CompuCom deal put off; HCA, Six Flags, Young Broadcasting lead reeling market lower

By Paul Deckelman and Paul A. Harris

New York, July 27 - The high yield market on Friday closed out a dreadful week which saw several prospective new deals pulled off the forward calendar, and buckets of blood spilled in the secondary.

The latest no-show among the new deals was CompuCom Systems Inc., heard to have postponed its $210 million offering of senior subordinated notes due to deteriorating market conditions.

That postponement followed earlier soundings from high yield syndicate sources that prospective deals for Allison Transmissions and Silverton Casino Hotel & Resort would not be getting done.

Among the deals that did get done during the week, Intergen Group's big multi-currency mega-deal had to be downsized in order to be completed, while DAE Aviation Holdings Inc.'s offering had to price substantially well below par in order to fatten its yield enough to entice investors. And CEVA Group plc's upcoming big deal was heard to have been restructured in order to offer investors a secured component as well as the regular unsecured bonds.

In the secondary realm, Thursday's big downturn stretched on into Friday. Although names were not down as dramatically as they had been the day before, there was still no shortage of losing credits, including HCA Inc., Six Flags Inc., and Young Broadcasting Inc.

Also lower were the big automotive benchmark issues of General Motors Corp. and arch-rival Ford Motor Co.

Still, some sources said that the broad high-yield market appeared to have stabilized somewhat on Friday.

A high-yield mutual fund manager mentioned that bids were starting to "fill in a little," and added that were a bond to be offered at 97.00, and a potential buyer responded with a bid of 95.00, that bid would probably be hit.

"The buyers are setting the levels," the investor said.

However Friday produced practically no news in the primary market.

And sources advised the Prospect News primary market desk to "Get used to it."

The mutual fund manager asserted that until the capital markets are repriced to investors' satisfaction very little will get done in the high-yield new issue market.

Prospect News followed by asking this investor where, other than junk, a money manager might put to work cash generated by coupon payments and early redemptions while waiting for the volatility to work through the markets.

"You can either buy governments or put it into commercial paper at 5¼%," the investor responded, adding that at the moment commercial paper generates more income than in Treasuries.

Near $2 billion week

With no issues pricing on Friday, the issuance total for the July 23 to July 27 week came in at $1.94 billion of proceeds in four dollar-denominated tranches.

Most of it came from Burlington, Mass.-based power generation company, Intergen NV, which placed a face amount of $1.875 billion equivalent of 10-year senior secured notes (Ba3/BB-) in three tranches on Monday: $1.26 billion of 9% notes at 99.189 to yield 9 1/8%, €150 million of 8½% notes at 99.174 to yield 8 5/8% and £200 million of 9½% notes at 99.209 to yield 9 5/8%.

The face amount had been downsized from $1.975 billion equivalent.

At Friday's close, year-to-date issuance came to $111.3 billion in 288 dollar-denominated tranches.

If the 2007 primary market is, as some sources suggest, headed into a period of dormancy in the near to intermediate term it would do so with a commanding lead in year-over-year issuance versus the record-setting year of 2006.

At the July 27, 2006 close the primary market had seen $73.3 billion of issuance in 217 tranches.

In round numbers 2007 issuance is $38 billion or 52% ahead of where it was at the same time last year.

Sea-change in liquidity

The high yield mutual fund investor said that as a result of recent capital markets volatility there has been a sea change in the liquidity of the high-yield asset class.

The investment banks are coming to grips with the fact that, in the wake of a rash of recent deal postponements in the junk bond and leveraged loan markets, that there is a huge amount of debt on their books, the source commented.

The investor also said that the CDO market, which represented a significant amount of the demand for the bonds and loans, is basically on hold because no one is buying the CDO mezzanine-level tranches or the equity-level tranches.

"Once everything stabilizes, and prices are down, they can figure out what kinds of returns they need to provide in order to get people to buy, and CDOs will be back," the investor said.

"There are rumors that some of the warehouses where they put all of the loans, waiting for the deals to be done, were liquidating, which is what has put pressure on the LCDX."

The week ahead

Despite grim expectations that were professed toward the end of the July 23 to July 27 week, the primary market heads into the July-August crossover week with a substantial calendar of deals.

GE Plastics, which has been on the road in Europe with its $2.765 billion equivalent two-part offering of eight-year notes, is scheduled to begin its U.S. roadshow on Wednesday.

The Pittsfield, Mass.-based supplier of plastic resins plans to place $1.95 billion and €590 million of the notes.

Citigroup, ABN Amro, GE Capital and HSBC are joint bookrunners for the deal, proceeds from which will be used to help fund the acquisition General Electric's plastics business by Saudi Basic Industries Corp. (Sabic).

Meanwhile, late in the week just completed, Ceva Group, plc restructured its $1.4 billion notes, breaking out $400 million equivalent of dollar-denominated and euro-denominated seven-year secured second-lien notes in fixed-rate and floating-rate tranches, meanwhile downsizing its eight-year senior unsecured notes (B3/CCC+) tranche to $1 billion equivalent from $1.4 billion equivalent.

Credit Suisse, Morgan Stanley, Bear Stearns, UBS Investment Bank, JP Morgan and Goldman Sachs & Co. are joint bookrunners for the deal.

Elsewhere Aeroflex Inc. is in the market with $370 million offering of 10-year senior notes, an LBO deal via Goldman Sachs.

Alliant Holdings I, Inc. has been roadshowing a $290 million offering of 7.5-year senior notes (Caa1/CCC) via JP Morgan and UBS Investment Bank.

Also in the market, with a $290 million offering, is East Valley Tourist Development Authority.

Last week the company set price talk for its restructured $290 million offering of senior secured notes (B+) at the 9½% area, and withdrew a planned tranche of seven-year floating-rate notes.

Merrill Lynch is leading that project financing deal - one of two presently in the market from a gaming concern.

The other is the Downstream Development Authority of the Quapaw tribe of Oklahoma's $235 million offering of eight-year senior notes (B-), via Banc of America Securities.

As last week got underway there had been three such deals in the market.

However on Wednesday Silverton Casino Hotel & Resort postponed its $215 million offering of eight-year second mortgage notes (Caa1/B-) due to market conditions. Banc of America Securities was the bookrunner.

Also on tap for the July-August crossover week is Myers Industries Inc.'s $265 million offering of 10-year senior subordinated notes (B3/CCC+), via Goldman Sachs.

Junk continues to take lumps

In the secondary market, a trader declared that the market "continues to bleed - it's bleeding to death."

He saw the widely followed CDX index of junk market performance down 1 3/8 on the day to 90 3/8, 90 5/8.

Among the big losers he saw were the carmakers, whose big, liquid issues suffered selling, on heavy volume.

GM's benchmark 8 3/8% notes due 2033, for instance, "at best" were at 77.25 bid, 78.25 offered, down 1½ points on the day, he said - this after having suffered "an absolute drumming" on Thursday, when they skidded down about 5 points on the session to finish at 78.75 bid, 79.25 offered.

The latest price decline "has got to put them over 11%" on a yield basis, he said - actually, it was 11.05%.

He saw a lot of action - more than in the bonds themselves - on credit default swap contracts on GM, the price of which has widened out to almost ridiculous levels over the past several sessions.

The cost of a five-year CDS contract for the automaker zoomed to 800-815 bps, while "just a couple of weeks ago, it was 400 [bps]."

Interestingly, he said that Ford's flagship 7.45% notes due 2031, in falling to 73.5 bid, 74 offered, were yielding about 10.50%, "55 [basis points] inside of GM. Now that's quite a switch."

Ford's bonds had fallen despite Thursday's good news that the Number-Two domestic carmaker had actually swung to a profit in the second quarter - its first positive return in two years. Far from inspiring buyers to take a chance on Ford's turnaround story, the earnings improvement "just gave people a chance to sell."

He said that "anybody who says this isn't signaling something, doesn't really believe that the market is really forward-looking, which I am a very strong believer in. The market always seems to know something."

Another trader said that the market "opened very sloppy and weak," but said that it had "regained its composure" after the release of positive U.S. economics numbers, which showed the economy having grown an unexpectedly strong 3.6% in the quarter ended June 30.

Even so, he still saw most issues down a point or two, even including such names as Abitibi-Consolidated Inc., whose 8 3/8% notes due 2015 dropped 1½ points to 81.5 bid, 82.5 offered, while Bowater Inc.'s 7.95% notes due 2011 lost a similar 1½ points to 86.5 bid, 87.5 offered - this despite the good news for the two paper and lumber companies that their shareholders on Thursday had overwhelmingly approved the planned merger of the companies.

HCA on the sick list

Perhaps the biggest losers of the day, a market source said, were the bonds of Nashville-based hospital operator HCA Inc.

The source saw the company's 6.95% notes due 2012 down nearly 9 points on the day at just over 83.5, while its 6 3/8% notes due 2015 nosedived 8 points to 74 bid.

However, no one was able to offer an explanation for the slide.

Young bonds drop

Another mystery was the 4½ point fall in Young Broadcasting's 10% notes due 2011, which closed at 91 bid.

Nobody saw any negative news out on the New York -based TV station group operator.

Six Flags dives on wider loss

But the reason was pretty obvious why holders of Six Flags bonds were riding a roller coaster almost as wild as the mighty Kingda Ka at Great Adventure. Prices bounced around crazily at mostly lower levels after the New York-based theme park operator reported a wider second-quarter loss.

A market source saw the company's 8 7/8% notes due 2010 gyrating around between 83 and 90 before settling in around 88.5, down about 3 points. Its other issues were even more volatile, with its 9¾% notes due 2013 plunging as low as 74 bid, down more than 10 points on the session, before steadying out at 84, still down 1½ points, while its 9 5/8% notes due 2014 yo-yoed in a 9 point range between 83 and 74 before ending at around 79, down 5½ points. Trading volume was described as active for a summertime Friday session, with many big bloc trades of $1 million or over.

A trader called the action in the company's bonds "very ugly," ultimately seeing them finish at 77 bid, 79 offered, which he said was down more than 7 points from the levels they held late Thursday before the earnings announcement.

Another market source called the 8 7/8% bonds nearly 4 point losers on the day at 88.5.

Friday's bond slide comes on top of a late loss of around 2 points at the end of trading on Thursday, when the quarterly numbers were first released and, a trader said, with some understatement, "they were not overly impressive."

Six Flags' New York Stock Exchange-traded shares were meantime seen having plunged 79 cents (16.84%) to $3.90, on volume of 11 million, about five times the usual turnover.

The bonds and shares slid after the company reported that it lost $50.9 million (54 cents per share) in the second quarter ended June 30, wider than the $45.1 million (48 cents per share) that it had lost a year earlier.

The red ink widened in the most recent period even though attendance rose by 3% to 8.9 million from 8.6 million a year earlier, and revenue increased to $344.8 million, up 6% from $325 million in the year-ago quarter.

The company said that these gains were more than offset by higher marketing and maintenance costs for its 20 U.S. properties and its parks in Mexico and Canada.

On the debt front, the company said that the current-year quarter included $10.4 million in net losses from debt extinguishment, reflecting the write-off of capitalized debt issuance costs from its recently refinanced senior secured credit facility and the repurchase of $85 million of senior unsecured debt. This was partially offset by gains from repurchasing senior unsecured debt at a discount.

Six Flags further said that it had no balance outstanding on its $275 million revolving credit facility, excluding $34.8 million in letters of credit, and had $81.9 million in unrestricted cash.

Friendly up on bond tender

Friendly Ice Cream Corp.'s 8 3/8% notes due 2008 were seen continuing to trade at the higher levels they reached on Thursday, after the Wilbraham, Mass.-based ice cream manufacturer and restaurant chain operator announced that it was tendering for all $175 million of the bonds as part of its recently announced $337 million buyout by Sun Capital Partners.

A market source saw those bonds shoot up to 106.5, about a 5 point gain on the day.

However, another source saw a more restrained rise, with the bonds getting as good as 104 bid after having opened in the high 99s, but then falling back from the peak to finish around 101, and then continuing that retrenchment Friday, with a 100.25 finish.

Friendly is also soliciting noteholder consents to desired indenture changes. It did not announce a tender price, but said total consideration would be set using a fixed-spread pricing formula and including a consent payment. The tender offer will expire on Aug. 22.

Pimco's Gross says junk now appropriately valued

After several days of scary blood-letting, junk bonds and stocks, said the man at the helm of the world's biggest bond fund, are now valued more or less appropriately.

Bill Gross, chief investment officer for Newport Beach, Calif.-based Pacific Investment Management Co., made his comments Friday morning in an interview on CNBC. His Pimco Total Return Fund manages around $100 billion of assets, part of Pimco's overall total of about $700 billion.

Gross declared that corporate earnings seem to be holding up okay within a reasonably performing U.S. economy - giving the back of his hand to the notion that the recent unsettled market conditions were signaling a sharp downturn in the economy and slide into recession.

His latest comments will no doubt be more reassuring to high yield players than what he said earlier in the week, amid the growing market turmoil. At that time, Gross warned that defaults on subprime mortgages were spreading into other sectors of the U.S. credit markets, producing a "sudden liquidity crisis" in junk, which he likened to "a dramatic earthquake of about 8.0 magnitude."

Gross said that the party was over for a leveraged buyout boom mostly fueled by cheap financing. He colorfully opined that up to that point, money managers desperate to put capital to work had unquestioningly snapped up bonds and loans coming from private-equity sponsored LBOs "as if they were prisoners in an isolation ward looking forward to their daily gruel passed unemotionally three times a day through the cellblock window" by their investment-banker "jailers."

With the subprime crisis and the resulting fallout throughout the debt markets seeming to have jolted money managers and other investors back to reality, high yield new issuance has essentially been "frozen," with potential investors now wary of the deals they are being offered, backing things up "so absolutely nothing is moving."

Gross added that "the tide appears to be going out for levered equity financiers" who had been leading the easy-money LBO parade, such as Blackstone Group LP and Kohlberg Kravis Roberts & Co., "and in for the passive owl money managers of the debt market."

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