Primary quiets down, though Samson looms in the future; Rite Aid up on Q3; funds post gains

By Paul Deckelman and Paul A. Harris

New York, Dec. 15 - With the forward calendar cleared, probably for the remainder of the year, the high-yield primary market began going into its year-end wind-down on Thursday.

No deals priced in the domestic junk bond sphere - unlike investment grade, where new paper kept on coming. Sources on both the buyside and the sellside professed no visibility on new issue activity for the remainder of 2011.

Out of Europe came word that Belgian real estate player Immobel had done a €30 million offering of five-year notes.

Back in the United States, the only news that Junkbondland syndicate sources heard was that Samson Investment Co. expects to come to market with a $2.25 billion junk deal early next year to fund the pending leveraged buyout of the company - which, despite its name, is an energy exploration and production operator rather than a financial firm - by a Kohlberg Kravis Roberts-led syndicate.

There was little happening in recently priced issues, although Wednesday's deal from 99 Cents Only Stores Inc. was seen continuing to struggle a little.

Away from the new-deal realm, such as it was, secondary traders reported not much more activity going on than on the primaryside.

Rite Aid Corp.'s bonds were seen improved after the No. 3 U.S. drugstore chain operator reported third-quarter earnings.

There was also some upside activity in Avaya Inc.'s paper following the communications equipment maker's fiscal year-end results.

Statistical indicators of secondary market performance were meanwhile mixed after having been more bearish on Wednesday.

Another gauge of the junk market's health - high-yield mutual funds, seen as a proxy for overall liquidity trends - was on the plus-side in the most recent week, posting a second straight gain after having last week broken out of a losing streak that had run since mid-November. Traders called the continued fund inflows a sign that investors are still confident about junk.

AMG posts $456 million inflow

As Thursday's session was wrapping up, market participants familiar with the weekly AMG high-yield mutual fund flow statistics said that in the week ended Wednesday, $455.67 million more came into those weekly reporting funds than left them.

That number came as no surprise to a high-yield portfolio manager who has seen inflows in three of the past four sessions, including Thursday.

The only negative day among those four sessions was Tuesday, which saw a modest outflow, the buysider said.

Flows have been robust, although not as massive as they were in mid-November when high-yield funds were taking in cash at near record levels, the investor added.

The latest week was the second straight cash infusion for those funds, following on the heels of the $1.94 billion gain seen in the week ended Dec. 7.

Those two inflows, totaling nearly $2.4 billion, represent a total turnaround from the two previous weeks, which saw the funds post net outflows totaling $3.18 billion - a cash loss of $1.01 billion in the week ended Nov. 30, which followed the $2.17 billion hemorrhage seen in the week ended Nov. 23, the fourth-biggest outflow recorded since Arcata, Calif.-based AMG - a unit of Thomson Reuters' Lipper/FMI division - began tracking fund flows in 1992.

Reflecting the recent streaky and volatile nature of the fund-flow numbers, that giant-sized outflow had meantime broken a previous stretch of six straight net inflows, dating back to early October and totaling $10.31 billion, according to a Prospect News analysis of the numbers. That total included the spectacular $4.25 billion cash transfusion seen in the week ended Oct. 26 - the biggest single weekly inflow in AMG history.

For the year as a whole, inflows have now been seen in 33 weeks versus 17 outflows, according to the analysis.

Net inflows for the year have totaled $10.28 billion, according to the analysis - up from an estimated $9.82 billion a week earlier but still below the peak cumulative figure of $11.06 billion, which was recorded in the week ended Nov. 16.

EPFR sees $336 million gain

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, also reported a second straight week of inflows, which broke a string of recent losses.

It said that $336 million more came into the high-yield funds it follows in the week ended Wednesday than left them, following last week's cash injection of $2.05 billion.

Those inflows reversed a skid of three consecutive weeks during which an estimated $3.52 billion more left the funds than came into them, according to a Prospect News analysis of the EPFR figures, including a $1.87 billion decline seen in the week ended Nov. 30.

On a year-to-date basis, the latest cash injection lifted fund-flow totals to an estimated $5.75 billion from roughly $4.42 billion the week before, according to the analysis.

EPFR's figures and those of AMG generally point in the same direction, although their actual numbers usually differ markedly since they calculate their respective fund-flow totals very differently. EPFR, for instance, includes results from non-U.S. domiciled funds as well as the domestic funds and counts exchange-traded funds excluded from the more narrowly focused AMG tally.

A market source said that strictly among the U.S.-domiciled funds that EPFR watches, excluding the offshore operators, inflows for the week totaled $565 million. He theorized that the non-U.S. funds had likely shown about $229 million of net outflows to arrive at the overall $336 million inflow figure.

Cumulative fund-flow estimates, whether of the AMG numbers from Lipper/FMI or those from EPFR, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable, percentage of the total amount of money coming in - fueled the record new-deal borrowing binges seen in both 2009 and then in 2010 as well as the robust secondary market seen both years.

Those trends had pretty much continued into 2011 as well, although the market hit something of a dry patch in June and then appeared to recover in July - only to run into a brick wall for all of August.

Judging by the patterns seen in the fund flows since then, the junk market has been trying to right itself and come back, although the trend of several weeks of outflows alternating with several weeks of inflows would seem to indicate that there is still work to be done on that score.

New 99 Cents still cheap

Amid a very quiet session overall, secondary market traders generally saw little, if anything, going on in the new bonds of companies that have recently done deals.

For instance, one declared that he had seen "no quotes at all" in the 11% notes due 2019 that Number Merger Sub, Inc. priced on Wednesday as part of the financing for the pending buyout of City of Commerce, Calf.-based extreme value retailer 99 Cents Only Stores.

A second trader, though, said that the $250 million forward calendar deal "is still trading below issue," just as it had on Wednesday, when the offering priced at par.

After having been initially offered at 100¼ on Wednesday, the bonds dropped back in their initial aftermarket dealings to end at 99¼ bid, par offered.

On Thursday, a trader was quoting the paper at 99 3/8 bid, 99¾ offered.

Ford Credit firms

There was a little bit of activity, both in volume terms and in terms of price changes, in last week's big new deal from Ford Motor Credit Co. LLC.

A market source pegged those 5 7/8% notes due 2021 at 102¼ bid - up from Wednesday's close at 101 11/16 bid. Early in the session, there were a few trades as high as the 104 area, and even beyond, but they were smallish odd-lots and not really representative of the true trading levels.

Volume was about $7 million - not all that much in objective terms but relatively busy in a largely becalmed market. That was up from Wednesday's $5 million of turnover, though both days pale in comparison to the $19 million that changed hands on Tuesday. And even that relatively robust figure was but a small fraction of the several hundred million dollars of those bonds that traded after Ford Credit priced its quickly shopped deal on Dec. 5.

The $1 billion of notes - structured as an add-on to the existing $1 billion of those bonds that Ford Credit priced back in early August - came to market at 101.8 to yield 5 5/8%, versus the 5 7/8% yield at which the original tranche of bonds priced.

The offering was massively upsized from the originally shopped $500 million.

After pricing, the new bonds quickly shot above 102 bid in very active dealings and had moved all the way up to quoted levels as high as 103 by last Thursday before starting to gradually come down off those peaks and dipping slightly below the bonds' issue price earlier this week before coming back up to end around their current levels.

Ford Credit is the loan-financing arm of Dearborn, Mich.-based automotive giant Ford Motor Co., whose 7.45% benchmark bonds due 2031 were seen by a trader on Thursday

Not much shaking

Away from the recently priced deals, a trader characterized Thursday's session as "a very boring day. Volume-wise, nothing really jumped out."

He said that even more than a week before the Christmas holiday break, "it seemed like everybody is done."

"There was definitely a better tone," a second trader said, in comparing Thursday to Wednesday's soggy session, adding that it was "still difficult to find stuff, particularly in the front end."

He agreed that there was "not a lot of standout stuff today."

Rite Aid rises on numbers

One of the few names that seemed to be doing much of anything was Rite Aid, whose bonds rose after the Camp Hill, Pa.-based drugstore chain operator - No. 3 in the United States behind Walgreen and CVS - released relatively benign fiscal third-quarter results.

While the company continued to lose money, there was less red ink than there had been in the comparable quarter a year ago. And for a second straight quarter, it trimmed its projected loss for 2010.

A trader said that its most active issue, the 9 3/8% notes due 2015, gained some 3¼ points on the day to end at 96¼ bid. About $12 million of the bonds changed hands, landing the issue among the junk market's most-active credits on the day.

He also saw Rite Aid's 9½% notes due 2017 up by 2 points, to 90 bid, with over $11 million having traded.

Rite Aid's 8 5/8% notes due 2015 moved up to around the 95 bid level, a gain of nearly 2 points.

The company reported a net loss of $52 million, or 6 cents per share, for the quarter ended Nov. 26. Revenues were $6.3 billion. In the year-ago quarter, Rite Aid had a loss of $81.5 million, or 9 cents per share.

Revenue in the latest quarter was up from $6.2 billion the year before. The 1.8% increase was a result of better same-store sales, the company said.

Same-store sales were up 2% for the quarter.

Additionally, Rite Aid updated its fiscal 2012 guidance. The company expects sales to fall in a $25.85 billion to $26 billion range and for same-store sales to increase 1.15% to 1.75%.

The net loss is estimated to be between $325 million and $440 million. That's not as bad as the projection the company made three months ago, when it estimated a loss for the year of $345 million to $495 million.

Avaya is better

A trader said that Avaya's 9¾% and 10 1/8% notes due 2015 were both better on the day, saying that the bonds were "up a couple of points" as investors reacted to the Basking Ridge, N.J.-based communications equipment maker's fiscal year-end results.

He quoted the bonds at 87 bid.

Another market source pegged the 9¾% notes up 1¾ points, at just under 87, and the 10 1/8% paper up by 2 points at 87¼ bid.

Avaya - which does not formally announce results - this week disclosed its earnings in a 10-K filing with the Securities and Exchange Commission. It reported a net loss of $863 million for the fiscal year ended Sept. 30, versus a year-earlier $871 million loss.

Indicators seen mixed

Statistical measures of junk market performance - which had turned negative on Wednesday after having been mixed during Tuesday's session - returned to a more mixed state on Thursday.

A trader saw the CDX North American series 17 High Yield index off by ½ point on Thursday to end at 90½ bid, 91 offered after having fallen by 1 full point on Wednesday.

The KDP High Yield Daily index, on the other hand, firmed by 7 basis points on Thursday to finish at 71.66 after having lost 10 bps on Wednesday.

Its yield declined by 6 bps, closing at 7.7%, after having edged up by 1 bp on Wednesday.

The widely followed Merrill Lynch High Yield Master II index remained choppy on Thursday, edging up after a loss Wednesday that in turn had followed a gain on Tuesday.

Its 0.003% gain on Thursday stood in contrast to its 0.112% loss on Wednesday.

The slight gain lifted the index's year-to-date return to 3.176%, versus 3.173% on Wednesday.

Year-to-date returns remain below the recent peak level of 4.28%, recorded on Oct. 28, and are well below the index's high-water mark for the year of 6.362%, which was set on July 26.

However, they are still well up from its 2011 low-point, a 3.998% deficit recorded Oct. 4.

Equities meantime seemed to recover their footing somewhat on Thursday after three straight sessions on the downside. Investor optimism over U.S. economic data and good numbers from bellwether issuer Federal Express outweighed continuing worries over Europe's inability to get its debt act together.

The Dow Jones industrial average - which had lost over 131 points on Wednesday - was up by 45.33 points on Thursday, or 0.38%, to close at 11,868.81.

The broader Standard & Poor's 500 index was up by 0.32% on the day, while the Nasdaq composite rose by 0.07%.

Stephanie N. Rotondo contributed to this report

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