CIT slides badly after bailout talks terminated; Virgin Media, ISS price deals; funds gain $98 million

By Paul Deckelman and Paul A. Harris

New York, July 16 - CIT Group Inc.'s bonds took a thumping on Thursday, traders said, with some sliding more than 20 points in wild trading as the high yield universe reacted to Wednesday night's news that rescue talks between federal authorities and the big New York-based commercial lender had ended and that a further bailout from Washington is not in the cards. That left CIT executives to ponder where they go from here.

The company said late Thursday that it is in talks with potential lenders to secure financing, although analysts expressed skepticism whether any lenders may go where Uncle Sam fears to tread and front the money-losing company at least $2 billion -- and possibly as much as $6 billion - to stave off bankruptcy. Some observers think a filing could come as early as Friday. A group of big bondholders meantime met to explore their own potential options, including a possible debt-for-equity swap.

Elsewhere, secondary market activity was seen relatively limited, with CIT - whose issues collectively traded well over $1 billion Thursday - "sucking up all of the oxygen" in the market, as one participant put it.

Over in the primary realm, Virgin Media Finance plc came to market with a quickly shopped add-on issue to its 9½% senior notes due 2016, which originally priced back on May 29. There was enough interest in the New York-based provider of U.K. broadband services to warrant doubling that tap in size to $600 million. The bonds priced at a lower yield than the original deal did. The company's existing notes were meantime actively traded.

Also on the new-deal front, Danish facilities service company ISS Global A/S priced an issue of euro-denominated five-year notes.

While several other prospective issuers were heard to have begun roadshows for their respective upcoming deals, such as Duane Reade Holdings Inc. and MTR Gaming Group Inc., with Peninsula Gaming LLC up next to hit the road, deals already on the calendar for a while like One Communications Corp. and Basic Energy Services Inc. were nowhere to be found.

Junk funds attract $98 million

As trading was finishing up for the session, 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, $98 million more came into weekly-reporting funds than left them.

It was the third straight inflow, continuing the trend seen in the previous week, ended Wednesday July 8, when there was a $328.9 million net inflow to the funds. A net of $811.9 million has come into the funds over those past three weeks. Including the latest week's total, inflows have now been seen in 17 weeks out of the last 18, according to a Prospect News analysis of the AMG numbers, totaling $9.802 billion during that long stretch. Before the most recent three weeks, the funds had seen a rare outflow of $110.1 million in the week ended June 24 - and before that, an incredible 14-week stretch of consecutive inflows, dating back to mid-March, during which time the funds grew by a record $9.1 billion.

With the year now just over half gone, inflows have been seen in 24 of the 28 weeks, versus just four weeks of outflows - the one seen in the June 24 week, plus three weeks of fund losses in late February and early March that totaled $996 million, according to the analysis. Counting the latest week's inflow number, the year-to-date net inflow for the weekly-reporting funds rose to $12.367 billion - a new peak level for the year so far, up from the old zenith of $12.269 billion seen in the previous week.

Excluding exchange-traded funds, as some calculations do, inflows in the latest week totaled $162.3 million, versus the previous week's $268.5 million inflow figure. No matter how the fund flows are calculated - with or without the ETFs -- the bottom line is that the massive multibillion-dollar flow of funds into high yield is seen as the major catalyst for the relatively strong pace of new issuance and the solidly positive year-to-date returns that have been seen in Junkbondland for most of the first six months of the year and now into the seventh - except for a lull in both the primary and secondary spheres for several weeks that largely coincided with the aforementioned outflows.

A market source also said that in the latest week there was a $1.1 million inflow to the funds which report on a monthly basis rather than doing so weekly, following the previous week's $451.8 million cash infusion. The latest gain left the year-to-date cumulative inflow for such funds at $9.76 billion, up slightly from the previous week's $9.759 billion.

The source further said that on an aggregate basis, consolidating the inflows for the weekly and the monthly reporting funds, a total of $22.029 billion more has come into the funds so far this year than has left them, up marginally from $22.028 billion the week before.

EPFR sees inflows continuing

At another fund-tracking service, Cambridge, Mass.-based EPFR Global, analysts also noted that the junk funds had racked up their 17th week of inflows in the last 18, with the $152 million cash infusion they calculated bringing the total year-to-date inflow to $12.84 billion. In the previous week, it said the funds had seen an inflow of $683 million, with a year-to-date inflow total of $12.69 billion.

While the EPFR junk figures usually point essentially in the same direction as AMG's, the precise weekly and year-to-date numbers almost always differ somewhat due to EPFR's inclusion of some non-U.S. funds in its universe. Any and all cumulative fund-flow totals, whether for AMG or EPFR, 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 less of the total monies floating around the high yield universe than they used to - because there is no similar 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.

Virgin Media goes well

Thursday saw the primary market generate a meager amount of news, and all of it emanated from Europe.

Virgin Media Finance priced a massively upsized $600 million add-on to its 9½% senior notes due Aug. 15, 2016 (B2/B) at 98.662 to yield 9¾% on Thursday.

The quick-to-market deal, which doubled in size from $300 million, came at the tight end of the 9¾% to 10% price talk, and was priced off the London syndicate desk.

An investment banker in New York, who did not work the deal but was kept in the loop, said that the Virgin Media trade went well.

Goldman Sachs, BNP Paribas, Deutsche Bank Securities, HSBC, J.P. Morgan and UBS Securities were joint bookrunners.

Proceeds will be used to repay the New York City-based media company's senior credit facility.

The original $1 billion equivalent issues priced at 95.574 to yield 10 3/8% on June 1, 2009, in tranches of $750 million and €180 million.

Hence Thursday's tap resulted in an interest savings of 62.5 bps for Virgin Media relative to the original print.

ISS Global tight to talk

Also from Europe, news circulated that ISS Financing plc priced a €525 million issue of five-year senior notes at par to yield 11%.

The yield was printed at the tight end of the 11% to 11¼% price talk.

Goldman Sachs and Deutsche Bank Securities were joint bookrunners for the debt refinancing from the Copenhagen, Denmark-based facilities services provider.

Existing 9½% Virgins very busy

The new Virgin Media add-on tranche of 9½% notes due 2016 priced too late in the session for any kind of aftermarket activity.

The company's existing 91/2s - $750 million of which, upsized from $650 million originally, had priced on May 29 at 95.574 to yield 10 3/8%, as part of a two-part dollar/euro deal - were seen actively traded on Thursday as participants awaited the new deal.

Those bonds - which had risen of Wednesday's closing level at 101 over the course of the seven weeks since their pricing - traded all day Thursday slightly below that, in a 991/2-par context, a market source said, before going home down 1½ points at 991/2, on volume of more than $25 million.

Gunmaker's deal shoots upward

A trader said that the new Freedom Group Inc. 10¼% senior secured notes due 2015 "went up a couple of points" from the 97.827 level at which the corporate parent of Madison, N.C.-based firearms manufacturer Remington Arms Co. Inc. priced its $200 million of new bonds on Wednesday, to yield 10¾%; after that, he said, "it's been radio silence. They're quoted, but I'm not seeing any trading. I haven't seen anybody come in as a buyer or seller."

He added that "a couple of people said they're trading too high now; someone said they'll wait [to jump in] until people are selling their ammunition on eBay, and then they'll buy the bonds at a discount."

Market seen eyeing coming gaming deals

The trader said that "guys are looking at the MTR deal, and they're looking at Peninsula," referring to the two upcoming gaming industry deals which are to be marketed to investors via roadshows, with MTR's expected to price around the middle of next week and Peninsula's expected somewhere around the end of the month.

"I don't get that," he opined, "because I think the consumer is still really strapped"- the current economic downturn, which started with the subprime lending crisis two years ago, has played havoc with consumer discretionary spending for such pricy non-essentials as weekend or vacation trips to gambling casinos. However, he said, "they're looking at that and feeling the worst is past."

'Mixed reviews' for upcoming issues

He also said that he had heard "mixed reviews" from people in the market for the prospective Reliance Intermediate Holdings LP deal, in which the Oshawa, Ont.-based heating and cooling products and services provider plans to sell $250 million of 10-year notes.

Meanwhile, he said "I don't know what they're doing with Basic Energy and One Communications." The issuers - Midland, Tex.-based oilfield services operator Basic Energy and Burlington, Mass.-based telecommunications company One Communications - and their respective underwriters "haven't been able to put a book [of prospective orders] together and they haven't been able to come up with a structure of price and a covenant package that the issuer and buyers can get comfortable with, for either deal. "

Overall, in the primary arena, he said, "there really isn't anything that grabs your attention."

CIT falls after talks fail

There was no shortage of attention for CIT Group's bonds on Thursday; they began falling from the get-go pretty much across the board as the market absorbed the sobering news that there will be no additional federal monies given to the 101-year-old company, which lends to thousands of small-to-medium retailers, manufacturers and other businesses.

All told, a market participant said, well over $1.1 billion of CIT paper changed hands. Its various issues completely dominated everybody's Top 10, Top 20 or Top 25 list of the most busily traded bonds. Some of the issues were seen down in intraday dealings as much as 20 points, or even more, on the news, although most had climbed off their lows by the day's end.

"It's hard to tell," said a trader who was asked about the direction the company's bonds ultimately took. "It looks like most of the paper between 2012 and 2016 seemed to be pretty well entrenched in that 50-52 area. And the bid has been remarkably deep - it just seems to have stayed pretty still all day. People have been selling obviously to some of the dealers that have that bid. So it's a pretty huge bid."

He noted that some of the bondholders had formed a group to discuss their possible options, whether or not CIT - as has been widely predicted - falls into bankruptcy on the refusal of Washington to bail it out. He also mentioned market rumors that the company might get a bridge loan from one or more financial saviors to buy it some breathing room. "There have been rumors swirling all day."

The volatile activity in the company's bonds, caused "a lot" of hedge funds to get involved with those bonds over the last three days.

A market source saw the day's most heavily traded issue, the CIT 4 1/8% notes scheduled to come due on Nov. 3, having plunged some 20 5/8 points on the day to the 57½ bid level, on incredibly heavy afternoon volume of some $137 million.

Another issue which easily topped the $100 million mark was CIT Group Inc. Income Fundings Trust's floating-rate notes maturing on Aug. 17; the source saw those bonds in freefall all the way down to 57 bid from Wednesday's levels around 86 - a dizzying 29 point nosedive as $122 million of the bonds changed hands.

CIT Group Holdings' 4¾% notes due 2010 saw a relatively restrained 10 5/8 point loss, down to the 57¼ mark, on turnover of $113 million.

Another market source saw the Nov. 3 bonds at the 51 level late in the day, calling that a 26-point shellacking. However, the source saw much smaller losses for some other CIT paper, like the 5.65% notes due 2017, off less than 4 points on the day to the 52 region.

A trader remarked that with all of that CIT activity taking place, "people who are not involved are just sitting back and watching what's going on."

Market indicators mostly up

Overall in the market, the CDX Series 12 High Yield index - which had jumped 1¼ points on Wednesday - was unchanged Thursday at 85¼ bid, 85¾ offered, a trader said.

The KDP High Yield Daily Index, which had gained 35 basis points on Wednesday, rose by another 13 bps on Thursday to end at 62.89, while its yield narrowed by 1 bp to 10.51%.

In the broader market, advancing issues - which led decliners for a second straight session on Wednesday - fell back behind them on Thursday, trailing by a six-to-five margin.

Overall market activity, measured by dollar-volume totals, rose by almost 30% from Wednesday's level.

CIT was clearly the dominant factor for yet another day - a trader said "it was what everybody seemed to be involved in, or tried to be involved in."

Away from CIT, "things are trading where they are - but you have a lot of people who are reluctant to chase things, and you have people just sitting there, waiting for some type of pullback, feeling that things have gotten too frothy, and that cash has been what's driving this." .

Retailers a mixed bag

With the woes of CIT on everyone's mind, a trader said that "I thought we'd see sellers this morning" among retailing names, since CIT provides financing for the retail industry as well as for apparel companies, a key merchandise component for many stores.

However, he said that "we went out bidding for Neiman Marcus [Group] - but we couldn't buy any." The company's 10 3/8% notes due 2015 gained 2½ points to end at the 58 level.

He also said that "Macy's traded - but there were buyers for Macy's paper."

And he said that he "didn't see much go on today" in Rite Aid Corp, which had been one of the more active non-CIT names trading around on Wednesday. While its 10 3/8% notes due 2016 gained 3/8 point to the 91 3/8 level, and its 8 5/8% notes due 2015 were a point better at 66, its 9 3/8% notes due 2015 were unchanged at 65½ bid.

On the other hand, a market source saw Burlington Coat Factory Warehouse's 11 1/8% notes due 2014 easing more than a point to the 76 area, while Bon-Ton Stores Inc.'s 10¼% notes due 2014 were down a deuce at 37 bid.

Energy names trade as oil rises

A trader said his shop "saw some activity" in Chesapeake Energy Corp.'s bonds - "but it's more situational than any flow trading" in the Oklahoma City-based independent oil and gas exploration and production company. He said "there didn't seem to be a story attached to anything."

Another market source said he had heard that Western Refining Inc.'s 11¼% senior secured notes due 2017 were trading around an 85-87 context. That remains well down from the 91.445 level at which the El Paso, Texas-based petroleum refiner had priced its $325 million issue back on June 9, to yield 13%, as part of a $600 million two-part deal.

He also saw Seitel Corp.'s 9¾% notes due 2014 "continuing to rise" from the lows in the 40s to which the bonds of the Houston-based provider of seismic services to the energy had fallen last week, after it released bearish revenue guidance.

At another desk, Seitel's paper was seen having firmed nearly 3 points on the day to the 55 level.

That activity came against a backdrop of improvements in the energy market, helped by surprise bullish comments from the normally bearish market guru Nouriel Roubini of New York University - the man who had accurately predicted the financial crisis - but who said Thursday the recession that has curbed fuel consumption will end this year.

On the New York Mercantile Exchange, light, sweet crude oil for August delivery hit an intraday high of $62.35 per barrel, before going out at $61.82, still an improvement. Oil futures are up 3.2% this week, poised for their first weekly gain since June 12.

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