Argosy Gaming jumps on Penn National buyout; three deals join calendar; funds see $361 million influx

By Paul Deckelman and Paul A. Harris

New York, Nov. 4 - Argosy Gaming Co. bondholders were holding a royal flush Thursday as the bonds moved up sharply on the news that the Alton, Ill.-based casino company has agreed to be acquired by rival Penn National Gaming Corp. in a $2.2 billion deal that includes Penn's assumption of $805 million of Argosy debt.

In primary market activity, Citizens Communications Co. and Neenah Paper Inc. were heard by syndicate sources to be getting ready to take to the road with marketing campaigns for their respective upcoming bond issues, a process slated to begin Friday for Citizens and Tuesday for Neenah. Meantime, Hornbeck Offshore Services joined the forward calendar with a $225 million 10-year offering, while price talk emerged on several deals already out there, for Stats CHIP Pac Ltd., Herbst Gaming Inc. and K&F Acquisition Inc. The latter deal has also been downsized by $50 million, and a companion bank debt deal upped by that same amount.

And after trading had wrapped up for the day, market participants familiar with the weekly high-yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday $361 million more came into the funds than left them, this on top of the more modest $56.5 million inflow seen in the week ended Oct. 27.

Inflows have now been seen in 11 weeks out of the last 12 - with the one outflow in that time, a barely discernable $900,000 for the week ended Oct. 21. Inflows have also now been seen in 23 of the 44 weeks since the beginning of the year, although the funds still show a net outflow over that time of $3.199 billion, according to a Prospect News analysis of the AMG figures. However, after a strong start to the year and then a rocky patch over a number of months in which outflows from the funds mounted up, the trend over the past three months has been solidly positive, according to the analysis of the figures.

The fund flow numbers are seen as a reliable barometer of overall junk market liquidity trends, even though the funds make up only a relatively small percentage of the money available in the greater high yield universe.

The AMG statistics include only those funds that report on a weekly basis and they exclude distributions.

Argosy notes jump

In the secondary market, the decision by Wyomissing, Pa.-based Penn National to place its bets on Argosy, which operates a string of half a dozen casinos in the Midwest and Baton Rouge, La., sent the latter's 7% notes due 2014 soaring as high as 114 bid from prior levels in the 106-107 area. By day's end, the bonds had come slightly off that peak, but still had a handsome gain at 113.

"Yippy, skippy, those were up," marveled trader. He said he had seen no sign of Argosy's other issue, its 9% notes due 2011.

At another desk, the 7% notes were seen having traveled to 113 from 106.5 on Wednesday, while the 9s were quoted up ¾ point at 113.75.

Argosy's New York Stock Exchange-traded shares rose $4.57 (11.21%) on Thursday to $45.32 on volume of 6.4 million shares, nearly 28 times the usual turnover of about 230,000. Penn National is offering $47 per share cash, or about $1.4 billion for the non-debt portion of the transaction.

Penn National has heretofore mostly been known as a racetrack operator, although it does now own and operate the Hollywood Casino in Aurora, Ill. Its bonds were all seen up anywhere from ¼ to ½ point, with its 6 7/8% notes due 2011 half a point better at 104.75 bid, and its 8 7/8% notes due 2010 seen 3/8 point better at 110.25.

Its Nasdaq-traded shares soared $10.78 (26.01%) to $52.22 on volume of 7.1 million, more than 13 times the norm.

While bonds and equity investors certainly like the deal, the ratings agencies may be less sanguine; Moody's Investors Service said Thursday that it was considering downgrading the two companies' debt, including Penn National's B1 senior unsecured issuer rating and Argosy's Ba3 rating. Moody's said that the union of the two gaming concerns will create a combined company with a debt burden that may be difficult to reduce in coming years.

Calpine rises after earnings

Apart from the gaming industry merger, earnings were the dominant feature of Thursday's market, and Calpine Corp. was a standout performer, after the San Jose, Calif.-based power generation company released its numbers - even though they showed a drop of some 90% from year-ago profit levels.

Calpine earned $22.3 million, (five cents per share) in the latest quarter, well down from $237.8 million (51 cents per share), in the year-ago period. Analysts were looking for earnings of about 17 cents per share. Revenues for the period fell 4% to $2.56 billion from $2.66 billion last year.

Calpine blamed the falloff on unseasonably mild weather and lower margins.

Even so, said a trader, "people were kind of expecting the numbers to stink, and I saw some people hitting bids late last night. I think people were pleasantly surprised, or breathing sighs of relief [that the numbers weren't worse]."

He saw Calpine's 8¼% notes due 2005 having firmed up to 98.75 bid, 99.75 offered from prior levels at 97.25 bid, 98 offered, while the company's 8½% notes due 2011 rose to 59 bid, 60 offered from 57.75 bid, 58.25 offered earlier.

At another desk, Calpine "was up a couple of points," a market source said, quoting its 7 5/8% notes due 2006 advancing to 95 bid from previous levels at 92, while its 8¾% notes due 2007 were likewise up a trey to 75 bid.

He also saw Calpine's 7¾% notes due 2009 and 7 7/8% notes due 2008 were both up two points, at 59.5 bid and 63 bid, respectively.

Calpine's NYSE-traded shares also got in on the action, advancing 34 cents (13.99%) to $2.77, on volume of 38.3 million shares, almost quadruple the usual daily handle.

MCI dips then gains

MCI Inc. reported a third-quarter net loss of $3.4 billion, mostly due to a $3.5 billion writedown that the Ashburn, Va.-based long distance operator took on the value of its assets, citing continued tough competition. But on an operating basis, MCI - which earlier this year shed its old WorldCom name and emerged from bankruptcy - had $121 million in the third quarter, up from operating income of $77 million a year earlier. It also said that pricing pressures among its largest customers might be easing, and it touted the effects of cost cuts on its bottom line.

"Initially there may have been a knee-jerk reaction to the headline [of the $3.4 billion net loss]," said a trader, who saw the company's 6.688% notes due 2009 "bouncing around" at levels somewhat below their Wednesday close at 99.5 bid. But then, he said, the bonds recovered to end somewhat higher at 100.5.

"They didn't race up," he said, "they bounced around" first.

He saw the MCI 5.908% notes due 2007 ending at 100.5 bid, 100.875 offered, "a little better" than Wednesday's 100.25 bid, 100.5 offered. But the 7.735% notes due 2014 rose to 98.75 bid, 99 offered level from 97.25 bid, 97.75 offered, he said, "so those were up smartly. It was a big move for this bond," he concluded.

Another market source saw the three year bond at 101, the five-year at 99.75 and the 10-year at 98, all up half a point on the session.

Charter bonds sink

He meanwhile saw Charter Communications bonds "all down a little bit," after the St. Louis-based cable operator reported a sharply wider third-quarter loss after taking a big earnings charge, and said it would require additional funding to meet maturing debt obligations in 2005 and 2006 (see related story elsewhere in this issue).

He quoted the Charter 8 5/8% notes due 2009 and 7¾% notes due 2009 each down ¾ point at 80.75 bid and 85, respectively. And he saw Charter's zero-coupon 2012 bonds down 3/8 point at 58.75.

No deals price

For the third consecutive session, no issues priced Thursday in the high-yield primary market, according to sources.

With a forward calendar that has been characterized as "slow to build" ever since the Labor Day break, investment bankers are now joining a sizable and growing chorus of paper-craving junk investors, asking: "Where are the issuers?"

Responses to that question were heard from three companies on Thursday.

However fuel was added to the fire, late Thursday - well after the market had closed - as a source told Prospect News that AMG Data Services has reported a $361.2 million inflow to the high-yield mutual funds for the week ending Nov. 3.

What could be stopping them?

Shortly before the inflow news was heard, one investment banker told Prospect News that the table is notably set for companies with below-investment grade ratings that want to borrow money for refinancing debt or for merger and acquisition financing.

However, this somewhat incredulous sell-sider added, issuers are demonstrating very little appetite for the available cash.

"The new issue calendar is building with unbelievable sluggishness," the banker said.

"Treasuries have backed up a little bit. The 10-year was down around 4% and now it's a little bit higher.

"But the stock market is rallying. The uncertainty of the election is behind us. Other than this Friday's non-farm payroll report there are no major news-making events on the horizon.

"There is nothing out there that people are really worried about."

Meanwhile, the sell-side source added, cash continues to come into the high yield asset class. And investors are having a hard time finding places to park it.

"Funds flow numbers have been mildly positive," the banker observed. "Basically we've been seeing small inflows.

"Meanwhile the accounts are reporting that they are receiving coupon payments. And add to that, there has been money moving across asset classes into high yield, so mutual funds are not the only high yield buyers.

"People are buying up paper in the secondary market. Secondary levels over the past few weeks have just marched steadily higher, in part because people just don't have anything to buy with the calendar so light.

"The calendar has averaged $2 billion or less per week recently.

"Around here we are wondering what issuers are waiting for."

Issuer pool diminished but not empty

Asked by Prospect News whether two consecutive years of low interest rates and a hot junk market have more or less drained the pool of issuers - particularly the ones needing to refinance debt - the investment banker responded: "Not completely.

"The universe has been limited by all of the deals that have gotten done in 2003 and 2004 but there are still people out there who could take out existing debt. And there are acquisition financing opportunities."

Slow, but building

The Prospect News high yield new issue calendar shows slightly less than $3.1 billion of dollar-denominated issuance expected to price during the remainder of the present week and over the two succeeding ones ending Nov. 19 - i.e. deals that are "in the market."

The list grew by two on Thursday.

Citizens Communications Co. announced plans to run a Nov. 5-10 roadshow for $400 million of senior notes that will mature in January 2013 (Ba3/BB+), with pricing expected to take place on Wednesday, Nov. 10.

JP Morgan, Morgan Stanley and Banc of America Securities will be joint bookrunners for the debt refinancing deal from the Stamford, Conn.-based local exchange carrier.

And Neenah Paper Inc. will run a Nov. 9-17 roadshow for an offering of $200 million of 10-year non-call-five senior notes via Citigroup, Goldman Sachs & Co. and JP Morgan.

Proceeds will be used to help fund the $215 million spin-off of Kimberly-Clark Corp.'s North American paper and Canadian pulp operations.

Meanwhile a little further in the distance, Hornbeck Offshore Services, Inc. revealed plans on Thursday to sell $225 million of 10-year senior notes, in a deal expected to close late in the present month.

According to market sources Goldman Sachs & Co. will have the books on the deal from the New Orleans-based provider of offshore supply vessels for the petroleum industry.

K&F shifts $50 million from bonds to bank

Also on Thursday the stage was set for what figures to be a comparatively big finish for the ultra quiet Election Week 2004.

According to a syndicate source K&F Acquisition Inc. shifted $50 million to its term loan from its pending high yield bond deal on Thursday, resulting in a downsized $315 million (from $365 million) offering of 10-year non-call-five senior subordinated notes (Caa1). They are being talked at 7¾%-8%. Pricing is expected to take place on Friday, with Lehman Brothers and Goldman Sachs in the lead.

Meanwhile price talk is 6¾% to 7% on Stats ChipPAC Ltd.'s $165 million of seven-year senior notes (Ba2/BB), also expected to price on Friday, via Deutsche Bank Securities and Lehman Brothers.

And price talk is 7 1/8% area on Herbst Gaming Inc.'s $150 million of 10-year non-call-five senior subordinated notes (B3/B-), with pricing again expected on Friday, via Lehman Brothers.

Add to those three the Rockwood Specialties Group Inc. $625 million equivalent of 10-year senior subordinated notes due 2014 (B3/B-) in dollar and euro tranches.

The Princeton, N.J., chemical manufacturer is selling a $150 million tranche, price talk 7¾%-8% and a €400 million tranche, price talk 8%-8¼%.

The euro tranche is said to be so heavily subscribed that the tranche amounts were approximately reversed from what the company had planned when it first came into the market.

Credit Suisse First Boston, Goldman Sachs & Co. and UBS Investment Bank are leading the deal.

Finally, Integrated Alarm Services Group Inc. is expected to price $125 million senior notes due 2011 (B3/B-) on Friday, via Morgan Joseph & Co.

Some market observers told Prospect News that terms on the deal had been expected to surface on Thursday. However late in the session none had materialized, according to sources.

Price talk on the deal is 10¼% to 10½%.

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