Xerox upsizes mega-deal to $1.25 billion; junk funds see third straight inflow at $716.9 million

By Paul Deckelman and Paul A. Harris

New York, June 19 - Xerox Corp. priced its eagerly awaited two-part offering of seven and 10-year notes Thursday, upsizing the mega-deal by 25% to $1.25 billion. The late pricing by the copier giant overshadowed several smaller issues - a phrase that is a relative term in the case of Arch Western Resources LLC's 10-year offering, which at $700 million would normally be considered a pretty big deal all by itself.

Market participants noted the role that ample liquidity has played in enabling such huge deals as Xerox, regular big deals as Arch Western's and smaller offerings, such as those brought in Thursday by American Color Graphics Inc. and Psychiatric Solutions Inc.

And sure enough, the market got another healthy dose of the green stuff, as participants familiar with the weekly mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that $716.9 million more came into the funds in the week ended Wednesday than left them, excluding distributions and including only those funds which report on a weekly basis.

It was the third consecutive week of large inflows, following inflows of nearly $1.329 billion last week and $1.45 billion the week before.

The fund flow numbers are seen as a key barometer of overall junk market liquidity trends. After an incredible 12-week long winning streak that occupied most of the spring, in which inflows - many of them more than $1 billion - were seen week after week, the fund flows paused for two weeks of outflows in late May - and then picked up right where they had left off.

Counting the latest week's tally, approximately $3.496 billion more has come into the junk funds over the past three weeks alone than has left them, according to a Prospect News analysis of the figures. For the year to date, inflows have been seen in 18 weeks out of 23 since the start of the year, and the net inflow total has risen to a staggering $16.189 billion.

With that kind of money flooding into the funds - and by extension, into the overall junk market - it's easy to see why the new-deal area has been red-hot, with billion-dollar-plus offerings like Xerox's almost commonplace.

And the rally in the high-yield market showed no sign of slowing during Thursday's session in the primary market as the investment banks completed a quartet of transactions including the Xerox offering.

Thursday's transactions hauled the high yield up over the $10 billion mark for the month: $10.61 billion in 38 tranches have priced so far in June 2003. With seven sessions left to run their courses before the calendar page turns, June is already the second-busiest month of 2003.

To replace the departing quartet of issuers, four companies stepped onto the forward calendar stage Thursday with new offerings of junk bonds.

Sources suggest that these and the rest of the prospective issuers on the now-bulging forward calendar - comprised of companies on the road, companies in the market and companies contemplating the market - are being lured in by the continuing rally in high yield.

Late in Thursday's session the market not only had the inflow to mull; news spread shortly after the close that Xerox had increased its deal by $250 million, selling a total of $1.25 billion in two tranches of senior notes (B1/B+).

The document company printed a 7 1/8% yield on $700 million of seven-year notes, which priced at par, at the tight end of the 7¼% area price talk. Meanwhile the 10-year piece, totaling $550 million, also priced at par to yield 7 5/8%, in the middle of the price talk which had the 10-year notes coming 50 basis points behind the seven-year tranche.

The Stamford, Conn. firm stated in a press release issued late Thursday that in addition to the bond deal it had priced new common stock and new mandatory convertible preferred stock.

"This financing will de-lever the balance sheet and extend debt maturities, providing Xerox with additional operating and financial flexibility," the company stated in the release.

The company also noted in the release that convertible and the high yield bond deals were oversubscribed "due to strong demand."

Deutsche Bank Securities, Citigroup, Goldman Sachs, JP Morgan, Merrill Lynch and UBS Investment Bank were bookrunners on the Xerox junk.

Although somewhat dwarfed by Xerox, St. Louis coal company Arch Western Resources also mined the high yield accounts for a significant load of ore, Thursday, pricing $700 million of 10-year senior notes (Ba2/BB+) at par to yield 6¾%. Citigroup, JP Morgan and Morgan Stanley ran the books on the deal from a subsidiary of Arch Coal, which came at the tight end of the 6¾%-7% price talk.

Terms also emerged Thursday on American Color Graphics Inc.'s $280 million of seven-year senior second secured notes (B3/B), which priced at par to yield 10%. The Brentwood, Tenn. company's deal, via Morgan Stanley and Banc of America Securities, also came at the tight end of the 10%-10¼% price talk.

And Psychiatric Solutions, Inc., of Franklin, Tenn., also made it off the couch, Thursday, selling $150 million of 10-year senior subordinated notes (B3/B-) at par to yield 10 5/8%. Lehman Brothers and Merrill Lynch were bookrunners on the deal, which also came at the tight end of the 10¾% area price talk.

News of four brand new offerings circulated in the primary market during Thursday's session.

Jacuzzi Brands, Inc. will whirl out on the road beginning Friday with $370 million of new seven-year senior secured notes which it expects to price on June 30, via Credit Suisse First Boston.

Merisant Co., the Chicago-based sweetener maker, began sweet talking the accounts last Wednesday for an offering of $200 million of 10-year senior subordinated notes (B), that is expected to price during the week of June 23, also via Credit Suisse First Boston.

Barcelona-based Teksid SpA, which makes metallurgical products for the auto industry, was heard Thursday to be headed into the Europe and stateside markets with a two-tranche offering of €250 million equivalent in dollar and euro tranches. The roadshow is set to begin in Europe during the week of June 23, with a U.S. roadshow to follow. The LBO deal is expected to price on June 30, via JP Morgan.

And Morton's Restaurant Group was heard to be in the market, Thursday, with an offering of $100 million face, $85 million proceeds of senior secured notes (B2/B) via Jefferies. No timing or further details was available on the offer from the New Hyde Park, N.Y. restaurant company.

Price talk of 10% area was heard Thursday on Gerdau Ameristeel Corp.'s $400 million of eight-year non-call-four senior notes (B2/B+), expected to price on Friday, via JP Morgan and Banc of America Securities.

And finally, price talk of 9½%-9¾% emerged Thursday on Mobile Mini, Inc. $150 million of 10-year non-call-five senior notes (B2/BB-), which are expected to price on Monday via Deutsche Bank Securities and CIBC World Markets.

The Xerox deal had been expected to price earlier in the session, but was delayed for its upsizing, meaning the copier king's bonds never did make it to the secondary on Thursday.

Also unseen was Psychiatric Solutions' 10 5/8% senior subordinated notes due 2013.

However, Arch Western Resources' 6¾% senior notes due 2013, which priced at par, "traded right up," a trader said, quoting the new bonds as having quickly firmed to around 103.5 bid, 104 offered.

He also saw American Color Graphics' 10% senior secured notes due 2010 as having also improved to 103 bid, 104 offered from their par issue price, and observed that it seemed like "now every deal trades up three points."

However, he added that the American Color Graphics issue was "not anywhere near as active as Arch. "

Outside of the dealings in the new bonds, he noted that secondary market activity in existing bonds was "mostly dead."

Another trader also saw Arch's new bonds up above 103, a sign of "very strong demand" for the coal company's paper - particularly given the fact that the coupon of Arch's issue is pretty small by traditional junk-market standards, and Arch is by no means the only company to have come to market with bonds yielding below 7%, or even 6%.

"I can't believe these [yield] levels," he exclaimed. Yet even with junk yields down to decidedly un-junk-like levels and coupons carrying 6-handles or even 5-handles in a few cases (and sometimes trading north of par, depressing yields even further), "it's the same old tired story" that's been holding sway for weeks now.

"I don't know what it's going to be a year from now, but the mutual funds still have this insatiable demand" and keep putting money into high yield, even at the present levels. With the funds making up only a relatively small portion of the money that goes into the junk market, it's presumed that other investors as well are also pouring money in, further stoking the furnace.

Speaking before the latest junk fund inflow numbers appeared, the trader cautioned "if it's more inflows, watch out!" - meaning more of the same.

He noted, for instance, that Lear Corp.'s 8.11% notes due 2009 were trading two week ago around 113. On Thursday, he said, those bonds had risen to 115.5 bid - translating to a yield of just 5.03%.

"The reason people are buying it is - it's a good credit (Ba1/BB+) and its non-call - but would you buy it [if you were a portfolio manager trying to wring the maximum return from his or her holdings]?"

On a spread-against Treasuries basis, "they look OK" - because Treasury yields have also fallen sharply as part of the general yield reductions seen in the fixed-income markets in recent months. "But I look at these levels and I want to short them all on principle."

If he were an issuer, on the other hand, "I would come [to market] with everything - just like we're all doing on our houses right now."

In specific secondary activity, the trader said that "everyone seemed to be a buyer" of Benton Oil, despite a lack of fresh news on the energy credit. He saw the company's 9 3/8% notes due 2007 as having firmed to 92 bid, 93 offered from recent levels around 88 bid, 89 offered.

Another trader said the automotive sector" "was weaker after their recent run-up," but allowed that there had been little in the way of real trading.

Elsewhere, he said he had seen Charter Communications Holding LLC's bonds initially firm in response to Wednesday's announcement that the St. Louis-based cable operator and its banks had agreed to amend Charter's bank loan facility to permit the company to set up a new entity below the bank debt but ahead of the bond debt through which principal owner Paul Allen plans to make a $300 million investment to keep Charter in covenant compliance.

Charter's benchmark 8 5/8% senior notes due 2009 got as good as bid levels in the 76-77 area, up more than two points, on what he termed "a knee-jerk reaction. There wasn't anything there that hadn't already been anticipated," he added. After the initial upward burst, he said, the Charters came back down to end with a one-point gain at the most.

At another desk, an observer called Charter's bonds "pretty much the same" where they had started out.

Power producer shares were firmer, on the expectation that the Federal Energy Regulatory Commission will move once and for all to close the book on lingering matters growing from the 2000-2001 California energy crunch; Mirant Corp., one of the companies heavily involved, was up 19 cents ($6.53%) to $3.10 on the New York Stock Exchange, while on the bond side, the Atlanta power producer's 7 5/8% notes due 2006 were quoted at 76.5 and its 9 1/8% bonds due 2031 at 59.75 bid, both up about a point on the session.

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