XM, Sirius bonds rise as U.S. OK seen for merger; Saks up on sales; funds see $197 million inflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 6 - Bonds of XM Satellite Radio Holdings Inc. and rival space broadcaster Sirius Satellite Radio Inc. were seen flying high on Thursday, each up several points in line with stock gains by both companies linked to positive speculation by analysts and in the financial press about the likelihood of getting federal approval for their pending merger.

Retailer Saks Inc.'s bonds were a point or two better after the luxury retailer reported much better than expected same-store numbers, the key retailing industry economic metric.

Bonds of theme park operator Six Flags Inc. were also seen higher, although there was no apparent news out on the company that might explain the rise.

Primary market activity remained virtually nil.

Funds see second straight inflow

And as trading was winding down for the session, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., reported that $196.8 million more came into those weekly-reporting funds than left them.

It was the second straight weekly inflow seen after 11 straight weeks of outflows totaling almost $4 billion. An $83.4 million inflow was seen in the previous week, ended Aug. 29.

Two consecutive weeks of positive numbers notwithstanding, the funds which report to AMG on a weekly basis remain mired in red ink, year-to-date, at negative $1.9 billion.

However the funds that report on a monthly basis remain boldly in the black.

Those funds, which saw inflows totaling $176.3 million during the most recent period, have now chalked up slightly more than $4.63 billion of positive flows for 2007 to Sept. 5.

Hence the aggregate flows, which tally both the weekly and monthly reporting funds, also remain in the black at $2.72 billion.

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 only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Satellite radio bonds in orbit

XM Satellite's bonds and Sirius' got a boost, along with their respective shares, after an analyst for RBC Capital Markets said that federal regulators would likely rule soon on whether to allow the two money-losing competitors to combine - and he thinks they will get the green light.

A market source quoted XM's 9¾% notes due 2014 as having pushed past par at one point during the day's dealings before dropping back slightly to the 99.5 level, still up nearly 4 points on the session, in fairly active trading of large blocks. The company's floating-rate notes due 2013 were meantime up about 1¼ points at 95.75, although trading in that issue was more restrained.

The source also saw Sirius' 9 5/8% notes due 2013 up about 2 points on the day at 96.5, although that's somewhat below their peak levels above 98.

At another desk, the XM 93/4s were seen up 3½ points at par.

Yet another trader quoted both companies' issues up 2 points on the day - XM's 93/4s at 98.5 and Sirius' at 96 bid, 98 offered.

Satellite shares up on analyst forecast

The rise in the bonds came in line with the gains in each company's Nasdaq-traded shares. Sirius' stock at one point gained 42 cents, or 8.9%, before ending up 7 cents, or 2.23%, at $3.21, on volume of 107 million shares, more than triple the usual turnover. XM's shares initially surged $1.09, or 8.22%, before coming off that peak level to close up 45 cents, or 3.40%, at $13.70. Volume of 11.7 million was more than double the norm.

The shares, and the bonds, firmed after RBC Capital Markets analyst David Bank said in a research note that the Justice Department is more than 50% likely to approve the companies' merger within 30 to 60 days.

When Washington-based XM and its upstart New York-based rival Sirius announced plans to merge back in February, there was some question over whether antitrust regulators at Justice and agencies like the Federal Trade Commission and the Federal Communications Commission would allow the two companies - presently the only commercial satellite radio broadcasters in the country - to combine. Consumer activists and some politicians voiced worry that such a combination would lead to a lessening of competition and higher subscriber costs.

XM, Sirius counter critics

In the interim months, the companies have been making the case that that the audio entertainment market - currently dominated by conventional terrestrial radio and with internet broadcasting a growing segment - is broad enough that combining the two satellite outlets would not significantly hamper competition or dilute listener choices. The companies also noted the proliferation of technologies like MP3 that allow listeners many other choices.

They also sought to blunt arguments that letting them combine would then allow the merged entity to put the squeeze on its subscribers for higher rates, once they have nowhere else to go - the companies announced in July that they would let customers choose post-merger programming packages at prices less than the $12.95 a month they presently pay. Banks said that is likely to win the approval of the FCC's chairman, Kevin Martin.

The analyst further said that the latter body is unlikely to vote in conflict with the Justice Department, especially since Sirius and XM have also unveiled family-friendly tiering plans to keep raunchier content - such as Sirius' headline attraction, risqué radio bad boy Howard Stern's program - away from children.

In a regulatory filing Wednesday, the two companies said they have provided the DOJ with all additional information which the department had requested during a second inquiry phase.

Saks sales soar, bonds up

Elsewhere, a trader quoted Saks' 7% notes due 2013 up 2 points to 92 bid, 93 offered .

That followed the retailer's announcement that its August same-store sales shot up by 18.2%, double most analysts' expectations. The company attributed the gains to strong sales at nearly all merchandise categories at its flagship Saks Fifth Avenue stores.

Saks said the strongest categories for the month included women's shoes, handbags, men's apparel and fine jewelry.

The New York-based company - which also operates the Off 5th and Club Libby Lu stores, anticipates same-store sales percentage growth in the high-single digits for the fall season.

Six Flags edges higher - but why?

Traders were at a loss to explain why Six Flags' bonds edged higher, with no real news out to prompt the gain.

"Fitch affirmed their rating," a trader said. "Big deal."

The trader slated the 8 7/8% notes due 2010 at 90 bid, 91.5 offered. Another trader quoted that issue at 90 bid, 90.5 offered, as well as the 9¾% notes due 2013 at 86.75 and the 9 5/8% notes due 2014 at 84.5.

A market source saw more pronounced movement in the 8 7/8s , pegging them up more than 3 points on the day to 91, in busy trading. Another source called those bonds 2 point gainers at 91.

The ratings agency said Thursday it would keep the issuer default rating of B- on the struggling New York-based amusement park operator. The rating on the senior unsecured notes was also affirmed at CCC+/RR5. The outlook is negative.

Fitch said the ratings reflected poor operating performance as well as significant leverage. The agency also said it expects the company to use some of its cash to pay down some of its debt in the near future.

"Given the company's leverage and operating performance, there is significant risk that under certain market conditions the company's access to external funding could be limited," Fitch said.

Neff back on the scene, but lower

A trader said one issue which "popped up from out of nowhere, finally," was Neff Corp.'s 10% notes due 2015 - although he said that at 78 bid, 80 offered, "they're down 15 points" from where they had been when he last saw the Miami-based construction equipment rental company's bonds.

"It's the first time I've seen a bid for them in weeks," he noted, saying they had been offered at cascading prices down from the prior 93 bid, 95 offered level, before a bid finally emerged.

The trader said that "most of the equipment sector is down a few points," with the exception of United Rentals Inc., which agreed in July to sell itself to affiliates of private equity firm Cerberus Capital Management for $4 billion and whose bonds trade above par. That having been said, however, he added that Neff was down more than other equipment companies such as Rental Services Corp., whose bonds still trade in the mid-90s.

"They've had bad numbers," he said, and they're based in Florida, which has been hit the hardest by the construction slowdown."

He added that the analysts at his shop "just don't like them."

At another desk, the bonds were seen having declined to about 79 from 83 the previous day and from 89.5 some time last week. Yet another market source called Neff a 4 point loser at 80.5.

Indexes better

Overall, a trader said, the market was quiet, but with a better tone. He saw the widely followed CDX junk bond index up ¼ point at 95 1/8-95 3/8. Among other indexes, The Banc of America Securities High Yield Broad Market Index was up 0.08%, for a year-to-date return of 1.13%. The KDP High Yield Daily Index rose 0.15 to 78.65, as its average yield fell 4 bps to 8.24%.

Finding the price

Just past the mid-day mark, a senior high yield syndicate official said that the broad market was extremely quiet.

Once again on Thursday the primary market produced no news.

Sources from both the buy-side and the sell-side have lately been telling Prospect News that both prospective junk bond issuers and high yield investors are attempting to determine what yields will look like in the wake of this summer's dramatic sell-off.

One sell-sider recently asserted that "Eleven is the new nine," meaning that bonds which might have priced with a 9% coupon before the sell-off might come at 11% now.

On Thursday a senior high yield syndicate official told Prospect News that both the buy-side and the sell-side are keen to resume activity in the new issue market.

"There is pent up opportunity on both sides," the source asserted, but added that the buy-side and the sell-side are not necessarily all that close to agreeing upon how to reprice the new issue market.

"There is interest from the buy-side in new transactions structured for the new reality," the syndicate official said.

This source also mentioned having "a couple of mandates." However the prospective issuers are not willing to price bonds at the levels the buy-side is willing to buy.

First Data not necessarily first

With no high yield primary market activity again on Thursday, this official was watching the First Data Corp. $14 billion term loan B.

The deal, which is part of the financing for the LBO of First Data by Kohlberg Kravis Roberts & Co., has become something of a talisman among primary market watchers who believe that the success of failure to syndicate the loans will provide a measure of the buy-side's willingness to become involved in the massive calendar of LBO deals that stretches through the remainder of 2007 and well into 2008.

On Thursday, sources told Prospect News that KKR nixed an appeal that covenant protection be added to the term loan, but conceded to upping the interest rate.

However the senior sell-sider who spoke to Prospect News on Thursday said that regardless of how things go for the First Data term loan, things could get underway in the high yield primary market.

In fact, this source professed some mystification at the fact that no issuer had yet tested the post-Labor Day primary market.

"Someone could have tried to get a deal done on Tuesday or Wednesday, before there was any feeling for the sentiment of the market, one way or another," the official said.

This sell-sider said that one possible scenario to rekindle primary market activity would be to bring an add on.

"A $100 million to $150 million add on, in something that is otherwise liquid, might be better than doing $250 million of a new issue just to get the extra maturity," the official pointed out, adding that underwriters could not only approach the existing bondholders but also make a pitch to shoppers who walked away from the original deal because they didn't like the price.

"It's presumably trading a little wider than where it was, so now you're showing them a little more yield," the source pointed out.

To this source, the "add-on scenario" holds much more promise with respect to a test run of the new issue market.

"A full roadshow, right now, could be tricky," the official said.

"You don't even know if the accounts would sign up."

Stephanie N. Rotondo contributed to this report.

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