Humongous $3.26 billion inflow set to wow market; HealthSouth up as banks OK coupon payment

By Paul Deckelman and Paul A. Harris

New York, Aug. 28 - After five straight weeks in which liquidity hemorrhaged from the high yield market, it came back in with a vengeance in the latest week, according to junk bond mutual fund flow numbers which circulated after the close on Thursday; the massive inflow of some $3.258 billion seen during the week ended Wednesday goes a very big way toward restoring the nearly $5 billion which the funds had lost over the previous five weeks.

The number is sure to surprise many players, who had generally been anticipating a positive number, given the upbeat tone seen in the secondary market over the last week or two - but it's fair to say that probably nobody was expecting an inflow anywhere near the size of the one reported by AMG Data Services Corp. of Arcata, Calif.

"That's unbelievable!" one sell-side official stated, confirming the number to Prospect News.

This source alluded to evidence in secondary action that market-timing money is possibly once again at play - and in a big way - in junk.

"Two weeks ago Reliant bonds were trading in the 80s," said the source. "Now they're in the 90s. And we're seeing that with a lot of bonds.

"There has been a lot of appreciation in price. I think people oversold a couple of weeks ago."

For purposes of comparison this source identified 2003's largest previous inflow, $1.54 billion for the week ending Feb. 26.

Hence the patient few who had waited out a session that session seemed to be unfolding into a "total yawner" were rewarded with eye-popping news during an otherwise "dead" session.

Even though mutual funds hold a relatively small proportion of the total assets in the high yield universe, the weekly fund flow numbers are generally considered a steady and reliable barometer of overall high yield market liquidity trends.

The latest week's mega-number - believed to be the largest since AMG began compiling those statistics more than a decade ago - are likely to restore investor confidence in a market which had been reeling under five straight weeks of outflows totaling approximately $4.996 billion, according to a Prospect News analysis of the AMG figures. The fund flow numbers include only those funds which report on a weekly, rather than a monthly, basis, and exclude distributions.

It should be noted, however, that after having endured three straight weeks of that five-week span in late July and early August during which a net of more than $1 billion more left the funds than came into them in each of those weeks (including a record $2.56 billion outflow in the week ended Aug. 6), the relatively modest $83.8 million outflow observed last week was considered almost a moral victory by the junk market, which had already begun to start moving back up that week.

The latest weekly inflow was the 21st in the 34 weeks since the start of the year, and zooms the cumulative year-to-date inflow total to approximately $15.574 billion from the previous week's $12.316 billion. The inflows had hit their cumulative peak of an amazing $17.312 billion in the week ended July 16, according to the Prospect News analysis.

That ample liquidity coming into the funds - and by extension, into the overall high yield market - had not only fueled a solid junk bond market rally for most of the year up through around mid-July (money came into the junk world as returns on other investment vehicles, such as stocks, Treasuries and high-grade corporate bonds, lagged badly), but also was the catalyst behind a bubbling new-issue market which in half a year's time had already eclipsed the total issuance for 2002, according to data compiled by Prospect News.

Over the past month, however, the secondary was abruptly treading water as money flowed out of the market, and new issuers meantime suddenly found conditions not much to their liking, causing a number of them - notably, Charter Communications Inc., which was going to issue $1.7 billion of new debt - to cancel planned new deals.

With the secondary pullback and the drying up of the primary more or less coinciding with the traditional late-summer seasonal lull, players have been recently predicting that both the secondary market rally and the new-deal parade might get back on track once the Labor Day holiday weekend - marking the unofficial end of the summer season - is past. Their case for a revived secondary and a renewal of primary activity can only be helped by the latest week's massive inflow total.

In the primary, news also emerged Thursday from the universe of emerging markets corporates, as Columbian brewer Bavaria was heard to be bringing up to $500 million in new bonds that are expected to come in September, via Citigroup.

And nodding toward the same investment bank, one source told Prospect News that Brazilian brewer and bottler Companhia de Bebidas das Americas (AmBev) is also expected to come with a deal after the Labor Day recess.

AmBev recently announced that it plans to build the plant in Peru, which will involve an investment of $40 million.

One sell-side source told Prospect News that while the emerging markets were "dead quiet," activity is expected to pick up "pretty seriously" next week.

"It's not necessarily a strong market," the source added, "but certainly a lot of issuers are looking to access the market. It remains to be seen what the tone will be like and what the anticipated supply will do to the tone."

Another emerging markets sell-side source said "Our strategy guys are more positive on the technicals than they were a month ago. In general we continue to hear of strategic inflows - pension funds, and so forth - that are funding new mandates.

"The market has held up extremely well in the face of the Treasury volatility that we have seen recently," added the official. "We are probably at or near tight levels on the year."

In the secondary market, "there was a lot of quoting going on," a trader said, "but not a lot of conviction. Nothing really moved up a lot."

Still, he noted, "considering the day [the last full trading session of a pre-holiday week which saw many participants at both the trading houses and the accounts off on vacation], it wasn't THAT slow. The tone was OK. It seemed like there was some liquidity out there."

He saw a few issues at better levels, including Level 3 Communications Inc. whose 9 1/8% notes due 2008 had firmed to 81 bid, 82 offered from prior levels around 80 bid, 81 offered. Another telecom name he saw gaining was Nextel Communications Inc., "up a little," with its 7 3/8% notes due 2015 having advanced to 98.25 bid, 99 offered from Wednesday's levels at 97.875 bid, 98.325 offered.

He did not, however, see very much follow up in Qwest Communications International Inc.'s bonds, which had firmed smartly on Wednesday in apparent response to statements by a Standard & Poor's analyst holding out the prospect of an eventual multiple-notch upgrade for the Denver-based regional Bell operating company's debt ratings if it can achieve certain financial goals. On Thursday, the trader said, Qwest's 7½% notes due 2008 were quoted perhaps half a point better at 93.5, but "I think that was just tightening. They really look 'unched' [i.e. unchanged]. It doesn't look any different to me."

Another trader said that while the market had "a very positive tone," there really was not much activity from his vantage point.

One issue which did look like it had moved, he said, was HealthSouth Corp., buoyed by a decision by its bank lenders to waive a payment blockage notice that had prevented the troubled Birmingham, Ala.-based provider of diagnostic imaging and outpatient surgical and rehabilitative services from making the scheduled interest payment on its 10¾% senior subordinated notes due 2008.

The company said that it will transfer sufficient funds to the trustees for holders of all notes outstanding to permit the payment of approximately $6 million of past-due interest. The payment will be made shortly after the record date of Aug. 29.

The company earlier this month had announced that it would make all past-due interest payments on its obligations - though payment on the subordinated bonds was subject to the bank approval - and would continue to make the interest payments in a timely fashion going forward. Resolution of the interest payment problems is considered a key step in restoring investor confidence in HealthSouth, which had been shaken by government allegations of over $2 billion of accounting fraud, leading to the indictments and guilty pleas of a number of former executives (although not ousted company CEO Richard Scrushy, who remains however under federal scrutiny).

On Thursday, HealthSouth's bonds "were moving up," the trader said, quoting the 10¾% subordinated notes on which the interest payment will be made as having jumped to 84 bid from 79 previously. Its other bonds, such as its 7 5/8% senior notes, also benefited, moving up to 82-82.5 bid from prior levels around 81, and the company's convertible bonds were also said to be up.

Elsewhere, the likelihood that Parker Drilling Co. might have difficulty refinancing its $110 million of convertible debt when those notes mature a year from now had recently dropped the Houston-based oilfield service company's convertible and straight bonds, but the trader said that Parker had "come back very strong," with the convertibles having firmed to 97.5 bid, 98.5 offered by Thursday's close from lows earlier this month around 92 bid, 93 offered.

"It seems the panic has subsided, and now it's [back to being] a par bond," he opined. Likewise, the company's conventional 9¾% junk bond, recently at 96 bid, 97 offered, had firmed to bid levels around 97-97.5 Thursday.

Also in the energy sphere, the trader saw the bonds of refining operators recently "very strong," - no surprise there, given the high price of gasoline, owing to the suddenly tight supplies of the fuel. That shortage has driven even the cheapest self-service prices at stations in the New York area up to around $1.85-1.90 a gallon - about a 30 cent per gallon gain over where they were earlier in the summer - while on the West Coast, a trader said, gas prices are already over $2.25 a gallon.

On Thursday, an article in The Wall Street Journal indicated that the refiners question whether they will be able to meet the soaring demand for gas over the next decade, given the shortage of excess refining capacity.

Premcor Refining Group Inc.'s 8 7/8% notes due 2007 were up a point Thursday to par bid; the trader also saw its 7½% notes around 95.5 bid, 96.5 offered, while Tesoro Petroleum's 8% notes due 2008 hovered around 103 bid, 104 offered and Frontier Oil's 8% notes were up to 102.

Another notable gainer was Smithfield Foods Inc., whose 7¾% notes due 2013 were quoted three points better at 104 bid and whose 8% notes due 2009 gained two points to end at 106 bid.

But the trader said that while certain issues seemed to have a good bid to them, given the paucity of real trading in the pre-holiday week (which will see an early 2 p.m. ET close on Friday and a full financial market shutdown on Monday, Labor Day), "it's hard to say what's going on. You call some of these institutions - and you end up speaking to the cleaning lady."

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