Surgical Care deal prices; Thomson sets talk; homebuilders mixed; funds see $503 million outflow

By Paul Deckelman and Paul A. Harris

New York, June 21 - Surgical Care Affiliates LLC priced its two-part bond offering on Thursday, high yield syndicate sources said. Both tranches were seen having moved up modestly when freed for secondary dealings.

Elsewhere on the primary scene, Thomson Learning restructured and set talk for its upcoming multi-tranche mega-deal.

Price talk also emerged on Blaze Recycling & Metals Inc.'s upcoming five-year issue.

In the secondary market, traders saw a mixed bag among the homebuilder names, amid continued investor angst over impact that the sub-prime lending industry's meltdown has had on the housing sector; while Standard Pacific Corp.'s bonds were stronger on the day, widely held Hovnanian Enterprises Inc.'s paper was lower

There was major movement coming out of some names in the distressed sector, where Calpine Corp.'s bonds rose handsomely in the wake of the bankrupt San Jose, Calif.-based electric power producer's announcement late Wednesday that it had filed its re-organization plan with the bankruptcy courts and anticipates emerging from Chapter 11 by the end of the year.

On the downside, Linens N' Things Inc.'s bonds were seen having fallen several points on the session, after a major investment bank had negative things to say about the Clifton, N.J.-based home furnishings retailer.

As the Thursday session got underway junk stunk, according to one high yield syndicate official.

However, the source added, having passed a malodorous morning, high yield rallied with the stock market in the afternoon, and was better as the Thursday session wound to a close.

Also on Thursday, sources had cause to call into question the long-vaunted liquidity of the high yield asset class.

One cause for concern, according to sources on both the buy-side and the sell-side, is the continuing flap in the CDO market.

The major worries there seem to be that, one, the phenomenal demand for junk bonds has been attributable in significant part to the lately besieged CDOs which use them as collateral, and two, the debacle could result in substantially tighter lending practices and margin calls, which could constrict the liquidity of hedge funds.

The other cause for concern, Thursday, was the second consecutive substantial weekly outflow from the high yield mutual funds.

Funds see $503 million outflow

According to a market source, AMG Data Services reported a $502.5 million outflow from the funds for the week to Wednesday. Following on the heels of last week's $399.6 million outflow - which was the biggest loss of cash in a year - it comprises hard-to-ignore evidence that mutual fund investors are moving cash away from the high yield asset class.

Those big back-to-back hemorrhages followed eight straight weeks of inflows, according to a Prospect News analysis of the AMG figures.

The latest figures trim the year-to-date cash flows to funds reporting on a weekly basis to AMG to $675.5 million.

Meanwhile the funds that report on a monthly basis have seen $4.884 billion of year-to-date inflows.

Hence the year-to-date aggregate flows, which tally both the weekly and monthly reporting funds, were $5.560 billion to Wednesday's close.

Inflows have been seen in 19 weeks out of the 25 since the start of the year, although the inflows have been relatively small in most of those weeks.

Up until the latest big one-two punch, the fund-flow numbers seemed to have successfully regained the positive momentum they showed at the beginning of the year, when an aggregate total of some $862 million came into the funds in the first two months, according to the Prospect News analysis. That run was then interrupted by a choppy four-week period in March, characterized by alternating weeks of outflows and inflows, none larger than $25 million. Over the next 11 weeks, though - through the week ended June 6 - with 10 inflows seen in that time, the funds had a net total infusion during that period of $786.9 million, according to the analysis.

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.

Surgical Care prices $300 million

Only one issuer priced bonds during the Thursday primary market session.

Surgical Care Affiliates priced $300 million of junk in two tranches.

The Nashville-based ambulatory surgery services provider priced a $150 million tranche of eight-year senior PIK election notes (B3/CCC+) at par to yield 8 7/8%, on the high end of the 8¾% area price talk.

In addition Surgical Care Affiliates priced a $150 million tranche of 10-year senior subordinated notes (Caa1/CCC+) at par to yield 10%, 12.5 basis points outside of the 9¾% area price talk.

Goldman Sachs & Co. and JP Morgan ran the books for the LBO deal.

Thomson restructures, sets talk

Elsewhere on Thursday Thomson Learning restructured its proposed $1.6 billion two-part junk bond offering.

TL Acquisitions Inc., the operating company, talked a downsized $1.2 billion tranche of 7.5-year senior unsecured notes (Caa1/CCC+) at 10¼% to 10½%. A planned toggle feature, which would have allowed the company to make in-kind coupon payments in return for an incrementally higher interest rate, was abandoned. The senior unsecured notes tranche downsized from $1.35 billion.

Meanwhile the company set talk on an upsized $400 million tranche of eight-year senior subordinated discount notes (Caa2/CCC+) at 12¾ to 13%. The notes come with a two-year zero coupon, an option that was added in Thursday's restructuring. Previously it had been a straight senior subordinated cash-pay tranche.

The subordinated tranche was upsized from $250 million.

In addition to the structural changes, Thomson Education also made modifications to the bonds' debt test and restricted payments covenants.

JP Morgan, Citigroup, UBS Investment Bank, RBC Capital Markets and RBS Greenwich Capital are underwriters for the LBO deal.

The Stamford, Conn., textbook publisher is also in the market with $540 million of eight-year senior PIK notes, via TL Holdings Inc. No price talk or any other information was available on the holding company tranche on Thursday, sources said.

Pricing is set for Friday.

Five deals for Friday

In addition to Thomson Learning's mammoth LBO deal, Friday's expected transactions include:

• Shingle Springs Tribal Gaming's $450 million offering of eight-year senior notes (B), via Morgan Stanley. The notes are talked at 9¼% to 9½%;

• AmeriCredit Corp.'s $200 million offering of eight-year senior notes (Ba3/B+) via Deutsche Bank Securities and Lehman Brothers, talked at 8¼% to 8½%;

• Blaze Recycling & Metals, LLC and Blaze Finance Corp.'s $110 million offering of five-year senior secured notes, via Jefferies, talked at 10¾% to 11%; and

• SIG, the Swiss beverage packaging firm, with a €770 million two-part offering.

The company has talked €450 million of nine-year senior notes at the 8% area, and €320 million of 10-year senior subordinated notes at the 9½% area.

Credit Suisse is the bookrunner.

From the tranches

With the sub-prime mortgage mess continuing to cause turbulence in the CDO market, Prospect News quizzed some of its buy-side sources as to whether the turbulence in CDOs, which are reported to represent a substantial part of the phenomenal bid for junk, could register an impact on a high yield new issue calendar now comprised of more than $13 billion of deals to be completed before the Fourth of July.

The sources, which included a hedge fund manager and a junk bond and bank loan trader for a mutual fund, emphasized that the most important variable might be how draconian the investment banks would become in tightening lending standards.

The trader commented that if the banks decide they are going to ratchet back the leverage there could be a problem.

"If they decide to tighten lending standards and not allow the private equity guys or hedge funds to lever 10 to one anymore, but only five to one, some of the bid is going to come out of this market, particularly the loan market.

"And if the CLO bid goes away you could start to see the LBOs not getting done.

"Then the new issue calendar could start to be impacted."

Prospect News pressed this source for color on how the mega-deals presently on the road are faring.

"At this point I don't think people are as focused as much on that as they are on whether or not the deals get done at all," the trader said.

"If you look at Realogy and Claire's Stores, which some of these bigger deals resemble, they are trading down 8 to 10 points, so people are probably not lining up to buy these new deals at par."

Realogy's two-month old 12 3/8% notes due 2015 were seen 91.75 bid, 92.75 offered on Wednesday. Meanwhile Claire's Stores Inc.'s 9 5/8% toggle notes due 2015 were seen 94.5 bid, while the 10½% notes due 2017 were trading at 92 bid, 92.5 offered.

Surgical Care trades up

When the new Surgical Care two-part deal was freed for secondary trading, it was seen having strengthened a little. A trader quoted the company's new 8 7/8% notes due 2015 and floating-rate notes due 2017 as having both moved up to 100.5 bid, 101 offered from their respective par issue prices earlier in the session, " so they did pretty well."

Trading subdued

Back among the established issues, traders said the overall market was fairly quiet, some buyers pushed to the sidelines by the continued uncertainty surrounding the problems of Bear Sterns' money-losing hedge funds and resurgent rising interest rates. One noted also that it was the first day of summer and said that he would "be surprised" if some participants didn't use that as an excuse for playing hooky.

He saw the widely followed CDX index of junk market performance down 3/8 point at 99-99 1/8.

Overall, he said, "there was not a lot of cash trading going down - it was all CDS [contracts]."

Among the heavily traded big benchmark issues, he saw General Motors Corp.'s 8 3/8% notes due 2033 up ¾ point to 91 bid, 91.5 offered, while arch-rival Ford Motor Co.'s 7.45% notes due 2031 were 5/8 point better at 80.125 bid, 80.625 offered.

Homebuilders a mixed bag

A trader was struck by the mixed movements of names in the homebuilding sector, which has over the past few months been dogged by the slowdown in home sales and the rise in interest rates.

He said that Standard Pacific's 7% notes due 2015, which he called a benchmark for the sector, were up "right out of the box," opening at 90.75 bid, up from Wednesday's late levels at 89.875. Those bonds continued to firm throughout the session, going home at 91.5 bid.

Although he noted the builder's strength, he said there wasn't "a push to the whole homebuilding sector, either way," as continued interest-rate and economic concerns kept many names weaker. One, he said was Hovnanian, whose 8 7/8% notes fell to 94.5 bid, 95 offered from prior levels at 97.

"It was definitely weaker throughout the day, but it was kind of sporadic." The selling, he felt was "pretty much all related to what's going on with the Bear Stearns situation and there was selling [in the sector] because of that."

Another trader saw Hovnanian's 8 5/8% notes due 2017 down a point at 97 bid, 98 offered, and saw Technical Olympic USA's 10 3/8% notes due 2012 at 74.5 bid, 75.5 offered, down ½ point.

"The whole housing market was weak across the board."

Another market source saw Red Bank, N.J.-based Hovnanian's 6 3/8% notes due 2014 off 1½ points at 89.

Tech names trade off

Another area seen lower was the high-tech issuers, led by Advanced Micro Devices, whose 7¾% notes due 2012 lost 2 points to 94.25 bid, 95.25 offered - even though the Sunnyvale, Calif.-based computer chip maker's shares rose smartly on an upgrade from the Stifel Nicolaus brokerage firm - a welcome tonic to a company which has been struggling with weak microprocessor prices and stronger competition from arch-rival Intel Corp.

Other sector names seen on the downside included Unisys Corp., whose 8% notes due 2012 eased to 97.5 bid, 98.5 offered, while its 6 7/8% notes due 2010 ended at 98, both down a point. Freescale Semiconductor's 10 1/8% notes due 2016 were seen down nearly 2 points on the day at 95.75 bid.

Calpine climbs on plan

In the distressed-debt sector of the market, Calpine's bonds firmed solidly in the wake of the official filing of its plan of reorganization late Wednesday with the U.S. Bankruptcy Court for the Southern District of New York, which is overseeing the troubled power producer's massive restructuring.

A trader saw Calpine's 7¾% notes due 2009 as having jumped 4 points on the session to 123 bid, 124 offered, and also saw the 8½% notes due 2008 issued by Calpine's subsidiary, Calpine Canada Energy Finance ULC, as having also risen to that same level, from 120.5 bid, 121.5 offered. He further saw the company's convertible issues up 1½ points across the board.

At another desk, a trader saw the company's 8½% notes due 2011 up 3½ points at 129 bid, 130 offered, citing the filing of the plan as the catalyst. The 8¾% notes due 2007 were similarly up 3 points to 127 bid.

Another source saw some very busy trading in the 8¾% notes that are slated to mature on July 15, which moved up about 4 points on the day to the 127 level, while the company's zero-coupon notes due 2014 were 5 point winners in active dealings at 116. Another 5 pointer was the 7 5/8% notes that were to have come due last year, which rose to the 122 level. The widely traded 2011 81/2s were quoted at 129.5, but the source called that only a ½ point gain, noting the bonds had previously been seen moving up there anyway.

The bonds shot up on investor optimism about the likely return under the company's reorganization plan. Calpine anticipates paying its unsecured creditors somewhere between $8 billion and $8.9 billion total. While the company said hopes to pay the creditors in full, some might only get 91 cents on the dollar, depending on the total value of the company's assets and the amount of allowed claims.

Linens 'n Things unravels

A trader saw Linens 'n Things' floating-rate notes due 2014 fall about 3 points on the session to 79 bid, 80 offered.

He cited a research piece on the specialty retailer put out by Merrill Lynch & Co. which "tore them apart and pushed the bonds down." He did not have any details about what specifically was said in the report.

A source at another desk noting some very active trading on size in the bonds, saw them hovering in a 79ish context all day, down more than 4 points on the session.

Remy may have topped out

Another name which has been sizzling for most of the past week, Remy International Inc., also seemed to be finally fizzling out.

A trader said the troubled Anderson Ind.-based automotive electrical systems manufacturer's Delco Remy 8 5/8% notes coming due later this year "stayed the same" at 110 bid, 112 offered, while its 11% notes due 2009 and 9 3/8% notes due 2012 were both seen at 98 bid, par offered, down from 102 bid, 104 offered.

At another shop, however, a trader was quoting the senior notes at 110.5 bid, 111.5 offered, which he called up two points on the session, and said the other bonds in the capital structure had also firmed.

Remy's junior bonds had shot up nearly 30 points over the previous several sessions, and the seniors up nearly 15 points in that time, to current levels, after the company announced last Friday that its bondholders were backing its proposed restructuring plan, which will leave those bondholders owning all of the company's equity.

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