Jean Coutu ends mixed on Eckerd news, Rite Aid lower; Metaldyne up; funds see $141 million inflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 24 - Jean Coutu Group Inc.'s bonds gyrated around and ended mixed Thursday on the news that the Canadian pharmacy operator will sell its roughly 1,900 drugstores in the United States to Rite Aid Corp. in a cash-and-stock deal valued at $3.4 billion, including debt assumption. Rite Aid's bonds, meantime, moved lower on investor dismay over the prospect that the Camp Hill, Pa.-based Number-Three U.S. drugstore chain operator will at least partly fund the cash portion of its big deal with new credit facility borrowings and additional bond debt.

Bonds of Canadian paper manufacturer Domtar Inc. - which firmed smartly in Wednesday's dealings on the news that the company will acquire the Fine Papers unit of U.S.-based forest products giant Weyerhaeuser Co., making Montreal-based Domtar one of the larger players in the industry - were seen continuing to rise, although more modestly, on Thursday.

And Metaldyne Corp.'s bonds - which had bounced around on Wednesday, first firming from previously oversold levels and then giving back most of those gains as key customer Chrysler Group announced cuts in its pickup truck and SUV production - managed to push back up on Thursday as a news service speculated on the possibility that the Plymouth, Mich.-based maker of metals parts for the automotive industry might be bought out.

The primary market remained quiet, although participants there studied the Jean Coutu-Rite Aid news, and theorized about the possible size of the latter's future bond issue.

Inflow trend resumes

And as activity was wrapping up for the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday, $140.5 million more came into the funds than left them - the fourth week in the last five in which there was been an inflow, although there was a $73.7 million outflow reported in the previous week, ended Wednesday, Aug. 16.

During that five-week span, net inflows have totaled $588.1 million, according to a Prospect News analysis of the figures. Inflows have also now been seen in six weeks out of the past eight- a rarity in a fund-flow landscape so far this year that has been almost completely dominated by outflows. Over those eight weeks, net inflows have totaled $684.9 million, according to the Prospect News analysis.

However, despite that recent show of strength by the funds, the year-to-date figures tell a much different story.

While the latest infusion of cash cuts the year-to-date losses, the weekly reporting funds are still negative by slightly over $3 billion

Meanwhile the funds that report on a monthly basis remain in the black for 2006 to date, having seen $2.266 billion of inflows.

Hence the aggregate year-to-date flows end the most recent week at negative $742 million, according to AMG.

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 hedge funds.

Jean Coutu 81/2s jump briefly

Back in the secondary market, "there was not much to report," a trader said, except for the movements of Rite Aid and Jean Coutu bonds, as the two companies officially confirmed Thursday what many people in the market had been talking about on Wednesday - that Rite Aid will acquire nearly 1,900 stores under the Eckerd and Brooks brands from Jean Coutu for $2.55 billion in cash and stock, plus the expected assumption of $850 million of existing Jean Coutu debt.

On Wednesday, talk that such a deal was in the works, including a story to that effect on The Wall Street Journal's online news service, had pushed Jean Coutu's 8½% senior subordinated notes due 2014 up nearly 4 points to 96.5, while its 7 5/8% notes due 2012 gained nearly 2 points to 98.5, while Rite Aid's numerous series of bonds were seen down anywhere from ¼ to ¾ point.

When that market buzz actually became a reality, it produced very heavy and volatile trading the Jean Coutu 8½% bonds.

A trader noted that those bonds "traded as high as par early this [Thursday] morning," but then after that "backed off pretty aggressively," falling to intra-day levels as low as 93 bid, before coming back off those lows to finish at 94.25 bid, 95.25 offered, down some 2 points from where they had begun the session.

He said that even though the deal seems to have been structured as a fairly straightforward asset sale by Jean Coutu, some investors must have initially - and erroneously-believed that the deal might constitute a change-of-control for Jean Coutu, "which would get you out of the bonds at 101, if not a little higher. Then I guess after a more careful reading [of the deal terms] or some coverage from the company, it was determined that it was not a change-of-control - so they dropped like a rock.

"Now, the feeling that they may or may not needs clarification - so they're stuck here in the mid-90s."

Far from undergoing a change of control, Jean Coutu will receive 250 million shares of Rite Aid common stock in the deal - enough Rite Aid shares to give it a hefty 30% stake in the U.S. pharmacy company, as well as $1.45 billion in cash. And far from being taken out at 101, the $850 million of outstanding 8½% notes are to be assumed by Rite Aid, subject to satisfaction of certain conditions. In the event that those notes are not assumed by Rite Aid, the cash paid would increase to $2.3 billion and Rite Aid - which expects to finance the cash portion of the transaction with a combination of existing excess cash on hand, bank borrowings (see related story elsewhere in this issue) and the issuance of new debt securities - would issue additional new bonds to fund the increased cash consideration.

Other Jean Coutu notes stay up

While the 8½% notes were first dramatically soaring up to par levels, and then plunging back down to end the day lower, the company's other series of bonds, the 7 5/8% 2012 notes, opened trading at 101.75, already up 2 to 3 points out of the gate, a market source said, and then just kept right on climbing, never looking back, to finish at 105 bid.

The first trader suggested that those $350 million of bonds, unlike the subordinated issue, "have different covenants" that would mandate that Jean Coutu take them out using a portion of the cash proceeds from the Eckerd and Brooks chains' sale. He also saw those bonds at 105 bid, 105.5 offered.

Yet another trader pegged the bonds 104.5 bid, 105.5 offered, calling it a 6 point gain on the day, while seeing the 81/2s down 2 points at 94.25 bid, 95.25 offered.

Rite Aid retreats

He meantime saw Rite Aid's 7½% notes due 2015 fall to 95 bid, 96 offered, which he called a 4 point slide on the session, while its 9½% notes due 2011 were 1¼ points lower at 102.75 bid, 103.75 offered.

While Rite Aid's 6 7/8% notes due 2013 were seen by a market source to have fallen as much as 6 points on the session, down to the mid-80s from prior levels around 91, its 8 1/8% secured notes due 2010 actually firmed a bit, rising ½ point to close at 101.75.

Another trader saw those 8 1/8s off maybe half a point to 100.75 bid, 101.25 offered, but saw its 9¼% unsecured notes due 2013 plummet 3 points to 96 bid, 97 offered.

Bond investors were not the only ones made wary by the prospect of a huge load of new debt on top of an already sizable leverage profile; Standard & Poor's and Fitch Ratings each said that they may cut Rite Aid's ratings deeper into junk territory.

More upside for Domtar

Elsewhere, Domtar's bonds were seen a little firmer, on top of the solid gains those notes notched on Wednesday on the news of its pending purchase of Weyerhaeuser's Fine Papers unit in a $3.4 billion deal.

A trader saw Domtar's 7 7/8% notes due 2011 up 3/8 point at 99.75 bid, 100.25 offered, while its 7 1/8% notes due 2015 did even better, up a full point at 93.25 bid, 94. The 7 7/8s had been described as 2 to 4 points higher on Wednesday while the 7 1/8s were up 3.

At another desk, the company's 5 3/8% notes due 2013 were seen up 3/8, at 86.125. Domtar's 9½% notes due 2016, which on Wednesday had zoomed to 105 bid, a gain of 5 or 6 points, held steady at that level on Thursday, although no trading was seen.

Metaldyne moves around

Automotive parts supplier Metaldyne - whose bonds were battered on Monday and Tuesday after S&P said the company, and seven other suppliers, were under scrutiny for possible downgrades in the wake of big output cuts by customer Ford Motor Co., then tried to bounce back Wednesday, only to surrender most of its early gains when customer Chrysler announced production cuts - was once again strong in the early going on Thursday. Traders cited a news report on the DebtWire service that a buyer might be interested in the company.

"Who knows?" said one, quoting its 11% notes due 2010 up 4 points in morning trading, as the bonds pushed into the lower 80s, "but as the day progressed, they gave most of it back" and ended at 76.5 bid, 77.5 offered, up just ½ point. He saw the company's 10% notes due 2013 up ¾ point on the session at 95.5 bid, 96.5 offered.

A source at another shop, though, said that while Metaldyne's 11% bonds did bounce from opening levels around 78 to as high as 82, before dropping back into the upper 70s during the afternoon, there was some late trading in the name that lifted those bonds back up to their day's peak by the day's end. The 10s, meantime, traded in a tight 95ish context all day, the source said.

Ford mulling going private?

And even as M&A speculation swirled around Metaldyne, USA Today was reporting that Ford itself might be bought out, saying that members of the struggling auto giant's founding Ford family, including chairman Bill Ford, were considering taking the company private. The Fords currently own 5% of the outstanding shares and control 40% through a separate class of stock, the paper said. Such a step would let chairman Ford and his inner circle move more quickly to try to turn the carmaker's fortunes around without having to answer to public shareholders.

Ford's 7.45% notes due 2031 were up ¾ point at 76.75 bid, 77.25 offered.

A trader, citing the going-private rumors generated by the USA Today report, ironically opined "good luck on that," noting that it would cost so much to buy Ford - at least $14 billion, piling even more debt on top of the company's tens of billions of dollars of already outstanding paper - that "they wouldn't have two sticks to rub together after that to try to improve the company."

Rotech rises

A market source saw Rotech Healthcare Inc.'s bonds healthier - although there was no fresh news out on the Orlando, Fla.-based provider of home medical equipment and related products and services that might explain the gain.

The source saw the company's 9½% notes due 2012 trade in a 68-69 context for most of the day, pretty much unchanged, but then push up to around 73 bid on a series of small to moderate sized trades late in the session.

Another trader, though, saw the bonds at 68.5 bid, 69.5 offered, which he called a 1½ point rise on the day.

The company's Nasdaq Global Market shares were up 10 cents (7.14%) to finish at $1.50.

Broad market quiet

A high-yield buy-side source marked the market unchanged on Thursday, adding that so many participants are absent that it might just as well be closed.

And for all practical purposes the primary market did remain closed, once again producing no news whatsoever.

Will they pay up?

During Thursday's totally uneventful primary market session Prospect News continued to press its sources for estimates of how much new issue volume the market is likely to see between Tuesday, Sept. 5, when players return from the three-day Labor Day break, and the end of the year.

One capital markets sell-side source mentioned that there is reckoned to presently be $25 billion in the high yield pipeline.

Meanwhile a buy-side source said $15 billion to $20 billion, but possibly more.

Prospect News asked the buy-sider if the market could clear $20 billion or more of paper before the end of the year.

The source responded that as long as issuers don't come to market with the idea that they will be able to "squeeze pricing, especially in the LBO deals," the answer is probably "Yes."

"If they come to market with the intention of pricing the deal regardless of where it gets done - because they don't really care in the long run - then I think it gets done," the buy-sider asserted.

"If people start trying to ratchet in price talk there could be some problems."

This source suggested that the $2 billion three-part deal that was priced on June 29 by Nortel Networks Ltd. could serve as a suitable model for issuers intent on selling junk bonds during the run-up to 2007.

To recap, the Brampton, Ont.-based telecommunications networking equipment company priced a $1 billion tranche of five-year floating-rate notes at par to yield three-month Libor plus 425 basis points, a $550 million tranche of seven-year fixed-rate notes at par to yield 10 1/8%, and a $450 million tranche of 10-year fixed-rate notes at par to yield 10¾%.

The buy-sider said that Nortel initially marketed the 10-year paper in a 9¾% to 10% context, but when it became apparent that the book for that $450 million tranche was not filling at that price they moved talk out to 10½% to 10¾%.

"There was an understanding that they needed to get the deal done and that they would pay up to make that happen," the buy-sider said.

The source added that right now the most interesting transaction in the pipeline is Nashville health care services company HCA Inc.'s LBO deal involving up to $5.70 billion of senior secured second-lien notes which are expected to come in the fourth quarter via Bank of America, Citigroup, JPMorgan, Merrill Lynch, Deutsche Bank, Wachovia Securities and possibly others.

"Volume alone will be an issue," the buy-sider said. "But if they price it right it should go okay."

Rite Aid to issue notes

During a Thursday conference call Camp Hill, Pa., national drugstore chain Rite Aid Corp. said it plans on using new six-year notes and new term loan debt to help fund its acquisition of Jean Coutu Group USA Inc.

Citigroup provided the financing commitment.

The transaction is expected to close late this year or early next year.

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