International Wire, Sunstate price; market awaits Vulcan, W&T; AES up; funds lose $236.7 million

By Paul Deckelman and Paul A. Harris

New York, June 2 - After a promising start to June on Wednesday, when AES Corp. priced an opportunistically timed $1 billion bond issue, the high-yield primary market slacked off on Thursday as syndicate sources heard pricings of just two small issues. These came in the form of equipment rental company Sunstate Equipment Co. LLC's slightly restructured $170 million offering of five-year notes and electrical wire manufacturer International Wire Group Holdings, Inc.'s $100 million tranche of payment-in-kind toggle notes.

Power generator AES's megadeal, meanwhile, was seen having firmed solidly from the par level at which those bonds had priced late in Wednesday's session.

Movie theater operator Cinemark USA Inc.'s 10-year subordinated issue continued to hold most of the gains it notched after the deal priced on Tuesday.

Price talk emerged on pending issues from construction aggregates manufacturer Vulcan Materials Co. and energy exploration and production operator W&T Offshore, Inc., with pricing seen possible for each after their respective order books close at midday on Friday

In the secondary arena, Catalyst Paper Corp.'s bonds firmed a little more, riding the momentum from Wednesday's advance in the wake of a successful amendment and extension of its credit facility.

French shipper CMA CGM SA's bonds were off as the company fended off accusations that it had acted improperly in carrying Iranian cargoes, which later turned out to have illegal weapons hidden in them.

There was a little downside activity in Sino-Forest Corp., even as the Canadian-Chinese timber company's shares were chopped down on heavy volume after an unmercifully scathing research report came out about it.

Considered a good barometer of overall junk market liquidity trends, high-yield mutual funds saw their first downturn in five weeks, losing $236.7 million, and slipped back from their peak level for the year to date.

Funds see outflow

As the session was winding down, market participants familiar with the weekly AMG high-yield mutual fund flow statistics generated by Lipper/FMI said that in the week ended Wednesday, $236.7 million more left those weekly-reporting funds than came into them.

It was the first such downturn in the funds after four straight weekly inflows totally $1.14 billion, according to a Prospect News analysis of the figures, including the modest $94 million inflow seen the week ended May 25.

That dropped the year-to-date cumulative inflow total to an estimated $7.58 billion from the previous week's $7.82 billion estimate, the peak level for 2011 so far, according to the Prospect News analysis. With 22 weeks gone in the year, there have now been 17 inflows recorded against just five outflows.

Fund-flow patterns began the new year on a roll with cash infusions totaling more than $8 billion seen over a 14-week stretch from early December through mid-March, including the more than $6 billion taken in during the first 10 weeks of this year. Since then, however, fund-flow patterns have been choppy: two weeks of declines in March totaling $1.146 billion followed by three weeks of inflows totaling $1.78 billion and then two more weeks of outflows in late April adding up to $190 million. That was then followed by the inflows seen over the previous four weeks, and the latest week's cash loss.

EPFR sees $153 million inflow

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, whose methodology differs from AMG, reported a $153.7 million inflow in the latest week, the 10th straight gain by that agency's calculations - but the smallest inflow seen during that stretch.

That followed a cash addition of $371 million in the week ended May 25.

The latest week's cash infusion lifted the year-to-date net inflow number to $16.2 billion, EPFR said.

AMG/Lipper's numbers and EPFR's figures generally point in the same direction, although their actual figures differ since the two services calculate their respective fund-flow totals differently. EPFR, for instance, includes results from some non-U.S. domiciled funds as well as the domestic funds.

EPFR's calculations show 20 weeks of inflows so far this year, against just two outflows, in the weeks ended March 16 and March 23.

Cumulative fund-flow estimates, whether from Lipper/FMI or EPFR, may be revised upward or downward or be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Analysts say the continued flow of fresh cash into junk - and the mutual funds represent but a small, though observable and quantifiable percentage of the total amount of money coming in - fueled the record new deal borrowing binges seen in both 2009 and then in 2010 as well as the robust secondary market seen both years. Those trends have been pretty much continuing in 2011 as well.

Sunstate Equipment offer

Meanwhile, against a backdrop of market sentiment that remained negative on Thursday, the primary market saw two deals price for a combined total of $270 million.

Sunstate Equipment Co., LLC and Sunstate Equipment Co., Inc. priced a $170 million issue of restructured five-year second-priority senior secured notes (Caa2/CCC+) at par to yield 12%.

The yield printed 75 basis points beyond the initial 11% to 11¼% price talk, which was set on May 26.

The tenor of the notes was decreased to five years from six years.

The notes pay a 12% coupon, which features PIK step-ups. The coupon steps 100 basis points if leverage is greater than or equal to 4.625 times on or after Dec. 31, 2011 and 150 bps if leverage is greater than or equal to 3.75-times on or after Dec. 31, 2012.

Bank of America Merrill Lynch ran the books for the debt refinancing deal.

International Wire PIK notes

International Wire priced a $100 million issue of senior PIK toggle notes due April 15, 2015 (Caa1/CCC+) at par to yield 11½%.

The notes pay a cash coupon of 11½% and a PIK coupon of 12¼%.

Wells Fargo Securities, LLC ran the books for the dividend funding deal.

The crossover market

Thursday saw a pair of split-rated deals completed.

Coventry Health Care, Inc. priced a $600 million issue of 5.45% 10-year senior notes (Ba1/BBB-/BBB-) at Treasuries plus 245 basis points, at the low end of guidance in the 250 bps area.

Bookrunners were Bank of America Merrill Lynch, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC.

And Southern Natural Gas Co. priced a $300 million issue of 4.4% 10-year senior notes (Baa3/BB/BBB-) at Treasuries plus 140 basis points via BNP Paribas Securities Corp., J.P. Morgan Securities LLC, RBS Securities Inc. and Scotia Capital (USA) Inc.

Neither deal garnered much interest from the straight high-yield accounts, market sources said.

Talking the deals

Setting the stage for Friday, Vulcan Materials set price talk for its $1 billion two-part offering of senior notes (Ba1/BB).

A tranche of 5.5-year notes is talked to yield 6¼% to 6½%, and a tranche of 10-year notes is talked to yield 7¼% to 7½%.

Bank of America Merrill Lynch, Goldman, Sachs & Co. and SunTrust Robinson Humphrey Inc. are the joint bookrunners.

And, W&T Offshore talked its $600 million offering of eight-year senior notes with an 8¼% to 8½%.

Morgan Stanley & Co. Inc. has the books for the Rule 144A with registration rights offering.

AES bonds move up

International Wire Group Holdings' $100 million issue of four-year PIK paper and Sunstate Equipment Co.'s $170 million of five-year secured bonds both priced late in the session and were thus not seen around in the aftermarket.

Traders did see some activity, meantime, in AES Corp.'s $1 billion issue of 7 3/8% notes due 2021, which priced late in the day on Wednesday at par.

Despite the relative lateness of the hour at which the Arlington, Va.-based global power producer's drive-by mega-deal had priced, a trader said that the bonds traded "a little bit" at the very tail end of the proceedings on Wednesday, although he did not have a trading level for them.

On Thursday, he saw the bonds higher, quoting them as high as 101 3/8 bid, 101 5/8 offered.

A trader at another desk saw the bonds get as good as 101½ bid, before coming off that peak level slightly and settling around 101 1/8 bid, 101 3/8 offered.

Yet another trader saw them going home at 101¼ bid, 101½ offered.

AES's existing bonds, which had moved lower on Wednesday on the news that the company was issuing another $1 billion of debt, were seen mixed on Thursday.

A market source saw its 8% notes due 2020 gain five-eighths of a point to finish at 107 3/8 bid.

Its 8% notes due 2017 gained about a half-point to end at 1071/2. Volume was a busy $7 million.

But at another shop, the company's 7¾% notes due 2014 were seen a half-point lower, at just under 109 bid. About $8 million of the bonds traded, making it one of the most active issues on the day.

Cinemark softens slightly

Also among recently priced deals, a trader said that Cinemark USA's new 7 3/8% senior subordinated notes due 2021 opened at 101 bid and were trading during the day at 101 bid, 101¾ offered, which he called "a little softer" than the levels seen on Wednesday, when he said the bonds got as good as 101½ bid, 102 1/8 offered.

A second trader saw the notes at 100¾ bid, 101¼ offered.

The Plano, Tex.-based movie-theater company 's $200 million offer had priced on Tuesday at par and then had firmed in initial aftermarket dealings to 101½ bid, 102 offered, softening a little bit from that during Wednesday's session and then a little more on Thursday.

Chrysler stuck in a rut

A trader said that Chrysler Group LLC/CG Co-Issuer Inc.'s recently issued bonds were trading around 99 bid, 99 3/8 offered.

He noted that the paper was ""hugging par a few days ago, so it was in slightly."

The Auburn Hills, Mich.-based No. 3 domestic carmaker priced a $3.2 billion offering of eight-year and 10-year bonds on May 19. That deal - originally expected to be $2.5 billion - was first upsized to $3.5 billion and then was cut back down to $3.2 billion.

The company priced $1.5 billion of 8% senior secured notes due 2019 and $1.7 billion of 8¼% senior secured notes due 2021, both at par. The new bonds were heard to have dipped below the par level in initial aftermarket dealings and to have pretty much stayed gyrated around at levels no better than par - and usually below it - since then.

Market signs turn lower

Away from the new deal arena, statistical measures of market performance, which had been mixed in Wednesday's dealings, turned more negative on Thursday.

A trader saw the CDX North American Series 16 HY Index down by 3/16 of a point on Thursday to end at 101 3/8 bid, 101½ offered, after having lost 5/8 of a point on Wednesday.

The KDP High Yield Daily Index dropped by 7 basis points on Thursday, to 94.87, after having eased by 1 bp on Wednesday. Its yield rose by 3 bps to 6.50%, after having come in by 2 bps on Wednesday.

And the Merrill Lynch High Yield Master II Index fell back by 0.154% on Thursday after having posted two consecutive advances, including Wednesday's 0.062% rise.

That dropped the index's cumulative return back below the psychologically potent 6% mark to 5.899% on Thursday, down from Wednesday's 6.063%. This was down as well from its year-to-date peak level of 6.071%, reached on May 20.

"It was kinda quiet today," a trader said, noting that Junkbondland was probably taking its cue from the equity markets, which "can't decide if they want to go up or down." Stocks meandered around at generally lower levels on Thursday, with the bellwether Dow Jones Industrial Average closing down 41.59%, or 0.34%, at 12,248.55, but some of the broader equity indexes showed small gains on the day.

Another trader said that Thursday was "one of the most boring days."

Noting that the calendar page has turned to a new month, in theory freeing investors who had held off on doing anything after getting their books in shape for the end of May, he said that "usually leading up to the last couple of days of the month and in the first couple of days of the month, you have a lot of either selling or buying, based on whether there is money coming in [at the end of the month] or going out the door.

"But this week, you just didn't see it either way - and folks just tend to be in a nasty mood. Everyone just seems to be in a 'leave me alone' type of mood, whether it's the buyside you're talking to, the sellside or any side.

"Everybody's just in a funk," he added.

A trader at another shop opined that just recently, "everybody's been talking about the market being softer, but we still find it difficult to buy any number of names. Things were for sale, but they weren't necessarily the bonds that people were trying to buy."

He continued: "There would be markets in the street that you go to transact in and the other side wouldn't be there. It's very frustrating."

He characterized the junk market as having "a lot of Rembrandts out there - painting pictures."

Catalyst climb continues

Among specific names, Catalyst Paper's 7 3/8% notes due 2014 "have been better," a trader said.

He saw the notes at 61 bid, 62 offered, up from levels around 59 previously. The 11% notes due 2016 were pegged at 92½ bid, 93½ offered, compared to 91 bid, 92 offered the day before.

On Tuesday, the Richmond, B.C.-based papermaker said it had secured an amend and extend on its $330 million asset-based loan facility due August 2013. The amendment altered the facility, making it a C$175 million ABL facility coming due May 31, 2016.

The reduced borrowing capacity "reflects reduced working capital levels due to the permanent closure of the company's Elk Falls,[B.C.,] mill in 2010," Catalyst said in a press release.

The financial covenants in the facility were also replaced by a covenant to maintain a minimum fixed-charge coverage ratio of 1.1 to 1.0. The covenant is triggered only if excess availability under the amended facility falls below $22 million.

Additionally, the fixed assets of the Snowflake mill are not part of the borrowing base and become first-lien security under the company's senior secured note facilities. This will allow for the issuance of an additional $60 million of senior secured notes under those facilities.

In sector peer NewPage Corp., a trader said there was "not too much" going on, adding that prices were "not all that different."

He saw the 11 3/8% notes due 2014 around 96 and the 10% notes due 2012 at 41 bid, 42 offered.

CMA CGM sinks on Iran charges

Elsewhere, a trader said that French shipping company CMA CGM's 8½% notes due 2017 were trading at 89 bid, 90 offered, which he called "down 10 points" from recent levels, citing the controversy over one of its ships having been stopped in the Mediterranean Sea earlier this year by an Israeli naval vessel while on a voyage from Syria to Egypt. The cargo was inspected and although listed as cotton and lentils, there were various Chinese-made rockets and other weaponry hidden in the boxes, apparently destined for delivery to Hamas.

Several U.S. Congressmen, noting that the company routinely carries Iranian cargoes dispatched from ports in Syria and elsewhere, have called for federal sanctions against the company, which has U.S. operations based in Norfolk, Va.

"They're screwed," he said.

A second trader saw the bonds down around 88½ bid, offered, but he said that he did not see any 10-point drop, noting that the had been offered at 92½ on Wednesday and had been quoted at 91½ bid, 92½ offered last week, "so they've been there for a while."

The $475 million issue priced at par on April 14, along with a euro-denominated tranche of eight-year notes.

The company on Wednesday issued a statement in an attempt to defuse the matter, saying that it adheres strictly to international law and recognized sanctions against weapons shipments from Iran, but claims to have been the unwitting victim of bogus shipping documents submitted by the parties sending the cargo to Egypt.

Sino-Forest suffers with report

A trader said that he had heard that Sino-Forest Corp. paper was "down huge - the converts were down a lot, and the stock was getting crushed," purportedly on allegations of what he called "massive fraud."

However, he did not have any levels available. A second trader, while noting a deep dive in the shares, did not see trading in the bonds.

But a market source at another desk saw the company's 6¼% notes due 2017 having tumbled to a closing price of 49 bid - well down from Wednesday's close in a 931/2-94½ context, and even down from the 92 bid round-lot trading level seen earlier in the day on Thursday. The plunge took place late in the day, but only reflected a handful of trades no larger than $100,000 apiece, the source noted.

Two other Sino-Forest bonds essentially went nowhere on the session, according to the source. The 10¼% notes due 2014, which had traded on Tuesday just under 109 bid, traded once earlier in the day, before the stock was halted, at 107 bid, while its 4¼% convertible notes due 2016, which had last traded in late May around the 111 mark, were untraded.

However, there was no shortage of volatile activity in the company's Toronto Stock Exchange-traded shares, which plunged as much as 25.4% during Thursday's hectic session before being halted at mid-afternoon down C$3.75, or 20.59%, at C$14.46 apiece and never re-opening. Volume of 11 million shares was nearly eight times the usual turnover.

The shares took a dive after a research report alleged - in stark and even insultingly scathing and accusatory language - that there had been fishy accounting by the company, which maintains twin headquarters in metropolitan Toronto and Hong Kong and which operates timber plantations in mainland China.

The research piece from a Hong Kong-based outfit called Muddy Waters Research declared that the amount of land Sino-Forest reported buying from Lincang City in the Chinese province of Yunnan doesn't match city records, meaning that the company could not have produced as much timber in the area as it claimed. It said that Sino-Forest had "overstated its Yunnan timber investments by approximately $900 million."

In a bluntly worded screed, Muddy Waters, which put out a "strong sell" recommendation on the shares, saying the equity was worth no more than $1 - charged that "like Madoff, TRE [the company's ticker symbol] is one of the rare frauds that is committed by an established institution. In TRE's case, its early start as an RTO fraud, luck and deft navigation enabled it to grow into an institution whose 'quality management' consistently delivered on earnings growth."

It said that "TRE, which was probably conceived as another short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since its RTO in 1995."

The damning research report further charged that "TRE massively exaggerates its assets" and scolded that the company "relies on Jakko Poyry to produce reports that give it legitimacy. TRE provides fraudulent data to Poyry, which produces reports that do nothing to ensure that TRE is legitimate."

Finally, "TRE's capital raising is a multi-billion dollar ponzi scheme and accompanied by substantial theft," the Muddy Waters report concluded.

There was no immediate reaction or response from the company.

According to published reports, some in the market dismissed the report as a wild exaggeration. They noted that Muddy Waters was founded by prominent short-seller Carson C. Block, who would be in a position to make substantial money from a big decline in the company's shares.

Stephanie N. Rotondo contributed to this report

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