Market awaits big HealthSouth deal; Smithfield easier on bad numbers; funds see $41 million inflow

By Paul Deckelman and Paul A. Harris

New York, June 8 - High-yield primaryside players were mostly biding their time Thursday - waiting, syndicate sources, said, for Friday's expected pricing of HealthSouth Corp.'s two-part offering of fixed- and floating-rate notes. Price talk was heard to have emerged on the pending mega-deal.

Price talk was also heard on Interline Brands Inc.'s upcoming offer of senior subordinated notes, which is also expected to price on Friday. Market sources said that the deal has been restructured to give it a shorter maturity.

And International Coal Group Inc. was heard to be getting ready to hit the road on Monday to market an offering of eight-year notes to potential investors.

In the secondary market, Smithfield Foods Inc.'s bonds were seen down about half a point or so after the world's biggest pork processor said its fiscal fourth-quarter profit tumbled 99% from year-earlier levels, on falling prices for the pigs it sells to meatpackers and rising costs.

The bonds of L-3 Communications Holdings Inc. - which had pushed up several points on Wednesday amid takeover speculation about the New York-based defense electronics company following the untimely death of its chief executive officer - pretty much held those gains; one or two traders said L-3 actually extended them, although modestly.

Out of the distressed-debt markets came word that the bonds of asbestos-challenged companies such as Owens Corning and Armstrong World Industries Inc. continued a sharp retreat that began Wednesday, on apparent investor fears that Congress may once again deadlock and fail to pass a proposed national asbestos trust fund claims mechanism. A new government report also links asbestos exposure to throat cancer - which could expand greatly the pool of potential claimants who would look to the trust fund to pay their damages.

Overall, sources said, the broad high yield market traded down on Thursday.

A buy-side source, speaking in the early afternoon on background, commented that "It's the same people trying to sell the same things - it's not as if the entire market is taking a leg down."

The buy-sider added that as the end of the second quarter approaches dealers are attempting to lighten their books.

A sell-side source, speaking well after Thursday's close, commented that high yield failed to capture the late afternoon rally enjoyed by the equity markets. He marked junk down a quarter of a point on the session.

The sell-sider concurred with the market color from his counterpart on the buy-side, above.

"You're not seeing any panic selling," the sell-sider said.

And as trading 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 $40.8 million more came into the funds than left them - the first weekly inflow seen after eight consecutive weeks in which the funds were hemorrhaging money, including the $244.2 million outflow seen in the previous week, ended May 31. Over that eight-week period, outflows totaled about $1.232 billion, according to a Prospect News analysis of the AMG figures.

Even with the most recent week's modest inflow, outflows have still now been seen in 15 weeks out of the last 19, dating back to early February, during which time $2.073 billion more has left the funds than has come into them, according to the Prospect News analysis.

Outflows have now also still been seen in 18 weeks out of the 23 since the start of the year, against only five inflows, and net outflows during that time have totaled $2,457.1 million from the funds that report to AMG on a weekly basis.

Meanwhile, funds that report on monthly basis have seen $231.3 million of inflows for the most recent period, extending their year-to-date inflows to just over $2 billion, according to the source.

Hence aggregate year-to-date flows, tallying the weekly and monthly reporters, ended the period at negative $450.1 million.

Those results confirm the continuation of the predominantly negative trend that was in evidence throughout most of 2005, when $11.483 billion more left the funds than came into them, according to the Prospect News analysis - much more severe than the $3.236 billion net outflow seen in 2004.

Prior to the emergence of the most recent numbers, a buy-side source commented that mutual funds have not driven the performance in the high-yield market during the past year.

As others have commented, this source believes that the cash at work in the asset class derives from institutional investors such as hedge funds, insurance funds and pension funds.

As for the hedge funds, the source said, May appears to have been a rocky months.

"They had a rough ride in May," the buy-sider said. "In a lot of cases they tried to double up their bets because they got smoked so bad.

"And that's when they started really getting hit."

Could be a big Friday

No issues were priced during the Thursday primary market session. However information surfaced on two of the four deals that are possible Friday business, which, if the session goes as scripted, could see $1.785 billion of notes price.

HealthSouth talks $1 billion

HealthSouth issued price talk on its $1 billion two-part offering of senior notes (B3/CCC+) during the Thursday session.

The Birmingham, Ala.-based provider of outpatient surgery, diagnostic imaging and rehabilitative health care services talked a tranche of 10-year fixed-rate notes at a yield in the 10¾% area.

Meanwhile the company talked a tranche of eight-year notes at six-month Libor plus 575 basis points.

Tranche sizes remain to be determined.

Merrill Lynch, JP Morgan and Citigroup are leading the deal.

Throughout the June 5 week buy-side sources have told Prospect News that HealthSouth has had a formidable row to hoe in getting the deal done.

One source said that the company pro-formaed the 10-year fixed-rate notes in the mid-to-high 9% range, and, during the ensuing sell-off which took hold of the junk market, watched as the projected yield pushed up to and through the mid-10% range.

On Thursday a buy-sider from an account that won't play the deal said that HealthSouth faces a somewhat difficult decision.

"Neither side is too happy with it," the source said. "I don't think management would be crazy about doing a deal at 11%, if it came to that.

"And they really don't have to do anything," the buy-sider added. "They can just pay the step up on the bridge loan in September, sell some assets - if they can get the assets sold - and come back in the market later."

Interline restructures

Also on Thursday, Interline Brands restructured its $175 million senior subordinated notes offering, decreasing the maturity to eight years from 10 years and increasing the call protection to five years from four years.

Meanwhile the company talked the notes at 8¼% to 8½%.

Lehman Brothers and JP Morgan are joint bookrunners for the deal which is also expected to price Friday.

The rest of the field

Terms are also expected to emerge Friday on Jacobs Entertainment Inc.'s $210 million offering of eight-year senior notes (B3/B-) which are talked at the 9¾% area.

Credit Suisse and CIBC World Markets are joint bookrunners.

Finally, market sources believe that pricing terms may emerge Friday on the restructured $400 million deal from Libbey Glass Inc.

On Wednesday the JP Morgan and Bear Stearns transaction was restructured into a $300 million tranche of five-year senior secured floating-rate notes and a $100 million tranche of five-year senior subordinated secured PIK notes with warrants to purchase 3% of Libbey's outstanding common stock.

The issue was launched as a single $400 million tranche of eight-year senior notes.

American Achievement up in trading

Back in the secondary market, a trader saw the new American Achievement Corp. 12¾% discount notes due 2012, which had priced at 98 on Wednesday, as having moved up to 99.5 bid, par offered on Thursday.

Another trader quoted the bonds as offered as high as 101.25, and said he had heard a 99.5 bid. But he characterized activity in the bonds as "not a lot."

A trader said that the new Royal Caribbean Cruises Ltd. notes "widened out," with the Miami-based cruise line operator's 7¼% notes due 2016 trading at bid levels equivalent to 240 basis points over Treasuries, and an offered level about 235 bps over - far wider than the 227 bps spread at the time the bonds priced on Wednesday.

A trader who heard the split-rated bonds actually quoted in dollar terms saw the 10-years at 99.125 bid, 99.5 offered, down from their 99.69 issue price. He saw its 7% notes due 2013 at 99.375 bid, 99.75 offered, straddling their 99.509 issue price.

Yet another trader concurred that he had heard that the bonds "were weaker. They came at issue and then backed up. There was not a lot of demand."

Smithfield drops on meat surplus

Back among the established issues, the trader quoted Smithfield Foods' bonds lower after the company reported a sharp slide in its quarterly numbers as a result of a meat supply glut.

He pegged the Smithfield, Va.-based food processor's 7¾% notes due 2013 at 99.5 bid, 100.5 offered, which he called down a point.

Another trader called those bonds ¾ point down at 99.25 bid, 100.25 offered.

Yet a third trader saw the '13s half a point down at 99.75 bid, 100.75 offered, while its 8% notes due 2009 were likewise down half a point, at 102.5 bid, 103 offered.

Smithfield posted earnings of $1.1 million (one cent per share), in its fiscal fourth quarter ended April 30 - sharply down from $85.4 million (76 cents per share) a year earlier. However, excluding a big restructuring charge and other special items, its adjusted earnings of nine cents per share beat the seven cents per share that Wall Street was expecting.

Smithfield said its results were hurt by depressed pork margins and lower live-hog prices as a result of an oversupply in the United States. It said that it will take time to work through what it called a "protein glut." In the meantime, it separately announced on Thursday that it will close a plant in Madison, Fla., and consolidate two other plants in Virginia, affecting as many as 611 workers.

L-3 holds at higher level

Elsewhere, a trader characterized L-3 Communications as "at best off a half if anything, but not really." He said that the bonds "went down, then went back up. There's nothing to really write home about there. They're still strong."

A market source at another desk saw the company's 5 7/8% notes due 2015 as having moved up to 94.75 bid from 93.5 offered, while its 6 1/8% notes due 2013 and due 2014, and its 6 3/8% notes due 2005, as having all edged up to 96.5 from prior levels at 96. Its 7 5/8% notes due 2012 were unchanged at 103.

The company's bonds and its New York Stock Exchange-traded shares had each firmed smartly on Wednesday in reaction to the news that its founder and chief executive officer Frank C. Lanza, had died suddenly late Tuesday at the age of 74 while recovering from recent esophagus surgery.

Lanza's sudden passing creates an instant vacuum, since there is no clearly designated successor waiting in the wings. That raised speculation on Wall Street that L-3, the ninth-largest U.S. defense contractor, might be an attractive takeover target for a larger defense firm, such as Britain's BAE Systems plc - rumored earlier this year, even before Lanza's death, to be a possible interested buyer - or such U.S.-based rivals as Raytheon Co. or Lockheed Martin Corp.

Level 3 up on equity, stock sale

A trader meantime saw the bonds of the similarly named - but completely unrelated - Level 3 Communications Inc. better in the wake of new capital coming into the Broomfield, Colo.-based telecommunications company. Level 3 on Thursday announced that it had priced an offering of 125 million shares at $4.55 each, as well as a $300 million convertible note offering. Most of the proceeds will be used to pay down debt.

The trader saw Level 3's 6% notes due 2009 left bid in an 83 context, with no offers seen. That is up from prior levels at 82 bid, 82.5 offered.

Owens Corning, Armstrong down

Traders saw the bonds of bankrupt asbestos-challenged Toledo, Ohio-based insulation maker Owens Corning and those of the bankrupt Lancaster, Pa.-based floorcovering maker Armstrong World Industries continuing to retreat.

One saw Owens Corning's 7½% notes due 2018 at 101 bid, 102 offered, and called Armstrong's 6.35% notes that were to have come due in 2003 at 75 bid, 76 offered, down three points on the day.

The asbestos bonds have been retreating from the high levels they hit in mid-May after Owens Corning announced an agreement among all of its creditor groups, including its asbestos claimants, but that slide accelerated this week, particularly on Wednesday, when critics of the proposed $140 billion industry-and insurance funded national asbestos trust claims mechanism attacked the proposal in a hearing before the Senate, which has yet to vote on the measure, bottled up since February.

Among these was Douglas Holtz-Eakin, the former director of the Congressional Budget Office. He warned that the asbestos fund could run out of private money, with the taxpayers left holding the bag.

The chairman of the Senate judiciary committee, Pennsylvania Republican Arlen Specter, sponsor of the current claims fund, called the ex-CBO chief's warnings about the fund plan's shortcomings "highly presumptuous," and said that he would do whatever he could to see that it is passed before the current session of Congress adjourns.

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