High yield reels after big outflow, hear Bombardier mega-deal delay; pre-holiday activity drops

By Paul Deckelman and Paul A. Harris

New York, Feb. 12 - The end of the week on Friday could not come soon enough for high-yield market players, who saw the biggest outflow of money from junk bond mutual funds - an important barometer of overall Junkbondland liquidity trends - in more than a year.

They also saw continued erosion of key statistical indicators of junk market performance, one of which fell into the red this week for the first time this year.

A chill likewise came over the high-yield primary market, which up until now has remained strong, even in the face of a faltering secondary. While the new-deal arena did manage to pump out over $4 billion of paper for a second consecutive week, almost half of that was attributable to just one deal - a $2 billion behemoth of an offering from GMAC Financial Services earlier in the week. That new GMAC issue ended the week little changed from its pricing level, while other new bonds, like Freescale Semiconductor, Inc. and, especially, Stallion Oilfield Holdings were seen trading below their issue prices - in Stallion's case, quite a bit below.

Market participants meantime heard - unofficially - that Bombardier Inc.'s $1 billion offering of eight-year notes had been postponed, although no confirmation was immediately forthcoming from either the company or its underwriters. If so, it would be the latest in a lengthening string of deal postponements that popped up during the week, including such names at ITC^DeltaCom Inc., Kemet Corp. and Hudson Products Holdings Inc., among others.

Back in the secondary realm, traders saw a reduced volume of activity ahead of the three-day Presidents' Day holiday weekend, as a consequence of both pre-holiday personnel absences and early exits from the market ahead of the break, as well as a reluctance on the part of some investors to be long anything over a long weekend, with the market in its current state of flux.

Friday's primary market session came to an inconclusive close, with one deal pulled, and at least one other deal reported - by both buy-side sources and sell-siders - to be in trouble.

RCS & RDS postpones

Romanian telecommunications company RCS & RDS postponed its $200 million offering of seven-year senior unsecured notes (/B+/) on Friday, due to market conditions.

Citigroup was the bookrunner.

The Bucharest-based company intended to use the proceeds to repay bank debt, to fund acquisitions, to fund capital expenditures and for general corporate purposes.

Bombardier buzz

Rumors surrounding Bombardier's $1 billion two-part offering of non-callable senior notes (expected ratings Ba2/BB+) ran rampant on Friday, which was the day the deal was expected to price.

The notes come with eight- and 10-year maturities. Tranche sizes remain to be determined.

JPMorgan, Deutsche Bank Securities and UBS Investment Bank are joint bookrunners for the tender financing and general corporate purposes transaction.

Numerous market sources told Prospect News that the deal had been pulled. However, at the end of the day sources close to the deal could not be reached for comment.

Rough guidance started in the low-to-mid 7% range, according to a mutual fund manager.

With an apparently dwindling appetite for high-yield paper afoot during the Feb. 8 week, the whisper backed up into the low 8% range, and perhaps even into the low-to-mid 8% range, the source added.

Biggest outflow in five years

As for evidence of a dwindling appetite for high-yield, it materialized late Thursday in the form of a report from AMG Data Services of Arcata, Calif.

The high-yield mutual funds saw an eye-popping $984.19 million of outflows for the week to Feb. 10, according to AMG, market sources said.

That's the largest weekly outflow since September 2005, a market source said.

Meanwhile bank loan funds - meaning funds that play assets which typically come with security senior to that which backs junk bonds - saw nearly $196 million of inflows.

That was the 11th consecutive week of inflows for the loan funds, which have taken in more than $1.2 billion year to date. The source who provided those numbers asserted that, net-net, the bank loan funds inflows represent a positive for the leveraged markets.

Meanwhile, an emerging markets trader in Europe said that investors are shifting money out of high-yield corporate bonds and into emerging markets debt.

Recent funds flows numbers bear out this assertion.

EPFR Global reported that dedicated emerging markets bonds funds - including those devoted to dollar-denominated debt, as well as those that play local currencies - saw $700 million of inflows during roughly the same time period as AMG reported the $984.19 million outflow from junk (AMG reported that dollar-only EM funds actually saw $100 million of outflows during the week to Feb. 10, according to a market source).

"People are getting out of risk, and they are being more cautious about new issues," the trader said, referring specifically to emerging markets.

"They're shifting from high yield into EM because everybody believes that EM is safer," the source added.

"I personally don't believe it."

The keenly followed AMG number generally makes the rounds of trading desks on Thursday afternoons, but was delayed for a second consecutive week.

It was the second outflow this year, against four inflows, but also the second in the last three weeks, completely dwarfing the previous week's $42 million inflow, and in fact, outweighing any of the inflows seen so far this year. It brought the previously robust high yield year-to-date inflow number down to $559 million from $1.543 billion. The AMG numbers essentially replicate fund-flow numbers released on Thursday night by another fund-tracking service, Cambridge, Mass.-based EPFR Global, which uses a somewhat different methodology to calculate its fund flows, but whose numbers usually point in the same direction as AMG's. EPFR said outflows in the latest week were the biggest weekly loss since the third quarter of 2008. EPFR's year-to-date inflow total was about halved, to around the $1 billion mark.

Cumulative totals, whether from AMG or EPFR, may reflect previously unannounced changes or revisions.

The fund flow numbers are considered a reliable barometer of overall junk market liquidity trends - even though the mutual fund money makes up a considerably lesser portion of the total cash sloshing around in the high yield world - since they are trackable and quantifiable, unlike other sources of cash coming into the junk markets.

A trader noted the big outflow, commenting that "for the first time, accounts that had been buying have been lightening up, because they're facing redemptions, and the hedge funds have been pretty quiet, and there has been a lot of technical shorting going on in the marketplace."

The week ahead

As Prospect News went to press on Friday, market sources expressed the belief that, at best, the above-mentioned Bombardier deal was delayed into the week ahead.

Aside from Bombardier, and the above-mentioned Romanian telecom deal which was postponed, two other offerings had been slated as Friday business, and have presumably been delayed into the week ahead.

They are Chaparral Energy, Inc.'s $400 million two-part offering, via left bookrunner UBS and joint bookrunners Credit Suisse Securities and RBS Securities Inc., and Community Education Centers, Inc.'s $210 million offering of six-year senior secured notes, via sole bookrunner Jefferies.

At Friday's close only one deal was believed to be on the road.

RDS Ultra-Deepwater, Ltd. began a roadshow on Thursday for a $260 million seven-year senior secured notes deal, led by bookrunner Jefferies.

Marketing is expected to continue into the Feb. 22 week.

Stock weakness takes its toll

A trader noted that "the stock market started out, and was very weak this morning, and our [junk] bond market has been following that with the uncertainty in Greece."

The bellwether Dow Jones Industrial Average was under water all day, finally ending down 45.05 points, or 0.44%, at 10, 099.44, although broader stock indexes were mixed.

A trader saw the CDX Series 13 index lose ½ point on Friday to end at 94¾ bid, 95¼ offered, after having gained ¼ point on Thursday. The index thus ends the week down nearly a full point from its closing level at the previous week, ended Friday, Feb. 5, of 95 7/8 bid, 96 3/8 offered.

The KDP High Yield Daily Index meanwhile actually rose by 5 basis points on Friday to finish at 69.27, after having fallen by 19 bps on Thursday. Its yield tightened by 3 bps to 8.76%, after having widened by 7 bps the previous session. However, the index ended the week down from 70.30 at the close the previous Friday, with the yield having ballooned out from 8.42%.

Another widely followed junk market measure, the Merrill Lynch High Yield Master II index, closed on Friday showing a year-to-date loss of 0.357%, the first time this year that the index has finished a trading week in the red. The previous Friday, the index has showing a 0.891% positive return for the year so far - although that was well down from the 2010 peak level of 2.292% seen at the close on Thursday, Jan. 14. Since that high point, the index's yield to worst has widened out to 9.41% from 8.508%, while its spread to worst had likewise gapped out to 703 bps from 618 bps.

Advancing issues remained behind decliners Friday for a seventh straight session, although the winning margin narrowed to just a couple of dozen issues out of nearly 1,300 tracked.

Overall market activity, as measured by dollar-volume levels, fell by about 41% from Thursday's pace. Although the Securities Industry and Financial Markets Association did not recommend the traditional early close ahead of the Monday federal holiday marking Presidents Day - continuing a trend which it began last year - traders said the reality was that at many shops it was a half-day in all but name, with skeleton staffing on many desks and people leaving early as trading activity dwindled after mid-day.

"Most people piled out around 2 or 2:30 [p.m. ET], so volume was pretty light," a trader said.

Another said that he had gotten an e-mail message from a bigger shop that given all that went on during the week, "the week cannot be ending too soon."

A trader characterized the session as "quiet and mixed," although he said that at his shop, "we were able to find a lot more buyers than sellers."

That was quite the reverse of what a second trader saw - more sellers than buyers.

He said "the caution flag is going up, with all of these new issues being postponed. There is a little flight to quality going on, for the first time in a while."

Traders hear Bombardier postponed

A trader said late in the session that he had heard that Canadian aircraft and railroad equipment maker Bombardier's $1 billion offering of senior notes due 2018 had been postponed due to unfavorable market conditions, and suggested that given the current suddenly fragile state of the junk market, "a lot more be postponed,"

A second trader agreed that "we're not going to be quoting new issues for a while, because they're getting postponed," with at least a half-dozen prospective new deals yanked off the high yield forward calendar and put on the shelf, at least for the moment for the moment.

He too heard that Bombardier's deal "is now day-to-day," which he called "one of the bigger shocks" of the day, explaining that he had heard that "it had a pretty decent book, from the higher-grade accounts."

Despite the deal's Ba2/BB+ nominally junk ratings, "they weren't counting on the traditional high yield buyers. A lot of the higher grade investors, like insurance companies or people like that, I had thought were lined up, so I was a little surprised that they'll be day to day."

Calls and emails to Bombardier and to its underwriters late Friday, seeking a clarification of the deal's status, had not been answered as of press time.

The trader otherwise said that speculative borrowers had been accessing the junk market like there was no tomorrow, fearful that a narrow window of opportunity for borrowing might close and "now, for the first time, that might happen. The caution flag is definitely up, with what's going on in Europe and [Federal Reserve chairman Ben] Bernanke saying he's going to raise rates. And there was a fairly significant amount of money taken out in the redemptions."

Freescale below issue

Among recently priced deals, a trader saw Freescale Semiconductor Inc.'s 10 1/8% senior secured notes due 2018 trading at 98 3/8 bid, 99 offered.

The Austin, Tex.-based computer-chip maker had priced its $750 million offering this past Tuesday at par to yield 10 1/8%, but they had traded below issue almost from the start.

Another recent borrower - Houston- based energy drilling company Stallion Oilfield Holdings' $225 million of 10½% notes due 2015, were seen having settled in around a 91-92 area - off their lows around 90 bid, but still well off the 99.094 level at which the bonds had priced on Tuesday to yield 10¾%.

A trader saw another last-Tuesday deal - GMAC'S $2 billion benchmark issue 8.30% notes due 2015 - at 99¼ bid, 99¾ offered. That was little changed from its issue level of 99.19, to yield 8½%.

Leap, Sprint weaker despite MetroPCS reports

Away from the recently priced deals, Leap Wireless International Inc.'s debt ended "a little cheaper," a trader said, even though news outlets reported that sector peer MetroPCS Communications had hired advisors regarding a potential purchase of the San Diego-based prepaid wireless company.

The trader saw the 9 3/8% notes due 2014 issued by Leap's Cricket Communications Inc. unit at 97½ bid, 98 offered, "probably a recent low."

Another source pegged the issue around 973/4.

Overland Park, Kan.-based wireless operator Sprint Nextel Corp.'s bonds were also a bit softer on the news. The first trader said the 7 3/8% notes due 2015 "got a little beating," ending "down a few points" at 86 bid, 86½ offered, versus 88 bid, 89 offered previously. He also saw the 8 3/8% notes due 2017 around 94, which he deemed unchanged.

"I think there might be a reason for that," he said of the discrepancy between the two issues, adding that the 8 3/8% notes were "old Nextel bonds" that get treated differently than the rest of the capital structure.

The second source quoted the 7 3/8% notes at 86 bid, 87 offered and called the 8 3/8% notes "down marginally" to around 94.

Earlier this month, Leap Wireless said that it was actively seeking a buyer and while many market players thought MetroPCS was the prime candidate, it had previously said it was not interested in the buy. Sprint was then considered the next possible buyer - that is, if they weren't bought out themselves.

"I don't think Sprint could buy Leap," a source said. "I think people are looking for somebody to buy Sprint."

But apparently MetroPCS had a change of heart about Leap, as it was reported to have hired JP Morgan Chase & Co. and Credit Suisse Group AG to look at the potential acquisition.

The two companies had attempted to merge in 2007, but could not agree upon a price. Since then, the industry has faced massive competition and both Leap and Sprint have felt the burn, mainly from subscriber losses.

Blockbuster quiet after dead-cat bounce

A trader saw Blockbuster Inc. ending the week up from its recent lows but pretty much unchanged on the day.

He saw the Dallas-based movie-rental company's 9% subordinated notes due 2012 trading in an 18-19 context, while its 11¾% secured notes due 2014 were ending at 65½ bid, 66½ offered, each up by several points from the lower levels seen earlier in the wee - the 9s as low as 14-15 and the 113/4s around 60.

"They've bounced off the bottom," he said. "There's some volume in it, but not as big as earlier in the week."

NewPage holds gains on CEO hire

A trader said that NewPage Corp.'s 11 3/8% notes due 2014 were in an 88-89 context and its 10% notes due 2012 were trading between 48½ and 50, which he called "a similar range" to where they had been trading, or perhaps up a point, but said that "there was not a lot of activity in the name," whose bonds have improved a little from the levels they held at mid-week before the announcement the Miamisburg, Ohio-based coated-paper company had filled its vacant president and chief executive officer positions, with E. Thomas Curley taking over both jobs.

The bonds had slid badly following the sudden and only vaguely explained resignation last month of Curley's predecessor, Richard D. Willett Jr.

Six Flags trades amid shareholder turmoil

A trader said that Six Flags Inc.'s bonds "did see some activity" around a 291/2-30½ context, adding that "30 and change is up 1½ [points]." He saw some trading in its 8 7/8% notes that were to have come due on Feb. 1, though "not much activity" in its 9 5/8% notes due 2014, all in that same 29-31 area.

A shareholder has meanwhile requested that the bankruptcy court overseeing the New York-based theme park operator's restructuring replace current management with a trustee, alleging that the management team led by Washington Redskins owner Daniel Snyder had breached its fiduciary duty to Six Flags shareholders and claiming that it had drained Six Flags resources to benefit other companies controlled by Snyder.

Automotive names little moved:

A trader said that General Motors Corp.'s 8 3/8% notes due 2033 were pretty much unchanged around 28 bid, on "some volume." Meantime, he saw GM domestic arch-rival Ford Motor Co.'s 7.45 % bonds due 2031 trading around 86-87, which he thought was up a point. The Dearborn, Mich.-based carmaker was one of Thursday's most active junk names, and on Friday, the trader said, "they looked active enough today."

- Stephanie N. Rotondo contributed to this report

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