Rite Aid rolls despite loss, MGM Mirage up on Colony Capital news; funds gain $980 million on week

By Paul Deckelman and Paul A. Harris

New York, Apr. 2 - The junk bond market - after playing the wallflower during Wednesday's big equity market fiesta celebrating the start of the fresh new quarter -- decided to join the party on Thursday, jumping right in and posting respectable gains on somewhat improved volume.

Leading the way upward was Rite Aid Corp., whose bonds were handsomely higher even though the Camp Hill, Pa.-based drugstore chain operator posted a wider fiscal fourth-quarter loss. Traders said investors were just relieved that the deficit wasn't worse than it was, and noted that the company forecast a considerably smaller loss for the current fiscal year, versus what it suffered in the year just past.

MGM Mirage's bonds were better for a second straight session, as market participants traded on the news - which had first hit the tapes late Wednesday, when most people were already gone - that the Las Vegas-based casino giant is in talks with Los Angeles real estate operator Colony Capital LLC on a possible investment in MGM's problem-plagued City Center development joint venture.

MGM Mirage again helped pace a firmer gaming sector, including such credits as Mohegan Tribal Gaming Authority and Wynn Las Vegas LLC

Other notable upsiders included AK Steel Corp., better amid a generally firmer metals sector, and Sprint Nextel Corp., helped by strength in the techs - as well as analysts' speculation that large cable operators might be looking to buy wireless telecom assets.

In the primary arena, Odebrecht Finance Ltd., an arm of the Brazilian builder, successfully priced an upsized offering of five-year notes.

Meanwhile, Wednesday's new deals for domestic issuers BWAY Corp. and Plains Exploration & Production Co. were seen firmer.

Junk funds show $980 million inflow

And as trading was winding down for the day, market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday $979.8 million more came into the weekly reporting funds than left them. It was the third consecutive inflow, including the $789.9 million cash infusion seen in the previous week, ended March 25.

The three week winning streak - during which $2.145 billion of inflows have been seen, according to a Prospect News analysis of the AMG figures - has easily way more than offset the $996 million of total outflows seen in the three weeks before that, between Feb. 25 and March 11, according to the analysis, and would seem to represent a reversion back to the pattern seen before the preceding three outflows - seven consecutive inflows from the beginning of the year through the week ended Feb. 18, totaling $3.608 billion, part of a total of 12 consecutive inflows, going back to the week ended Dec. 3 and adding up to an astounding $5.425 billion, according to the analysis.

Including the latest week's inflow number, the year-to-date net inflow for the weekly reporting funds has swelled to $4.757 billion, according to the analysis, up from $3.777 billion the week before.

The massive multibillion-dollar flow of funds into high yield is seen as having been primarily responsible for the relatively strong pace of new issuance and the solidly positive year-to-date returns that were seen in Junkbondland for about the first two months of the year, as high yield sought to recover from last year's staggering 25%-plus loss and sharply reduced primary activity. While both of those trends subsequently moderated for a while, new issuance and secondary performance have each more recently shown signs of picking up.

A market source also said that in the latest week, funds which report on a monthly basis rather than doing so weekly were up by $69.3 million on the week, versus the week before, when the total was unchanged. That brought the year-to-date cumulative inflow for such funds up to $5.534 billion from $4.838 billion.

The source also said that on an aggregate basis, consolidating the inflows for the weekly and the monthly reporting funds, a total of $10.291 billion more has come into the funds than has left them, compared with the previous week's aggregate figure of $8.615 billion.

At another fund-tracking service, Cambridge, Mass.-based EPFR Global, the week's net inflow from domestic and foreign-based high yield funds totaled $795.9 million, on top of the previous week's $836 million inflow. That brought its calculation of the year-to-date net inflow total up to $4.28 billion from $3.486 billion previously.

'Coming off the sidelines'

While the EPFR junk figures usually point essentially in the same direction as AMG's, the precise weekly and year-to-date numbers generally differ somewhat due to EPFR's inclusion of some non-U.S. funds in its universe. Noting the continued flow of capital, both domestically and globally, out of money market funds where cash had been safely parked and into more dicey, but potentially lucrative areas such as junk bond funds and emerging market equity funds - a trend which has been going on for the past few weeks - EPFR's managing director, Brad Durham, said that: "Despite the uncertainty generated by the G-20 policy disagreements, money is still coming off the sidelines, with some of it finding its way into riskier, more rewarding asset classes. " He said that the latter were benefitting from a "spring thaw in sentiment" among investors.

Any and all cumulative fund-flow totals can include unannounced revisions and adjustments to figures from prior weeks.

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 comprise considerably less of the total monies floating around the high yield universe than they used to - because there is no reporting mechanism to accurately track the movements of cash coming into the junk market from other, larger sources seen in recent years such as insurance companies, pension funds and hedge funds.

Looking for volume to rise

Given the positive cash flows and rallying stock prices the high-yield primary market, which has seen a mere trickle of issuance year-to-date, will likely start to get busy, a high-yield syndicate official said late Thursday, after the AMG number circulated.

That prognostication came on the heels of a Thursday primary market session that was mostly quiet.

Brazilian construction firm Odebrecht Finance Ltd. priced an upsized $200 million issue of 9 5/8% five-year guaranteed notes (/BB/BB+) at 98.552 to yield 10%.

Banco Santander and Banco Itau were the bookrunners for the Rule 144A/Regulation S deal which was increased from $150 million.

High-yield market watchers in the United States who spoke to Prospect News on Thursday considered the Odebrecht deal to be primarily an emerging markets corporate play.

New Plains, BWAY bonds a bit better

A trader saw Plains Exploration & Production Co.'s new 10% notes due 2016 at 95 bid, 96 offered, calling the bonds up 1 to 1½ points on the day, while another quoted them at a wider 94.75 bid, 96,.75 offered. Still another trader saw them going out at 94.5 bid, 95.5 offered.

The Houston-based independent energy company priced $200 million of the notes at 92.969 Wednesday to yield 11½%, although a trader saw them move up to 94-95 in initial aftermarket action later that session. The issue was an add-on to the $365 million tranche of bonds the company brought to market on March 3.

Also seen doing better was BWAY Corp.'s 10% senior subordinated notes due 2014, a trader pegging those bonds at 89.5 bid, 90.5 offered. A second trader said the bonds "bracketed 90," at 89.25 bid, 90.75 offered.

BWAY, an Atlanta-based manufacturer of rigid plastic and metal containers, priced the bonds on Wednesday at 87.513 to yield 13½%. The issue was upsized to a principal amount of $228.5 million from the originally planned $200 million, which turned out to be the amount of proceeds the company will get from the issue, given the heavy discount at which it priced.

BWAY's established 10% notes due 2010, which are to be redeemed with the new deal's proceeds, were actively traded at a premium to par, seen up nearly a point on the day at just under 102.

Also among the recently priced names, AES Corp.'s 9¾% notes due 2016 were seen by a trader at 94 bid, 94.5 offered, which he called "maybe up 1/4, but pretty much unchanged." The Arlington, Va.-based international electric producer priced $535 million of the bonds, upsized from the originally planned $350 million, on Monday at 93.98 to yield 11%.

Market indicators firm smartly

Back among established credits, a trader saw the widely followed CDX Series 12 High Yield index of junk bond performance - which was unchanged on Wednesday - up solidly on Thursday, quoting it 1½ points higher at 72½ bid, 73 offered.

The KDP High Yield Daily Index meantime jumped by 60 basis points to 53.63, while its yield tightened by 17 bps to 13.26%.

In the broader market, advancing issues jumped out ahead of decliners, leading them by a more than two-to-one margin.

Overall market activity, measured by dollar-volume totals, rose 4% from the levels seen in Wednesday's session.

A trader said the junk market was "doing just fine." Even before news of the big mutual fund inflow began circulating, he correctly projected: "I guess we're going to find out there's more cash in the market, because most of the trades looked like they were on the right side today, offerings getting lifted."

Among the broad range of issues seen higher were such familiar big market benchmarks as Community Health Systems Inc.'s 8 7/8% notes due 2015, with a market source quoting the Franklin, Tenn.-based hospital operator's $3 billion-plus at 95.25, up a point on over $14 million traded.

Also among the most active issues, trading at firmer levels, were Freeport-McMoRan Copper & Gold Inc.'s floating-rate notes due 2015, quoted at 83 bid, and its 8 3/8% notes due 2017, which rose to 96.5, with over $18 million of each of the Phoenix-based metals mining company's issues traded.

Rite Aid rises despite results

A trader saw Rite Aid's bonds up after the company released its numbers for the fiscal fourth quarter ended Feb. 28, saying that "the numbers were bad - but they were not as bad as people were expecting," and said that the same was true for Sealy Corp.

He said the Rite Aid 9 3/8% notes due 2015 were up 3 points on the session to 28 bid, 30 offered, while its 7½% notes due 2017 were 4 points better at 58 bid, 60 offered.

At another desk, those bonds were seen up as much as 4½ points to the 29 level, with a market source seeing over $13 million changing hands as of mid-afternoon. Rite Aid's 8 5/8% notes due 2015 were meantime more than 4 points ahead at 28.5 bid.

Another trader said that the Rite Aid numbers "didn't look that bad," and said the company had "a very informative [conference] call. The numbers were better than expectations, and management was pretty forthcoming" on the call about the company's financial situation.

Rite Aid's New York Stock Exchange-traded shares meantime rose 6 cents, or 145.38%, to end at 45 cents per share on volume of 15.4 million shares, about five times the norm.

For the fourth quarter, the company reported a net loss of $2.3 billion, or $2.67 per diluted share, compared to a net loss of $952.2 million, or $1.20 per diluted share, last year.

The company said that the net loss was impacted by significant non-cash charges resulting from goodwill impairment, store impairment and an additional tax valuation allowance against deferred tax assets. Excluding these non-cash charges, net loss for the fourth quarter was $116.9 million, or $0.14 per diluted share.

Revenues for the quarter were $6.7 billion, down 1.7% from $6.8 billion in the prior year fourth quarter.

Also for the fourth quarter, Rite Aid reported adjusted EBITDA of $261.4 million, compared to $276.3 million last year.

Rite Aid also came out with guidance for fiscal 2010 on Thursday that includes expected net loss between $210 million and $435 million, or a loss per diluted share of between 26 cents and 53 cents - significantly less than its $2.94 billion loss for the just concluded 2009 fiscal year, which works out to $3.49 per share.

In their news release announcing the results and on their follow-up conference call, company executives noted progress in getting costs under control and improving Rite Aid's liquidity position.

"Despite continued weakness in the economy, we were able to improve our business significantly in the second half of the year as we completed the integration of Brooks Eckerd [two pharmacy chains which Rite Aid purchased in 2007 from Canadian retailer Jean Coutu Group], enhanced our management team and focused on strengthening our financial position," said Mary Sammons, the chairman and chief executive officer.

"We made good progress operating our stores more efficiently, taking costs out of the business and reducing working capital, especially in the fourth quarter. As a result, we ended the year with our strongest liquidity position in more than a year," Sammons added. "We are focused on improving cash flows and expect to be in a position to start reducing our debt this year."

The company - which greatly increased its debt to purchase the Eckerd and Brooks chains - said Thursday that it was in talks with bank partners to explore refinancing options for a $1.75 billion credit facility due in 2010 as well as a $145 million term loan.

Sweet dreams for Sealy

The first trader meantime saw Sealy's 8¼% notes due 2015 at 43 bid, 45 offered, up 2½ points, after the mattress manufacturer reported an unexpected first-quarter profit, even though it was below year- ago totals.

A market source at another desk saw those bonds up more than 5 points, around the 44 mark.

The Trinity, N.C.-based company posted a profit of $4.7 million, or 5 cents a share, beating Wall Street expectations of a loss of around a nickel per share, although the earnings were well below the year-earlier net income of $16.2 million, or 17 cents a share.

MGM move continues

For a second straight session, MGM Mirage's bonds were better, apparently on the news the company is in talks about getting Colony Capital LLC to invest in its troubled CityCenter project in Las Vegas,

However, while seeing the bonds up, a trader opined that such a deal "doesn't make sense - Colony has its own problems."

Another trader saw MGM's 8 3/8% notes due 2011 at 18 bid, 20 offered, a 2 point gain, on "a lot of odd-lot trading."

Its 6 5/8% notes due 2015 were also up about 2 points to the 38 bid level.

Another market source saw MGM-owned Mandalay Resort Group's legacy 9 3/8% notes due 2010 up as much as 6 points on the session at the 24 level.

MGM's NYSE-traded shares jumped 51 cents, or 19.39%, to $3.14, on volume of 26 million shares, more than 4 times the usual daily handle.

The Wall Street Journal reported on its website just before the close on Wednesday that Colony Capital, which has gaming and hotel interests in Las Vegas and elsewhere, was in talks with MGM and its joint-venture partner of the CityCenter project, Dubai World, on the possibility of investing in the ambitious development scheme, which is seen as endangered by ongoing financing difficulties.

As was the case on Wednesday, MGM helped pace the gaming sector, with Las Vegas rival Wynn Gaming's 6 5/8% notes due 2014 seen finishing up 1½ points on the day at 78 bid, while Connecticut casino operator Mohegan Tribal Gaming's 6 3/8% notes slated to come due on July 15 were up nearly 4 points to the 89 level.

Sprint runs up

A trader said that Sprint Nextel "had a nice day," quoting the Overland Park, Kan.-based wireless phone provider's 8¾% bonds due 2032 as having traded up to 73.5 bid from prior levels at 68.5, although he said that paper subsequently came back down from that peak level.

"They traded at 68.5 at the open, then up 5 points on the next trade, and then they settled down inside of there." He said "it just seemed to be that people paid up for stuff," but saw the bonds ultimately "going out cheaper" and finishing at 70.5 bid, 71.5 offered, off the highs but still up from the early lows.

He said that all of the company's other paper was up about a point across the board.

A market source at another desk saw the phone company's Sprint Capital Corp. financing arm's 6 7/8% bonds due 2028 having traded up almost 6 points on the session to around the 66 level, while its 8¾% bonds due 2032 ended at 70 bid, up nearly 4 points on the day. Its 8 3/8% notes due 2012 were quoted at 92 bid, up some 1½ points on the day.

The Sprint complex's most actively traded bond of the day, Sprint Capital's 7 5/8%% notes due 2011, traded as high as 95 at one point in the session before coming off that peak to end around 93 bid, up a point, on $20 million traded.

The company's NYSE-traded shares jumped by as much as 15% intraday before settling up 31 cents, or 7.81%, at $4.28, on volume of 68 million shares, around 1 1.2 times the norm.

The Sprint bonds and shares rose amid generally better performance by high-tech issues, but also were seen helped by analysts' comments speculating that major cable operators like Comcast Corp. and Time Warner Cable Corp., already trying to beef up their telephone offerings in order to compete with traditional phone companies like AT&T Inc. and Verizon Communications Inc. as one-stop providers of all kinds of communications services, might look to buy wireless assets.

Pali Capital analyst Richard Greenfield said in a research note that while those two big cablers are currently offering wireless options to customers via partnerships with Clearwire Corp., in which they hold equity stakes, but which is 51% controlled by Sprint, either one or both of them may realize that in order to more effectively compete in the wireless field, they would have to own more such assets, and could look to buy out Sprint and other partners like Google Inc.

Meanwhile, Argus Research said that Sprint itself could attract buying interest because its beaten-down share price could make it attractive as a relatively cheap way to acquire a large wireless network in one fell swoop.

AK advances with commodity names

Also seen gaining was West Chester, Ohio-based specialty steels maker AK Steel, amid a general rise in industrial and commodity names on expectations that world leaders meeting for the G-20 summit would agree on measures to battle the international economic downturn and boost the global economy.

A trader noted that such peer companies as aluminum processor Alcoa Inc. and United States Steel Corp. were also up in both their bonds and shares, "so everything was moving up."

He saw AK's 7¾% notes due 2012 up 1½ points at 81.5 bid, 82.5 offered.

Another source, seeing the bonds trading north of the 82 level, called that a 4 point gain on the day.

Meanwhile, AK's NYSE-traded shares were up as much as 18.5% intra-day before finishing up $1.13, or 14.54%, at $8.90, on volume of 13 million shares, or 1 1.2 times the average daily turnover.

AK also got a boost from Wednesday's news that it will levy a $55 per ton surcharge for electrical steel products shipped next month to offset its increased raw materials and energy costs.

GM idles, but other autos drive higher

In the automotive sphere, a trader saw General Motors Corp.'s bonds unchanged and mostly trading in a 10-11 context, where the bonds seem to have converged in anticipation of a restructuring that will likely pay bondholders just pennies on the dollar.

Another trader also specifically saw the benchmark 8 3/8% bonds due 2033 at 10½ bid, 12.5 offered, unchanged on the day.

He meantime saw Ford Motor Co.'s 7.45% bonds due 2031 up a point at 30.5 bid, 31.5 offered.

A trader saw GM's 49%-owned auto-finance arm, GMAC LLC's bonds "moving up, a point or maybe two points better across the board." He quoted its 7¾% notes due 2010 78 bid, 79 offered.

A trader said that Hertz Corp.'s 8 7/8% notes due 2014 - which had retreated on Wednesday after a Standard & Poor's ratings downgrade for the Parsippany, N.J.-based car-rental kingpin - were up about a point to 60 bid, 62 offered.

Stephanie N. Rotondo contributed to this report.

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