communications Inc.'s 9 1/8% notes due 2008 were likewise a point lower than Friday's levels, closing Monday at 71 bid.

He also saw Charter Communications Holdings LLC's 8 5/8% notes due 2009 off a point, at 45 bid/46 offered.

One exception to the general rule, at least in the communications constellation, was Nextel Communications Inc.'s benchmark 9 3/8% notes due 2009, which he said were "hanging in" around 101 bid. "They've held up pretty well."

The Reston, Va.-based wireless telecommunications operator's bonds had hovered above par all of last week, even in the face of news that wireless telecom pioneer Craig McCaw had sold a third of his stake in the company and would soon pare his equity stake to under 5% and give up his control of three seats on the company's 11-member board, although analysts said that McCaw's decision to sell 23 million of his 68 million Nextel shares had more to do with his own finances than any reflection on the Number-5 U.S. wireless company, which has actually shown a profit over the last several quarters - a rarity for any high-yield telecom operator - and which is continuing to add new subscribers at a healthy pace.

The trader noted that on Monday, Nextel and Motorola Inc, which makes Nextel's combination cellular phone/walkie talkie - announced the latest development in their rollout of Nextel's Nationwide Direct Connect service, which will eventually allow Nextel customers to have instant digital walkie-talkie-type connections to one another anywhere on Nextel's national network.

Nextel is currently the industry leader in the push-to-talk instant connections that allow groups of users - a business looking to keep its employees in touch with one another - to stay in touch, in addition to standard cellular phone service. A number of other large cellular players are looking to penetrate Nextel's primarily business-oriented niche, but so far lag far behind.

Elsewhere in telecom, a distressed-debt trader said that the bankrupt Global Crossing's bonds had moved up to around 3 to 3.5 cents on the dollar from Friday's closing price at 2.75, citing the news that the Hamilton, Bermuda based international network operator had had filed a special committee report with the bankruptcy court, releasing information about the troubled company's accounting practices.

In addition, the official committee for Global Crossing's unsecured creditors on Monday reaffirmed their support for a sale of a majority of the company to two Asian companies - Hutchison Whampoa Ltd. unit Hutchison Telecommunications and government-run Singapore Technologies Telemedia - saying it gives the creditors the best means to recoup some of their losses. A majority of the company is slated to be sold.

A rival bid emerged on Feb. 25, when long-distance telecommunications company IDT Corp. announced it would launch an offer for Global Crossing's assets, claiming that national security could be compromised by the current plan for investors in Hong Kong and Singapore to take over the fiber-optic carrier.

However, the Hutchison Whampoa/Singapore deal has been confirmed by the bankruptcy court, although it still awaits regulatory approval by the Committee on Foreign Investment in the United States.

Outside of the telecom area, not a lot was happening, a trader said. "The Street was quiet."

He saw Fleming Companies Inc. continuing to hover at the lower levels to which its bonds had been driven last week, with the Dallas-based grocery products wholesaler's 10 5/8% subordinated notes due 2007 still languishing around 18 bid/22 offered, while its 10 1//8% senior notes due 2008 "didn't surface" for trading, but remained quoted around 52 bid/54 offered.

Royal Ahold NV's 8¼% notes due 2010 and 6 7/8% bonds due 2029 saw "no movement," the trader said, remaining at levels of 80 bid/82 offered and 71 bid/73 offered, respectively - this despite a report in the Financial Times that the Dutch-based international supermarket and foodservice group knew of the recently disclosed accounting problems at its U.S. unit as early as 2001.

The trader noted that AMR Corp.'s 9% notes were two points lower on the session, at 18 bid/19 offered, as speculation that the corporate parent of industry leader American Airlines might be considering a bankruptcy filing was renewed after an official of its flight attendants union opined that AMR might go bankrupt "sooner rather than later." And Reuters - citing unidentified sources - reported late in the day that AMR "has discreetly begun talks on Wall Street about lining up . . . debtor-in-possession financing. One source said American is looking for $2 billion to start, although that could change."

AMR's New York Stock Exchange-traded shares fell 40 cents (14.23%) to $2.41 on volume of 3.9 million shares, far more than the usual 2.7 million turnover.

Elsewhere among the airlines' Continental Airlines' 8% notes due 2005 were heard a point better, at 49.5 bid.

But a market source suggested that the whole sector was in for more rough sledding, citing a Wall Street Journal story indicating that for the most part, the airlines had not hedged against higher jet fuel costs - and with the fuel now over $1 a gallon, double what it was costing them last summer, the carrier's situation could only get better.

But things couldn't be better for the refining companies that turn crude petroleum into jet fuel and other distillates. Business is booming for the refiners, pushing up the bonds of such operators as Tesoro Petroleum, whose 9 5/8% notes due 2012 were a point better at 85 bid. Giant Industries' 9% notes due 2007 were unchanged at 77 bid, while Premcor Refining's 9½% notes due 2013 continued to hover above 105 bid.

In a different facet of the energy industry, however, Allegheny Energy, Inc.'s bonds were down across the board Monday after the company announced it needed more time to complete its review of its financial statements.

Allegheny said Monday it does not expect to meet the March 31 deadline to file its 2002 results and postponed its annual meeting while it completes an ongoing review of its financial statements.

Traders said the company's 7.80% notes due 2011 fell to 68 bid/71 offered after having risen to 71 bid/ 73 offered earlier in the session.

Dynegy Inc.'s debt, which had climbed last week on speculation that new financing was near, was quietly unchanged Monday, its 7.45% notes due 2006 hanging in at 71 bid/73 offered.

(Carlise Newman contributed to this report)

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.