Intergen backs up talk on $1.975 billion deal; AMG reports sixth straight outflow; Traders see 'liquidation'

By Paul A. Harris and Stephanie Rotondo

St. Louis, July 19 - Sources marked the broad high yield market 1 to 2 points lower on Thursday, with broad selling of cash product increasing as the day wore on.

Traders and other sources pointed to a pair of stories that were impacting broad sectors of the market.

One, the financing for the LBO of Chrysler Group is getting sloppy, with prices on its credit facility heard to have backed up. A consensus developed which held that this sloppiness was putting pressure on the entire auto sector.

And two, the Canadian dollar appeared to be headed toward parity with its U.S. counterpart. Canadian paper and forestry products companies, in particular, and the broad sector in general, softened as a response, according to a trader.

Meanwhile two traders told Prospect News that there was evidence during the Thursday session that some high yield investors were "liquidating" substantial positions in the cash bond market, as opposed to the indexes where most of the recent trading activity had been seen.

In the primary market no issues were priced.

Intergen Group, which is in the market with a $1.975 billion three-part offering of 10-year notes, which it is attempting to place in dollar-, euro- and sterling-denominated tranches, increased price talk on all three of them.

Meanwhile there was a buildup in the forward calendar.

And late Thursday AMG Data Services reported a $194.1 million outflow from high yield mutual funds for week to July 18.

It was the sixth consecutive negative flow among the funds which report to AMG on a weekly basis, and sent them into the red for 2007 to date.

Strong start, and then...

A hedge fund manager who spoke to Prospect News at mid-morning, New York time, said that the broad market began the day higher, "but then started flip-flopping around."

The source added that at 10:30 a.m. ET junk was probably down 3/8 after having started the day up a ¼ to 3/8 point, and added that there had not been a lot of buying either way.

Shortly after - in the late New York morning - a trader said that the broad market was off ¼ to ½ point.

"The cash market in high yield today in general is lower," the trader noted, adding that Thursday marked the first time there were "real cash offerings, in any kind of size, in a while.

"Usually we've just seen trading in the CDS, and a couple of cash offerings trickle out here and there.

"But there was some serious selling today."

Pressed for an explanation, the trader said that the activity involved "a lot of the bigger, liquid capital structures.

"It's hedge funds that have to sell things because their leverage is getting dialed back. They are selling the stuff that they know they can get good marks on.

"The leverage is starting to come out of the markets."

"A lot of the dealers are running cover.

"They're long, and they want to pull back some of the aggressive nature of this market."

At the close, another trader had more or less the same take.

"We seemed to be seeing some liquidation," the source said, "names that don't generally trade off, including some oil and gas names."

Georgia-Pacific sees selling

As an example of a "big liquid name" that was on the move, both traders mentioned pulp and paper company, Georgia-Pacific Corp.

While the trader who spoke in the morning declined to furnish specific levels, the one who spoke after the close did provide some bond prices.

Noting that the Atlanta-based company's bonds were "very heavy" during the session, the source said that the 8 1/8% notes due 2011 initially traded into a 101¼ bid, then subsequently traded to a par bid.

The trader also saw the 7 1/8% senior notes due 2017 trading at 94½ bid, and the 8% due 2024 at 95 bid.

The Georgia-Pacific long paper, the 8 7/8% notes due 2031 traded at 98 bid, 98½ offered.

All of them, the trader added, were "quite a bit softer."

Strong loonie hurts forest products

This trader went on to say that a broad swath of the paper and forest products sector came under pressure on Thursday owing to a Canadian dollar that is approaching parity with the U.S. dollar.

"It was pushing 96 cents [on the U.S. dollar] but didn't quite get there," the trader said, and went on to explain that parity between the Canadian and U.S. dollars would be bad news for Canadian forestry and paper companies including Tembec Inc. and Abitibi-Consolidated Inc., both based in Montreal.

"I think we're going to parity, and that is going to be a big hurt on these guys when they start reporting earnings," the trader said, noting that Abitibi will report earnings on July 24 while Tembec will report on Aug. 2.

With respect to the Abitibi report, the trader noted, it will take place just two days before shareholders are scheduled to vote on a proposed merger of Abitibi with South Carolina's Bowater Inc.

The trader said that activity in Abitibi's bonds shows that there is a lot of betting that the merger will happen, and a lot of betting that it won't.

"The merger is good for the industry if it gets done," said the trader who noted that it would take some capacity out of the market, and result in some pricing power.

Having said so, the source commented that trading in Abitibi's existing bonds on Thursday was "kind of sloppy."

"There are definitely buyers, those who believe the merger will go through, and there are definitely sellers who believe it won't go through."

Tembec range-bound

The trader said that should the merger fail to materialize, weaker names in the sector, such as Tembec and Portland, Ore.-based Pope & Talbot Inc. are "going to have some trouble going forward."

On Thursday, according to this source, Tembec traded in a range.

Its 8½% bonds due 2011 were at 52 bid, 53 offered, while its 7¾% notes due 2012 were about 1 point behind the 2011 notes.

However the short-dated 8 5/8% notes due 2009 traded better.

Noting that there has been a relationship between the three issues, the trader explained that the reason the 2009s traded better is because it is the first one that matures, and investors believe that eventually the company is going to have to take that issue out, either with debt for equity, or a second lien financing, in order for the company to achieve some relief going forward.

"The Canadian dollar is not helping any of them," the trader asserted, noting that Abitibi exports 60% of its products to the United States, and has the biggest exposure to the Canadian dollar.

"And most of these companies are not hedged," the trader added.

"Strength in the Canadian dollar keeps eating away at their profitability. And with housing prices as weak as they are they are not getting good prices for their timber."

Elsewhere another market source saw the Tembec 8½% notes due 2011 at 52¼ bid, up from Wednesday's 51½ bid. Meanwhile the Tembec 73/4s due 2012 were at 51½ bid, up from 51 bid on Wednesday.

Chrysler loan hits autos

Apart from the paper and pulp sector, sources told Prospect News that the auto sector came under pressure on Thursday owing to "sloppiness" in the overall $20 billion deal now in the loan market which will finance the acquisitions of Chrysler Financial and Chrysler Corp. LLC by Cerberus Capital Management LP from DaimlerChrysler AG.

Sources explained that pricing on the loans has backed up, and added that the accounts are demanding that those loans be sold at significant discounts.

"The Chrysler financing is sloppy," a hedge fund manager asserted.

"They had to back it up to get it done, and it has put pressure on other things.

"There is not much demand out there for risky assets right now."

This source, who spoke in the morning, said that the long-dated paper of Ford Motor Co., the 7.45% note due 2031, was trading at 78¼ bid, 78¾ offered, after having gone out Wednesday at 78½ bid, 79 offered.

Meanwhile the long end of the General Motors Corp. curve, the GM 8 3/8% notes due 2033, was trading at 88 7/8 bid, 89 3/8 offered mid-Thursday morning, after having finished Wednesday at 89 1/8 bid, 89 5/8 offered.

DaimlerChrysler's 2031 maturing paper, which trades at a spread to Treasuries, was at 133 basis points bid, 128 bps offered Thursday morning, having ended Wednesday's trading at 129 bps bid, 124 bps offered. The hedge fund manager marked it wider by 4 bps.

Later in the day a market source spotted the GM 8 3/8% due 2033 at 88 7/8 bid, down from 89 bid on Wednesday.

At the shorter end of the curve, the GM 7 1/8% notes due 2013 were at 92½ bid, down from 93½ bid on Wednesday.

The source had the Ford 7.45% notes closing unchanged at 78¼ bid.

Hanover up on tender

Elsewhere Hanover Compressor Co.'s bonds were boosted on the news that the company had commenced a tender offer for three issues of its senior notes.

A trader said the 7½% notes due 2013 - one of the issues being tendered for, with a principal amount of $150 million - traded up 3 to 4 points, ending the day at 108 bid, 108¼ offered.

The trader said the $200 million 9% senior notes due 2014 were also up several points at 110 bid, 110.25 offered. He said the third issue being tendered for, the 8¾% notes due 2011, did not trade.

Intergen hikes talk

In the primary market Intergen raised price talk on its $1.975 billion equivalent multi-currency bond offering on Thursday.

The company is marketing 10-year senior secured notes (Ba3/BB-) in three tranches.

A dollar denominated tranche is now talked at 8 7/8% to 9%, increased from the 8½% area. The size of the dollar-denominated tranche remains to be determined.

Meanwhile price talk was raised on a €200 million to €300 million tranche to 8 3/8% to 8½%, up from the 8% area.

And talk was also increased on a £250 million to £300 million tranche to 9 3/8% to 9½%, raised from the 9% area.

The deal is expected to price on Friday.

Merrill Lynch & Co. is the bookrunner for the deal, proceeds from which will be used to refinance LBO-related debt.

The calendar builds

Apart from the fortunes of Intergen, the forward calendar took aboard three passengers on Thursday.

Alliant Holdings I, Inc. began a roadshow for its $290 million offering of 7.5-year senior notes (Caa1/CCC).

The deal is being led by JP Morgan and UBS Investment Bank, and is expected to price on July 30.

Proceeds will be used to fund the acquisition of San Antonio-based specialty broker by the Blackstone Group.

Elsewhere Parallel Petroleum Corp. began a roadshow for its $150 million offering of seven-year senior notes (Caa1/B-) via Jefferies & Co. and Merrill Lynch.

The Midland, Tex.-based independent energy company will use the proceeds to refinance debt.

And Saskatchewan Wheat Pool Inc. has set price talk for its C$200 million offering of 10-year senior notes at 7¼% to 7½%.

The offering, via underwriters TD Securities, RBC Dominion Securities Inc., Scotia Capital and Genuity Capital Markets, is expected to price on Wednesday.

Sixth straight outflow

On the funds flow front, the news remained negative with respect to cash flows seen by high yield mutual funds.

Late Thursday a market source told Prospect News that AMG Data Services reported a $194.1 million outflow from high yield mutual funds for week to July 18.

It followed the previous week's $47.5 million outflow, and was the sixth outflow in as many weeks.

Those outflows, collectively have now completely wiped out whatever cumulative inflows had built up over the first half of the year - over $1.6 billion at their peak in early June, according to a Prospect News analysis of the AMG figures - with the 2007 total having now swung to a $227.5 million net outflow.

However the funds which report on a monthly basis to AMG have seen year-to-date inflows totaling $4.689 billion.

Hence the aggregate flows, which combine the year-to-date totals of both the weekly and monthly reporting funds, stood at $4.461 billion to July 18.

The shift into negative territory for the weekly numbers comes about even though inflows have still been seen in 19 weeks out of the 29 since the start of the year, versus just nine weekly outflows - although the inflows have been relatively small in most of those weeks, and the recent outflows have been sizable.

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. Also, 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.

© 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.