Adelphia bonds jump on inter-creditor progress; Hilcorp deal prices; funds see $418 million outflow

By Paul Deckelman

New York, June 22 - Adelphia Communications Corp. bonds were seen up about four to five points Thursday, traders said, with the posting on the company's bankruptcy case docket of a term sheet outlining a proposed settlement of the inter-creditor disputes that have been delaying progress in its reorganization seen as a major catalyst.

Market observers said that the term sheet - which one analyst said came "as a surprise" on Wednesday - raises the possibility that after months of legal back-and-fourth, the Adelphia bankruptcy process, which will be exactly four years old this coming Sunday, may finally be nearing a conclusion. That would bring investors a measure of closure and, down the road, would clear the way for the $17 billion sale of most of the bankrupt Greenwood, Village, Colo.-based cable operator's company's assets to Time Warner Cable and Comcast Corp.

In the primary market, Hilcorp Energy Co. was heard by syndicate sources to have successfully priced a $200 million issue of 10-year senior notes, the day's sole pricing. However, several deals await in the wings, with price talk having emerged on offerings for Millipore Corp. and National Mentor Holding Inc.

Meantime, new deals joined the forward calendar, from would-be issuers Stewart & Stevenson LLC, Citisteel USA Holdings, and Mark West Energy Partners LP.

And as trading was winding down for the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday, $418.5 million more left the funds than came into them. It was the second sizable outflow in as many weeks, following the $382.7 million that hemorrhaged in the previous week, ended June 14, which in turn had followed a small inflow.

In the past two weeks, some $801.2 million of net outflows have been seen, according to a Prospect News analysis of the figures, and there have now been outflows seen in 10 weeks out of the last 11, for a net total outflow in that time of around $1.992 billion.

Outflows have now also been seen in 20 weeks out of the 25 since the start of the year, against only five inflows, and net outflows during that time have totaled $3.258 billion, according to the Prospect News analysis, excluding distributions and counting only those funds that report on a weekly, rather than on a monthly, basis.

Funds which report on a monthly basis meantime have seen total net inflows of $2.007 billion. Aggregate flows consolidating the numbers from the two categories show a $1.251 billion total net outflow

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 between 10% and 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 hedge funds.

Adelphia higher

Back in the secondary market, "most of the focus was on Adelphia today [Thursday]," a trader said, quoting the company's 10¼% notes due 2011 at 55.5 bid, 56.5 offered, which he saw up "at least three points."

Other issues seen up multiple points included the 10 7/8% notes due 2010, at 51.5 bid, 52.5 offered, and its 9 3/8% notes due 2009, at 53 bid, 53.5 offered. A source at another desk saw the company's 9 7/8% notes due 2007 three points better at 52 bid.

Traders said that Adelphi's bonds had first firmed by about a point or two on Wednesday as word made the rounds of the market that there would be a late-afternoon conference call that day that included the company and representatives of the various creditor groups.

A trader said that there was another such conference call Thursday morning, essentially a continuation of the previous one, at which the proposed settlement was further discussed, and the bonds rose even more solidly on Thursday morning.

"I think people were working through the impact of that term sheet, saying it's positive for the seniors [bonds issued by Adelphia] and positive for the Centurys [bonds issued by Adelphia's Century Communications Corp. subsidiary] as well, relative to recent trading levels," said Robert Konefal, the media and telecommunications analyst for Imperial Capital LLC, of Beverly Hills, Calif.

However, Konefal noted that the proposed settlement is by no means a done deal, at least not yet. "There are a couple of moving parts here," he cautioned.

"Importantly, the ad hoc committee for the Adelphia seniors has not signed onto this term sheet as well" as of late Thursday afternoon, he noted.

"I think there was a flurry of activity [in the Adelphia bonds] earlier in the day," which he said drove the levels up in the early going, but after that, "caution started to set in as bond investors market grew concerned that with the ad hoc senior committee not actually on board yet, "there might be at least some risk that this term sheet doesn't go through."

He said that as of Thursday afternoon they hadn't said yes - but they hadn't said no either. There is no deadline by which the committee must take a position one way or the other.

Last month, Adelphia asked the U.S. Bankruptcy Court for the Southern District of New York to approve an expedited sale process, under which it might be able to proceed with the sale of most of its assets to Time Warner and Comcast, even before its bankruptcy plan was approved by its creditors and confirmed by the court. Such a sale without a confirmed reorganization plan in place would be allowable under section 363 of the Bankruptcy Code.

Meanwhile, Adelphia would sell to Comcast its majority interest in two joint ventures with that company - Century-TCI and Parnassos. That sale would occur at the same time as a separate plan of reorganization for those particular entities would take effect. Adelphia late Wednesday agreed to a set of confirmation guidelines for its amended joint venture plan of reorganization, under which proceeds from the sale of the joint ventures must be distributed to joint venture debtors Parnassos and Century-TCI to pay all joint venture creditors.

The parties had originally been racing against a "drop dead" deadline of July 31 by which the company's assets would have to be sold to Time Warner and Comcast.

Under the modified plan approved by the judge earlier this month, the deadline for the joint venture sale, for which a confirmed plan is necessary, was extended by a month to Aug. 31. The sale of the majority of the company's assets would meantime be going forward separately under section 363.

The modified plan was drawn up due to lack of progress in settlement discussions and concerns that the existing plan might not be confirmed. It breaks the transaction into two parts and extends the deadline for confirmation for the joint venture plan to Aug. 31.

Imperial's Konefal indicated that Adelphia is likely to need more time than that current Aug. 31 deadline in order to put through the plan proposed in the term sheet. It is possible that Time Warner and Comcast may take issue with granting this further extension, and concessions may be sought. However, the amount of time is not likely to be that significant, he said.

"There are a couple of pieces to the term sheet proposal that would still not assure everything," he said. "But broadly speaking, the idea would be to settle a huge issue - the inter-creditor dispute - and basically move a lot of the transaction to a reasonable time frame, around the end of the third quarter or so, as opposed to holding back a lot of the proceeds and fight it out in court."

Rite Aid down on earnings

Elsewhere, Rite Aid Corp. bonds were seen lower, after the Camp Hill, Pa.-based drugstore chain operator reported what analysts considered to be disappointing numbers. A market source saw its 7.7% notes due 2027 dip to 81.5 bid from 82.875 previously, while its 7 1/87% notes due 2007 fell half a point to 99.625.

Rite Aid saw income of $3.2 million (one cent per share) in the quarter, versus year-earlier profits of $25.2 million (five cents per share).

Toys slips again

Another retailer, Toys "R" Us, was mostly lower for a second straight session, its 7 5/8% notes due 2011 dipping to 80.5 bid, down a point, while its 7 7/8% notes due 2013 were also down a point, at 76.5.

Hilcorp prices, trades up

Among the new issues, Hilcorp's 9% notes due 2016 traded up half a point, a trader said, at 100.25 bid, 100.75 offered.

Those bonds had priced at par earlier in the session via joint book-runners Lehman Brothers and Deutsche Bank Securities. The Houston-based energy exploration and development company plans to use the deal proceeds to repay debt from its previous acquisitions.

Millipore, National Mentor talk

Hilcorp was the only deal seen pricing. However price talk emerged on several upcoming deals. Primaryside sources said that Millipore's upcoming split-rated €250 million issue of 10-year senior notes is expected to price at Bunds plus a spread of around 200 basis points. Even though it was initially anticipated that the deal would likely price early next week, a market source indicated that pricing Friday, following the conclusion of a short roadshow, "is possible as well."

The Billerica, Mass.-based biotechnology company's bond issue will come off the European desks of joint lead managers Banc of America Securities and UBS Investment Bank.

And price talk of 11% to 11¼% was heard on National Mentor Holdings' issue of $180 million of eight-year senior subordinated notes. That offering for the Boston-based provider of services to people with developmental disabilities is expected to price Friday afternoon, with books on the deal closing at 1 p.m. ET.

The deal will come to market via JP Morgan, UBS Investment Bank and Banc of America Securities.

Stewart & Stevenson joins calendar

Among new prospective issuers joining the forward calendar ranks, Stewart & Stevenson LLC was heard Thursday to be in the market with a $150 million issue of eight-year senior notes, expected to price next week.

Junk market primary sources said that the Houston-based oilfield services company had begun a roadshow Wednesday to pitch the issue to prospective investors. That sales campaign will last a week, with pricing expected next Thursday, they said, through sole bookrunner JP Morgan.

Stewart & Stevenson, which also provides non-oilfield transportation equipment, plans to use the proceeds from the new deal to repay bank debt.

The company is no longer affiliated with Stewart & Stevenson Services Inc., a Houston-based manufacturer of tactical military vehicles, following the latter's approximately $277 million sale of its engineered products and power products business in January. Those assets were sold to Houston oil industry entrepreneur and philanthropist Hushang Ansary, with the parent company's chief financial officer, John B. Simmons, becoming president and chief executive officer of the newly formed Stewart & Stevenson LLC entity.

MarkWest unwraps deal

Also joining the calendar, MarkWest Energy Partners LP said that it will offer $200 million of new 10-year senior notes, as well as three million common equity units, which are being sold via joint bookrunners RBC Capital Markets and Wachovia Securities.

A syndicate source said late Thursday that further details of the upcoming offerings would be made public on Friday.

Citisteel USA Holdings was heard to have hit the road Wednesday to market a $60 million issue of five-year senior secured payment-in-kind notes, via Jeffries & Co. Pricing is expected late next week.

The Claymont, Del.-based steel industry mini-mill operator will use the proceeds for a distribution to the company's equity holders.

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