Idearc, other directory bonds slide again; Freescale off as CEO exits; funds see $142 million inflow

By Paul Deckelman and Paul A. Harris

New York, Feb. 8 - And the hits just keep on coming, as the suddenly troubled telephone directory publisher Idearc Inc.'s bonds got whacked around for a fourth consecutive session Friday, this time hurt by a combination of continued investor disappointment with quarterly numbers released Thursday and a downgrade in its shares, which were also down sharply. Rival publisher R.H. Donnelley Corp.'s paper was also again lower, since the two companies are affected by the same negative industry dynamics.

Elsewhere, Freescale Semiconductor Inc.'s bonds were off, as the Austin, Tex.-based computer chip maker announced the abrupt exit of its chairman and chief executive officer, Michael Mayer, leading some observers to wonder whether the executive's departure is as voluntary as the company announcement made it sound.

Another high-tech name down on the day was Amkor Technology Inc. However, Advanced Micro Devices Inc. apparently managed to shrug off the sobering news that major customer Dell Inc. is cutting back the variety of AMD-equipped computers it is making available to consumers.

Sources marked the high-yield market lower on Friday.

One high yield syndicate official said that junk was down across the board.

Another source from a different syndicate agreed that the index "gave it up" on Friday, but added that the cash market had been pretty quiet.

Friday produced one ray of light, however.

On Friday morning sources told Prospect News that AMG Data Services reported a $141.6 million inflow to high yield mutual funds for week to Wednesday.

It is the first positive flow in two months, among accounts that report to AMG on a weekly basis.

The inflow follows the previous week's $78 million outflow.

With the Forbes Energy Services LLC/Forbes Energy Capital Inc. offering of seven year notes having priced on Thursday, primaryside activity was considerably muted Friday.

Fund flows up $142 million on the week

A market source familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday $142 million more came into the funds than left them. The fund-flow numbers generally circulate through the market late in the day on Thursdays, but did not make their appearance this week until Friday morning.

The inflow was the first one of 2008. It followed seven consecutive outflows dating back to mid-December, according to a Prospect News analysis of the AMG figures, including the $78 million cash exodus seen in the previous week, ended Jan. 30. During that losing streak, outflows totaled approximately $1.097 billion.

The latest week's inflow brought the net outflow total for the year through Feb. 6 down to $600.9 million from $742.9 million the previous week, according to the analysis. (The year-to-date cumulative figures include the final three market sessions of 2007, which were reported as part of the week ended Jan 2, according to the source). There have been five weekly outflows reported so far since the start of the year against the one inflow; in 2007, outflows among the weekly reporters totaled approximately $2.75 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, most recently, hedge funds.

Indicators point to another down day

Continuing the decidedly negative trend seen most of the week, a trader said that the widely-followed CDX index of junk market performance fell about another ½ point to 88 bid, 88½ offered, while the KDP High Yield Daily Index tumbled 0.51 to 74.66 and its yield widened out by 10 basis points to 9.47%.

In the broader market, declining issues again topped advancers by around a five-to-three margin. Overall activity, reflected in dollar volumes, rose by nearly 17% from Thursday's levels levels.

Despite the overall higher volume figures, relative to Thursday's session, one trader called Friday "a ridiculously quiet day," and another observed that there was "not a ton going on." At several shops, phones went unanswered or traders were reported gone by 4 p.m. ET, well before the usual time.

A tough week comes to an end

Friday's session capped a dismal week in which the junk market "gave back some of [the previous] week's gains," according to a research note put out by the Fitch Ratings service. The catalyst for the retreat, its analysts said, was "economic data [which] continued to point to a softening economy," including a sharp fall in the Institute for Supply Management's index of non-manufacturing business activity, which slid "precipitously" to 41.9 in January from 54.4 in the previous month, indicating a sharp contraction in the service sector of the economy, as well as a larger-than-expected 1.5% fall in pending home sales in January reported by the National Association of Realtors, which spelled further trouble for the already beleaguered homebuilder, real estate and mortgage origination sectors.

Crunching the numbers, Fitch noted that the widely followed Merrill Lynch High Yield Master II Index fell 2.88 points this week, closing at 579.873 on Thursday, from 582.753 a week earlier, while the total return for the Master II Index was a loss of 50 basis points, which brought the total return for the year-to-date period to negative 1.85%, or negative 16.39% on an annualized basis. The yield-to-worst on the Master II Index increased 14 bps this week, closing at 10.17%, up from 10.03% last week, while the option-adjusted spread widened by 15 bps to stand at 710 bps over Treasuries, out from 695 bps a week earlier.

Fitch further said that secondary market activity "pulled back slightly this week," as volume totaled $23.9 billion for the week ending Thursday. That translates to a daily average of $4.79 billion, compared with weekly volume of $28.5 billion and a daily average of $5.70 billion the preceding week.

Idearc, other directories get drubbed

In Friday's dealings, it was yet another tough session for Idearc's 8% notes due 2016, which were getting pounded down most of the week, particularly from Wednesday onward, first on expectations that the Dallas-based telephone and online directory publisher would report bad quarterly numbers, and then on the actual numbers themselves, which were out on Thursday.

A trader said that the bonds fell another 5 points on Friday to finish off at 74 bid, 76 offered, while another market source said that paper was the day's most actively traded issue, falling more than 2 points to finish in a 77.5 context. At another desk, the bonds were pegged down 4 points on the day at the 75 level.

A trader, seeing them going out at 74.5 bid, 75 offered, noted that they were down at least 15 points on the week.

Its New York Stock Exchange-traded shares, which on Thursday had plunged some 24%, kept right on nosediving on Friday, down another $1.86, or 16.09%, to end at $9.70, on volume of 11.9 million, or seven times the average daily turnover. The shares were hurt when Deutsche Bank Securities downgraded them to a "sell" from "hold" previously.

The bonds and shares were continuing to react to fourth-quarter earnings released on Thursday showing profits of $100 million, or 68 cents a share, on revenue of $787 million, down from $107 million or 73 cents a share on revenue of $801 million a year earlier. Even though the per-share earnings actually beat Wall Street estimates by 4 cents, investors were spooked by a $4 million shortfall between analysts' expectations for the revenue figure and where sales actually came in.

Investors also continued to focus on warnings from company executives during their conference call Thursday that "cyclical economic headwinds" would continue to hinder revenues this year, and their refusal to actually attach a number to where they thought those revenues might come in.

While the executives outlined the company's ongoing efforts to expand their activities into the potentially huge and lucrative field of online directory publishing and other directions away from their traditional print directories, thought to be a declining technology, analysts and other observers noted that online still constitutes a relatively small percentage of the company's revenues, and at this point, produces relatively small profit margins.

Idearc's bonds have not been alone in their slide away from near-par respectability and toward oblivion this past week; the likelihood that the weakening economy will result in lower telephone directory advertising revenues is also bad news for its main rival, Cary, N.C.-based R.H. Donnelley, whose shares and bonds, as well as the bonds of Donnelley subsidiary Dex Media Inc., were all lower.

A trader quoted Donnelley's 6 7/8% notes due 2013 down 3 points on the session to 76 bid, 78 offered, while another market source saw its 8 7/8% notes due 2016 down a whopping 5 points to just below the 74 level. A market source saw the Dex Media West 9 7/8% notes due 2013 tumble to 93.5 bid from prior levels around 98.

Donnelley's NYSE-traded shares, which on Thursday had swooned 20% in tandem with Idearc's plunge, surrendered another $3.12, or 14.21% Friday to end at $18.83. Volume of 10.5 million shares was more than six times the norm.

Those shares were also downgraded Friday by Deutsche Bank, which lowered them to "hold" from "buy" previously.

Freescale falls as chief leaves

Elsewhere, Freescale Semiconductor's bonds were seen mostly lower following the sudden announcement that chairman and CEO Mayer is leaving the company.

A market source saw its 8 7/8% notes due 2014 down nearly 2 points on the session to around the 79.25 level, in very active size dealings.

Another source saw them down 1 point on the day, at 80 bid.

However, a trader said that the company's 9 1/8% notes due 2014, while "heavily traded," actually moved up about ½ point to 74 bid, 76 offered. But another source saw those bonds down about ½ point at 75.

Freescale said that Mayer, who took the reins in 2004, when Freescale was still a unit of electronics giant Motorola Inc. and guided it to independence, first as a publicly held spin-off and then later as a privately held entity following a big leveraged buyout, plans to resign. However, he will continue in his job until the company finds a successor.

"The time is right for me and my family to take some time off before exploring new challenges. The company is well positioned to continue its transformation," Mayer said in the company's statement. Freescale executives didn't respond to requests for further elaboration on the circumstances of Mayer's coming departure.

Tech industry publication EE Times, noting that Freescale went from a modestly profitable public company following its 2005 spinoff by Motorola to a hugely unprofitable private one following its fall 2006 buyout by a syndicate led by Blackstone Group, Carlyle Group and Texas Pacific Group, speculated "whether Mayer was ousted amid ongoing losses and problems at the chip maker. Some also wonder if the sudden move portends other changes at Freescale, including the breakup of the company or a move to find a suitor."

Also off in the high-tech sector was Amkor Technology's 7¾% notes due 2013, down 1 point at 88 bid.

AMD little moved by Dell development

But Advanced Micro Devices' 7¾% notes due 2012 were seen little moved by the potentially very bad news that Dell - the second-largest computer maker behind Hewlett Packard Co. - plans to pretty much stop offering computers equipped with AMD microprocessors for online sales to non-business customers, although it will still ship such machines to stores for sales there. While it will still offer one AMD-equipped machine for consumer sale through its website, and will offer the AMD machines to business customers, the vast bulk of its online sales will henceforth be computers equipped with processors made by AMD's larger rival, industry leader Intel Corp.

Despite that potentially bad news, a trader saw the AMD bonds actually up 2 points at 83 bid, 85 offered.

Another market source saw them pretty much clinging to the same 83.5 context all day, and noted some small-size trades late in the day as high as 86 bid.

MBIA notes seen gaining

A trader saw the 14% surplus notes due 2033 issued by embattled bond insurer MBIA at 91 bid, 93 offered, which he called up a point from Thursday's levels, saying that the notes - nominally investment-grade instruments which have recently been widely traded off junk desks at a number of shops - benefited from the news that the company had sold $1 billion of new shares on Thursday to beef up its capital reserves and thus preserve its vaunted AAA financial strength rating.

The New York-based company had sold $1 billion of the notes at par approximately a month ago, but then saw them losing 3 or 4 points a day over a number of sessions in later January and finally bottoming around the 70 level, on investor concerns over whether MBIA, the largest bond insurer, might lose its AAA rating, after Moody's Investors Service, for one, put it on watch for a possible downgrade, along with some of its smaller peers such as Ambac Financial Group Inc. Moody's and other ratings services expressed concerns about the liquidity and capital positions of the bond insurers in the wake of an expected rise in defaults in their insured bonds connected to the ongoing credit crunch. After hitting their rock-bottom levels late in January, the MBIA bonds reversed course and climbed back above the 90 bid mark, helped by the news that New York state insurance regulators and major banks were working on a plan to boost the capital levels of MBIA, Ambac and the other insurers to enable them to keep their ratings at an acceptable level.

With nothing set in stone yet on that front, MBIA moved to shore up its own capital position, originally announcing plans to sell $750 million of new shares, and ultimately increasing that issue so it could reap $1 billion of fresh capital. The 14% bonds - which had peaked about 92 at mid-week and then eased slightly back to around 90 - moved back up on Friday, the trader said, because "having $1 billion on hand always helps."

Another trader noted that MBIA was also helped on Friday by "rumors of a rescue plan by the New York State Insurance Division that came out late in the day - they may have something [this upcoming] week."

Forbes Energy bonds unseen

Several traders queried by Prospect News on Friday said that they had seen neither hide nor hair of the new Forbes Energy 11% notes due 2015, which priced late Thursday at 97.635 to yield 11.5%.

One deal week

The Friday session turned up no news in the primary market.

Hence the Feb. 4 to Feb. 8 week passed with only one new issue clearing the market.

On Thursday Forbes Energy Services LLC and Forbes Energy Capital Inc. priced a $205 million issue of 11% seven-year senior secured notes (B2/B) at 97.635 to yield 11½% - a Jefferies & Co.-led deal that generated $200.15 million of proceeds.

It bumped the year-to-date issuance total to $7.385 billion in five high yield tranches.

Away from the LBO risk overhang, however, issuance is considerably more anemic: just $1.250 billion in four dollar-denominated tranches.

By way of comparison, at the Feb. 8 close in 2007, issuance stood at just under $16.8 billion in 57 dollar-denominated tranches.

Away from energy

Again, with the exception of the LBO risk overhang all of the new year's new issuance has emanated from the energy and resources sectors, which, according to sources on the buy-side and the sell-side, continues to be perceived as a safe haven in a market that has otherwise been more or less sidelined by risk aversion.

Hence, sources in the deal and otherwise are now keenly tuned in to the fortunes of Axcan Pharma Inc.'s $240 million offering of eight-year senior unsecured notes (B3/B-).

Banc of America Securities LLC is the left lead bookrunner for the LBO deal. HSBC and RBC Capital Markets are joint bookrunners.

Of interest, sources say, is the fact that it is an LBO financing which came together well after the credit market meltdown began, provisioned with bridge caps and leverage ratios meant to reflect "the new reality."

Also, unlike all the other non-backlog business seen so far in the 2008 new issue market, Axcan is from the pharmaceutical sector, not from energy or resources.

On Friday Prospect News pressed one source for color on the deal, which is expected to price during the middle part of the coming week.

However all this source would say is that the bond deal is going better than the bank deal - the Mont-Saint-Hilaire, Quebec-based company is also in the market with a $475 million senior secured credit facility (Ba2/BB-) which is comprised of a $350 million seven-year term loan B talked at Libor plus 350 basis points, at an original issue discount of 96.00 to 97.00, and a $125 million six-year revolver talked at Libor plus 350 basis points.

Even though the high yield market is tough, the source commented, the bank loan market is much tougher. Hence the bank deal could see some tweaking.

The Axcan notes offer is the only deal in the market as business expected to be priced before Friday's close.

One other deal - also away from the energy/resources area - is presently on the road, and expected to price during the week beginning Feb. 18: Elyria Foundry Co. LLC and EH Acquisition, Inc. are offering $100 million of five-year senior secured notes (B3/B), an acquisition financing via Jefferies.

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