Little market response seen to huge junk outflow number; Amerco announces deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 27 - Even though the high-yield mutual funds outflow number reported late Thursday by AMG Data Services set a new record for money exiting the funds, traders said Friday that market response was limited, with most players merely hugging the sidelines in the face of still more stock market carnage.

In the primary market, one new deal surfaced as Amerco announced it would haul a $235 million offering around to junk bond investors. Also terms emerged on buyout deal to help fund Francisco Partners' acquisition of Global eXchange Services from General Electric Co.

However the big news on Friday continued to be the $1.4 billion outflow from high-yield mutual funds for the week ending Sept. 25.

The number reported late Thursday is the biggest single-week hemorrhage of capital from junk funds since Arcata, Calif.-based AMG started keeping records, easily surpassing the old record of $946.9 million seen one week back in March, 1994.

It essentially wipes out about two-thirds of the aggregate $2 billion-plus inflow painstakingly accumulated over the previous four weeks, and once again puts the zig-zagging funds flow momentum back on a negative course. Prior to the four-week $2 billion winning streak which was broken by the huge outflow, the junk market had seen 11 straight weeks of outflows, stretching from early June to mid-August; in that time, a total of over $2.5 billion more left the junk funds than came into them. The fund flow numbers are watched by many market participants as a barometer of overall high yield market liquidity trends.

In the 39 weeks since the beginning of the year, inflows have been seen in 22 of those weeks, according to a Prospect News analysis of the AMG statistics. The approximate cumulative inflow for the year is still at a hefty $3.686 billion, but the latest week's figure knocks it well down from the approximate $5.089 billion total inflow seen in the week ended Sept. 18.

"I think we can say that [the record weekly outflow] kind of makes sense, an analyst told Prospect News. "It was headed that way in the last couple of weeks," as the weekly inflow numbers had steadily decreased - how could they do anything but - following the record $1.556 billion funds inflow recorded in the week ended Aug. 28. That explosion of pent-up liquidity had put an end to the nearly three-month long summer drought previously mentioned.

"But there was no jolt," he declared.

A trader said that the $1.4 billion outflow number would have had a greater impact on the market "if it had been busier." But he said that activity levels were low with the approach of the end of the month, the end of the calendar third quarter and the continued blood-letting in the equity markets.

One high-yield fund manager reached on Friday pointed to the record $1.56 billion inflow for the week ending Aug. 28 and merely said: "Easy-come, easy-go.

"I was highly skeptical of that huge inflow because I didn't see any technical indicators that would justify that sudden change, so I thought all you were seeing was market-timers reacting to some technical indicators that showed that high yield was very cheap," this buy-sider added.

"I figured that whatever came in could flow right back out. And it appears that it has.

"Whatever indicators they were using a month ago, they have different indicators now."

This fund manager went on to say that the strategies for buying and selling securities become especially challenging when timer money is at play.

"I think that the timers really have a very negative effect on the funds," the investor said. "The money typically comes in when the market rallies and goes out when the market's soft, so it's very counterproductive in terms of trying to make an investment strategy because you have to absorb these flows, which can be a substantial percentage of the fund, and very costly."

In this investor's opinion an improvement in the high-yield market is likely to be foreshadowed by a reduction in the volatility presently seen in the stock market.

"I think the equity market is very important for the high-yield market at this point," the source said. "The high-yield market takes its tone from the equity market. When the equity market is stabilized and feeling good then the high-yield market looks good and vice versa.

"On a day like this (Friday) stocks are down and the high-yield market is down.

"I think you won't have a substantial calendar unless you see the equity market stabilize-which I think you will. I think we're very near the equity market starting to do better in spite of the terrible tone in the market right now."

"The economy continues to grow albeit gradually and unevenly," the source added. "But it is still growing.

"We've had a lot of problems in the economy. We've had a lot of bankruptcies. And we've had a lot of cost-cuttings because revenues have fallen.

"But it looks like people who are guilty of corporate malfeasance are going to go to jail," the investor concluded. "That shows the system works, which is good."

Also on Friday a source from an investment bank said that the record outflow from high-yield mutual funds, coming on the heels of a record inflow may portend something new and perhaps somewhat ominous at play in asset management.

"Institutions seem to be able to make these asset-class decisions more readily these days," the sell-sider said. "I wonder if this is a fundamental change in the market that we're witnessing here: it doesn't appear that there is any concern from an institutional perspective with regard to making a decision to pull millions of dollars out of an asset class on the turn of a dime or the tip of a hat.

"How would you like to have a deal on the road right now?" this official asked rhetorically, and added that for junk bond deals poised to price record outflows from high-yield mutual funds do not bode especially well.

Nevertheless, the market anticipates that execution on at least three deals will be undertaken during the first week of October 2002.

Markets sources said Friday that the books will close Tuesday on Brake Bros. plc's two-part £175 million equivalent of 10-year senior notes in euro and sterling tranches (B3/B-) via Credit Suisse First Boston and JP Morgan. The U.K.-based food distributor's deal is expected to price Wednesday, according to a syndicate source.

Also expected to price during the Sept. 30 week is TI Automotive plc's $215 million of 10-year senior notes (B3/B) via JP Morgan and Salomon Smith Barney. And St. Louis scaffolding services company Brand Services Inc.'s $165 million of 10-year senior subordinated notes (B3/B-) via Credit Suisse First Boston and JP Morgan figures to conclude its roadshow on Thursday.

Finally in Friday's primary news, terms emerged on GXS Corp.'s $235 million of seven-year senior subordinated reset notes (B2/B), which were purchased by GE Capital Corp., according to a Friday press release.

Credit Suisse First Boston ran the books on the Rule 144A deal which priced with an initial coupon of 12%. The interest rate will be permanently reset on Sept. 27, 2003.

The proceeds will be used to help fund the buyout of GE Global eXchange Services by Francisco Partners, which announced the completion of the acquisition in the Friday press release.

In the secondary, the airline industry was again the focus of much of what trading did take place. United Airlines - in the wake of the five-year plan for $5 billion in wage concessions presented by its unions on Thursday - "certainly opened stronger," the trader said, quoting its 10.67% notes due 2004 as having traded at bid levels in the 26-28 area, up about three points on the session.

However, another trader pegged the troubled Number-Two U.S. air carrier's notes - which had risen around four or five points on Thursday - as having closed down about two points across the board on Friday in the face of the generally heavy market and the pall thrown over the airline sector by news from UAL rival Delta Airlines. "UAL was down two points, but Delta had the biggest drop," he said.

The trader quoted the Atlanta-based Number-Three air carrier's 7.90% notes due 2009 as having fallen about five points on the session, to 62 bid/63 offered.

During the session, Delta warned that it would post deeper-than-expected losses in the third quarter and said it was eliminating 1,500 flight attendant jobs, citing the continued funk through which the airline industry has been flying since last year's Sept. 11 airborne terrorist strikes against the U.S.

In July, Delta had projected that it would post a third-quarter loss of $1.34 per share - but on Friday, it upped that figure to $225 million, or equivalent to $1.83 per share, excluding special items. That's far worse than the approximately $193 million ($1.57 per share) that analysts had been expecting for the quarter.

Those widened loss projections caused Delta shares to plunge $2.81 (24.43%) in Friday's New York Stock Exchange dealings, to $8.69. Volume of 7.8 million shares was more than four times the norm.

Of more concern to bondholders was Delta's announcement, along with its worsened loss projections, that it would not be able to meet the debt-to-equity ratio limit in a letter-of-credit facility by the end of the year, forcing it to renegotiate the terms of the $409 million agreement.

Delta said that Commerzbank AG, one of its lenders, had agreed to replace the debt-to-equity ratio with a guarantee that the air carrier would maintain a minimum of $1 billion of cash, cash equivalents and short-term investments.

Standard & Poor's meanwhile said that its BB credit rating and negative outlook on Delta was unchanged.

Apart from the volatile airline sector, however, a trader said that there was "very limited trading" as stocks deteriorated and bond players sat on their hands. "The Street was asleep."

He saw Qwest Communications International debt weaken between one and two points, mostly on a lack of participation, noting that many portfolio managers and other buyside decision-makers, having spent most of the week at a Deutsche Bank Securities bond conference in sunny Scottsdale, Ariz. had probably delayed their return to cool and rainy New York and other East Coast business centers by a day.

As a result, he said, there was little doing even in the usual big names, such as Nextel Communications Inc. Charter Communications and the recently active Fleming Cos. Trading in the latter credit - which had firmed smartly over a two-day period earlier in the week on its announcement that it would sell its retail unit and put the proceeds toward debt reduction - was "non-existent."

Another trader said he saw about a point improvement in AT&T Canada bonds, with its 7.65% notes rising to 13.5 bid/15.5 offered and its 7 5/8% notes at 12.5 bid/13.5 offered.

At another desk, Outsourcing Solutions, normally a little-traded credit, was quoted down as much as 15 points over two sessions, with its 11% notes due 2006 at 55 bid.

But overall, trading was seen as light, and not very encouraging. "We closed sloppy," a trader said, "and we're probably going to open sloppy on Monday morning."

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