Cablevision bonds up on deleveraging news; CDX up 3/8; funds see $153.6 million outflow

By Paul A. Harris

St. Louis, Sept. 13 - Thursday was a quiet session in the high-yield market, taking place against the backdrop of the Rosh Hashanah holidays, which significantly thinned the ranks of capital markets participants.

Sources were spotting the index as well as cash bonds higher in extremely quiet trading activity.

A trader said that the CDX closed at 95 3/8 bid, up 3/8 point on the day.

Another trader said that activity focused on the housing, building supplies and equipment rental sectors which may have advanced by as much as 2 points on Thursday.

Apart from those sectors, most of the market moved sideways, the source said.

Elsewhere, for the second time this week, market watchers were reporting that underwriters had succeeded in offloading a significant piece of the $300 billion-plus risk overhang which has resulted from unsyndicated loans and unplaced junk in the wake of the mid-summer credit markets sell off.

This time it was a £750 million of piece of the mezzanine debt hung up in the Alliance Boots Plc LBO financing.

Meanwhile the bonds of Cablevision Systems Corp. were up a point on the session trailing the company's disclosure that due to conditions in the credit markets it is seeking to cut post-LBO leverage.

And trailing a pair of positive cash flows to the high yield mutual funds, the tide turned once again.

Market sources told Prospect News that AMG Data Services reported a $153.6 million outflow from the high yield mutual funds for the week to Wednesday.

Liking Cablevision's aim of lower leverage

Leveraged markets investors appear to have opened their wallets when they heard that Cablevision was looking for ways to lower its post-LBO leverage.

The company disclosed that conditions in the credit markets have prompted it seek to cut the leverage on the deal that Cablevision hopes to close before the end of the year.

"If current unsettled conditions in the credit markets persist, the interest costs and transaction fees of the debt may be significantly higher than Cablevision's current borrowing costs and higher than the costs related to such debt that were anticipated at the time the merger agreement was entered into," the company stated in a proxy filing on Thursday.

As a result, the Dolan Family Continuing Investors are considering steps to reduce Cablevision's post-closing leverage, including selling assets, entering into strategic partnerships, reducing operating expenses and/or discontinuing some businesses which do not currently generate positive cash flow.

Trailing the announcement, Cablevision's term loan rose between ¼ and ½ point to close at 97¼ bid, 97¾ offered, according to a trader, who said that the there is an expectation that the loan will be taken out at par.

Meanwhile another trader saw Cablevision's 7 5/8% notes due 2011 closing at 98½ bid, 99½ offered, up a point on the day but unchanged from a week ago.

Merrill Lynch, Bear Stearns and Banc of America Securities have committed to financing the merger in which Dolan Family Group is purchasing all outstanding shares of Cablevision that it does not already own for $36.26 per share in cash.

A trader said that the Thursday announcement prompts investors to think that Cablevision is serious about deleveraging, and increases the level of confidence that the company can attain financing for its going private deal.

Housing-related names bounce

Apart from Cablevision, traders said that the junk bond secondary market generally was quiet on Thursday, due to the holidays.

One trader told Prospect News that anything associated with housing - including home builders, building materials companies and equipment rental companies - saw a healthy bounce on Thursday.

"It could be an 'oversold bounce,'" the trader said, remarking that the rental sector, especially, has been badly beaten up of late.

"There was no specific news," the trader added.

"The closer we get to the Fed meeting [scheduled for Tuesday], the clearer it's becoming to people that [the Fed] is going to ease.

Until Thursday, this source had an outlook which saw the Federal Reserve's Federal Open Market Committee lowering its benchmark Fed Funds rate by 50 basis points at Tuesday's meeting.

However by Thursday's close the source was "on the fence" between a 25 basis points easing and a 50 basis points reduction - and leaning toward 25.

As to the above-mentioned sectors with bonds on the move, the trader singled out Neff Rentals, Inc.'s 10% notes due 2015, and recounted the trajectory that saw the paper swoop from 90 to 67 over the past three weeks.

"They actually got as low as 65 bid," the trader said, but added that the Neff 10% paper ended the Thursday session at 71 bid, up a point on the day, and up 4 points from mid-day Wednesday.

Elsewhere in the equipment rental sector, the trader saw the RSC Holdings III, LLC's 9½% senior notes due 2014 at 93 bid, 94 offered, up 2 points.

The trader also saw Ashtead Group plc's 9% notes due 2016 closing at 94½ bid, 95½ offered, up from 93 bid, 94 offered on Wednesday, and Ashtead's 8 5/8% notes closing at 93½ bid, 94½ offered.

Both issues were up 2 points.

The trader also saw the Technical Olympic USA Inc. 9% notes due 2010 at 70 bid, and mentioned that a couple of days ago they were at 67½ bid, 69 offered.

"They are up about 3 points over the past couple of days," the source commented.

Another trader said that the automotive cash bonds and credit default swaps were better on Thursday on news that Citigroup initiated coverage of General Motors Corp., and placed a "buy" rating on the stock - this, in spite of the news that the United Auto Workers Executive Board selected GM as the union's strike target in current national contract negotiations.

"It was a better day all across the board," said the trader who focuses on both junk bonds and leveraged loans.

The source added that the Ford Motor Co. 7.45% notes due 2031 closed at 76 bid, 77 offered on Thursday, up a point.

Risk removal

Mezzanine debt backing the LBO of Alliance Boots became the second sizable portion of risk overhang resulting from hung bridge loans to be placed with investors this week, according to market sources.

Deutsche Bank, JP Morgan and UniCredit placed approximately £750 million of mezzanine debt at an original issue discount of 95.00, with a coupon of Libor plus 650 basis points.

Sources told Prospect News that although the mezzanine and second-lien debt had been talked in July at an OID of 95.00, the coupon was initially 400 to 425 basis points. Hence the new price represents a 225 basis points increase in interest expense on the loan.

And it still leaves approximately £1.0 billion of second-lien and mezzanine debt backing the £11.1 billion LBO led by Kohlberg Kravis Roberts & Co. on the balance sheets of the underwriters, according to sources.

In August £9 billion of Alliance Boots debt financing was withdrawn due to market conditions.

Alliance Boots is the biggest LBO deal ever done in Europe.

Earlier in the week Citigroup, Lehman Brothers and Merrill Lynch placed approximately $1 billion of the hung bridge loan backing the LBO of Allison Transmission at 96.00, leaving approximately $2 billion of the postponed $3.1 billion term loan on the underwriters' balance sheets.

Investors in the Allison Transmission deal were granted 60 days of downside trading price protection should the underwriters elect to sell any of the remainder at a discount deeper than 96.00 during that period.

The way forward

One banker, parsing the news that hung debt backing both the Alliance Boots and Allison Transmission LBO's has been placed at discounts no greater than 5 points declared that with respect to the $300 billion-plus that remains on the balance sheets of the investment banks, transactions such as these are "the way forward.

"People are going to be unloading chunks here and there," the banker said.

"That's the way the whole pipeline is going to have to clear out."

This banker asserted that at present the high yield bond market is in considerably better shape than the bank loan market.

"While the liquidity issue looms large in both markets, it's a bigger issue in the loan market," the banker said, adding that prospective issuers could see better reception in the bond market.

"There are some small deals clearing in the bank market," the banker asserted, adding that if a company came to the capital markets with a deal sized closer to "a couple of hundred million, as opposed to a couple of billion," it could get done, provided that the company demonstrated enough flexibility with respect to pricing.

"A lot of the deals in the pipeline don't have enough pricing in them," the banker asserted, estimating that given present market conditions Libor plus 400 or 450 might be enough to get a bank deal done.

A bond deal to go with it, with a 11% or 12% yield, could probably sell, the source added.

$153.6 million outflow

As trading was winding down for the session, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., reported that weekly reporting funds saw a $153.6 million outflow for the week to Sept. 12.

The outflow trailed two consecutive weeks of positive numbers, the most recent being a $196.8 million inflow for the week to Sept. 5

Beyond those two inflows, however, AMG reported 11 straight weeks of outflows totaling almost $4 billion.

The most recent outflow pushes the weekly reporting funds beyond the negative $2 billion mark, year to date.

Funds that report on a monthly basis also saw outflows during the most recent period, with AMG reporting $148.6 million of redemptions, according to a market source.

However the funds that report on a monthly basis remain boldly in the black, with positive year-to-date flows of $4.48 billion.

Hence the aggregate flows, which tally both the weekly and monthly reporting funds, also remain in the black at $2.42 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.

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