Airlines continue oil-fueled climb, Six Flags up; add-on trio prices; funds see $50 million inflow

By Paul Deckelman, Paul A. Harris and Ronda Fears

New York, Jan. 11 - Delta Air Lines Inc.'s bonds continued to gain altitude on Thursday, along with those of Northwest Airlines Corp., as the paper of the two bankrupt carriers rode the momentum from big gains notched Wednesday amid merger and acquisition news and rumors involving both companies, as well as getting a boost from a fourth straight session of sharply declining oil prices, considered a positive sign for the fuel-intensive airline industry.

Back on solid ground, Six Flags Inc.'s bonds improved on the news that the theme park operator has agreed to sell seven of its theme or water parks near several major metropolitan areas for $312 million and use the proceeds to pay down debt.

Overall, traders said that while there was a decent enough volume of activity in the morning, things turned quiet after mid-day, with one quipping that "it was almost as though today [Thursday] was the half-session, rather than tomorrow [Friday]." The Bond Market Association has recommended a 2 p.m. ET close for United States debt markets Friday ahead of Monday's Martin Luther King Day legal holiday, which will see all U.S. financial markets shuttered.

In the primary arena, a trio of quickly appearing add-on offerings to existing bond tranches priced, for American Real Estate Partners LP/American Real Estate Partners Finance Corp., Iron Mountain Inc. and Ahern Rentals Inc. All three of the deals were upsized from their originally envisioned sizes. The Iron Mountain offering was euro-denominated, while the other two were dollar deals.

Also on the new-deal front, Snoqualine Entertainment Authority, a Washington state-based tribal gaming concern, was seen also getting ready to hit the road to market a planned $320 million two-part issue.

Funds continue on the upside

Late Thursday sources told Prospect News that AMG Data Services reported $49.9 million of inflows to the high yield mutual funds for the week to Wednesday among accounts that report on a weekly basis.

That increases the year-to-date flow of cash among the weekly reporting accounts to $288.4 million.

Meanwhile accounts that report on a monthly basis are reporting a more substantial $331.3 million of inflows for the most recent period, increasing year-to-date flows among monthly reporters to $708.3 million.

Thus aggregate flows, which tally both the weekly and monthly reporting accounts, stood at $996.7 million through Wednesday.

That positive note on which the new year has begun, liquidity-wise, with inflows seen in each of the two weeks since the year's beginning, stands in marked contrast to the way the old year ended, when outflows were recorded over the last three weeks of 2006. During that three-week stretch, a net total of approximately $148.1 million more left the funds than came into them, according to a Prospect News analysis of the figures.

That final hemorrhage was a fitting way to end a year which mostly saw capital leaking out of those funds. For 2006, through the period ended on Dec. 27, the final reporting week of the year, the junk funds saw a net outflow of about $2.998 billion, with outflows recorded in 34 out of the year's 52 weeks, and inflows seen in just 18 of them, according to the Prospect News analysis. However, the year's second half actually saw a net inflow of some $638 million, with that positive trend apparently now carrying over into the new year as well.

The figures exclude distributions and count only those funds that report on a weekly, rather than on a monthly, basis.

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 only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Calendar slow to grow

A high yield syndicate official marked the broad market up ¼ to 3/8 point on Thursday, as sources on both the buy-side and the sell-side remarked upon the slow build up to the forward calendar thus far in 2007.

However that calendar, representing deals thought to be presently "in the market," had pushed north of the $5 billion mark by the Thursday close.

As to the session's issuance, three companies chose to tap existing issues via quick-to-market deals that generated gross proceeds of approximately $591 million and €222.728 million.

One high yield syndicate official who spoke to Prospect News well after the Thursday close noted that all three deals came upsized.

"Market demand is where we expected it to be and there is not a ton of issuance," the source said.

American Real Estate massively upsized

American Real Estate Partners, LP, issuing in conjunction with American Real Estate Finance Corp., priced a massively upsized $500 million add-on to its 7 1/8% senior notes due Feb. 15, 2013 (Ba3/BB+) at 99.50 to yield 7.226% on Thursday.

The add-on, which was increased from $300 million, came in the middle of the 99.25 to 99.75 price talk.

Jefferies & Co. ran the books.

The Mount Kisco, N.Y.-based rental real estate, hotels and resorts, housing and condominium development company priced the original $480 million issue at par on Feb. 1, 2005, hence the interest expense on the add-on notes increased by slightly more than 10 basis points.

Ahern benefits from upgrade

Elsewhere in the dollar-denominated primary market, Ahern Rentals priced an upsized $90 million add-on to its 9¼% second-lien senior secured notes due Aug. 15, 2013 (B3/B) at 103.75 resulting in an 8.253% yield to worst and an 8.497% yield to maturity.

CIBC World Markets led the debt refinancing from the Las Vegas-based equipment rental company.

The original $175 million issue priced at par on Aug. 11, 2005. Hence Ahern realized more than 75 basis points of interest savings with the tap it did on Thursday.

A source close to the deal, which was upsized from $75 million, said it was vastly oversubscribed and greatly benefited from a recent upgrade by Standard & Poor's to B from B-.

Iron Mountain in euros

Finally, Iron Mountain Inc. priced an upsized €225 million add-on to its 6¾% senior subordinated notes due Oct. 15, 2018 (B3/B) at 98.99 on Thursday, resulting in a yield of 6 7/8%.

Bear Stearns & Co. ran the books for debt refinancing and general corporate purposes deal which was upsized from €175 million, and generated approximately €222.728 million of gross proceeds.

The original €30 million issue of 6¾% notes due 2018 was sold in a private placement on Oct. 17, 2006.

Friday's lone deal

An abbreviated session in front of the three-day weekend including Monday's U.S. national holiday commemorating Dr. Martin Luther King, Jr. figures to see only one deal price.

Germany-based plumbing fixtures manufacturer, Grohe Holding GmbH has talked its €800 million offering of seven-year senior secured floating-rate notes (B2/B) at three-month Euribor plus 275 to 287.5 basis points.

The deal is expected to price in London via Credit Suisse and Lehman Brothers.

Snoqualmie hits the road

Elsewhere in Thursday's primary market, Snoqualmie Entertainment Authority began a roadshow its $320 million two-part offering of senior notes (B).

The tribal gaming company, which is based in western Washington state, is in the market with a $120 million tranche of seven-year floating-rate notes and a $200 million tranche of eight-year fixed-rate notes. The project financing is coming to market via Bear Stearns.

Smooth sailing continues

In the secondary market, a buy-side source who spoke to Prospect News on background Thursday morning, said that the high yield market, which had a banner year in 2006, seems to have made an uninterrupted crossing into the new year.

"Since the beginning of the year spreads are tighter," the investor said.

"In general things are better bid because there is not much of a calendar yet.

"Intelsat went well and is trading at a little premium," the source added, referring to Intelsat (Bermuda), Ltd.'s $600 million issue of senior unguaranteed floating-rate notes due 2015 (Caa1/B) that priced Tuesday at par to yield six-month Libor plus 350 basis points.

"Defaults are low, liquity is high and nothing seems to have fallen apart," the buy-sider said.

New Chaparral Energy bonds firmer

Meanwhile traders did not see the new add-on deals trading around on Thursday. One did see American Real Estate Partners' outstanding bonds quoted at 99.5 bid, 99.75 offered, but said the new notes weren't trading.

Among recent deals, he pointed to activity in Chaparral Energy Inc.'s new 8 7/8% notes due 2017, which priced Wednesday at 99.178, too late for aftermarket activity that session.

"This [Thursday] morning, they tried to take them up above par, and they met some resistance there," the trader said. "There was some trading between 99.875 and 100.125, so they were bracketing par."

Another trader saw the new Chaparral bonds at 99.5 bid, 100.5 offered.

With the prospect of a large new split-rated euro-denominated seven-year deal coming sometime soon, Royal Caribbean Cruises Ltd.'s outstanding 8¾% notes due 2011 were seen down ½ point, at 110 bid.

Delta continues to fly as oil continues drop

Back among the established issues, a trader saw airline bonds continuing to climb in the wake of Wednesday's big gains fueled by merger and acquisition news and speculation and lower oil prices.

While there was no fresh news Thursday on the M&A front, oil continued to decline, with light, sweet crude - already down 15% in 2007 - falling to its lowest level since May 2005, settling down $2.14 to $51.88 a barrel on the New York Mercantile Exchange.

The fall of crude, which has now extended over four sessions, gives some hope to airline sector investors, who see crude price movements as a barometer of likely future price movements for jet fuel; energy costs are one of the single largest expenditures for any major airline, and sky-high fuel prices helped to push both Atlanta-based Number-Three U.S. carrier Delta and Eagan, Minn.-based Number five carrier Northwest into bankruptcy in the fall of 2005.

The trader said that oil price optimism, combined with M&A speculation about Delta, which is trying to fight off a hostile takeover attempt by US Airways Group Inc. and which has been reported to have held talks with Northwest about a possible link-up of the two companies, helped to push Delta's 8.30% notes due 2029 up to 70.5 bid, 71 offered, versus 69 bid 70 offered on Wednesday.

Northwest's bonds, he said, were meantime up 3 to 4 points, depending on the issue, with its 8 7/8% notes that were to have matured last year up 3 points at par bid, its 9 7/8% notes slated to come due this year 4 points better at 103, its 7 7/8% notes due 2008 at par and its 10% notes due 2009 at 102, both up 3 points.

Another trader also saw Delta "continuing to march higher," with the 8.30s at 70.75 bid, 71.25 offered, up from 68.75 bid, 69.75 offered, while Northwest's 10s were at 102.25 bid, 103.25 offered, up from Wednesday's 98.5 bid, 99.375 offered finish.

"What a difference a day makes," he observed, "especially if there's a $2 cut in the price of oil."

Another trader saw AMR Corp.'s 9% notes due 2012 around the 105.75 level, up from prior levels around 104 bid. The Fort Worth, Tex.-based company is the parent of the largest air carrier, American Airlines.

Six Flags better on sale plan

Six Flags' bonds were seen up after the New York-based amusement park company announced plans to sell a total of seven of its parks for $312 million - $275 million of it in up-front cash - and use the proceeds to pay down debt.

A trader saw its 8 7/8% notes due 2010 a point better on the day at 99.5 bid, par offered, while another saw the bonds at 99.625 bid, 100.125 offered, up from 98.5 bid, 99.5 offered, "so that was up pretty nicely."

Yet another trader said that "right after the news, all three issues were offered at pretty much the levels they had been at," with the 8 7/8s offered at 99, the 9 5/8% notes due 2014 offered at 94 and the 9¾% notes due 2013 offered at 95.

"All three offers got lifted," he said, and they traded up about a point, with "a lot of trading around par" in the 8 7/8s. He said the bulk of the day's trading had taken place in the 9 5/8s and the 8 7/8s.

He said his belief was that some of the asset-sale news "was already in the price, and the first offers we saw made you wonder whether you were just going to see some selling, after buying on the rumor, but it looked like there was a fair amount of buying."

He said the conventional wisdom on Six Flags - which has been an underperformer over the past several years, leading to a proxy-fight shareholder revolt last year that resulted in the ouster of the old management and its replacement by the current leadership - is that "you buy them in the off-season and then you sell them when the season opens - because usually you get disappointing numbers.

Six Flags said it had agreed to sell seven parks located in the Houston, Denver, Seattle, Buffalo, Oklahoma City and the San Franciso-Oakland markets to CNL Income Properties Inc., a real estate investment trust. The buyer will pay $275 million in cash and $37 million in a note receivable. Six Flags Magic Mountain and the adjacent Hurricane Harbor water park in Valencia, Calif., are not included in this transaction, the company said.

It went on to say that the disposition of the seven parks "is a key component of the company's overall strategy to reduce debt and enhance operational and financial flexibility."

The Six Flags announcement noted previous statements by management of its intent to reduce debt by several hundred million dollars over the next several years. The agreement to sell the seven parks, combined with the June 2006 sale of the land underlying its Houston AstroWorld theme park for $77 million, will result in gross cash proceeds of $352 million for debt reduction, Six Flags concluded.

Tembec gain continues

Elsewhere, a trader said, Tembec Inc.'s recently resurgent bonds were also up solidly again, pushed up by favorable foreign exchange conditions and other potentially positive developments for the embattled Canadian forest products company, with its 8½% notes due 2009 at 76 bid, 78 offered, up 4 points, its 8½% notes due 2011 six points better at 71 bid, 72 offered, and its 7¾% notes due 2012 up a whopping 7 points on the day at 69 bid, 70 offered.

Market sizzles - then fizzles

All told, a trader said, "there was a little bit of action in the morning - but then that was about it."

Another trader agreed that "we started out the day with the market firming up. It looked like there was a bid in the market, and people trying to put money to work - but then around lunchtime it went sound asleep. It felt like a holiday weekend."

Treasuries went down from the opening, knocked lower by strong U.S. data, as weekly unemployment claims fell a larger-than-expected 26,000 to 299,000, the lowest level since late July, raising some fears that the Federal Reserve could go back to tightening interest rates to tamp down incipient inflationary pressures.

"They stayed down - and we saw better bids in the [junk] market in most cases. Some stuff was kind of mixed, but there were more buyers than sellers this morning."

But after that promising start, helped along by surging stocks, things fizzled out in junk bond land.

"Whoever was planning for the long weekend was out spending their money this morning."

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