CEVA prices $400 million; Blockbuster bid fades; funds see $439 million outflow

By Paul A. Harris

St. Louis, Aug. 9 - The broad high-yield market largely withstood Thursday's rout in the equity markets sparked by news out of Europe that BNP Paribas SA froze three investment funds, whereupon the European Central Bank, attempting to stave off panic, rode to the rescue with a massive infusion of liquidity.

Traders saw junk players watching the stock market rout from the sidelines, older and wiser from similar routs that have taken place during recent weeks.

One trader saw junk off ½ point on the day.

Another thought that some late selling brought about a more substantial drop, but didn't have a number.

A hedge fund manager said that the high yield tracking CDX index ended the session at 94 1/8 bid, 94½ offered, down 1 1/8 points on the day.

Players saw trading in specific names - the one mentioned most frequently was Blockbuster Inc.

Any luster on the Texas-based movie rental company's paper that may have resulted from news earlier in the week that it was finally moving into the internet-based movie rental business by acquiring download service, Movielink, seemed to come off Thursday as investors mulled the price and the possibility that Blockbuster is late to the game.

Interestingly, the news out of Europe that the subprime debacle had deepened substantially and the cost of borrowing euros - and dollars - was going up, put more pressure on high grade bonds Thursday, sources said.

Meanwhile, for the second day in a row the long dormant high-yield new issue market saw terms emerge on a deal.

CEVA Group plc returned to price its $400 million issue of 10% seven-year senior second-lien notes (B3/B-) at 95.17 to yield 11%.

However sources were skeptical that the CEVA news, or for that matter the terms which emerged Wednesday on the upsized Vector Group Ltd. $165 million issue of senior secured notes, signaled a reopening of the primary.

And perhaps to underline that sour note, late Thursday a market source said that AMG Data Services reported a $439 million outflow from high yield mutual funds for week for Aug. 8 - the ninth consecutive outflow.

A 'huge move' in Libor

To set the stage for the Thursday session, sources pointed to news out of Europe: that BNP Paribas SA had frozen three investment funds while Dutch investment bank NIBC Holding NV announced it had lost at least €137 million on subprime investments.

To stave off possible bank runs, the European Central Bank rode to the rescue with a whopping $130 billion equivalent of liquidity.

In the immediate fallout three-month Libor rose to 5.5% from 5.38%, a source said.

At mid-morning an investment banker took a minute to put that jump in Libor into perspective for Prospect News.

"It's a huge move," the banker said, adding that three-month Libor had barely moved in a year.

It had been in a range of 5.35% to 5.36% since the end of 2006, and had not moved either way from the 5.35% to 5.40% range since August 2006, the investment banker added.

Then, the source recounted, three-month Libor moved up to 5.38% on Wednesday, and to 5.5% on Thursday.

Having said so, this source said that at 9 a.m. Thursday the CDX was wrapped around 94¾ bid, down ½ point on the day but up 3 points from approximately 91 bid, 92 offered on Aug. 1.

Shortly after a trader who focuses on both high yield bonds and leveraged loans explained that the BNP Paribas funds saw withdrawals and apparently couldn't meet them because they could not get bids on a lot of their subprime CDOs, so they had to borrow money, and the rate at which they had to borrow ended up pushing all of the overnight rates, including Libor, higher.

It also ended up pushing U.S. overnight rates higher as well, the trader said.

Then the ECB stepped in to provide everyone liquidity, staving off a run.

"When you start to get banks' names involved people get really nervous, although this was BNP Investment Partners, not necessarily part of the bank's capital, but a fund that the bank offers," the source explained.

Only a technical Blockbuster

In what this trader saw as a "technical" move at mid-morning, the Blockbuster 9% notes due 2012 were up ½ point at 84½ bid, "while the rest of the market is mostly down."

The source mentioned Blockbuster's recently announced acquisition of Movielink.

Later, however, a source from the buy-side said that in light of developments in digital cable's video-on-demand platform and the fact that Apple added movies to its iTunes download service and Wal-Mart had opened its own movies-over-the-internet service, Blockbuster's acquisition of Movielink might be too little too late.

This source had the Blockbuster 9% notes at 83¾ bid, 843/4, off the earlier highs.

Trailing the Thursday close, a trader, asserting that Blockbuster was spending cash on a business move that has yet to be proven, took the bonds down about 2 points on the day to 83½ bid, 85½ offered, adding they had been as high as 85 bid earlier in the session.

For this trader the recent volatility in the overall junk market is a "welcome" development.

"A year ago you would go away on vacation with the bond at 98 bid, 99 offered, and when you came back it was 98 bid, 99 offered.

"From the trader's perspective that makes things very difficult.

"Now you have bonds that trade in a 5 point or 6 point range throughout the day."

Retail weak on sales

This trader said that there had been heavy trading in the retail sector, and added that "a ton of numbers" rolled out of the sector on Thursday, with many retailers reporting declines in July same-store sales.

The Burlington Coat Factory Warehouse Corp. 11 1/8% senior notes due 2014 were down a point on the day, the source said.

Yankee Candle Co., Inc.'s 9¾% senior subordinated notes due 2017, which up until recently no one ever looked at, according to the trader, closed Thursday at 89½ bid, 90½ offered, down a point on the day after having been up as much as 3 points.

"They had decent numbers out, although if you factor in the merger costs it's a tough one," the trader commented.

The trader also remarked that July same store sales were negative for a lot of retailers, and suspected that with credit tightening they're beginning to sweat the back-to-school season and the holiday season

"No one seemed to be beating their chests."

However the retail names on the screen of another trader who spoke to Prospect News after the Thursday close were holding in.

This trader saw the Claire's Stores Inc. 10½% senior subordinated notes due 2017, which were priced in May, unchanged on either side of 80.

The trader also said that the existing bonds of Sally Holdings, Inc. were decently bid for, as they have been for the past few days.

Re-breakdowns in restaurants

This trader mentioned some "re-breakdowns" in some of the chain restaurant names, and mentioned Denny's Corp., and Sbarro, Inc.

"There was a breakdown a couple of weeks ago, and they started to recover.

"Now we saw it breakdown a little yesterday and again today," the trader remarked.

Meanwhile the trader saw the Perkins Family Restaurants/Perkins Finance Corp. 10% senior notes due 2013 trade at 82 bid on Thursday, and said they traced a trajectory that had the paper at 85½ bid last Friday, and as high as 83½ bid, 84 offered on Wednesday, before closing that session at 82¾ bid, 83 offered.

CEVA returns

In the new issue market, CEVA Group returned to price a $400 million issue of 10% seven-year senior second-lien notes at 95.17 to yield 11%.

The notes, which had been withdrawn from the market on Aug. 2, were priced on top of the talk.

During the marketing which took place before the Aug. 2 postponement, however, they had been talked at the 10% area.

Credit Suisse, Bear Stearns, Goldman Sachs & Co., JP Morgan, Morgan Stanley and UBS Investment Bank were joint bookrunners.

In late July the company slashed the bond deal by $1 billion equivalent, replacing the bonds with bridge financing, and withdrawing proposed euro-denominated tranches.

The company, which came to the debt markets for financing to help fund its acquisition of Houston-based logistics and supply chain management company, EGL Inc., meanwhile restructured the remaining $400 million tranche by adding second-lien security to the notes.

One trader said that the new CEVA secured note, which priced at 95.17, broke to a 96¾ bid.

Later, however, another trader mentioned seeing 96 bids "in a couple of spots," whereupon the stock market started to dive in earnest, and the bids were gone.

"Either people brought in their horns, or they got hit someplace and disappeared," the trader said.

Hope but no belief

When Prospect News suggested to its sell-side sources that the completed CEVA deal, along with the Vector Group's upsized $165 million issue that priced Wednesday on top of the price talk, might signal a reopening of the primary market, trailing a two-week deal drought, there was only polite applause.

It's a hopeful sign, said one high yield syndicate official not involved in either transaction.

But it likely doesn't mean things are back on track in the primary market.

$439 million outflow

That overall lack of enthusiasm from the syndicate desks can't have been helped when, late Thursday, AMG Data Services reported a $439 million outflow from high yield mutual funds for week for Aug. 8, according to a market source.

It is the ninth consecutive outflow, according to the source.

It trails the previous week's $493.4 million outflow.

Those outflows, collectively have completely extinguished the $1.6 billion of cumulative inflows which had built up over the first half of the year, through early June.

For the year to date, the latest outflow sends the weekly-reporting funds deeper into negative territory: negative $1.54 billion.

The present string of nine consecutive outflows has seen $3.14 billion leave the high yield mutual funds.

The most recent bigger run of consecutive outflows was the 11-week string that concluded on Nov. 23, 2005, which saw $3.36 billion leave the funds.

The biggest run of consecutive outflows going back to 2000 was the 15-week, $6.8 billion negative streak that came to a conclusion on May 25, 2005.

The sudden shift over the last few weeks has come about even though inflows have still been seen in 19 weeks out of the 32 since the start of the year, versus just 13 weekly outflows.

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 hedge funds.

Tap on the shoulder

Also on Thursday sources on both the buy-side and the sell-side remarked upon the massive amount of issuance taken down Wednesday in the investment grade bond market, which totaled $13 billion, according to one source, who added that the high-grade market had been "kind of dry for a few days.

"People seemed to like what they were seeing in the markets on Wednesday, and took the opportunity to get some paper out the door," the source said.

Shortly later a trader concurred: Wednesday was a one-day "all-you-can-eat" window of opportunity.

"You see that from time-to-time," the source asserted.

"Years ago, when it was the bottom of the rate-cycle, IBM would issue paper. You always knew that was the bottom of the Treasury cycle."

IBM, as it happens, was among Wednesday's investment grade bond issuers.

"Yesterday people felt better about the markets," the trader continued.

"Also the dealer desks had been tapped on the shoulder and told to get their risks down.

"Then as the market started to rally on Wednesday everyone was caught short because they had gotten their risks down and it was a huge short-covering rally, and a good time to buy paper from the issuer."

Later in the day another junk trader mentioned the "tap on the shoulder," that dealers are feeling in light of the current squeeze in the credit markets.

This source asserted that on Thursday the squeeze was impacting high grade considerably more than junk.

"You definitely saw a lot of short-end paper for sale in the investment grade realm after the news came out of Europe," the trader said.

The source added that the Procter & Gamble 5.3% bonds due 2009, which came at the end of June in a $250 million deal, at a spread of 50 basis points to the two-year Treasury, traded Thursday at a spread of 70 bps.

"Six-week old paper back 20 basis points," the trader recounted, and added that part of the story is that you can sell it without taking as bad of a hit.

"If everyone is getting the tap on the shoulder to lighten up, you can do it and mathematically only lose a quarter of a point, instead of selling something with a 10-year maturity, where you're going to take a one point hit."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.