Power names continue to gain; Fleming falls; at $1.02 billion, another huge funds inflow

By Paul Deckelman and Paul A. Harris

New York, March 27- Power generating companies were up for a third consecutive session on Thursday, continuing to glide, at least in part, on AES Corp.'s announcement earlier in the week of sizable asset sales. On the downside, troubled grocery distributor Fleming Companies Inc.'s notes continued their slide toward oblivion.

In the primary sector, Westport Resources Corp. priced a $125 million add-on to its 8¼% senior subordinated notes due 2011, while Town Sports International was preparing to hit the road Monday to market a $250 million note offering.

And the recent liquidity surge that has made the healthy new-issue market possible continued to roll along, as market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services Inc. of Arcata, Calif. that junk fund inflows - a key measure of the market's overall liquidity trends - totaled $1.02 billion in the week ended Wednesday, counting only those funds which report on a weekly basis and excluding distributions.

It was the fifth consecutive week in which more money flowed into the funds than left them. Inflows had totaled $881.6 million in the previous week, ended March 19.

Inflows have now been seen in eight out of the 12 weeks since the beginning of the year, with net inflows for the year rising to approximately $6.987 billion from the $5.967 billion net inflow total seen last week, according to a Prospect News analysis of the AMG figures. Over the past five weeks, approximately $5.408 billion more has flowed into the funds than has left them. In three of those weeks, including the most recent week, inflows have totaled over $1 billion.

Market participants attribute both the strong surge in new issuance, and the robust secondary market, both of which date back to around mid-October, to the extended run of weekly inflows, which began at around the same time.

When Prospect News contacted Evergreen High Yield Bond Fund manager Prescott Crocker for his reaction to the inflow he quipped: "There's no end to the cash, is there?

"People are going to be increasingly unable to get into the market, and will have to get into alternatives," added the Evergreen portfolio manager. "Those people who find the alternatives - or who allowed to do things like emerging markets or foreign bonds as alternatives - are the ones who are going to come out on top.

"And the ones that are more limited are the ones who are going to come out on the bottom."

Interestingly, TrimTabs.com Investment Research, Inc. of Santa Rosa, Calif., reported that equities had seen a $2.9 billion inflow for the week ending March 26. That followed an equities inflow of $900 million which the California firm reported for the week ending March 19.

Prescott Crocker told Prospect News that the simultaneous substantial inflows to both asset classes were not necessarily counter-intuitive.

Normally it's the stock market that leads the high-yield bond market, Crocker observed - but perhaps in this case it's the other way around.

In the secondary sphere, it was another strong day for AES Corp. bonds and those of the overall power generating sector. Earlier in the week, Arlington, Va.-based AES - which is trying to pare down a $4.4 billion debt load via asset sales - announced three deals which will yield a total of $327 million in proceeds to AES. That brings to around $1 billion its total asset sales for the year so far.

In Thursday's dealings, the company's bonds continued to hum along on the earlier news; AES' 9½% senior notes due 2009 were quoted a point better at 84.5 bid/85.5 offered, while its 8 7/8% subordinated notes due 2007 were heard two points better, at 68.75 bid/69.75 offered.

At another desk, AES' 10¼% subordinated notes due 2006 were heard half a point improved, at 69.5.

As it has done for most of the week, the power generating sector in general has come along for the upward ride; investors were apparently relieved that the Federal Energy Regulatory Commission did not slam the generators with the kind of mandated refunds that the state of California was asking for, arising from the energy crunch that hit the Golden State in late 2000 and early 2001.

The FERC ruled that the power generators would have to pay California $3.3 billion in refunds, arising from allegations that the electricity producers had price-gouged the state during the energy crisis. That was more than the $1.8 billion which an FERC administrative law judge had awarded the state back in December, but still well below the $8.9 billion in refunds the state was seeking. And since the state owes the producers $3 billion in unpaid bills, that cancels out most of the award, meaning California will only get about $300 million in refunds, likely to be stretched out over a period of years, just the same way El Paso Corp. was able to do in its $1.7 billion settlement with the state, which was announced last week.

That settlement had boosted the Houston-based energy operator's bonds sharply, but the bonds haven't been doing much since then.

A trader said that while nothing was doing in the El Paso paper, other names were up, or at worst, unchanged.

A market observer saw power producer Aquila Inc.'s bonds about three to four points better on the session - even as Standard & Poor's released a bearish assessment of the company's prospects.

The S&P report - starkly entitled "Aquila Inc. Faces Liquidity Crunch," - warned that depressed power prices and negative spark spreads "continue to be a drag on Aquila's cash flow from operations. Aquila's credit profile depends on the successful and timely execution of asset sales, the refinancing of the company's unsecured credit facility on a secured basis, and the successful restructuring of its tolling contracts and gas prepay liabilities."

The ratings agency said that Aquila's liquidity position has rapidly deteriorated as it began restructuring itself from a merchant energy business to a traditional utility business in June 2002.

Aquila ended third-quarter 2002 with an estimated $650 million of liquidity, consisting of $515 million in cash and $135 million of availability under its revolving credit facility.

"The company continued to divest assets as part of its restructuring initiative and has managed to raise about $950 million in asset sales proceeds. However, asset sales proceeds have mostly been used to repay bank debt and post collateral due to ratings downgrades," said Standard & Poor's credit analyst Rajeev Sharma.

Despite that gloomy assessment, however, the market observer quoted Aquila's 8% notes due 2023 at 73.5 bid, up from 71 on Wednesday, while its variable-rate notes due 2012 firmed to 98.5 bid from 95 on Wednesday.

Also in the power sector, Calpine Corp.'s 8 5/8% notes due 2010 were being quoted about 1½ points better at 56 bid. Its 7 7/8% notes due 2008 were about a point better at 52.75 bid.

Outside of the power generating grid, Fleming was perhaps the most notable name of the day, continuing to slide ever lower. Fleming's 10 1/8% senior notes due 2008 were down about four points on the session, at 26.5 bid, while its 10 5/8% subordinated notes due 2007 were five points lower, at around eight cents on the dollar.

No fresh negative news that would explain the renewed fall in the Lewisville, Tex.-based wholesale grocery distributor's debt was seen. Earlier in the week, a Chicago bankruptcy judge overseeing the reorganization of Kmart Corp. - formerly Fleming's single largest customer - approved the settlement of Flemings $1.5 billion pre-petition claim against the bankrupt Troy, Mich.-based discount retailing giant for packaged food products and other merchandise it had supplied Kmart with - but had not been paid for - prior to Kmart's Chapter 11 filing in January, 2002.

Under terms of the settlement, the $1.5 billion Fleming claim was knocked down to $385 million - but Fleming won't even get anywhere near that much. It agreed as part of the settlement, to sell the claim to ESL Investments Inc., which is helping to fund Kmart's emergence from bankruptcy - for a mere $22 billion.

Elsewhere, Nortel Networks Corp. announced it had been selected for a telecommunications equipment contract by Verizon Communications' wireless division. Financial terms were not announced.

Nortel's 6 1/8% notes due 2006 were about half a point better, at 91 bid/92 offered.

Lucent Technologies Corp. - whose notes often move more or less in tandem with those of its Brampton, Ont.-based rival - was also up, its 7¼% notes due 2006 a point better at 88.25 bid/88.75 offered.

Also among technology names, Xerox Corp. bonds were up half a point, its 9¾% notes at 107.25 bid/108.25 offered. The Stamford, Conn.-based copier and office machines giant's bonds "have been moving up pretty steadily," on a day-to-day basis, a trader said.

He also saw Tommy Hilfiger - a rarely quoted name - up on takeover rumors. The designer fashion company was reported by the Wall Street Journal to be in preliminary talks about the possibility of being acquired by Jones Apparel Group Inc.

That sent Tommy's stock soaring $1.41 (23.94%) to $7.30. Meantime its 6.85% notes due 2008 were three points better at 96.5 bid/97.5 offered.

Although primary market sources reported a quiet session on Thursday, with people continuing to focus on news coming out of the Middle East, the market saw terms emerge on a drive-by deal from Westport Resources Corp., which priced a $125 million add-on to its 8¼% notes of 2011.

Also on Thursday two new deals appeared. Allied Waste Industries announced shortly after the session closed that it plans to haul in $300 million of new 10-year junk. And Town Sports International will take off the warm-ups and climb into the blocks to prepare for a full roadshow, with the gun expected to go off Monday.

During Thursday's session in the primary market terms emerged on Westport Resources' $125 million add-on to its 8¼% senior subordinated notes due Nov. 1, 2011 (existing ratings Ba3/B+), which priced at 106 to 7.091%. The deal priced spot-on to the 106 price talk, via Lehman Brothers.

Westport priced the original $275 million deal on Oct. 31, 2001 at par and a $300 million add on on Dec. 11, 2002 at 103 to yield 7.68%.

Also on Thursday Allied Waste Industries announced it will bring $300 million of senior notes due 2013 as part of "a multifaceted financing and divestiture plan to replace its bank credit facility, significantly extend maturities, substantially enhance liquidity and improve its capital structure while accelerating deleveraging."

The Scottsdale, Ariz. waste services company will also take out a $3 billion credit facility led by JP Morgan, Salomon Smith Barney, Credit Suisse First Boston, Deutsche Bank Securities and UBS Warburg.

The firm will also bring a converts deal, securitize accounts receivable and undertake some asset divestiture (see related story in this issue).

And the roadshow starts Monday for Town Sports International's offering of $250 million senior notes due 2011, via bookrunner Deutsche Bank Securities and joint lead BNP Paribas.

Along with the Rule 144A notes the New York City-based health club owner-operator is also obtaining a $100 million credit facility (B1/B+).

Proceeds will be used to help fund a recapitalization to refinance bank debt, call bonds and redeem preferred shares.

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