Vector prices add-on deal; AIG up as stock surges; Foxwoods falters; funds gain $351 million

By Paul Deckelman and Paul A. Harris

New York, Aug. 27 - The high-yield primary market stirred briefly from its summer siesta on Thursday, as an upsized add-on offering to an existing issue of Vector Group Ltd.'s bonds priced. The small deal came to market about where participants had anticipated, and was not seen trading around afterward.

Back in the secondary arena, American International Group Inc.'s shares were seen trading higher, in line with a surge in the New York-based insurance giant's shares, attributed to news reports that the company's new chief executive officer, Robert H. Benmosche, as part of his effort to turn the company around, has reached out for advice and assistance to its former CEO, Maurice R. "Hank" Greenberg, who was ousted from that position back in 2005, but who is still a major shareholder, with definite ideas about what went wrong with the company, and how to right the situation.

Also among the financials, Royal Bank of Scotland Group plc's split-rated issues were seen mixed - one solidly up, one badly down - in active dealings, although there was no immediate news out on the company that might explain why.

Eastman Kodak Co.'s bonds, which had jumped several points on Wednesday, though for no clearly-defined reason, were still fairly busily traded, holding onto most of the prior session's gains.

Among the downsiders, Mashantucket Pequot Tribe's bonds - already trading at badly distressed levels - were seen to have plunged another 20 points on the news that the Native American operator of the massive Foxwoods Resort Casino in Connecticut has hired a turnaround firm and is in restructuring talks with its lenders - and fears that it may be in danger of defaulting on its obligations.

Funds rebound, gain $351 million

Meanwhile, news Thursday may have abated fears that the tides of cash to high-yield mutual funds might be turning negative.

As trading was wrapping up for the session, market participants familiar with the high yield mutual fund-flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday, some $350.7 million more came into the weekly-reporting funds than left them.

It was a strong rebound from the numbers seen in the previous week, ended Wednesday, Aug. 19, when an outflow of $89.9 million was recorded - the first such cash exodus after a seven-week string, dating back to mid-June, during which time net inflows had totaled $3.549 billion, according to a Prospect News analysis of the AMG figures.

Counting the latest week's number, the year-to-date net inflow for the weekly-reporting funds - which had declined the week before to $15.013 billion - rose back up to $15.364 billion, a new peak level for the year so far, eclipsing the old mark of $15.103 billion seen in the week ended Aug. 12.

With 2009 now around two-thirds over, inflows including the latest weekly gain, have been seen in 29 weeks out of the 34 since the start of the year, according to the analysis, against just five outflows - last week's retreat, a $110 million outflow in the week ended June 24, and three weeks of outflows in late February and early March, totaling $969 million. The inflows, on the other hand, include an incredible 14-week run of consecutive gains, dating from mid-March through mid-June, during which time the funds grew by a record $9.1 billion.

A market source also said that in the latest week, flows into and out of the funds which report on a monthly basis rather than doing so weekly gained $55.9 million, versus the previous week's unchanged level. That pushed the year-to-date cumulative inflow for such funds up to a 2009 peak level of $10.169 billion, versus $10.113 billion seen the previous two weeks, the old peak level.

The source further said that on an aggregate basis, consolidating the inflows for the weekly and the monthly reporting funds, a total of $25.533 billion more has come into the funds so far this year than has left them, a new peak level, up from the previous zenith of $25.126 billion.

Those sustained inflows have helped the junk market bounce back nicely from last year's staggering 25%-plus loss and sharply reduced primary activity totals. Total returns so far this year - while slightly off their peak level of a bit north of 40% seen earlier this month - continue to impress, with the authoritative Merrill Lynch High Yield Master II index still reading a formidable 39.611% as of the close Wednesday, handily beating virtually every other major investment asset class. Meanwhile, the $83.62 billion of new high yield debt issued so far this year globally, as of Wednesday's close -- $71.798 billion of it domestic - is running almost 37% ahead of the anemic pace of last year's global primary tally. Domestic new issuance is almost 48% ahead of its year-ago levels.

EPFR sees inflows continuing

Meanwhile, another fund-tracking service, Cambridge, Mass.-based EPFR Global, which uses a different methodology, calculated a $347 million inflow for the week, well up from the $69 million gain seen the week before. The latest inflow was the ninth week in a row, its analysts said. It was also the 23rd such cash infusion in the last 24 weeks.

The inflow brought the year-to-date total up to $16.99 billion from $16.64 billion the week before.

While the EPFR junk figures most weeks point essentially in the same direction as AMG's - last week was the rare exception - the precise weekly and year-to-date numbers almost always differ somewhat due to EPFR's inclusion of some non-U.S. funds in its universe. Cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

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 comprise less of the total monies floating around the high yield universe than they used to - because there is no similar reporting mechanism to accurately track the movements of cash coming into the junk market from other, larger sources seen in recent years such as insurance companies, pension funds and hedge funds.

Week's first deal

The primary market, which spent the first three days of the week in suspended animation, with no junk deals launching or pricing, flickered to life on Thursday.

Vector Group Ltd. priced an upsized $85 million add-on to its 11% senior secured notes due Aug. 15, 2015 at 94.00 to yield 12.453%.

The non-rated notes priced on top of the 94 area price talk, in a quick-to-market transaction.

Jefferies & Co. ran the books for the general corporate purposes deal, which was upsized from $60 million.

The original $165 million issue priced at par on Aug. 8, 2007. Thursday's add-on increases the total size of the issue to $250 million.

Market indicators turn firm

A trader saw the CDX Series 12 High Yield index - which had lost ¼ point on Wednesday - edging upward Thursday by 1/16 point to finish at 88 13 /16 bid, 89 1/16 offered.

The KDP High Yield Daily Index, which had risen by 13 basis points on Wednesday, added another 13 bps Thursday to close at 66.16, while its yield again came in by 3 bps to 9.38%.

In the broader market, advancing issues - which led decliners for a seventh straight session on Wednesday by around an 11-to10 margin, remained in the lead on Thursday, holding a six-to-five advantage.

' Overall market activity, reflected in dollar-volume totals, rose almost 15% from Wednesday's pace.

Despite the numerical improvement, a trader characterized the overall market as "kind of quiet.

"I'm looking for something exciting," he said - "but I'm not coming up with too much."

He saw "a lot of HCA's traded," though adding that the Nashville-based hospital operator was "kind of a non-special name." HCA Corp.'s 9¼% notes due 2016 were seen up a point at 101.5 bid, with about $5 million traded at mid-afternoon, while its 6¾% notes due 2013 were quoted a shade above 93 bid, with about $8 million changing hands.

He also noted that DirecTV Holdings LLC, "which doesn't trade that much, they traded a bunch of bonds today."

The El Segundo, Calif.-based top satellite TV broadcaster's 6 3/8% notes due 2015 were seen having gained 3/8 point to 101 1/8 bid, on fairly busy trading of almost $16 million at mid-afternoon.

The trader also noted the strong dealings in financial credits, which at that point in the afternoon had accounted for "$392 [million] of the $1.2 [billion] in trading today."

AIG is An Interesting Gainer

The trader said that AIG's bonds rose in tandem with its New York Stock Exchange-traded shares, "which were way up today," given a big boost by media reports quoting AIG's new boss, Robert Benmosche, as saying that he has been in contact with one of his predecessors, Maurice "Hank" Greenberg, who led the company for nearly 40 years from 1968 until his ouster in 2005, when the company came under regulatory scrutiny related to its accounting practices.

He said that "a bunch" of AIG's 6¼% notes due 2037 traded in a 42-44 context on Thursday. On Tuesday, he said, they had been "right around 40."

Although he saw those bonds come off their peak levels and trade down late in the day, he dismissed it as "an aberration - there was one trade at 401/2, but two more at 43."

He also saw brisk activity in AIG's 8 1/8% junior subordinated hybrid bonds due 2058, with "a lot of them traded" around the 49-51 region. On Tuesday and Wednesday, he said, they had traded around 46-47, while they had been at 43-44 last week, even falling as low as 40 a week ago, "so they've been moving up pretty nicely."

At another desk, a trader saw the 61/4s "anywhere from 40 to 43, on a lot of volume. The last big trade he saw took place at 43, calling the bonds up 3 points.

He also saw the 6.90% notes due 2017 of AIG's American General Finance Corp. move up to 62 bid, 63 offered, which he called up 1¼ points, on "some decent volume."

A market source at another desk also saw the 6.90s up 1¼ points, pegging them at 62¾ bid.

AIG's NYSE-traded shares meantime shot up as much as 32.7% during the session on the Greenberg news, ending off their peak levels at $10.15, or still a 26.93% gain, at $47.84, on volume of 148.9 million shares, or more than six time the norm.

Greenberg - who continues to fight civil charges related to the 2005 investigations -- maintains his innocence, claiming the state probe headed up by then-New York attorney general Eliot Spitzer, was little more than a publicity-seeking political witch-hunt. He remains one of the largest individual holders of AIG stock, and has been critical of the way the company has been run since his departure from the leadership, culminating with the firm's collapse last fall, requiring a federal rescue. Benmosche said in an interview that although Greenberg "had some problems," he believes that the ousted boss "can help us with the solutions," adding that he wants "to get the benefit of his criticisms or his support."

Royal Bank of Scotland roiled

Elsewhere in the financial sector, market sources saw Royal Bank of Scotland Group's bonds mixed on the day in fairly busy trading, with its 5% notes due 2014 up nearly 2 points at 88½ bid - but its 5% notes due 2013 quoted down nearly 5 points at the 90 level.

There was no indication what was driving the activity in the Edinburgh, Scotland-based financial services company, whose notes carry Ba1 ratings from Moody's Investors Service but are high-grade rated by Standard & Poor's and Fitch Ratings.

Kodak climb continues

A trader saw the bonds of Rochester, N.Y.-based photography and imaging products company Eastman Kodak's 7¼% notes due 2013 having pushed up on Thursday, building on the gains notched on Wednesday when those bonds were seen up anywhere from 2½ to 5 points, depending on whether you were measuring just round-lot dealings, or all trading.

He saw the bonds in a 771/4- 77½ range Thursday, up from 75¾ -76 on Wednesday, 73-73¼ on Tuesday and 72 on Monday, "sp they keep moving up," although he acknowledged that he didn't know what was driving those gains, or the nearly 15% rise seen in the company's shares on Wednesday, although it surrendered about half of that stock gain on Thursday.

Even without a clear indicator of what's happening, he said "we kind of like those," especially Kodak's convertible issue due 2033, which is putable back to the company next year. He saw that paper having moved up to the low 90s. He said that Kodak has "significant liquidity" deal with that upcoming put.

Foxwoods falls, sharply

A trader saw Mashantucket Pequot Tribe's 8½% notes due 2015 "drop 20 points" into the lower 20s,

from around the 40s previously, on the news that the operator of the Foxwoods casino resort complex in Connecticut is in refinancing talks with its bankers and has also hired the turnaround firm of Miller Buckfire & Co., LLC as its financial and restructuring adviser in connection with this process.

"They were in the 40s," he said, "and then there was the news, and the stuff dropped 20 points." He said it was difficult to gauge how much trading was happening because the $500 million issue, which priced at par in November 2007, was a Rule 144A deal, so "it's private, you don't see it."

He saw levels drop as low as an 18-21 context by the end of the day, with "more paper for sale in the low 20s."

There are, he warned "a lot of questions" about Mashantucket, "and when in doubt --- people sell them."

While the tribe said in a statement Wednesday that it is currently in compliance with all debt agreements, is also current with all its debt payments, and has sufficient resources to continue to operate its businesses as normal, other accounts would seem to indicate there may be more to the story - and that the situation may be more grim than the tribe is letting on.

For instance, an article in Wednesday's edition of The New London Day newspaper in Connecticut, titled "Mashantuckets near default on Foxwoods' debt," characterized the tribe as being "on the brink of default" and quoted an unidentified "senior advisor to the tribe" as saying that the tribe's $2.3 billion of debt which it is looking to restructure "is $1 billion more than the tribe's Foxwoods Resort Casino - North America's largest casino and once the world's most profitable - can sustain."

The paper quoted the advisor as saying that the Mashantucket Pequots are at risk of defaulting Monday on the terms of a $700 million line of credit with a syndicate of banks. In their talks with the banks, the advisor told the newspaper, "our goal is to reduce debt," rather than further downsize the casino's workforce, an alternative which he termed "counterproductive."

The advisor flatly declared for The Day that "we'll be asking creditors to take a big haircut."

That sentiment would seem to be in line with recent statements by the chairman of the Mashantucket Pequot Tribal Council, Michael Thomas, who in a letter to e-mailed last week to tribe members and quoted by the New London paper, spoke of the tribe's "dire" financial situation.

Thomas, in discussing the seriousness of that situation, struck something of a combative note in his letter, declaring, the paper said, that "Foxwoods is here to support our people not Wall Street," adding that "those who put the interests of bankers and bond holders ahead of our tribal community will have to answer to me."

He said that he had introduced a resolution in the council "to take our last borrowed dollars" - the tribe recently drew down the final $91.9 million from its line of credit - "and put them in a lock box" - only to be used for paying the expenses of the tribal government and the regular monthly "incentive" payments which the tribe makes to its individual members, which can range, the senior advisor said, from $90,000 to $120,000 a year, but which have been reduced over the last 36 months, along with the size of the tribal government.

Thomas wrote that rather than the payment structure which the tribe has been following since Foxwoods opened in the early 1990s, with Kien Huat, the Malaysian investment company that originally bankrolled Foxwoods, getting "first dibs" as the advisor put it - it is still owed $21.2 million of its original $160 million investment - followed by the banking syndicate headed by Bank of America Merrill Lynch and Wells Fargo/Wachovia, followed by bondholders and finally the tribe, "Tribal Government and the Incentive will now be paid FIRST with any cuts or changes to our operation taking place after our members are paid."

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