Three deals price, fourth scrubbed; outflow throws damper over market

By Paul Deckelman and Paul A. Harris

New York, Aug. 8 - Three new deals priced in Friday's high yield primary market, sources said, including offerings from Tempur Pedic Inc., Amstead Industries Inc. and Group 1 Automotive Inc. - but clearly, the bloom was off the rose, with considerable attention paid to more negative developments - the demise of Panavision Inc.'s already downsized $250 million offering of five year senior secured notes, pulled because of market conditions, and - of course - what's believed to be the largest-ever weekly hemorrhage of cash from high-yield mutual funds, considered a key barometer of overall junk market liquidity trends.

The outflow of $2.56 billion for the week ended this past Wednesday - coming on top of the $1.06 billion outflow seen the week before - brings the total net inflow since the beginning of the year down to $13.6 billion, according to a Prospect News analysis of the weekly AMG Data Services fund flow numbers.

While that's certainly nothing to sneeze at, it's still well down from $16.16 billion in the week ended July 30, and especially from the peak cumulative inflow total of $17.312 billion, seen in the week ended July 16. Even though the cumulative total remains high, the momentum, with three consecutive weeks of outflows, is clearly headed in the wrong direction.

The latest week's outflow is thought to be the largest since AMG began tabulating the weekly fund flow numbers in 1992, and easily dwarfs the apparent previous record outflow, of about $1.4 billion, seen in the week ended Sept. 25, 2002.

Analysts, traders and investors closely watch the fund flow numbers for clues to market liquidity trends. The steady drumbeat of week after week of inflows - in many weeks exceeding $1 billion - has been given much of the credit for the revival of both the high yield primary and secondary markets since last fall, and especially, since the start of the new year.

Among the effects has been the pricing of slew of mega deals of $1 billion or more (such as the recent $2.55 billion three-part deal for Calpine Corp.) as well as literally scores of smaller deals.

But in the face of the history-making outflow and the second pulled deal in seven days, sources sounded upbeat notes in conversations with Prospect News.

"People were buying bonds today, and there was a positive tone to the market," stated one sell-side source shortly after the session closed.

The official added that the harrowing news from the previous session, that the high yield mutual funds had undergone $2.56 billion of outflows for the week ending July 30, initially caused "shock waves.

"It was the biggest outflow ever," said the source. "It was the biggest outflow by a lot. We wondered if everyone would pull their orders out of the book.

"But we didn't see any of that," the official added. "We saw secondary levels trading higher. And three deals priced without any problems."

Indeed, the session saw Amsted Industries price a downsized $250 million of eight-year senior notes (B3/B) at par to yield 10¼%, significantly wide of the 9½% area price talk and reduced from $275 million. Citigroup and Banc of America Securities ran the books.

Also in the session Group 1 Automotive Inc. sold $150 million of 8 ¼% 10-year senior subordinated notes (B1/B+) at 98.337 to yield 8 ½%, with of the 8 1/8%-8 3/8% price talk. Goldman Sachs was the bookrunner.

And Tempur-Pedic Inc. jointly with Tempur Production USA Inc. priced $150 million in a seven-year senior subordinated notes deal (B3/B-). With Lehman Brothers and UBS Investment Bank running the books the paper priced at par to yield 10¼%, at the wide end of 10%-10¼% price talk.

In the conversation with the sell-side source quoted above, Prospect News noted that of the day's three completed transactions one had downsized, two had come wide of their price talk and the other came at the wide end of its talk.

True enough, conceded the sell-sider. But the pricing levels of recent deals don't necessarily reflect disastrous changes in the cash positions of the buy-side, nor do they necessarily portend a tumbling high yield market.

"From Thursday July 31 through Thursday Aug. 7, 12 out of 13 deals were wide of or at the wide end of price talk," said the source. "I think that has a lot to do with the direction the market was headed in.

"Accounts know when money is going out of their funds," the sell-sider added, alluding to the record-breaking outflow reported Thursday. "They know that before anybody else because they see it firsthand.

"A lot of what we have been seeing over the past 10 days or so has to do with the Treasury volatility and primary levels expecting to be matched up with secondary levels. And with the secondary levels trading the way they were - which was the wrong direction with everything trading down - new issues had to come wide of price talk.

"Price talk is set at a given time, and the market keeps sliding away from that."

Diane Keefe, portfolio manager of the Pax World High Yield Fund, also conceded the gravity of Thursday's outflow news when she spoke to Prospect News on Friday.

"The previous biggest outflow, I think, was $1.4 billion in September 2002 when spreads were close to their widest and fear was triumphing over greed, in large measure," said Keefe.

"What you saw before high yield started selling off was an incredible narrowing of spreads," she added. "Things that had been trading at 550 off were trading at 300 off. And they had to adjust because there had not been significant credit improvement over the time when they were trading at 550 off.

"Experienced junk managers also started realizing that they were overpaying for the riskiest securities they had, and those had run up so much that they would take profit and reinvest in the higher quality issues, now that they are at higher yields than they had been during the bull market."

Keefe, whose Pax World fund submits credits to social issues screens, said that the remarkable thing over the course of past two weeks, given the fact that money was reported to be flowing out of the asset class, was that so many of the new deals kept getting done, albeit wide of talk and occasionally downsized.

She characterized the recent chop in high yield as "a correction," and stated that the period of correction could well come to a conclusion sooner than later.

"You could see some asset-allocation decisions in favor of junk because now the average spread in junk is at around 640 over - not as low as it was a couple of weeks ago," Keefe said.

"This correction has been pretty dramatic."

The upbeat color from both the buy- and sell-sides notwithstanding, the new deal market did suffer one casualty during Friday's session. Panavision postponed its downsized $250 million (from $275 million) two-tranche offering of five-year senior secured first lien notes (B3/B-). Credit Suisse First Boston and Bear Stearns had been joint bookrunners.

The Panavision postponement trailed by seven days the pulling of FHC Health Systems, Inc.'s $250 million eight-year notes (B3) offering on Aug. 1.

Like FHC Health Systems, Panavision cited market conditions as the reason for abandoning the deal.

Finally on Friday one new offering came into the new issuance pipeline.

A brief roadshow is set to get underway Tuesday for Nevada Power Co.'s $350 million of general and refunding mortgage notes series G due 2013 (Ba2/BB), which is expected to price during the week of Aug. 11 via Merrill Lynch.

Traders said not much was seen of recently priced deals in Friday's market, with Sonic Automotive Inc.'s 8 5/8% senior subordinated notes due 2013, which priced late Thursday at 98.3628, seen at 98.25 bid, 98.75 offered on the break and then firming up to 98.5.

A trader saw the new Ardent Health Services LLC 10% senior subordinated notes due 2013 at par bid, 100.5 offered, unchanged from issue. Bio-Rad Laboratories Inc.'s 7½% senior subordinated notes due 2013 held steady at a point above issue, at 101 bid, 102 offered.

Calpine Construction Finance Co.'s floating rate notes due 2011, which priced late Thursday at 98.01, had moved up ever so slightly to 98.25 bid, 98.75 offered on Friday.

Meantime, Calpine's 8½% second priority senior notes due 2010 and 8¾% second priorities due 2013, which had both priced at par on July 10, were seen continuing to tread water below the 90 bid mark.

Also in the power generation area, El Paso Corp.'s 7¾% notes due 2013 were heard to have firmed to 93 bid and its 7 5/8% notes due 2012 gained nearly four points to close at 82 bid. Williams Cos.' 8 5/8% notes due 2010 improved to par and Williams' 8¾% bonds due 2032 were three points better at 95. CMS Energy Corp. - whose bonds slid anywhere from two to four points earlier in the session - were on the rebound, its 7½% notes due 2009 up two-and-a-half points at 91 bid.

Outside of the power generators, Sinclair Broadcast Group's 8% notes due 2012 were a quarter point easier at par as the Baltimore-based station ownership company issued quarterly numbers.

Cablevision unit CSC Holdings Inc.'s 7 7/8% notes due 2007 were a point-and-a-half better at 97.5 bid. Trump Holdings & Funding's 11 5/8% notes due 2010 were a point better at 90.5 bid.

On the downside, Oregon Steel Mills Inc.'s 10% notes due 2009 were several points down, around 75 bid. Level 3 Communications' 9 1/8% notes due 2008 lost two points to close at 79.

But a trader said that overall, things were "very quiet, which I found surprising, You'd have thought that there would have been some fireworks, with the outflow number - but there wasn't."

A lot of players were "just shocked" at the sheer magnitude of the outflow," another trader said. "People were not in a good mood" - and that translated to Friday's market being, essentially, "a non-event. Unbelievable."

The trader added, however, that while the market's behavior over the past several sessions had been "really ugly, this thing has gone up just so far that you'd have to expect it to give back something."

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