Trading light, featureless as week winds down; funds show $341 million inflow

By Paul Deckelman and Paul A. Harris

New York, Dec. 20 - High yield market activity was very light and essentially featureless Friday, market participants said, as the last full trading week of 2002 came to a close. The only real news percolating through the market was that high yield mutual fund flows - considered a key barometer of overall junk market liquidity trends - were back in the black for the ninth week in the last 10.

Some $341.1 million more came into the funds in the week ended Wednesday (Dec. 18), according to statistics compiled by AMG Data Services of Arcata, Calif. That contrasts with the $447.3 million outflow seen in the week ended Dec. 11. Before that, the funds had run off a skein of eight consecutive weeks of inflow, boosting market liquidity by several billion dollars in that time.

The latest inflow marked the 31st week out of 51 weeks in the year so far in which the funds showed a net inflow (excluding distributions and counting only funds that report on a weekly basis). The cumulative inflow total in that time grew to $7.770 billion from $7.429 billion in the previous week.

The inflow was good news - perhaps putting to rest market speculation kindled last week that the end of the long run of inflows that had consumed most of October, all of November and early December might mean an eventual drying up of liquidity. Although the mutual funds have slipped in importance as buyers of junk bonds - high-yield funds had $94.3 billion in assets at the end of 2001, down from a peak of $117.4 billion at the end of 1998 - they are nonetheless widely viewed as a reliable proxy for overall junk market liquidity trends. It certainly is no coincidence that the recent fund flows surge has mirrored surges in most of the major indexes of high yield market performance compiled by the major brokerage houses.

And the renewed inflows were one reason primary market sources expressed a guarded optimism that January 2003 would pick up the brisk pace that the high-yield market set in December.

One sell-side source termed the single $447.3 million outflow last week as a hiccup.

"It may have been that people were nervous that the market was running so well," this sell-side official commented, "people who may have been anticipating a decline that didn't happen.

"I think people have pretty much gotten comfortable with the credit cycle where we are," this source added. "We're not seeing it degrade.

"When you hit the bottom of the credit cycle those problems that you thought were out there have kind of been realized.

"You don't see the economy slowing down much. It's kind of going sideways. And you have to hope that it will go north."

Another sell-side source said that the inflow could be an indicator that January in the new issuance market will see a considerable volume of business.

"There are a lot of things sitting out there, like the William Lyon Homes and Legrand. The TRW automotive deal should be a big one.

"People are expecting it to remain busy once the holiday is over. Conditions are still very robust.

As it happens the deal from TRW Automotive - reported to be a 60% bank/40% bonds play to help fund the $4.725 billion acquisition of the company by the Blackstone Group - was one of two deals that an informed source told Prospect News are almost certain to be transacted during the first quarter of 2002.

The bond deal, which will involve JP Morgan and Lehman Brothers, figures to include senior and subordinated tranches, the source added, stipulating that the combined size will be greater than $1 billion.

The other deal that this source has squarely situated on the forward calendar as business highly likely to be transacted during the first quarter of 2002 is Legrand, SA's €600 million equivalent of 10-year notes in euro and dollar tranches via Credit Suisse First Boston and Lehman Brothers.

However another sell-side source added a third to this list, Friday. Dole Food Co., this informed source said, will bring up to $450 million of notes to help fund the leveraged buyout by DHM Acquisition Co. vehicle of company chairman David H. Murdock. Deutsche Bank Securities Inc. will do the bookrunning.

"That's a great deal," a sell-sider commented on the Dole offering. "He's just done a good job of diversifying the company from a consumer standpoint, from just being a fresh produce company to being a packaged consumer goods company. Instead of just selling heads of lettuce that say 'Dole,' they have pre-cut washed and packed lettuce and carrots and cucumbers, all in the bag. He gets outrageous premiums for that stuff. And Americans are into convenience. They want everything ready to use. Dole has been an innovator in that space. They've taken a commodity and made it value-added.

"I think investors are going to like that deal."

But from the secondary desks, good news or no, the fund flows number was largely ignored by a market that seemed to have its head elsewhere Friday. With the next two weeks truncated by the approaching Christmas and New Year's holidays (the junk market and other U.S. debt trading will see an early close - 2 p.m. ET - on each of the next two Tuesdays, Dec. 24 and Dec. 31, and full financial mart closes on the next two Wednesdays, Dec. 25 and Jan. 1, 2003) and little activity foreseen for either the primary or the secondary markets the other three days of each of those weeks, many market participants, especially those of senior, decision-making rank, will be off altogether - so at a number of their companies Friday saw the annual holiday office parties. That, plus the piggy weather most of the day in New York, made for an early exit for many people, with activity having wound down by early afternoon, hours before the official close.

There was, for instance, little reaction to the mid-afternoon announcement by Xerox Corp. that it had discovered a small error in the calculation of non-cash interest expense, adding up to $6 million over some seven quarters. That will forced the Stamford, Conn.-based copier and office machines giant to restate its 2001 financial statements and to revise this year's quarterly information to reflect the changes.

The amount of money involved is not really significant, although observers said of far more importance than the relatively small sum of cash involved is market perception, in these days of corporate accounting scandals and blow-ups all over the horizon, that Xerox (which has been under SEC scrutiny before) might have additional accounting problems that might emerge. Nonetheless, Xerox's debt was seen little changed from recent levels.

Elsewhere, Solectron Corp.'s 9 5/8% notes due 2009 were seen three points higher, at around the 98 bid level; the company, which released fiscal first-quarter results, including a wider loss, also said that it had repurchased $219 million in long-term debt and repaid about $85 million of short-term bank debt, while maintaining a cash position of almost $2 billion in the quarter, which ended Nov. 29.

Even so, Standard & Poor's cautioned that while sales for the Milpitas, Calif.-based provider of global manufacturing and supply-chain management services to high-tech electronics companies "were within expectations, but profitability, although somewhat improved, remains severely depressed, and cash flow generation was weak."

S&P said that the reported results would not affect its ratings (BB) or outlook (negative) on Solectron. "Credit measures are very weak for the rating with total debt to EBITDA for the 12 months ended Nov. 29, 2002 of more than 6x," S&P continued. "This is only partially offset by expected long-term debt reduction (as much as 20% by mid 2003) with free cash flow from operations, anticipated profitability improvement, and a solid cash balance."

Cablevision debt continued to firm in the wake of Thursday's news that Verizon Wireless will buy 50 radio-frequency spectrum licenses from Cablevision affiliate Northcoast Communications for $750 million in cash, with the Long Island, N.Y.-based cable operator expected to use its share of the proceeds, estimated at $635 million, to pay down bank debt.

Cablevision's 8 1/8% notes due 2009, which on Thursday had gained 2½ points , were seen up another point, at 96.5 bid.

Also in the communications sphere, Qwest Communications International Inc.'s bonds continued to firm on the heels of a court ruling earlier in the week that the Denver-based telecom operator could go through with its planned offer to swap new debt for up to $12.9 billion face amount of its existing bonds; that exchange had been unsuccessfully challenged by holders who said it was inadequate and coercive.

Quest's 7½% holding company notes due 2008 were being quoted up nearly three points, at 77.5 bid, while its 7¼% notes due 2011 were pegged at 64 bid/65 offered, up around three points since the court ruling.

And in what one trader termed "a blast from the past," satellite telecom operator Globalstar LP - whose once actively traded bonds had all but disappeared from regular trading for many months on the company's financial woes, re-emerged, its 11 3/8% notes due 2004 seen as high as 9 bid, up from recent levels around six cents on the dollar.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.