R.H. Donnelley up as stock soars; Six Flags rise continues; Ferrellgas seen firm; primary still asleep

By Paul Deckelman and Paul A. Harris

New York, Aug. 18 - R.H. Donnelley Corp.'s bonds were seen mostly higher Monday, albeit in relatively light trading in an otherwise sleepy market, as investors followed the lead of equity players who took the Cary, N.C.-based telephone directory publisher's shares solidly higher after a favorable mention in Barron's magazine over the weekend. Sector peer Idearc Inc.'s bonds were also seen better.

Six Flags Inc.'s bonds were seen higher, despite a lack of new news about the company; the paper apparently was borne up by the continued momentum generated last week when it reported favorable interim third-quarter revenue and attendance data.

A trader saw Ferrelgas, LP's bonds well bid for, citing better buyers.

Primaryside players reported that the "gone fishing" sign remains hung out on the new-deal market - a condition expected to prevail at least through the end of this month.

Market indicators mostly higher

Back among the established issues, a trader said Monday that the widely followed CDX index of junk bond performance was slightly lower at 92 9/16 bid, 92 11/16 offered. But the KDP High Yield Daily Index rose by 10 basis points, replicating Friday's performance, to end at 70.67, while its yield narrowed by 1 bp to 10.54%.

In the broader market, advancing issues again led decliners by a margin of about four to three. Activity, represented by dollar volume, fell by 7% from the already quiescent levels seen on Friday.

"It was very quiet, as if it were a summer Friday," a trader said.

"There was not a lot going on," another said. "It was pretty boring." He said that "lots of issues were unchanged. We saw some trades - but not much happening," price-wise.

"Even with stocks off," another said, "there was not much going on. We were unchanged to maybe up ¼ point."

Donnelly up on Barron's boost, Idearc tags along

R.H. Donnelley's bonds were seen generally higher, in tandem with a sharp boost in the company's shares that followed an article over the weekend in Barron's that said the telephone directory publisher's shares had been so beaten down - having lost an eye-opening 97% for their value in the past year, going from $68 a share a year ago down to around $2 a share currently, with almost all of the carnage having taken place in calendar 2008 - that those beleaguered securities are "a risky but attractive way to bet on the continued profitability of publishing yellow pages."

The article also noted that "some of R.H. Donnelley's debt trades for just 50 cents on the dollar, which works out to a yield of over 25%. That may make the bonds a safer play than the shares, which also hold promise."

A trader saw Donnelley's 8 7/8% notes due 2017 up a point at 46.5, but said the credit "wasn't really active" despite the sharp rise in its shares.

At another desk, a trader called Donnelley's 8 7/8% 2016 notes 1 point to 1½ point losers at 47 bid, 48 offered, versus 48.5 bid, 49 offered on Friday.

On the other hand, yet another trader saw Donnelley's 2016 notes "pretty active for a day like today" at 47.25 bid, up ¾ point from previous round-lot levels last week, while the 2017 notes were also at 47.25, a point better, again versus the most recent round-lot levels.

Also in round-lot trading, he saw the Donnelley 9% notes due 2013 up 1¾ from the end of last week, at 55.75, while its 9 7/8% notes due 2013 dipped to 75.25 bid, down 3/8 point, "the only issue [among the actively traded Donnelly bonds] that was down."

Donnelley's New York Stock Exchange-traded shares zoomed by as much as 28.1% in intraday action, but eventually came down from that peak, although they still finished up 31 cents, or 16.49%, at $2.19. Volume of 5.3 million shares was more than double the average daily turnover.

The Barron's article did caution would-be stock buyers that although Donnelley maintains impressive cash-flow generation despite a slowdown in advertising arising from the weak economy - it is expected to produce $475 million to $525 million in free cash flow this year - "the problem for equity investors is that none of that cash flow is heading directly to them. Instead, management is earmarking all its free cash for debt repayment." Net debt stands at some $9.7 billion, although none is due for repayment till 2010.

The article raised the possibility, being suggested by some in the market, that the company use a portion of its cash flow to buy back up to 25% of its stock in addition to paying down or buying back debt, which would restore investor confidence. Absent that, the article suggested, "an activist investor may also get involved."

With those possibilities at least floating around, even though management at this point is solidly committed to reducing debt and leverage with its free cash flow, the Barron's piece advised that assuming management's contention that the current slowdown in the company's ad revenues is merely a function of a weak economy rather than a fundamental weakness in its business model is correct - and company officials say its yellow pages remain popular and widely used out in heartland America - then "the stock could shoot up. And if it's not [the case], it probably will take another two years, at least, before its debt load sinks the company. That probability alone could be worth more than $2 a share."

As for sector peer Idearc, a trader saw the Dallas-based directory publisher's 8% notes due 2016 "maybe a little higher" at around 43 bid, 45 offered, versus 42 bid on Friday. Another saw Idearc's bonds up about a point at 43.5 bid.

The article said that Idearc might also benefit from combining a stock and debt buyback, although it also said that Idearc is seen as less able to generate free cash. Its NYSE-traded shares gained 7 cents, or 5.47%, to end at $1.35. Volume of 6.1 million shares was about 50% above normal levels.

Six Flags continue to fly

Elsewhere, Six Flags' 9 5/8% notes due 2014 were "really active," a trader said, but only up ¼ point at 56.25 bid. He did call those bonds "one of the most active issues of the day." The recently issued 12¼% notes due 2016 - the exchange notes from the company's partial debt-for-debt exchange for its older bonds - were meanwhile down ¼ point at 93.75 bid, 94.25 offered.

Another market source said that the Six Flags 9 5/8s were among the most busily traded bonds, although given the generally light volume of the session, that wasn't saying all that much. At that desk, the bonds were quoted up 1¼ points, also at 56.25.

The New York-based theme park operator's NYSE-traded shares meantime dropped by 8 cents, or 6.45%, to $1.16. Volume of 813,000 shares was less than half the norm.

There was no fresh news seen out on the company, whose bonds had risen solidly last week after it reported that revenue, attendance and customer spending figures halfway through the current third quarter show gains in all three important performance measures from a year ago, prompting its chief executive officer, Marc Shapiro, to declare that Six Flags is off to "a terrific start" in the current quarter.

The company said that as of about the halfway point of the quarter that began on July 1 and that will wrap up on Sept. 30, revenue had increased by $23.5 million, or 7.6%, versus the year before, with attendance up by 5.1% from a year ago, or 407,000 patrons, rising to 8.43 million guests. Guest spending was up about 1.6% to $38.56 on average, between admissions, food and other spending. Counting in the money Six Flags takes in from corporate sources such as sponsorship, licensing and other fees, average total revenue per visitor rose about 2.4% to $39.55.

The stronger third-quarter numbers, so far, come on top of better performance in the first half of the year, including the unexpected profit Six Flags reported for the second quarter. Company executives have declared that the company is on track to be free cash flow-positive this year - something it has never accomplished before.

Six Flags also said that during the month of July, it continued to score high marks in customer satisfaction in various key areas, such as ride safety, park cleanliness, employee service and speed of lines at attractions, according to a market research survey the company commissioned.

GM bonds seen steady to higher

Among the big automotive benchmark issues, a trader saw General Motors Corp.'s 8 3/8% bonds due 2033 at 52 bid, 54 offered, unchanged on the day, while its 49%-owned automotive finance unit GMAC LLC's 8% bonds due 2031 fell 1 point to 56 bid, 57 offered.

At another desk, a trader called the benchmark notes unchanged at 52.5 bid, 53.5 offered, while seeing domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 lower by ½ point at 54 bid, 55 offered.

Another trader saw the GM benchmarks up 1/8 point at 53.875 bid, but saw no trading in the Ford paper.

On the other hand, a market source at another desk saw GM's bonds enjoying a solid rise, quoting the 8 3/8s up as much as nearly 4 points to 56.25, in busy trading, and seeing the GM 8¼% bonds due 2023 nearly a point better at 51.75.

But another market source disagreed, pegging GM's 7 1/8% notes due 2013 down nearly a full point at 58 bid.

Also in the automotive realm, a trader said that from deep in the distressed-debt market came word that Metaldyne Corp.'s bonds get "a little bounce, post-conference call." He saw the Plymouth, Mich.-based metal stamping company's 10% notes due 2013 up 3 points at 26 bid, 27 offered and its 11% notes due 2012 some 2 points better at 14 bid, 15 offered.

Ferrellgas seen firmer

Outside of the autosphere, a trader said that from where he sat Ferrellgas' 8¾% notes due 2012 "traded today and seemed to bounce a little bit, because that whole sector has been off." He said that "bids have started to fill in" on that paper, although he added that "it doesn't trade a whole lot."

He quoted the bonds trading at 91.375 bid, 91.75 offered, up from 90.5 bid, 91 offered previously.

However, a second trader opined that while there had been prints that high during the session, "I don't know necessarily if they're really up at that level."

The first trader said "it looks like there are some better buyers coming out in that sector." He said that Ferrellgas, an Overland Park, Kan.-based retail propane marketer, was "a better-quality name, but given what commodities have done over the last couple of weeks," including natural gas, "the paper has been coming in. So that sector seems to be catching a bid to it" - although he quickly added "not that it's running up or anything like that."

The movement, he said, was best seen in the context of trends in the broader market. "Whether the stock market is up or down 200 or 300 [DJIA points], it really doesn't matter - the high yield market, with the better-quality names, finds bids, and accounts are adding."

He also said that there was "a little bit of selling into strength, especially in some of the illiquid names." He theorized that "some of the accounts are trying to lighten up on their exposure on some of the sectors that have outperformed over the last three or four months. Whether you believe that the market [for those sectors] is going to pop, or implode, or what have you - that's what's going on."

While some accounts were in fact taking money off the table and realizing some profits on the better-quality issues, "there are more than enough players down here [looking] to add better-quality names."

Returning to Ferrellgas in particular, he said that "this one is a four-year piece of paper, it's a solid single-B, and you can make the case that the propane gas sector is a better sector to be in than oil, nowadays."

Looking beyond Labor Day

With eight full sessions and one abbreviated session remaining before the bond market breaks for the three-day Labor Day weekend, the market's traditional summer-fall threshold, officials on four different high-yield syndicate desks all professed expectations for new issue volume to ramp up in September.

Those expectations, however, were given with varying degrees of confidence and enthusiasm.

Two of the four sources had visibility on deals.

One asserted that high quality corporate issuers will emerge with deals when the market resumes on Sept. 2.

Eyes on the window

An investment banker said that in September the job for the high yield syndicate will be to have potential corporate issuers prepare documentation should a window of opportunity open in late September or early October.

"Over the past we've seen that the window opens and shuts very quickly, and no one wants to wait a month for documents to be prepared," the banker said.

"If that window fails to open, and these financings carry over into 2009, all you have to do is refresh the numbers."

Cash is building

As to what forces might serve to pry open that window of opportunity, the banker tends to rule out a repeat of the confluence of market and sector circumstances that paved the way for a burst of corporate issuance from the energy sector during the spring.

However two other sell-side sources reported encountering ample evidence that the cash balances at high-yield accounts are building.

Both pointed to four consecutive weeks of positive flows into the high-yield mutual funds as reported by AMG Data Services.

"That means that at least the real money accounts are not seeing net redemptions," one syndicate official pointed out.

"And in addition to that they're clipping coupons.

"If you add to that the fact that there hasn't been much supply, it should set up a bounce once those balances build up to the point where they have to put that cash to work.

"In the secondary we'll start to see spreads rally, which will trigger some primary issuance."

The traditional fanfare

The high-yield syndicate sources who spoke to Prospect News on Monday were in agreement that the primary market is unlikely to see post-Labor Day business intensify as dramatically as it has done in years past.

"You're certainly not hearing the traditional buzz about a tremendous post-Labor Day calendar," a banker conceded.

"We'll have something of an increase, which isn't surprising given that presently there is nothing."

This source looks for more developments from the pool of hung LBO bridge loans, some of which have been rolled into securities as those loans cross their one-year thresholds.

Among the recent bridge rolls are Clear Channel Communications, US Foodservice, Aeroflex Inc. and ServiceMaster Co.

The source also looks for a modest amount of traditional corporate issuance.

At Monday's close the 2008 primary market had seen $61.25 billion of dollar-denominated Rule 144A or registered junk-rated issuance year-to-date, according to Prospect News data.

This banker forecast that all-in total issuance for 2008 will come in at $75 billion to $80 billion.

"A lot depends on whether or not a portion of Bell Canada gets done," the banker added, referring to BCE Inc.'s overall C$11.3 billion bonds backing the record-setting LBO by Teachers Private Capital, Providence Equity Partners and Madison Dearborn Partners.

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