Mobile Storage prices upsized deal; HCA bonds down as LBO try flops; funds see $72 million outflow

By Paul Deckelman and Paul A. Harris

New York, July 20 - Mobile Services Group Inc./Mobile Storage Group Inc. were seen having successfully priced an upsized issue of eight-year notes Thursday. Secondary market traders saw the new bonds firm solidly in initial aftermarket dealings.

Elsewhere on the primary scene, Barrington Broadcasting Co. was heard getting ready to embark on a marketing campaign, beginning next week, for the Hoffman Estates, Ill.-based television station group operator's proposed eight-year bond offering.

In the secondary realm, HCA Corp.'s bonds were seen markedly lower for a second consecutive session, hurt by news reports indicating that a planned leveraged buyout for the big Nashville-based hospital operator has fallen apart, practically at the last minute.

Even though Ford Motor Co.'s results fell into the red during the second quarter versus a year-earlier profit, there was little fallout among investors in the Number-Two domestic carmaker's bonds.

And Lyondell Chemical Co.'s bonds retreated following the announcement that the Houston-based chemical company and joint-venture partner Citgo Petroleum Corp. have decided not to sell their huge Houston oil refinery - and speculation arose that Lyondell may instead buy out its partner's 41% stake in the $5 billion facility. Tesoro Corp. bonds were meantime up more than a point; the San Antonio-based refining company had recently been mentioned as a possible buyer for the plant.

An official from a high yield syndicate desk said that junk traded down an eighth of a point to a quarter of a point during the Thursday session.

As the session was wrapping up, 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 $72.3 million more left the funds than came into them, reversing the $71.6 million inflow reported in the previous week, ended Wednesday, July 12.

That outflow actually followed two straight weeks of inflows - a rarity in a fund-flow landscape so far this year that has been almost completely dominated by outflows. In those previous two weeks, inflows totaled $169.1 million, according to a Prospect News analysis of the AMG figures - although that modest winning streak was absolutely dwarfed by the $1.181 billion cumulative outflow seen over the previous three weeks, according to that analysis.

And outflows have now been seen in 12 weeks out of the last 15, for a net total outflow in that time of $2.273 billion, the analysis indicated, and have also now been seen in fully 22 weeks out of the 29 since the start of the year, against only seven inflows. Year-to-date net outflows have totaled $3.539 billion, according to the Prospect News analysis, excluding distributions and counting only those funds that report on a weekly, rather than on a monthly, basis.

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 between 10% and 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.

1 deal prices, 3 join calendar

The primary market saw a single, upsized issue price at the tight end of price talk.

Meanwhile the forward calendar took aboard a trio of new offerings - all of them expected to price by the end of July.

Mobile Storage upsizes

Thursday's sole transaction came from Mobile Services Group, Inc. and Mobile Storage Group, Inc., which combined to price an upsized $200 million issue of eight-year senior notes (B3/B-) at par to yield 9¾%.

The Lehman Brothers-led LBO deal, which was upsized by $40 million from $160 million, came on the tight end of the 9¾% to 10% price talk.

An informed source told Prospect News that the deal went really well, and added that it was an excellent book with "blue chip holders."

Calendar continues build-up

Although the Mobile Storage deal is the final transaction expected to price before Friday's close, the late July primary market figures to be a relatively active one - especially considering that the dog days of summer are nigh.

To a calendar that contains $4.40 billion of dollar-denominated deals which are expected to price by the end of the month, three new names were added Thursday.

H&E Equipment Services Inc. will begin a roadshow on Friday for its $250 million offering of 10-year senior notes (B3/B+), via Credit Suisse and UBS Investment Bank.

The Baton Rouge, La., heavy equipment manufacturing and services company will use the proceeds to refinance debt.

U.S. Shipping Partners LP will also start a roadshow on Friday for its $200 million offering of eight-year senior notes.

Lehman Brothers and CIBC World Markets are joint bookrunners for the vessel construction and equity funding deal from the Edison, N.J., operator of a fleet that serves large oil and chemical companies.

And Barrington Broadcasting will begin a roadshow next week for its $125 million offering of eight-year senior subordinated notes (B3), via Banc of America Securities and Wachovia Securities.

The Hoffman Estates, Ill., operator of television stations in mid-sized markets will use the proceeds to fund an acquisition.

Mobile Storage up in trading

Several secondary traders saw the new Mobile Storage Group 9¾% senior notes due 2014 at 101 bid, 101.5 offered as the day closed out. Those bonds had priced earlier in the session at par.

HCA wider on LBO news

Back among the established issues, HCA's bonds - which largely appeal to high-grade crossover players reaching for yield and which are usually quoted on a spread-versus Treasuries basis, despite their junk status (the bonds are rated Ba2 by Moody's Investors Service and BB+ by both Standard & Poor's and Fitch Ratings) - were heard to have widened out substantially for a second straight session on news reports that plans for a huge buyout deal for the nation's largest hospital operator had come apart.

Traders reported on Wednesday that the company's most actively traded issue, the 6½% notes due 2016, had ballooned out by as much as 40 basis points to a spread of 300 bps over Treasuries on the bid side, 290 bps over on the offered side.

And on Thursday, they picked right up where they had left off at the close Wednesday. A trader said that "they were anywhere from 50 bps to 75 bps wider today alone," on top of the erosion seen on Wednesday.

At another desk, a trader - who translated the spread levels into approximate dollar-price values - said that the bonds were down 3 full points on the session to 86.5 bid, 87.5 offered. He said that they had gone out on Wednesday at the equivalent of 89.5 bid, 90.25 offered - and that was down from 91.5 bid, 92 offered late Tuesday, before the news surfaced.

The company's 5¾% notes due 2014, which had fallen a point on Wednesday, were seen down another 2½ points Thursday to 86 bid.

The Wall Street Journal reported Wednesday morning that the company had been in talks with several private equity firms on a possible buyout, and said that those talks had gotten to the final stages before they foundered.

The paper, citing unidentified sources close to the talks, said that the prospective purchasers included Bain Capital, Kohlberg Kravis Roberts & Co. and Merrill Lynch Private Equity, as well as relatives of Senate majority leader Bill Frist - a heart surgeon by training whose father, the late Thomas Frist, and brother, Thomas Frist Jr., founded HCA back in the 1960s.

The Journal said HCA had convened a special board committee to study the buyout bid - but the company's massive debt load, estimated north of $11 billion, made it difficult for lenders and prospective buyers to offer a high enough price. The paper said that the company and its would-be suitors remained about 10% apart when the talks finally ended.

HCA over the past two days has declined to make any comment on the reported buyout talks, or the movements in its shares or bonds. A spokesman for Sen. Frist said the Tennessee Republican owns no HCA shares and declined further comment.

While the apparent demise of the deal was a blow to the bonds - which likely would be taken out in the event of a change-of-control - the company's New York Stock Exchange-traded shares inched up about 38 cents on Wednesday and zoomed by $4.53 (10.37%) on Thursday to $48.20. Volume of 14.9 million shares was more than seven times the average daily turnover. The sharp rise was seen by observers as a sign that Wall Street considers the company to be in play. A sign of that conviction was that over 34,000 call options on HCA stock changed hands Thursday, topping the total for the whole month of June.

Lyondell sinks, Tesoro gains

Elsewhere, the demise of another apparent deal pushed Lyondell Chemical's bonds lower, after Lyondell and its joint-venture partner Citgo Petroleum said that they were no longer interested in selling their 268,000-barrel-per-day refinery, a facility that had been shopped around since April. News reports said that several prospective buyers had emerged in that time, and had made offers of more than $5 billion for the refinery.

One name in particular that had figured in the speculation was Tesoro, which has become a major player in the U.S. refining industry in recent years via a series of acquisitions. There were reports early in the month that Tesoro was interested in buying the refinery for somewhat more than $4 billion - and thus increasing its 560,000-barrel per day refining capacity by nearly 50% in one fell swoop. Those news reports were never confirmed by Tesoro, Lyondell or Citgo.

A trader said that news that Lyondell and Citgo will not sell the refinery to a third party like Tesoro - thus eliminating the need for the latter company to go out and borrow a massive amount of debt to finance such a deal - pushed Tesoro's 6¼% notes due 2012 up 1¼ points and boosted its 6 5/8% notes due 2015 by 1½ points, both to 95.25 bid, 95.75 offered.

Meantime, he said, Lyondell's 10 1/8% notes due 2008 dipped ¾ point to 104.75 bid, 105.75 offered, while its 10 5/8% notes due 2011 fell to 107 bid, 108 offered.

A trader at another desk saw its 9½% notes due 2008 down ½ point at 102.5 bid, 103.5 offered.

Late in the session, news stories began circulating indicating that rather than sell the refinery to Tesoro or some other third party, Lyondell might decide to buy out its partner itself. The stories said that the aborted bidding process gave the plant's owners a pretty good idea of its market value.

Lyondell owns 58.75% of the joint venture company that operates the refinery, while Houston-based Citgo - the U.S. petroleum refining and marketing unit of Venezuela's state oil company, Petroleos de Venezuela SA - owns the remaining 41.25%. The two companies have been in partnership since 1992, but that marriage has recently turned rocky, as relations between the United States and Venezuelan president Hugo Chavez's government have worsened, leaving both parties wanting out. Besides the political differences - Chavez has accused U.S.-based oil companies of exploiting his country, a charge the American companies and Washington deny - Citgo and Lyondell have divergent strategic goals, with Citgo reportedly wanting to focus on its three wholly-owned U.S. motor fuels refineries.

Lyondell, which according to published reports never really did want to sell the refinery, but went along with shopping it more as a means of getting out from under its Citgo partnership, said in its announcement that the sale was off, that the offers "were insufficient to overcome the significant benefit of retaining an ownership position."

It reportedly likes having it because it provides a steady stream of petrochemicals for Lyondell's nearby chemical plants, and because with demand for gasoline high and U.S. refining capacity tight, it is expected to generate handsome cash flow that enables the chemical company to pay down its debt.

A Lyondell spokesman declined to address the idea that the company may buy out its junior partner, but said that a decision on whether the two companies will continue their business together or go their separate ways could emerge "in the very near future."

Ford firm despite loss

News that Dearborn, Mich.-based Ford lost $123 million (seven cents a share) in the second quarter, a sharp deterioration from its year-ago profits of $946 million (47 cents) had "not much impact" on Ford's bonds, a trader said.

Another agreed, actually quoting Ford's flagship 7.45% notes due 2031 ¼ point higher at 71.5 bid, 72 offered. He saw the 7% notes due 2013 of Ford's financial arm, Ford Motor Credit Co., ½ point better at 86.5 bid, 87 offered.

Horton unchanged on earnings

Also on the earnings front, the news that D.R. Horton Inc.'s earnings dropped to $292.8 million (93 cents per share) in the Fort Worth, Irving, Tex.-based homebuilder's fiscal third quarter from $371.7 million ($1.26 per share) a year ago, had little impact on its bonds, with its 6½% notes due 2016 "really unchanged," said a trader, who quoted the spread on the bonds at 220 basis points over Treasuries on the bid side, 215 bps over on the offered side, versus 223/213 on Wednesday.

The earnings decline was not unexpected. Horton last week said it expected to report lower sales figures for the quarter, and cut its quarterly and full-year guidance.

Another trader said that he had not seen D.R. Horton's bonds, but said that he did see "a rebound" in some of the other recently embattled homebuilder names, such as Hovnanian Enterprises Inc. and Standard Pacific Corp. He saw Red Bank, N.J.-based Hovnanian's 8 5/8% notes firmer at 96.5 bid, 97.5 offered.

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