Stocks get bopped, but bonds don't really drop; AmeriGas prices $40 million add-on

By Paul Deckelman and Paul A. Harris

New York, May 6 - While stocks fell sharply Monday, high yield players were yawning their way through a generally dull session, with little in the way of secondary market price movements, especially ahead of Tuesday's meeting of the Federal Reserve's policy-setting Federal Open market Committee.

In the primary market sphere, though, AmeriGas Partners LP got cooking with a quickly shopped $40 million add-on offering.

And another gaming credit, Venetian Casino Resort, LLC, appeared poised to roll across the green baize of the high yield primary market, with pricing expected in May.

Meanwhile in a conversation Monday with Prospect News, portfolio manager Tim Collins said that at present the high yield market finds itself in a "funky" situation, with an abundance of cash on the sidelines which investors are attempting to put to work in a market in which the supply of product is limited.

Collins, who co-manages the Mason Street High Yield Fund with Steve Swanson, cited the $407 million inflow to the high yield mutual funds for the week ending May 1 - a number, he said, that was derived from the combination of weekly reporters and monthly reporters to AMG Data Services - as evidence that at present there is a lot of cash "looking for a home" in high yield.

"What you have right now is sort of an unusual technical situation in the market," Collins said. "On the demand side you really have three things happening:

"You have strong mutual fund flows. As a rule of thumb the mutual funds are generally regarded to represent 20% to 25% of the total cash flow into the market from all sources. So it implies a pretty strong inflow situation, in the billions of dollars for the week.

"You also have a fair amount of cash on hand at the big funds and with the money managers.

"And you have a reasonable number of bonds in this market, and in this interest rate-environment, from some of the better issuers, that are being refinanced or called out."

Meanwhile on the supply side of the equation, Collins said, the preponderance of supply is not originating in high yield, but rather in the investment-grade universe, creating a stream of product that causes the buy-side to be wary.

"There really aren't too many large deals happening because there just aren't many leveraged buy-outs happening," Collins said. "You've got a tight bank market and LBO activity is light. And of course the LBO sponsors have historically been a source of a lot of the big deals that happen in the high-yield market.

"The other place where you see some of the big deals come into the high-yield market is the fallen angels and the crossover investment grade-type names. The problem you're having there is that most of the things that are falling out of investment grade-land right now are concentrated in telecom and technology: things like WorldCom and Qwest and Xerox. And frankly while those balance sheets were financeable in the investment grade market there's really too much of that paper out there floating around to be easily absorbed in the high-yield market.

"A lot of investors have been bludgeoned the last couple of years in high-yield telecom," he pointed out. "So there's really just not a very good bid for the kind of fallen angel supply you're seeing in these big deals.

"That leaves everyone bidding for paper in a series of $100 million to $200 million small transactions. And when you've got 50 or 100 or 150 institutions trying to get a reasonable position in a nice deal - but a deal where there's only a couple of hundred million dollars worth of bonds available - there's a tendency to bid that up. And it gives the investment bankers an awful lot of flexibility and headroom to raise pricing, which in the case of a bond means lowering the rate or the coupon.

"That technical situation is producing tight pricing and it doesn't leave you with a lot of wiggle room or a lot of extra coupon to cushion mistakes," Collins added.

"I think prudent investors have to be very selective in that kind of environment, and make sure they don't reach for something that may have industry or macro characteristics that they are seeking for their portfolio but which end up not to be very good underlying credits."

Given the present supply and demand dynamics of the high-yield market, Collins conceded, there may be an incentive for investors to take a closer look at fallen angel credits. However, he added, there is a limit to how much fallen-angel paper high-yield investors can absorb and to what risk they will incur in doing so.

"You have a tension there between fundamental value and short-term trading dynamics," he said. "The fact that a company like WorldCom can be right on the brink of becoming a below-investment grade credit and falling out of all the major investment grade indices means that you're going to have $30 billion going out of those investment-grade indexes and coming into the high-yield indexes.

"A lot of high-yield accounts are index-driven," Collins continued. "It forces some people to buy. But our market is just not nearly as large as the investment-grade market. And everybody in the high-yield market gets a full weighting long before you can mop up $30 billion of WorldCom paper.

"These balance sheets are just too big for our market," he added regarding the fallen angels.

Collins created a hypothetical scenario. Suppose, he said, that in North America there were 100 high yield managers each managing $3 billion of assets. That would mean there were $300 billion of assets under management. If you bring $30 billion of WorldCom paper into that high yield universe each of those investors would have to be 10% weighted - committing 10% of their portfolios to WorldCom - in order to absorb all of that paper.

"That's not realistic," Collins said. "We don't run with 10% weightings and very few people do. A total-return portfolio, properly risk-adjusted, may be able to accommodate a position of 3% or 4% from time to time of a better-rated, high quality situation. But you would never buy a 10% weighting in a bond that is trading in the 40s or the 50s; I mean WorldCom is trading like distressed debt at this point.

"Reasonable people can differ on what WorldCom's ability to deal with their problems is going to be going forward. But the fact is whether we like it or don't like it there's no way we're going to sit here at Northwestern Mutual and take a 10% weighting.

"And if those high yield accounts don't absorb it that means that you are going to have an awful lot of investment grade people sitting there without a willing buyer, who are trying desperately to get it off their books. And what that creates is a motivated seller, who really wants it off their books, and a lot of satiated buyers that, even if they like it, can't afford to buy all that the sellers would like to sell. And it really creates a buyer's market, and that may persist for a very long time."

Collins's fund is among the 11 Mason Street Funds to have celebrated its fifth anniversary on March 31. Collins has been with Northwestern Mutual for 16 years, and has worked 12 of them in high yield. Mason Street Advisors, he said, manage $52 billion of public market assets for Northwestern Mutual's general and separate accounts.

Although he said he tries to maintain an open mind to the various credit situations in high yield, including fallen angels, such "falling knives," he added, labor against a market psychology which the events of the past two years have embedded in the minds of investors.

"I think for a lot of people the easy thing to do with big fallen angel names, especially in telecom, is to put their heads in the sand," he said.

"The easy answer is 'No' You've got an awful lot of people who are still trying to pick themselves up off the mat from the whipping they've taken the last couple of years in high yield telecom. Nobody wants to 'Play it again, Sam' with the investment grade boys that are migrating into our universe, and then take the ride and mark those down too. That's just human nature, a kind of a Pavlov's Dog reaction. People have just been conditioned that trying to catch the falling knife in below-investment grade telecom companies is a good way to get yourself hurt rather than rewarded."

Meanwhile in Monday's primary market activity AmeriGas Partners, LP and AP Eagle Finance Corp. announced they had priced a $40 million add-on to their 8 7/8% notes due May 20, 2011 (Ba3/BB+) at 104.00 for a yield to worst of 8.116%. Credit Suisse First Boston was the bookrunner.

And Venetian Casino Resorts, LLC and Las Vegas Sands, Inc. announced they will bring $850 million of eight-year second mortgage notes (expected ratings Caa1/B-) via Goldman Sachs & Co. in addition to a new $480 million senior secured credit facility. The roadshow on the notes starts Thursday with pricing expected on May 22.

Finally, although the tranche sizes remain to be determined, price talk was heard Monday on the two tranches of a $750 million split-rated offering form Topeka, Kan.-based utility Western Resources, Inc. Price talk is 8% area on approximately $350 million of first mortgage notes due 2007 (Ba1/BBB-), and 9½%-9¾% on approximately $400 million of senior notes due 2007 (Ba2/BB-). Salomon Smith Barney is the bookrunner.

Among recently priced new deals trading in the secondary market, Compton Petroleum Corp. attracted "a little buyside interest" Monday for its new 9.90% senior secured notes due 2009, a trader said. He quoted the new bonds at 99.75 bid/100.25 offered, up from Friday's 98.273 issue price.

He also saw Silgan Holdings Inc.'s 9% senior subordinated notes due 2009, which continued to hover at 103.25 bid/104 offered, somewhat above their April 23 issue price of 103.

Among already established issues, "not a whole lot was going on," one trader said, characterizing the session as a very slow day. He saw that WorldCom Inc. paper, for instance, "opened up softer by a point or so, then it traded up, then it was down, then it was up," before ending essentially unchanged across the board, on "not a lot of volume."

Another trader agreed that the troubled Clinton, Miss.-based telecommunications company's bonds "just kind of hung in there." He saw its longer-dated issues "pretty much staying status quo from where we opened [Monday] morning, with its 6.95% notes due 2028 opening at the 37-39 bid level and closing around 38-40, "not much changed." WorldCom's benchmark 7½% notes due 2011 opened at 42 bid/44 offered, he said, then got as good as 44 bid/45 offered, before dropping back to around 43.5 bid/44.5 offered, "trading back and forth in that range, so there's still a little volatility in the WorldCom sector."

The No. 2 U.S. long-distance operator's bonds fell to distressed junk-bond levels over the past few weeks, in tandem with a sharp fall in the company's shares amid investor concern over the challenges it faces being able to make enough money in a very depressed telecom industry environment so that it will be able to continue to service its massive debt load, which includes $29 billion of bonds. Those bonds continue to cling - barely - to investment-grade status at Baa2/BBB, but the major agencies are eyeing WorldCom for a possible downgrade. The company's situation is further clouded by a Securities and Exchange Commission investigation and the recent ouster of founder and long-time chief executive Bernie Ebbers, amid controversy over a $366 million loan the company gave to Ebbers.

While WorldCom's seeming slide towards oblivion dominated activity in last week's high-yield market - the junk bond desks at many investment houses began trading the issue, which heretofore had been handed by the high-grade desks, even with bond prices slipping down into the 40s - so far this week, the trader said, "there was not much happening, compared with last week."

Among other telecom issues, he said, Nextel Communications Inc.'s bellwether 9 3/8% notes due 2009 were hanging in at 67 bid/68.5 offered, down about a point and a half from its levels at the end of last week, but on very limited dealings.

Outside of the telecom world, he saw Kmart Corp. as a little better, even as the bankrupt Troy, Mich.-based retailer said last week that it may restate its results for its latest fiscal year, and announced plans to suspend severance payments to several to several former officials, as well as "reviewing the[ir] stewardship of the company."

The longer-dated paper, "which I hadn't seen in about six weeks," the trader said, was better bid Monday, with the company's 8¼% and 8 3/8% notes due 2022 had moved up to 44.5 and 45 bid, from prior levels around 44. "Maybe there some interest in that long end, that comes around every now and then, with someone getting the idea they want to buy some of that paper."

On the downside, he said, forest products producer Tembec Industries's 8 5/8% and 8½% notes, which had held lofty levels around the 103 bid/104 offered area, as recently as a week ago, were being quoted at 101 bid/103 offered, with the whole paper and containers sector "a little heavy as of late, a little softer."

Aurora Foods, whose bonds had dropped sharply on Friday after the food products company reported a sizable first-quarter loss versus a year-ago profit, continued to retreat on Monday, albeit in relatively restrained trading. One market source said its 9 7/8% notes due 2007 - which had fallen more than 20 points Friday, from levels around par to a close of 79 bid - tacked on another four-point loss Monday, easing to 75. Its 8¾% notes due 2008, which had plunged 20 points on Friday to 75, likewise fell four additional points, to 71.

Aurora's bonds - and its shares - had swooned Friday after the St. Louis-based producer and marketer of such well-known brands as Duncan Hines baking mixes, Log Cabin syrup, Mrs. Paul's frozen seafood products and Aunt Jemima breakfast food products posted a first-quarter loss of $107.8 million ($1.51 per share) Thursday, versus a year-ago profit of $7.8 million (11 cents per share), mostly due to large charges connected with the impairment in the value of its trade names in accordance with new accounting guidelines. EBITDA (earnings before interest, taxes, depreciation and amortization, considered the key bond market measure of its cash flow generation potential and ability to service debt) sank 62% to $13.2 million from $35 million in the year-ago quarter.

Adelphia Communications Corp. debt, which was on the slide last week amid the latest ratings downgrade, were little changed, with a trader quoting the Coudersport, Pa.-based cable-TV operator's 9 7/8% notes due 2005 at 83 bid/85 offered, "which is how they opened, and how they closed."

There was also little movement seen in the 12% notes due 2009 of Marvel Enterprises Inc., which were not heard to have budged from their recent levels around 51, an observer said, despite the boffo box office results of the new "Spiderman" movie, which is based on the famous comic-book character owned by Marvel. The company's shares were up four cents (0.52%) on the session, to $7.70, though on heavy volume of 2.3 million shares, about five times the usual.

Back among the nominally investment-grade names which have recently been trading down in junk bond territory, a source indicated that Tyco International's debt was about a point or so below recent levels, which had seen its 6 3/8% notes due 2004 hanging around 87.5 bid and several other issues - its 7.20% notes due 2008, its 7% notes due 2013, and its 8% notes due 2023 - all around 78. The troubled Bermuda-based conglomerate's shares meantime lost $2.30 (10.62%) to $19.35 in New York Stock Exchange dealings, although volume of 31 million shares was not much more than usual.

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