Penn Gaming seen lower after LBO flops; GM, GMAC still struggle; funds see $87 million inflow

By Paul Deckelman and Paul A. Harris

New York, July 3 - As junk market players headed for the exits on an early close Thursday ahead of the traditional July 4th holiday break, news that the proposed leveraged buyout of Penn National Gaming Inc. had fizzled out like a firecracker dunked in a pail of water sent the Wyomissing, Pa.-based racetrack and casino operator's bonds lower, although trading volume, as expected, was relatively light.

Elsewhere, GMAC LLC's bonds remained under pressure, which also pushed rival auto financier Ford Motor Credit Co.'s paper a little lower, after the respective automotive parent companies - General Motors Corp. and Ford Motor Co. - reported another horrendous sales month in June.

Primaryside activity was quiet, with new-deal players having effectively shut down until after the three-day holiday weekend break, but traders saw recently priced offerings from Rite Aid Corp. and Fox Acquisition Sub LLC both holding their own at levels above their respective issue prices.

A high-yield syndicate official said that the broad market was flat during the abbreviated Thursday session leading into the three-day Independence Day holiday in the United States.

Funds rise by $87 million on week

After trading had wound down ahead of the holiday break, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday $87.124 million more came into the funds than left them.

That broke a two-week losing streak in which net outflows had totaled $784.8 million, according to a Prospect News analysis of the figures, including the $651.2 million outflow seen in the previous week, ended June 25. The two weeks of outflows, in turn, had followed a stretch of 11 consecutive weeks, running from early April to mid-June, in which inflows were seen totaling $3 billion, according to the Prospect News analysis. Before April, outflows had been recorded in most weeks.

With the year slightly more than half over, inflows, after a slow start, remain solidly ahead, with 16 inflows versus 11 outflows seen in the 27 weeks since the start of 2008, according to the analysis.

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 $1.235 billion, up from $1.148 billion the previous week. At its peak, the 2008 net inflows totaled $1.933 billion in the week ended June 11.

A market source meantime said that in the week ended Wednesday funds which report on a monthly basis, rather than on a weekly one, showed an inflow of $406.855 million. On an aggregate basis combining the weekly- and the monthly-reporting totals, year-to-date inflows for high yield mutual funds stand at $4.25 billion.

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.

Market indicators again off

Back among the established issues, a trader said that the widely followed CDX junk bond performance index was down another 3/8 point Thursday, seeing it around the 92 5/8 bid, 92 7/8 offered level. The KDP High Yield Daily Index was once again down, losing 17 basis points to end at 71.74, while its yield widened by 4 bps to 10.39%.

In the broader market, advancing issues trailed decliners for yet another day, by an almost three-to-two margin. Activity, represented by dollar volume, plunged by 71% from Wednesday's levels, as trading was curtailed by the shortened session ahead of the holiday weekend, which saw U.S. fixed-income markets officially close at 2 p.m. ET on Thursday - although, realistically, most participants were already be long gone by then - followed by the full market shutdown on Friday, July 4.

A trader said the market "opened a little bit on the firmer side" - he saw the CDX up about 1/8 point as the day got started, "only to get slammed" as the morning went on, albeit in light dealings, finally heading down by 1/8 to ¼ point to around 92¾ bid, 92 7/8 offered.

"Obviously, with stocks opening firmer, things did go a little bit better" in the early going, "and I think people used it as an opportunity to hit bids."

Overall, he characterized the market as "very quiet, with not a lot trading around."

Another trader said that "it's been absolutely dead today."

Penn National slips as LBO falls apart

"The big news" on the day, a trader said, was the collapse of the leveraged buyout deal to acquire Penn National Gaming for $6.1 billion, or $67 per share, and to also pay off $2.8 billion of outstanding Penn debt, including its $200 million of 6 7/8% senior subordinated notes due 2011 and its $250 million of 6¾% senior subordinated notes due 2015.

By cancelling the merger, he said "they basically unraveled the tender offer" for the two series of bonds which the would-be acquiring parties had announced in mid-May, "so people are trying to figure out where those bonds are."

He said that the 6¾% bonds were trading around 85.5 bid, 86.5 offered, while the 6 7/8s were around 93 bid, 96 offered, "in that ZIP code, in the mid-to-low 90s, with probably better buyers, I would guess."

Another trader that "there was some buzz" around Penn National, "but those bonds are so thin anyway that you really didn't even see any activity today. You saw some low-bid buyers coming in, but they had no luck in buying paper."

He saw "some mid-80s kind of buyers" for the 6¾% notes, "but I never really saw a right side to it - and the bonds had not been traded over the past couple of days and weeks. So [there's been] not much transparency in the name, despite the size of that deal."

A market sources saw the 6¾% paper opening at 86.5 bid, well down from recent levels around 94 - although the bonds had not traded for more than a week - before going out at 88.5, lifted from the opening on several large-block trades.

Another trader saw the 63/4s going as low as 86 bid, 88 offered before closing at 88 bid, 90 offered, down 4 points from 92 bid, 94 offered pre-news, while the 6 7/8s dipped to 89 bid, 91 offered before going out at 91 bid, 93 offered, down 1 point on the bid side from previous levels at 92 bid, 93 offered.

He said that the bonds "really didn't do much," and with "all of these [LBO] deals falling apart, the collapse of Penn National's transaction came as no great shock. "There were some rumblings [beforehand] about this particular deal, so people weren't nearly as blind-sided as they had been in many other ones."

Under the terms of the transaction, which was announced a little more than a year ago, on June 15, 2007, Penn National agreed to be acquired by funds managed by affiliates of a pair of private-equity firm, Fortress Investment Group LLC and Centerbridge Partners LP, in an all-cash transaction valued at approximately $8.9 billion, including the planned repayment of some $2.8 billion of Penn National's outstanding debt.

Penn National shareholders were slated to get $67 in cash per share - a price which would be increased slightly, by $0.0149 per share per day, or a total of about $1.274 million per day for the whole of the 85.5 million-share common float, if the acquisition was not closed by June 15 of this year. The would-be buyers and Penn National, which operates casinos and racetracks in 14 U.S. states and the Canadian province of Ontario, anticipated using the year to line up all of the necessary regulatory approvals those jurisdictions that required such an OK, expecting to close the acquisition some time in June.

PNG Merger Sub Inc., an entity owned by the acquiring parties, announced its tender offer for the two series of bonds on May 12, planning on buying the 6 7/8% notes for total consideration of $1,035.63 per $1,000 principal amount, including a $20 per $1,000 consent fee for holders tendering by the May 22 consent deadline, and setting the consideration to be paid to the 6¾% noteholders at $1,093.73 per $1,000 principal amount, including the $20 per $1,000 consent payment. Holders of virtually all of the notes had tendered them and had agreed to requested indenture changes by the consent deadline, with the offer scheduled to have expired on June 7 - but that deadline was extended several times, most recently until July 7, to give the overall acquisition transaction time to be completed, one of the conditions for completion of the tender offer.

In the meantime, the company announced on June 6 that the parties to the deal had extended the end date for its merger agreement by 120 days to June 15, citing the fact that necessary approvals had not been received up to that point from gaming regulators in several of the states in which Penn National has gaming operations.

On Thursday morning, the company put out a news release announcing that the parties involved in the merger had agreed to terminate the transaction. It said that the proposed deal would not be completed "without significant and lengthy litigation which is inherently unpredictable," and also said that a renegotiated, reduced purchase price "was not a viable option." Penn National further said that "the likelihood of successfully navigating the remaining regulatory approvals, credit facility conditions for funding and likely litigation required to complete these tasks was highly uncertain," so the parties pulled the plug on the buyout.

In its place, it announced a replacement agreement with Fortress and Centerbridge, and with Wachovia Corp. and Deutsche Bank, which had originally agreed to make indirect minority co-investments in the company if the merger had closed as planned. Penn National is to receive $1.475 billion, in the form of a $225 million break-up fee and $1.25 billion in proceeds from the sale of redeemable preferred stock due 2015 to Fortress, Centerbridge, Wachovia and Deutsche Bank. The preferred stock sale is essentially a seven-year interest-free loan, since the preferred securities have no yield associated with them. At the preferreds' maturity, Penn National can elect to redeem the shares for cash, common stock or a combination of the two.

Penn National said that it will use the cash infusion to repay about $610 million on a revolving credit facility, and may invest in new business opportunities and could buy debt of other gaming companies. It may also repurchase up to $200 million of its stock in the next 24 months.

With gaming industry stocks generally lower in recent months, hurt by the combination of the economic downturn and rising fuel prices, which have cut air and road travel to gaming destinations, the Penn National shares have fallen sharply from the levels in the $60s to which they had moved after the deal was first announced, closing on Wednesday at $28.60.

Analysts said that the shares had also been hurt by investor perception - correct as it turned out - that the deal would not get done because of funding problems in the currently tight credit environment. The shares opened lower Thursday on news of the busted LBO, initially nosing down about $1.75, or about 6% to $26.85, before rebounding to finish up $1.06, or $3.71, at $29.66, stockholders buoyed by the cash infusion and possibility of a stock buyback. Volume of nearly 15 million was about 15 times the usual turnover.

Other gaming names little moved

A trader said that even with attention centered on Penn National, "there was no visibility, so I couldn't really say" if the collapse of the LBO had an impact on other gaming sector bonds. "I saw some Wynns trading out there, but it didn't look like they were much changed."

Another market source saw the Wynn Las Vegas LLC 6 5/8% notes due 2014 at just below 89, down around a point.

Elsewhere in the sector, Boyd Gaming Corp.'s bonds were seen a little higher, with its 6¾% notes due 2014 up perhaps ¼ point at 76.5, and its 7¾% notes due 2012 half a point higher at the 85 level.

On the other hand, the various Harrah's Entertainment Inc. bonds were easier, with the Harrah's Operating Co. Inc. 5¾% notes due 2017 seen down 1 point at 51, and its 5.5% notes due 2010 seen easing to about 90. Harrah's forerunner Caesar's Entertainment's 7 7/8% notes due 2010 lost a point to end at 92.5, while the 7 7/8% notes due 2010 originally issued by another Harrah's forerunner, Park Place Entertainment Corp., finished at 91.

GM, GMAC still under pressure

Apart from Penn National and the gaming sector, a trader said, "things were very quiet. We had a couple of bid-wanteds on GM and GMAC paper, guys looking to sell some bonds, and I think there were a lot bottom-fisher-type guys looking for that stuff."

Another trader said that GM and GMAC bonds "have been off, but later in the week, as we've moved towards this holiday, there's just no real flow going on, so it's tough to say. If you look at the Trace board, there's little volume on it."

A trader saw GM's 8 3/8% bonds due 2038 unchanged at 55 bid, while its 49% owned GMAC 8% bonds due 2031were 2 points lower at 58.

Another market source saw the GM benchmark down ¾ point at 55.25 bid, while the GMAC bonds slid nearly 4 points to 58.25.

In shorter paper, GM's 7.20% notes due 2011 dropped to 69, which a market source called down some 3¼ points, although at another desk, those bonds were seen a point better at 71. Its 7 1/8% notes due 2013 were off a point at 63, while GMAC's 6 7/8% notes due 2012 were seen off 2 points to the 64 area, and a market source saw its 7% notes due 2012 tumble nearly 6 points to 62.25.

However, at another desk, a source saw those 7s only down about 2¼ points at just under 64.

GM's paper came under pressure on Wednesday, when the giant carmaker reported an 18.2% slide in its June sales from year-ago levels, but the bonds were able to hold up that day, although the shares did not, on investor perception that the slide could have been worse.

However, the credit cracked on Thursday, falling several points after several analysts issued negative commentary about its near- and medium-term outlook and Merrill Lynch said that even a bankruptcy filing for the once-mighty GM was not out of the question, should the current unexpectedly sharp deterioration in the domestic auto market continue and worsen.

While GMAC paper was skidding lower, counterpart Ford Motor Credit Co.'s bonds, hurt by the same kind of auto industry dynamics, were also struggling. The Ford Credit 7% notes due 2013 were seen having dropped 2 points to 71.5 bid, while its 7 3/8% notes due 2011 were off 1 ½ points at 78.

Chesapeake gain continues

Elsewhere, Chesapeake Energy Corp.'s bonds, which had pushed upward on Wednesday on the news that the Oklahoma City-based independent oil and gas exploration and production company had convinced Plains Exploration & Production Co. to buy in as a joint venture partner in developing one of Chesapeake's shale properties, strengthened again on Thursday.

Chesapeake's 7¼% notes due 2018 were being quoted at 101.5, up some 3 points on the day, a market source said, although another source saw those some bonds only up about ½ point at 98.5.

Under the terms of the deal, Chesapeake will sell a 20% stake in its leasehold on the Haynesville shale field in northwest Louisiana and eastern Texas to Plains for $1.65 billion in cash. Plains will also finance half of Chesapeake's 80% share of the drilling and completion costs for future wells in the area over a period of several years, until another $1.65 billion has been paid.

Rental car companies still spin their wheels

A trader saw the bonds of both Avis Budget Group Inc. and Hertz Corp. lower for a second day, with Avis' 7 5/8% notes due 2014 down a point at 75.5 bid, 76.5 offered, while Hertz's 10½% notes due 2016 were off 2 points at 86.5 bid, 88.5 offered.

Parsippany, N.J.-based Avis' bonds, and those of its larger, Park Ridge, N.J.-based car-rental industry rival, Hertz, fell after Avis on Wednesday warned of likely weaker financial results because of a downturn in car-rental transactions because of the softer economy and rising gas prices.

New Fox, Rite Aid bonds holding

Among recently priced issues, a trader said "the Rite Aids were holding in pretty well," seeing them at 91.5 bid, 92 on Wednesday and 91.625 bid, 92.125 offered Thursday morning. The Camp Hill, Pa.-based operator of the third-largest U.S. retail pharmacy chain priced $470 million of the 10 3/8% secured notes due 2016 on Monday at a deeply discounted 90.588 to yield 12¼%, realizing proceeds of $425.76 million from the deal.

He had not seen any new levels on the Fox Acquisition Sub 13 3/8% notes due 2016, beyond the par bid, 100.25 offered level at which the bonds had finished on Wednesday, when a downsized offering of $200 million of the notes priced at 98.803 to yield 13 5/8% and then moved smartly upward on the break.

Another trader observed that given the overall lack of activity in the market, "even trying to get involved with some of the new issues that have come over the past week or two, you can't even get any flow in them."

He said the new Fox bonds "may have moved up - but I didn't see it. It wasn't on the broker screens. It priced late in the day [Wednesday] and the market had already started to drift out for the holiday [Wednesday] afternoon. My guess is that if it was moving higher, it was moving up very thin."

The week ahead

The holiday-shortened week in the primary market saw slightly over $1.6 billion of issuance in four dollar-denominated tranches.

The post-Independence Day week will get underway with a medium calendar, although observers say that the greater part of that calendar is comprised of business carried over because of the capital markets turmoil which took place in the run up to the holiday weekend.

Three deals have been pushed into the post-holiday week, those sources say.

They include AEI's $250 million offering 10-year senior bullet notes (B2/B), which are talked at the 10¼% area. AEI is being simultaneously marketed to high-yield and emerging markets accounts.

The AEI deal is being led by Credit Suisse, as is Ferro Corp.'s $200 million offering of eight-year senior notes (B2) which are talked at 8¾% to 9%, and have also been pushed into the July 7 week.

Likewise pushed is Ferrellgas, LP and Ferrellgas Finance Corp.'s $250 million offering of notes mirroring the company's existing 6¾% senior notes due May 1, 2014 (Ba3/B+) via Banc of America Securities LLC and JP Morgan. No price talk has yet been heard on the Ferrellgas deal.

A source close to the transaction said that Ferrellgas feels it ultimately does not have to be a "price taker" with these mirror notes simply because of coincidental volatility in the capital markets.

All three have been characterized as "day-to-day," meaning the executions may hinge, somewhat, on the subsidence of that capital markets volatility.

Meanwhile Horsepower Holdings, Inc. will begin a roadshow on Tuesday for a $275 million offering of 10-year senior notes, a merger financing deal via left lead UBS Investment Bank and joint bookrunner Goldman Sachs.

The proceeds were shifted to the proposed bonds following the company's decision to eliminate its $275 million term loan B, according to a market source.

Through the latter part of the June 30 week high yield syndicate sources professed visibility on several deals likely to launch early in the post-holiday week, although no one volunteered any names.

There were mixed opinions as to how capital markets conditions might impact these prospective deal launches. However one source professed visibility on three deals that have the green light irrespective of market chop.

© 2015 Prospect News.
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