Retailers off on soft sales, airlines fly on oil drop; Aramark to hit the road; funds see $232 million inflow

By Paul Deckelman, Paul A. Harris and Ronda Fears

New York, Jan. 4 - Bonds of retailers were seen struggling on Thursday, after many store chains reported softer-than-expected December sales data. Among the big losers seen in the sector were Brookstone Inc. and Jo-Ann Stores Inc.

On the upside, airline bonds - particularly those of such hard-hit names as bankrupt Delta Air Lines Inc. and Northwest Airlines Corp. - were seen winging their way higher, given a lift by a sharp two-day slide in world crude prices, which could be a harbinger of more moderate jet fuel prices further down the road.

Trailing Wednesday's news that the Fed may be nursing what it perceives to be a slump in the housing market - a perception that apparently stayed the Fed from raising rates in December - junk was lower on Thursday morning, according to a sell-side source who focuses on both the bond and bank loan markets.

However a sell-side source who spoke shortly after the Thursday close said that traders had seen little activity on the day. And while this source conceded that junk was trading lower Thursday morning, he added that it had beaten its way back to end the session flat.

In the primary market, Aramark Corp. was heard getting ready to take the new year's first mega-deal on the road to shop it around to potential investors - the Philadelphia-based professional food, hospitality, and facility management services company's planned $2.27 billion three-part bond offerings.

New dealers also saw Tube City IMS Corp. planning to sell a $250 million issue of eight-year subordinated bonds.

Funds start '07 on the upside

And as activity wound 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 $232.3 million more came into the funds than left them.

Meanwhile, a source added, the funds which report to AMG on a monthly basis saw inflows totaling $377 million during the most recent period.

Hence the year-to-date aggregate flow, tallying both the weekly and monthly reporting funds, is $609.3 million, the source said.

That positive note on which the new year begins, liquidity-wise, stands in marked contrast to the way the old year ended, with outflows seen over the last three weeks, including the $56.4 million recorded last week, for the period ended Wednesday, Dec. 27. During that three-week stretch, a net total of approximately $148.1 million more left the funds than came into them, according to a Prospect News analysis of the AMG figures.

That hemorrhage was a fitting way to end a year which saw capital leak from those funds, even though that downturn was more than made up for by a veritable flood of liquidity for the junk market from capital sources other than the mutual funds, such as hedge funds, which emerged both as big buyers of bonds and as funding catalysts for leveraged buyouts and other merger and acquisition deals.

For 2006, through the period ended on Dec. 27, the junk funds saw a net outflow of about $2.998 billion, with outflows seen in 34 out of the year's 52 weeks, and inflows seen in just 18 of them, according to the Prospect News analysis.

However, according to the analysis, most of the damage was done during the first half of 2006, when there were 21 weeks in which outflows were seen, against only five inflows. In the second half, the number of weeks in which there were outflows and inflows were even, as 13 all - but tabulating up those weekly figures showed a net inflow for the second half of some $638 million, the analysis said, and that positive trend seems to have carried over into the new year as well.

The figures exclude distributions and count only those funds that report on a weekly, rather than on a monthly, basis.

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.

Aramark on the mark

In the primary market, Thursday mirrored Wednesday, in that no issues were priced.

However, as sources had advised during the run-up to the holidays, Aramark Corp. became the first prospective issuer to show up with a mega-deal in 2007.

The Philadelphia-based professional food, hospitality and facility management services company will start a roadshow on Monday for its $2.270 billion three-part offering of notes, with plans to sell plans to sell $1.70 billion of eight-year senior notes in two tranches, fixed and floating, sizes to be determined, and $570 million of 10-year senior subordinated notes.

JP Morgan and Goldman Sachs & Co. are joint bookrunners for the LBO deal.

Meanwhile on Thursday Aramark reduced the size of its proposed term loan B ahead of the upcoming Monday general syndication bank meeting since the company decided to keep more of its existing debt in place.

The seven-year term loan B is now sized at $3.66 billion, down from an originally expected size of $3.755 billion.

The company's now $4.51 billion credit facility - down from $4.605 billion - also includes a $600 million six-year revolver and a $250 million seven-year synthetic letter-of-credit facility.

Aside from Aramark little else took place in the primary market.

Sources anticipate another quiet session on Friday, and continue to profess the view that it might take up to two weeks for the primary to ramp up to the pace it had maintained through the final quarter of 2006.

However sell-side sources continue to look for the primary market to regain that pace before the month of January is too far advanced.

Market cautious

Back in the secondary arena, a trader opined that "it was a very nervous market today." He saw energy issues, for instance, lower in response to the sharp slide in oil prices as an example of the kind of selling mood that was prevalent.

"I wouldn't say it was an overly active market - but it was a very nervous market." He said that one reason was that "there wasn't very constructive news coming out of the market today."

Jo-Ann jolted, Bon-Ton bopped

The trader said that some of the retailing names were down following the monthly release of same-store sales figures by the major chains.

He saw Jo-Ann Stores' 7½% notes due 2012 "get hammered," retreating to 90.5 bid from prior levels around 92 after the Hudson, Ohio-based fabric and crafts store chain reported that same-store sales - that is, sales at stores open at least a year, a crucial performance metric in the retailing industry - fell 6.9% in December from year-earlier levels, a wider decline than the 4% that Wall Street had been expecting. Including sales from stores which were not open a year ago, or from those which were open then but which have since closed, the company's total sales for December fell to $257.5 million, a 5.9% decline from $273.5 million in December 2005.

At another desk, a market source pegged those bonds at 92.5 bid, down from prior levels in the 95 area.

The first trader meantime saw Bon-Ton Stores Inc.'s 10¼% notes due 2014 down about ½ to ¾ point around 102.5 bid after the York, Pa.-based family apparel and furniture retailer reported that same-store sales fell 5.8% in December, partly due to lower-than-anticipated sales of cold-weather clothing, given the relatively mild temperatures and lack of snow seen so far in normally frigid regions of the United States such as the Northeast and parts of the Midwest.

The company did say that its total sales for the five weeks ended Dec. 30 more than doubled to $642 million from $259.9 million for the same period last year, although it should be noted that the enlarged figure includes $401.9 million of sales from the Carson's and Parisian store chains which Bon-Ton bought during the years; their results thus aren't included in same-store sales figures.

The trade also saw Saks Inc. bonds "quoted lower, though it very rarely trades."

The Birmingham, Ala.-based upscale department store-chain operator's 8¼% notes due 2008 were seen continuing to hover around 104 bid, while its 7½% notes due 2010 remained around the same 97.875 area they have recently held, unmoved even though the company reported an 11% jump in December same-store sales over the year-earlier results, and a 13% rise in total-store sales to $440 million from $392 million a year earlier.

"Personally," he said, "I think people are foolish to trade bonds on one-month sales [changes] - but what can I say?" since investors are going to do it, no matter what.

At another desk, a trader saw the 12% notes due 2012 of Brookstone - the Merrimack, N.H.- based niche retailer specializing in mostly pricey gadgets like massage chairs, desk sets, arcade-type pinball games and high-end exercise equipment - down a point on the session to 96.5 bid, 97.5 offered, citing market scuttlebutt that the company's December comps were down something like 20% from a year earlier. Closely-held Brookstone's corporate website had no official release of its sales numbers.

Another market source, however, had a different explanation for the downturn, saying that the bonds likely were off because of a lackluster holiday sales report from its biggest competitor, Sharper Image Corp., which said Thursday that same-store sales fell 20% in December.

In general, retail sales figures for the holiday shopping season just past were disappointing, and the same is expected to be the case for Brookstone.

Consumers hang onto their wallets

The numbers reported by the retailers "were more or less on the weak side of guidance," declared analyst Bob Lupo of BB&T Capital Markets in Red Bank, N.J., "lower than expected," citing the monthly results for Jo-Ann Stores, Pier 1 Imports and other retailers. The end-of-year holiday shopping season, which accounts for nearly half the yearly sales totals for some retailers "didn't pan out as expected. Consumers were tight-fisted."

Lupo said that apparel retailers such as Bon-Ton "were impacted by weak cold-weather category sales," because of the incredibly warm December.

"More importantly," he added, you have to wonder what their [profit] margins were, and we're not going to know that until [the retailers] release their results for their December quarter.

Lupo also saw restaurant operators - affected by many of the same consumer-industry dynamics as retailers, and which also report monthly sales on a same-store basis - also reporting "very moderate" results, with Denny's Holdings Inc., for instance, posting around a 1% gain in its year-over-year comps. The company's 10% notes due 2012, which have recently hovered around the 105.75 range, were not quoted trading around on Thursday.

"I think the consumer was more or less cautious," the analyst concluded.

James River routed on transaction delay

Elsewhere, a trader saw James River Coal Co.'s 9 3/8% notes due 2012 down about 3 points on the session, quoting them as having retreated to 85 bid, 87 offered. He cited as a reason the news that the Richmond, Va.-based coal producer will delay an asset-sale transaction.

The company announced that the closing of the previously announced sale of the assets of its Bell County Coal Corp. subsidiary has been temporarily delayed. It said that while the purchaser has confirmed its intention to complete the transaction, the buyer requested an extension to close the purchase, with James River Coal agreeing to an extension until Jan. 31.

James River Coal also said that it had completed an amendment to its senior secured credit facility, effective Dec. 27, which, among other things, allows it to complete the sale of Bell County Coal, eliminates the fixed-charge coverage ratio covenant and makes changes to other financial covenants.

James River Coal said that it "continues to evaluate additional financing alternatives."

Airlines rise as oil falls

Energy of another sort - oil - was making big news on Thursday, and resulting in sizable gains of airline junk bonds.

Delta Air Lines and Northwest Airlines bonds got a boost as oil prices declined sharply for a second consecutive session, hitting the lowest levels they been in over six months - which airline investors hope will eventually translate into lower jet-fuel prices.

A trader saw Delta and Northwest initially move lower, but then bounce off their early lows to finish up about a point at day's end.

Bankrupt Atlanta-based Delta's 8.30% notes due 2029 initially lost a point to around 65, before ending up a point at 66 bid, 67 offered, he said, adding that Northwest's 10% notes due 2009 dropped to 94 bid, 95 offered and then recovered to close at 96 bid, 97 offered, also up a point.

Another trader saw the Delta 8.30s up 2 points on the day at 66 bid, 67 offered, while Northwest's 10s gained a point to 94.5 bid, 95.5 offered.

Traders noted that with a lack on any fresh news flow on either airline's reorganization plans, their paper is thus ripe to be steered by oil and fuel prices, for lack of any other impetus.

World crude prices have dropped from record late-summer/early-fall levels approaching $80 per barrel down into the mid-$50s, and on Thursday, those prices hit their lowest levels in more than six months, with light, sweet crude for February delivery plunging $2.73 (4.7%) on the New York Mercantile Exchange to settle in at $55.59 a barrel - the lowest settlement price since June 15. That decline came on top of a 4.5% slide in Wednesday's dealings.

Oil prices have recently weakened due to the unseasonably warm winter weather in much of the United States and elsewhere in the Northern Hemisphere. Amid weak demand for heating fuel in the Northeast and Midwest, the U.S. government reported higher-than-expected inventories of heating oil as well as other distillates such as gasoline and diesel fuel on Thursday, pressuring crude prices further southward.

The recent storms in the Denver area and other parts of the Western U.S. were seen having reduced demand in recent days for both gasoline and for jet fuel, another distillate, since air traffic into and out of Denver's busy airport was curtailed by blizzard conditions.

Delta move boosts Bombardier

Delta was also making news on another front, seeking permission from the bankruptcy court overseeing its restructuring for permission to buy a slew of new regional jets from Bombardier Inc. so that Delta can expand into newer markets profitably with the smaller aircraft.

Delta said that it had reached a deal with Montreal-based Bombardier to buy 30 aircraft with the option to buy 30 more. Deal terms were not disclosed.

A trader saw Bombardier's 8¼% notes firm to 102.375 bid, 103.75 offered, a gain of ¾ point, while its 6¾% notes due 2012 were about ½ point better at 98.75 bid, 99.5 offered.

Unrestricted Adelphia up

A trader said that Adelphia Communications Corp. bonds were up about 2 points because with the troubled Greenwood Village, Colo.-based cable operator's plan of reorganization having finally been approved by the federal bankruptcy court judge overseeing the company's reorganization, "people are [now] unrestricted on Adelphia and are bidding up the paper."

He saw the company's 7 7/8% notes due 2009 at 92 bid, up from 90.5 previously.

At another desk, Adelphia's 10¼% bonds due 2011 were seen up 1 point at 97 bid, 98 offered and the 10¼% bonds due 2006 up a point as well at 93 bid, 94 offered.

The approval of Adelphia's plan by the U.S. Bankruptcy Court in New York freed several desks that had been restricted in the paper to begin trading it, causing the paper to move up.

After nearly five years in bankruptcy, Adelphia - which sold off virtually all of its assets last year in a $17 billion sale - is scheduled to exit bankruptcy in the next 30 to 45 days and there will be a distribution of the proceeds Adelphia received when it sold those assets to Time Warner Inc. and Comcast Inc. The company's reorganization plan was approved Wednesday, despite ongoing objections from some creditors.

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