BP, Anadarko gain, new Insight Communications up; primary stilled, funds lose $332 million

By Paul Deckelman and Paul A. Harris

New York, July 1 - The second half of the 2010 calendar year, as well as the third quarter and the month of July, got under way on Thursday, but without any pre-July 4 fireworks. New deal activity was non-existent and the secondary was not much better, largely muted as traders counted down to the upcoming holiday break. Friday's final pre-Independence Day session is expected to be even quieter and more sparsely attended.

Insight Communications Co.'s new eight-year notes were being quoted at nicely firmer levels versus Wednesday's pricing.

Among names with no new-deal connections, traders saw a fair amount of activity in the bonds of BP Capital Markets plc and Anadarko Petroleum Corp., which both rose on the day. Those credits - which have been attracting buyers from Junkbondland as well as their normal high-grade accounts - may have benefitted from the news that the world's biggest bond fund, Pimco, said it was increasing its holdings in some of the companies involved in the ongoing Gulf of Mexico oil-rig disaster, feeling they are still solid credits but now trading at attractive junk-type yields.

Traders said that the market seemed not much impressed by the June car sales numbers released by General Motors Corp. and Ford Motor Co.; while both big carmakers reported substantial sales gains versus admittedly weak year-earlier levels, each also reported about a 13% fall off in sales versus their respective May levels.

Junk funds lose $332 million

And as the day's dealings were finishing up, participants familiar with the Lipper FMI weekly high yield mutual fund-flow numbers compiled by AMG Data Services of Arcata, Calif. - considered a reliable barometer of overall junk market liquidity trends - said that in the week ended Wednesday some $332.443 million more left those funds than came into them.

That outflow was in marked contrast to the $1.391 billion inflow seen in the previous week ended June 23 - believed to be the biggest inflow seen in the junk market since August 2003 and one of the largest inflows ever recorded, according to a Prospect News analysis of the figures provided by market sources.

The outflow broke a two-week winning streak during which time $1.662 billion of net inflows were recorded, according to the Prospect News analysis, including $270.7 million in the week ended June 16. Those two inflows, in turn, had stopped a six-week long slide, dating back to early May, which saw a combined net outflow of $4.613 billion mount up, according to the analysis. And before that, there had been 10 straight weeks of inflows dating back to February and totaling over $4.44 billion, the analysis indicated.

That back-and-forth pattern, with several weeks of inflows alternating with several weeks of outflows, would seem to stand as a symbol for junk players' continued uncertainty about the chances of a strong market showing given current financial and macroeconomic conditions, at least since the strong bull run seen in the first four months of the year seemed to fade.

With 2010 exactly at the halfway mark, inflows have now been seen in 16 weeks out of the 26 since the beginning of the year, while there have been 10 outflows - the most recent ones, as noted, and three other cash drains recorded in January and in February.

The outflow in the latest week cut the year-to-date cumulative total for the weekly-reporting funds down to $854 million, according to the analysis of the data, versus the $1.186 billion 2010 net outflow recorded the previous week. The funds hit their biggest year-to-date negative number for the year so far in the week ended June 9, with a cumulative deficit of $475 million, while their peak cumulative inflow total for the year was the $4.086 billion recorded in the week ended April 28.

There was evidence that a substantial portion of the redemptions took place Wednesday, the final session of the most recent week's reporting period, according to market sources.

Heading into Thursday, sources from two different mutual funds were expecting Lipper-AMG to report inflows for the week, as the cash flows these buy-siders were seeing, up until the Tuesday close, had been positive throughout the reporting period.

The caveat was the Wednesday flows, the mutual fund sources said.

"Wednesday was very negative," a trader from one of the high yield mutual funds remarked just after Thursday's close.

EPFR sees little change

Another fund-tracking service - Cambridge, Mass.-based EPFR Global, whose methodology differs somewhat from AMG - meantime reported just a minuscule $4 million inflow in the latest week. It was the third straight inflow reported by EPFR and followed the prior week's enormous $1.1 billion cash infusion. There had also been a $164 million inflow in the June 16 week and before that, five straight weeks of outflows totaling some $6.27 billion.

Reflecting the difference between the ways AMG and EPFR calculate their respective fund-flow totals - EPFR includes results from certain non-U.S. domiciled funds as well as the domestic funds - the service's year-to-date net inflow total now stands at $3.624 billion. That's up from last week's $3.62 billion, but thanks to the recent outflows, still well below the peak inflow level of $8.59 billion seen from the beginning of May onward, after 10 straight weeks of inflows starting in late February.

Any and all cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

Market indicators turn lower

Among issues having no new deal connections, a trader saw the CDX North American HY Series 14 Index lose ¼ point on Thursday, to end at 94 bid, 94½ offered, after having eased by 3/8 point on Wednesday.

The KDP High Yield Daily Index meantime fell by 15 basis points on Thursday to 70.22, after having gone down by 3 bps on Wednesday. Its yield moved upward by 4 bps to 8.76%, on top of the 1 bp rise seen on Wednesday.

Advancing issues fell behind decliners on Thursday by a nearly six-to-five margin, after having topped the downsiders on Wednesday and breaking a five-session losing streak by the narrowest of margins - about two dozen issues out of the nearly 1,400 tracked.

Overall activity, represented by dollar-volume levels, rose by 12% on Thursday after having fallen by 22% on Wednesday.

Despite that nominal rise, traders said that activity seemed fairly quiet on Thursday - and is expected to be even quieter on Friday, even though officially the last session before the Independence Day three-day holiday is supposed to be a regular day, with the standard 4 p.m. ET close. The official schedule promulgated by the Securities Industry and Financial Management Association notwithstanding, the traders were almost uniform in asserting that most market players would probably take an early powder on Friday after a little bit of pro forma trading early in the market.

Energy names seen active

A trader said that BP Capital Markets' bonds "got a little better," seeing the British energy giant's paper up by about 1½ points on the day. Its 5¼% notes due 2013 finished at 93½ bid, 94½ offered, while its 3 7/8% notes due 2015 moved up by a point or more to the 87 bid region.

At another desk, a trader said that its 4¾% notes due 2019, which on Wednesday had been trading as low as 83½ bid, opened up around 85 on Thursday, dipped a little to 841/2, but finished with flying colors at 86, up "a good 2½ points from yesterday."

A trader said that Anadarko Petroleum's 7 5/8% notes due 2014 were up a point at 95½ bid, 96½ offered, versus their morning levels. He said generally "everything" in the Woodlands, Tex.-based exploration and production company's structure "was up a point," with the 6.45% bonds due 2036 a point higher at 80 bid, 81 offered.

Another trader saw Anadarko's 5.95% notes due 2016, its most active issue on most days, opened a little lower on Thursday at 85 bid, but then bounced off that early low to finish at 87, up 2 points from Wednesday's close.

The bonds of the two nominally investment-grade energy credits have attracted the interest of some junk market accounts in recent days, given the way the bonds have been pushed lower, producing junk-like yields, in the wake of the ongoing Deepwater Horizon Gulf of Mexico oil spill disaster at a deepwater well 65% owned by BP and 25% owned by Anadarko.

The companies' bonds may have gotten a big boost from the news that the world's largest bond fund, Pacific Investment Management Co., said that it is buying more debt of some of the companies involved in the Gulf disaster, whose bonds have been driven down to more attractive level since that mishap.

Although Pimco did not directly identify which companies' bonds it is buying, it did say that it is "adding to positions in names that we favor" - and last month, the company's main investment guru, Bill Gross, had said that he had bought about $100 million of shorter-dated BP paper, as well as some Anadarko bonds. Gross at that time also left the door open for further such investments, saying they would depend upon the unfolding course of events as well as market conditions.

In a lengthy piece on Pimco's website Thursday, Mark Kiesel, a Pimco managing director acknowledged numerous potentially negative factors that could make investment in the shares or debt of energy companies operating in the Gulf of Mexico dicey, including rising legal and insurance costs as well as all kinds of political and regulatory uncertainty. He also mentioned the possibility of credit ratings downgrades, which could result in forced selling by ratings-constrained investors, "leading to negative technicals in the market and sellers outnumbering buyers."

That having been said, however, Kiesel - without naming any names - also declared that "despite these risks, select energy corporate bond investments in highly free-cash-flow-generative businesses with healthy balance sheets are starting to make increasing sense now given current valuations." He said that many of the companies involved in the oil spill accident "have investment grade ratings, yet their bonds are trading as if they are high yield," noting that "energy companies rated between BB and B by S&P that were not involved in the oil spill accident now yield roughly the same as investment-grade-rated energy companies that were involved in the spill.

"As a result, the market has started to price in significant ratings downgrades that our bottom-up credit analysis currently finds unwarranted. For this reason, we believe a handful of select corporate bonds offer investors attractive risk-adjusted return potential, and we are adding to positions in those names we favor based on our bottom-up research."

Kiesel further stated some market participants have recently raised the possibility that "a company involved in the oil spill accident may consider filing for bankruptcy" - while he did not specify which company, the fact is that there has been speculation in the media that its mounting political, legal financial woes and its operational problems in the Gulf, might force BP into such a position. But the Pimco managing director flatly dismissed such a scenario as "highly unlikely for several reasons."

He said that "companies with high cash balances, strong operating cash flow, the ability to sell assets and raise new capital - not to mention overall strong balance sheets - do not typically resort to bankruptcy." He also noted that "the recent concession from the Obama administration that the oil spill clean-up trust be funded over time rather than all at once indicates that the U.S. government is wary of creating undue liquidity pressures for involved companies."

A trader said that such statements "are enticing everybody [to buy BP or Anadarko bonds] because they're still investment grade."

Transocean a puzzle

Elsewhere in the energy patch, a trader said that he was "trying to figure out what was going on in Transocean [Inc.] today," noting that the "the stock is on a tear, but the bonds aren't doing much of anything."

The Swiss undersea oil drilling rig fleet operator's New York Stock Exchange-traded shares gained $2.56, or 5.53%, on Thursday to end at $48.89. But volume of 8.3 million shares was actually only about half the norm.

At the same time, he said the bonds "seemed rather lackluster." The company's most active issue, the 5¼% notes due 2013, had traded around 94 on Wednesday, but in Thursday's trading, he saw the bonds "more around 931/2ish than 94ish." He said that in view of the stock gain this was "a little surprising - I'm not sure what's driving the stock up."

The company owns the Deepwater Horizon oil-drilling rig craft whose destruction in an April 20 explosion and fire caused the BP/Anadarko rig it was leased to to develop its massive oil spill.

In terms of fresh news stories out on the company on Thursday that might explain the apparent divergence of the shares and the bonds, he said that he "didn't see anything dramatic."

Transocean did announce that John L. Whitmire had resigned from Transocean's board of directors. The company cited health reasons as the cause of the 68-year-old Whitmire's decision to leave the board. Whitmire meanwhile this week relinquished the post of chairman of Consol Energy, Inc. that he had held since 1999. He will instead become vice chairman of Consol, a Canonsburg, Pa.-based coal mining company, which its chief executive officer, J. Brett Harvey, will also take on the chairmanship. Consol's 7 7/8% secured notes due 2012 were meantime quoted Thursday at 107 bid, down about 1½ to 2 points from levels earlier in the week.

A trader said that ATP Oil & Gas Corp.'s 11 7/8% senior secured notes due 2015 "bounced around" between 71 bid and 72½ bid "all day," before finally ending in a 71-72 context, which he called "a little lower."

"There was not a lot of action," he said, "considerably less activity than BP's bonds "by a lot."

Unlike BP, Anadarko and Transocean, ATP played no role in the explosion and subsequent oil spill, but investors have hammered its bonds down ever since the mid-April mishap on fears that tough new restrictions on offshore and deepwater drilling in the Gulf of Mexico imposed by Washington in the wake of the accident will harm the company, which has most of its proved petroleum reserves in the Gulf.

GM weaker, Ford unchanged despite sales

General Motors' paper closed the day unchanged to weaker following the release of its June sales report.

A trader said the 8 3/8% notes due 2033 were "active" around 311/2.

"I think that's kind of unchanged," he said. "That's about where they have been for the last couple days."

Another trader said the notes were "maybe down a half" at 31¼ bid, 31½ offered.

GM, another trader said, "went on a wild ride because it had some news." Although the company's benchmark bonds initially got as good as 33 bid early on, helped by its car sales numbers, by the end of the day, he had seen those bonds retreat back to around 31-31½ bid, unchanged on the day.

The Detroit-based top domestic automaker posted its sixth consecutive month of double-digit sales increases, seeing total U.S. sales in its four remaining core brands - Cadillac, Chevrolet, Buick and GMC - gain 36% year over year. Year to date, sales have improved by 32% from 2009 levels. Including in the results of the four brands it is discontinuing - Pontiac, Saturn, Saab and Hummer, which slid 98% from year-ago levels despite dealer efforts to clear out their remaining inventory - total U.S. sales for June hit 195,380 cars, pickup trucks and SUVs, a 10.7% overall gain year-to year.

The company said the continued sales gains were due in part to its "continuing success" in launching new vehicles, as well as "some recovery in the markets for pickups and full-size SUVs."

"As companies continue to invest in their businesses, we expect this segment to continue to recover," said Don Johnson, vice president of U.S. sales operations, in a statement. "We think the release of some pent up demand in the pickup market is an indication that a fundamental part of the U.S. economy is gradually strengthening."

Analysts noted however, that the June sales total, up from weak year-earlier comps, was down some 13% from May's figures, reflecting continued consumer wariness about making a big-ticket purchase like a vehicle.

Ford meantime found itself in the same boat - its June sales, while up 15% from weak year-earlier levels to 170,900 units, was down 13% from May's levels.

Ford's 7.45% bonds due 2031were quoted at 90¾ bid, 91 offered, which a trader called about unchanged on the day on "some volume - not a whole lot."

Rite Aid sales, bonds decline

Camp Hill, Pa.-based Rite Aid Corp. also released its latest sales results, which showed a 2.5% decline in June same-store sales. As a result, traders saw the company's bonds falling about a point on the day.

A trader said the 9½% notes due 2017 were 1¼ points softer at 781/4. Another trader quoted the issue at 78¼ bid, 78½ offered, down "about a point."

At another desk, a source saw the 8 5/8% notes due 2015 slipping nearly a point to 81¾ bid.

For the four weeks ending June 26, Rite Aid reported total sales of $1.91 billion, a 3.3% decline year over year.

Year to date, same-store sales have fallen 1.4% compared to 2009 comparables. Total sales meantime dropped 2.4% to $8.28 billion from $8.48 billion the year before.

New Insight bonds add to gains

Among recently priced issues, a trader saw Insight Communications' $400 million offering of 9 3/8% notes due 2018 as having "traded a bunch today."

He quoted the New York-based Midwestern U.S. cable systems operator's new bonds at 101¼ bid, 101½ offered, "so those things traded well."

Another trader saw the bonds at 101¼ bid, 101¾ offered, versus the par issue price at which the bonds came to market on Wednesday.

Recent Vanguard, Bankrate deals hold their own

A trader said that Vanguard Health Holding Co. II LLC's new 8% notes due 2018 were trading at 95¼ bid, 96¼ offered.

However, at another desk, a trader saw those bonds going home at 96 bid, 96½ offered, versus the 96.25 level at which the Nashville-based hospital owner had priced its $225 million add-on deal to an existing tranche of such notes on Tuesday, to yield 8.686%.

Another trader was quoting Bankrate Inc.'s 11¾% senior secured notes due 2015at 99 3/8 bid, 99¾ offered.

The North Palm Beach, Fla.-based provider of consumer loan rates and other information priced $300 million of the bonds, upsized from the originally planned $280 million, on Tuesday at 99.077 to yield 12%.

CKE post-holiday business

Barring unlikely surprises, the primary market is essentially closed until Tuesday, when business resumes following the three-day Independence Day weekend in the United States, sources said on Thursday.

At the outset, players will be looking at a thin calendar of deals in the market.

CKE Restaurants, Inc., which was initially expected to price its deal during the run up to the holiday weekend, is now expected to be post-Independence Day business, market sources said on Thursday.

The Carpinteria, Calif.-based owner of quick-service restaurant chains is in the market with a $600 million offering of eight-year senior secured second-lien notes (B2/B) via Morgan Stanley, Citigroup and RBC Capital Markets Corp.

Proceeds will be used to help fund the buyout of the company by Apollo Global Management and to repay all balances under its credit facility.

The deal has lately been discussed in a yield context of 11¼% to 11½%, sources said Thursday.

In addition, market watchers expect covenant changes to materialize before the deal crosses the finish line.

Post-holiday primary

Apart from CKE Restaurants, a trio of issuers expects to price deals during the week ahead.

Postmedia Network Inc. looks to price a $275 million offering of eight-year second-lien notes (B3/B-) on Wednesday via joint bookrunners JP Morgan and Morgan Stanley.

Proceeds will be used to acquire the assets of Canwest LP.

Meanwhile, Nordenia International AG is in the market with a €280 million offering of seven-year senior second priority notes (B2/B) via Barclays Capital and Deutsche Bank securities.

And Oxea GmbH has been roadshowing €500 million equivalent of seven-year senior secured notes (B2/B+) in Europe.

The deal is expected to be issued in dollar- and euro-denominated notes.

A roadshow will get underway in the United States during the week ahead.

Deutsche Bank Securities, Morgan Stanley and JP Morgan are leading the offering.

Deeper into summer

Looking beyond the post-Independence Day week, estimates of primary market volume during the traditional summer lull varied notably as Prospect News polled syndicate sources.

One debt capital markets banker said that $5 billion to $7 billion per month for July and August would not be surprising.

However a banker from a different syndicate said that July could see as much as $15 billion of new issuance.

That latter estimate seemed high to a trader from a high-yield mutual fund who took a telephone call on Thursday afternoon.

Recent issues a mixed bag

Liquidity in the high-yield market was low Thursday afternoon, according to the trader.

People were keen to wrap up business ahead of the holiday weekend, the source added.

However, high-yield bonds, although a little softer again on Thursday, have been outperforming equities, the trader said.

As to the secondary market performance of recent new issues, it's a mixed bag, the source added.

Insight Communications Co., Inc.'s new 9 3/8% senior notes due 2018, which priced at par on Wednesday in a $400 million issue (B3/B-), were up a point on Thursday morning.

DynCorp International Inc.'s new 10 3/8% senior unsecured notes due 2017, which priced at par in a $455 million issue on Tuesday, were at par 3/8 bid, par ¾ offered at Thursday's close.

However the new add-on Vanguard Health Holding Co. II, LLC/Vanguard Holding Co. II, Inc. 8% senior notes due Feb. 1, 2013, which priced at 96.25 to yield 8.686%, in a $225 million issue on Tuesday, were at 96 bid, 97 offered on Thursday afternoon, the trader said.

Stephanie N. Rotondo contributed to this report

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