R.H. Donnelley bonds seen down several points; funds see $269 million inflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 2 - R.H. Donnelley Corp.'s bonds were quoted solidly lower Thursday - although market sources noted that trading was extremely thin on the last full session before the Labor Day holiday break.

Domestic new-deal activity was meanwhile still in its late-summer snooze mode, with almost all of what news there was coming from overseas - Hornbach-Baumarkt-AG heard readying a €200 million Rule 144A deal and Hong Kong-based Techtronic Industries Co. planning a $300 million issue.

And after trading had rolled up for the day - and for the week, in the case of those participants not planning to be around for Friday's abbreviated pre-holiday session, which will see a 2 p.m. ET market close ahead of Monday's full-day closure - late-working market players familiar with the widely followed weekly high yield mutual fund-flow statistics compiled by AMG Data Services Inc. of Arcata, Calif. told Prospect News that $269 million more came into the junk funds than left them in the week ended Wednesday.

It was the second consecutive week of inflows, following the almost-identical $264 million inflow reported to have occurred during the previous week, ended Aug. 25. The two weeks of inflows, totaling almost $533 million, have more than made up for the previous four straight weeks of outflows, dating back to July 28. During that time, some $504.1 million more left the funds than came into them, according to a Prospect News analysis of the statistics, which are considered a key barometer of overall junk market liquidity trends.

Even with that sizable inflow over the past two weeks, outflows have still been seen in 20 weeks out of the 35 weeks since the beginning of the year, versus 15 inflows. So far this year, net cumulative outflows have totaled some $4.392 billion, according to the Prospect News analysis, although that year-to-date outflow total was down from about $4.661 billion the week before.

Stage is set for remainder of 2004

One sell-side official told Prospect News on Thursday most of the scenery is in place for a strong finish to 2004 in the new issue market.

"You have low default rates and an overall improving credit environment," said the source. "You also have cash out there.

"So the signs are all good.

"But this is an election year," the official added. "It is still difficult to say what impact that will have on the market. It could result in a slowdown of activity - especially in November.

"Then you have Thanksgiving, and then you have December.

"The real window you have is basically September and October, and maybe a week in November and one or two weeks in December."

Tight supply but disciplined market

The official said that although the word in the market is that demand is once again outpacing the supply of high-yield paper, the final months of 2004 do not figure to see the re-introduction of "hot market deals" - dividend payment deals, notes and warrants units, discount notes, etc. - in any substantial volume.

"Supply is an issue," conceded the sell-sider, "however people have definitely become more conscious of covenants. They're looking for tighter deals. They're not buying everything. There is some discipline in the market, which is good to see actually."

The sell-sider did concede, however, that late summer 2004 did not come and go without a smattering of dividend payment deals, pointing to MQ Associates, Inc.'s (MedQuest Holding Co.) $84.8 million of proceeds of eight-year senior discount notes (Caa1/B-) which priced at 62.337 on Aug. 19 to yield 12¼%, according to market sources.

Proceeds were slated to fund a dividend payment to the company's existing stockholders.

The sell-sider also nodded at the Aug. 12 transaction from Norcroft Holdings LP/Norcroft Capital Corp. The $80.333 million proceeds issue of zero-coupon eight-year senior discount notes (Caa1/B-), which priced at 68.079505 to yield 9¾%, was sold in order to fund a distribution to limited partners.

What's the hurry?

Finally the sell-sider took issue with color heard earlier in the week from certain investment banks - holding that the post-Labor Day week of Sept. 6 will get underway with a burst of activity in the new issue market.

The source forecast a moderate pace as the week gets underway.

"It is a shortened week, so I don't see it as particularly advantageous for drive-by deals," the official said.

"The Sept. 13 week is a better bet for drive-bys.

"Personally I don't see any urgency," the source added. The market is the way it is. It is not soft. We doubt that people are going to be rushing in during the first couple of days."

Hornback-Baumarkt plans euro deal

The last full pre-Labor Day session in the primary market came and went with little activity.

No prospective issuers stepped up to join Fisher Communications Inc., which announced Wednesday that it will begin a roadshow Tuesday for $150 million of 10-year senior notes (B2).

However Hornbach-Baumarkt-AG announced in a Thursday press release that it intends to issue as much as €200 million of bonds to improve its long-term capital structure and secure liquidity for further growth.

The Bornheim bei Landau/Pfalz, Germany-headquartered company operates do-it-yourself retail markets and garden centers.

And from emerging markets, Hong Kong-based Techtronic Industries Co. plans to sell $300 million of global bonds that would mature in seven to 10 years, according to market sources.

The underwriters and timing on the deal are yet to be determined.

R.H. Donnelley lower

In the secondary, a trader saw R.H. Donnelley's 10 7/8% notes due 2012 "a lot lower," quoting the bonds as having fallen to about 112 bid from prior levels at 117. However, it should be noted that with trading as thin as it was - and the same trader called Thursday "even slower than [Wednesday], if that's possible" - bond price movements are exaggerated.

He chalked up the slide in the Cary, N.C.-based telephone directory publishing company's paper to profit-taking.

It should also be noted that Donnelley on Wednesday said it had closed on its previously announced purchase of SBC Communications Inc.'s directory publishing business in Illinois and Northwest Indiana, for $1.41 billion in cash, after working capital adjustments and the settlement of a $30 million liquidation preference related to the company's companion purchase of DonTech, the partnership for local sales into the Illinois and Northwest Indiana SBC yellow pages.

While Donnelley said that the purchase - first announced on July 28 - will be immediately accretive from a cash-flow perspective and "completes our strategic transformation to a fully integrated yellow pages publishing and directional media company from a sales agent and pre-press publishing vendor," from the leverage point of view that bondholders might take, things aren't quite so sanguine.

When the deal was first announced, both Moody's Investors Service and Standard & Poor's - while acknowledging Donnelley's strong position in the telephone directory industry - warned that the new acquisition, especially coming on top of the company's $2 billion-plus purchase of some of Sprint's directory assets earlier in the year , makes the company much more highly levered.

The company's total pro forma debt from the debt-financed acquisition rose to $3.236 billion at the closing from the $1.835 billion as of Dec. 31. Moreover, even figuring in a rise in pro-forma full-year EBITDA to $586 million from previous guidance of $415 million on account of the anticipated additional revenues from the new assets, the total pro-forma ratio of debt versus EBITDA balloons up to 5.8 times from a more moderate 4.42 times previously.

Levi Strauss better

Elsewhere, Levi Strauss & Co. bonds were seen "a little firmer," a trader said, quoting its 7% notes due 2006 at 98.5 bid, 99.5 offered, and its 11 5/8% notes due 2008 at 102.5 bid, 103.5 offered.

Another trader saw the 7s up ¼ point, at 99 bid, and saw the 11 5/8s at that same 102.5 bid, 103.5 offered level.

Late Wednesday, the San Francisco-based blue jeans maker said that it completed the final agreements with its bankers that will clear the way for the company to proceeds with the long-awaited sale of its Dockers casual clothing operation.

Such a sale could bring debt-laden Levi anywhere from $500 million to $1 billion, according to analysts' estimates and published reports. The company would use the money to pay down at least 30% of its approximately $1.9 billion of debt.

Levi had to go to its lenders to seek permission for any sale of Dockers because the valuable asset is part of the collateral which currently secures the company's senior secured term loan and its asset-backed revolving credit line. Their agreement had been expected.

For many months, Levi bondholders and analysts who watch the once-dominant blue-jeans maker had been speculating that Levi might unload Dockers, both to raise cash with which to pay down debt, as well as to then direct its focus on its core blue-jeans business, as well as the Levi Strauss Signature clothing line sold through discount retailers. However, it wasn't until May that Levi finally acknowledged what pretty much everyone else already knew - that Dockers was indeed for sale.

Since then, the company has had little to say about the progress it has - or has not - been making in trying to sell the Dockers franchise, which Levi started back in 1986. Dockers signature product is its line of khaki shirts and trousers, although the product mix includes other kinds of casual clothing as well.

Among the companies which have been mentioned as potential buyers for Dockers are VF Corp., the world's largest apparel company and maker of such rival jean brands as Wrangler, Lee and Gitano; Jones Apparel Group Inc.; and Kellwood Co. The latter, a St. Louis-based contract manufacturer which produces Dockers under license from Levi, sparked a short-lived flurry of excitement in early June when its chairman, Hal Upbin, made some offhand remarks in the presence of a reporter after the company's annual meeting to the effect that his company was looking at Dockers and that the unit might fetch as much as $1 billion.

Upbin later backed away from his comments, indicating that his company's interest in Dockers was no different than its routine scrutiny of other companies in its industry that might be for sale. He also said that in estimating a possible price, he was only repeating Wall Street scuttlebutt he had read in the papers.

Gap steady on small sales decline

Also in the clothing retailing area, there seemed to be little market response to Gap Inc.'s twin announcements. A trader saw the company's 5¾% notes due 2009 holding steady around 124 bid.

The San Francisco-based operator of the eponymous The Gap, Old Navy and Banana Republic store chains saw same-store sales - the retailing industry's key economic metric - decline 1% in August from year-ago levels, in line with a generally soft retailing industry environment; the decline in sales at stores open at least a year was actually not as bad as the 2.5% decline Wall Streeters had been expecting.

Gap also announced that it had completed a five-year, unsecured $750 million revolving credit facility, replacing the company's existing $750 million three-year secured revolving credit facility, which was scheduled to expire in June 2006. Gap further said that it is exercising its option to retire the remaining $122 million in debt from its 2005 maturity during the current third quarter.

Six Flags quiet

Traders saw no activity Thursday in Six Flags Inc. bonds, which had firmed handsomely on Tuesday and added to those gains Wednesday on news that major shareholders of the theme park operator were expressing dismay with its underperforming results and might press management strongly to make changes in the way the company operates.

Mediacom down

A trader saw Mediacom Communications Corp. bonds a little lower, at 97.25 bid, 97.75 offered, down from 98.25 bid, 98.75 offered previously.

Standard & Poor's on Wednesday put the Middletown, N.Y.-based cable operator on CreditWatch negative.

Calpine short maturities rise

Calpine, he said, was "a little better in the short end," with the San Jose, Calif.-based power generator's 8¼% notes due 2005 firmer at 88 bid, 89 offered, and its 10½% notes due 2006 at 94 bid, 95 offered. However, he said, "the back end was off," with Calpine's 8½% notes due 2008 and 8½% notes due 2011 both easier at 64.5 bid, 65 offered and 62 bid, 63 offered, respectively.

The trader saw "nothing going on all of this week." He said that at his shop, they had seen "accounts liquidating and rebalancing portfolios," leading up to the end-of-the month this past Wednesday, as well as a desire not to be too long in anything over the 31/2-day Labor Day weekend. "But away from that it was just quiet."

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