Steel Dynamics prices upsized deal; Idearc up on dividend move; tech names easier; funds lose $79 million

By Paul Deckelman and Paul A. Harris

New York, March 27 - Steel Dynamics Inc. was heard by high yield sources Thursday to have successfully priced an upsized offering of 8-year notes - an event which could perhaps be cautiously greeted as a sign that better days may lie ahead for the primary market. Following Wednesday's new-deal triple-header which saw offerings pricing for Abitibi-Consolidated Co. of Canada, FairPoint Communications Inc. and Harrah's Entertainment Inc., it was the first time that junk marketers were able to string together two consecutive days in which issues priced in more than a month - when Axcan Intermediate Holdings Inc. and Elyria Foundry Co. LLC priced in successive sessions in mid-February. It was also the first deal in a month - since Rock-Tenn Co.'s eight-year deal that priced on Feb. 28 - in which a coupon bloated into double-digit territory was not needed to get the issue priced.

In the secondary market, Idearc Inc.'s bonds were seen several points better, in very active dealings, after the Dallas-based telephone company directory publisher announced plans to conserve cash by suspending its stock dividend - but sought to reassure investors that it is not motivated by any liquidity problems.

Elsewhere, high-tech issues like Freescale Semiconductor Inc. and Amkor Technology Inc. were seen lower, in line with a general decline in tech-sector equities after bellwether Oracle Corp. reported what Wall Street saw as disappointing third-quarter earnings.

Clear Channel Communications Inc.'s bonds were seen little moved, despite a Texas court ruling that's seen as favorable to the San Antonio-based broadcasting and billboard advertising giant's planned nearly $20 billion leveraged buyout by private equity investors. That's a deal which Clear Channel's bondholders are not especially keen on, fearing additional leverage; in Wednesday's session, the bonds had firmed smartly on market speculation that the LBO would not get done due to lender reluctance.

Fund flows off by $79 million on week

And late in the day, market participants familiar with the high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $78.4 million more left those funds than came into them.

It was the third consecutive week in which an outflow was seen, following the $140.7 million cash exodus seen in the previous week, ended March 19.

The latest results represented a strengthening of the negative fund-flow trend which has dominated for most of this year. With 13 weeks now in the books, outflows have been seen in nine of them, versus four inflows, according to a Prospect News analysis of the AMG figures.

Net outflows from the weekly-reporting funds since the start of the year have totaled about $1.067 billion, according to a market source, up from $988.9 million the previous week.

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.

Steel Dynamics oversubscribed

Trailing a Wednesday session that saw a pair of new deals price Steel Dynamics, Inc. came with some upsized, quick-to-market action on Thursday.

The Butler, Ind.-based rolled steel manufacturer priced an upsized $375 million issue of eight-year senior notes (Ba2/BB+) in an a.m. to p.m. drive-by transaction.

It was the first all-high yield a.m. to p.m. drive-by deal to clear the market since Constellation Brands, Inc. priced $500 million of 8 3/8% seven-year senior notes (Ba3/BB-) and Alliance Imaging, Inc. priced a $150 million add-on to its 7¼% senior subordinated notes due Dec. 15, 2012 (B3/B-) both on Nov. 28, 2007, nearly four months ago.

The new par-pricing Steel Dynamics issue, upsized from $300 million, came with a yield of 7¾%, at the wide end of the 7 5/8% to 7¾% price talk.

The order book was two-times oversubscribed, according to an informed source who added that a solid cadre of investors got in the deal, and the bonds traded up in the secondary market.

Banc of America Securities, Morgan Stanley and Goldman Sachs & Co. were joint bookrunners for debt refinancing.

New Abitibi bonds ease

A trader said he had not seen the new Steel Dynamics 7¾% notes due 2016 freed for secondary dealings following their par pricing.

He did see the new Abitibi-Consolidated 13¾% senior secured notes due 2011 trading at 101.75 bid, 102.25 offered, which he called down about a point from the high levels to which those new bonds had climbed in their initial aftermarket dealings on Wednesday, following their pricing at par.

He also saw FairPoint Communications' 13 1/8% notes due 2018 at 98 bid, 98.25 offered, not much removed from their Wednesday pricing level at 97.973.

And he saw no sign of the Harrah's Entertainment 10¾% notes due 2016 which were sold Wednesday at a reoffer price of 84 by the underwriting syndicate which had originally brought the bonds to market at par back in late January.

Market indicators mixed

A trader saw the widely-followed CDX index of junk market performance off by 3/8 point on Thursday at 89¾ bid, 90¼ offered. Meanwhile, the KDP High Yield Daily Index rose by 0.11 to end at 73.48, while its yield tightened by 3 bps to 9.80%.

In the broader market, advancing issues shaded decliners by a narrow margin. Overall activity, reflected in dollar volumes, eased by 1% from Wednesday's levels.

Idearc up on dividend suspension

A market source saw Idearc's 8% notes due 2016 up nearly 1½ points to 66, calling the issue one of the most actively traded of the session. At another desk, the notes were seen up 2 points to just below the 67 level. Another market source saw them move up to 66.625 from 64.25 on Wednesday, in busy dealings.

A trader said that the bonds had been helped by the news that the company plans to conserve cash by suspending its 34.2 cent quarterly stock dividend. He pegged the bonds up 1½ points at 65.5 bid, 66.5 offered.

"They're going to stop paying cash as their revenues decline," he noted - adding that not surprisingly, equity holders were displeased at this latest turn of events, and the company's New York Stock Exchange-traded shares dropped by 47 cents, or 9.34%, to $4.56, although volume of 4.2 million shares was not unusually heavy. "But the bonds were up."

Those bonds have been under pressure for weeks, having slid from levels around 90 bid that they had held at the beginning of February. The bonds have been driven down by investor fears that any downturn in the economy will likely cause businesses to cut back on the amount of advertising they place in media such as the yellow and white page directories which Idearc publishes on a contract basis for various telephone service providers, as well as its online directories.

The decision to suspend the dividend was announced by the company's acting chief financial officer, Samuel "Dee" Jones, in a presentation at Credit Suisse's 2008 Global Leveraged Finance Conference in Scottsdale, Ariz. But Jones sought to put the best possible face on the news, saying that the company's board of directors had decided to eliminate payment of dividends "as part of the current capital allocation program and focus on improving the company's risk profile."

He said that doing so "allows us to maximize flexibility as we work our way through a more challenging economic environment." While he held out the possibility that the board could decide to resume paying the dividend in the near future, "it is keenly focused on an appropriate capital allocation program and risk profile for the enterprise. In light of current market conditions, we firmly believe this is the most financially prudent approach to capital allocation."

Jones also sought to reassure investors that cutting the dividend should not be taken as a distress signal. He said that he does not foresee any near-term liquidity issues for Idearc, and stressed that the company's underlying fundamentals and long-term prospects are unchanged.

"The set of assets that made this business an attractive investment are still there, still sound and still solid," the CFO declared. Local media, he said, and directional media in particular, such as Idearc produces, "continues to be a large and growing market."

That having been said, however, the executive acknowledged that "we anticipate mid-single digit percentage point declines in multi-product amortized revenue. And, as previously communicated, we anticipate some operating margin contraction due to the mix shift in revenues."

Clear Channel little moved on Texas news

Also in the media sphere, Clear Channel Communications' bonds - which were seen up anywhere from 4 to 7 points in brisk activity Wednesday on speculation that the company's proposed nearly $20 billion leveraged buyout by private equity firms was in trouble and would likely not happen - were seen little moved Thursday, on sparse trading, in the wake of a Texas state judge's ruling that's being seen as a positive for that LBO'S prospects.

A market source saw Clear Channel's 6¼% notes due 2011, which on Wednesday had pushed up 4 or 5 points to the 88 level in heavy trading, staying pretty much in that area Thursday, with volume dwindling to a bunch of odd-lot trades, while its 6 7/8% notes due 2018, seen as 8 point winners on Wednesday were unchanged, continuing to hovered around their same 72 bid level.

In contrast, Clear Channel's New York Stock Exchange-traded shares - which on Wednesday had plunged more than 17% on four times the usual volume - jumped $2.68, or 9.96%, on Thursday to end at $29.60, on volume of 65.7 million, about five times the average daily turnover.

The shareholders were heartened by a ruling by Texas judge John D. Gabriel, who on Wednesday evening issued a temporary court order that effectively bars the syndicate of banks that promised to finance the buyout of Clear Channel Communications from backing out of that deal, at least not yet.

Clear Channel and the private equity firms leading the buyout, Thomas H. Lee Partners LLC and Bain Capital Partners LP, filed suits with the courts in New York and Texas, demanding that the banks which had committed to the long-term financing of the LBO - Citigroup Inc., Morgan Stanley, Credit Suisse Group, The Royal Bank of Scotland, Deutsche Bank AG and Wachovia Corp. - be forced to live up to the terms of their commitment and fund the deal.

Clear Channel and the private equity firms said that the banks - unnerved by the credit crunch that has overtaken the whole financial industry since last summer - were trying to back away from the commitment they made some 18 months ago, when the buyout deal first surfaced. At that time, they offered long-term financing for the transaction and said that they would bear any risk arising from changes in the credit markets, which was then booming, with the kind of dislocations seen lately considered to be only a remote possibility.

With the recent turmoil in the markets, observers theorize that the banks would have trouble re-selling the $19.5 billion of bank loans and $2.6 billion of new junk bonds that would be issued under the funding plan, and might have to write down as much as $3 billion to $4 billion to cover losses related to the deal. Recent news reports indicated that the lenders were getting cold feet and were looking for an escape hatch. The plaintiffs argued that the banks were trying to substitute a short-term loan, with restrictions, for the long-term funding on relatively easier terms that they had initially promised, in hopes of torpedoing the deal. The banks, on the other hand, contend that the new funding offer they made to Clear Channel and its would-be acquirers is consistent with their original commitment, and say the lawsuits are without merit and would be strongly contested.

However, Gabriel - while not yet ruling on the merits of the case - said the preliminary evidence presented to him by the plaintiffs was sufficient to convince him that they could be harmed if the situation were allowed to continue on the way it's been going of late, and issued a temporary restraining order barring the lenders from interfering with the deal by not providing the promised funding or "engaging in any other conduct that would operate to modify, compromise, jeopardize, sabotage, undermine, nullify, void, eliminate, hinder, or obstruct consummation of the merger agreement." Observers said that while the order does not necessarily mean that the deal will go through, it keeps it on life support for the moment. Gabriel scheduled an expedited trial on the lawsuit to begin on April 8 in San Antonio.

High-tech names move lower

Market participants saw high-tech names move lower after tech-sector bellwether Oracle reported profits and earnings less than what Wall Street was looking for, considered a possible sign that businesses may cut back in their spending on computers, software and other high-end electronic gear.

In junk bond land, this meant a downturn in names such as Austin, Tex.-based computer chip manufacturer Freescale Semiconductor, whose 8 7/8% notes due 2014 lost ½ point in busy trading to end at 79.5. Another market source saw those bonds down around ¾ point, just below the 80 mark. Its 10 1/8% notes due 2016 were also off about ¾ point at the 69.5 level.

Chandler, Ariz.-based semiconductor testing and packaging firm Amkor Technology's 9¼% notes due 2016 were seen down ¾ point at the 96 level. Alcatel-Lucent's 6.45% bonds due 2029 lost ½ point to close at 72. However, Flextronics International's 6¼% notes due 2014 were actively traded, but ended unchanged at 93.

Thornburg surge halted

Elsewhere, Thornburg Mortgage Inc.'s amazing surge - which carried those 8% notes due 2013 up to the lower 60s from recent lows around 37 over the span of the last few sessions - appeared to have run out of steam on Thursday.

A trader saw the bonds unchanged at a wide 60 bid, 65 offered. However, a market source at another desk saw the bonds go home at 62.5 bid, down about a point, after first bouncing around at bid levels between 61 and 65, in fairly active dealings with some large-block trades late in the session.

Another trader said the bonds were up 2 points on the day at 60 bid, 65 offered. The Santa Fe, N.M.-based mortgage originator's bonds had risen sharply after it announced plans to raise $1.35 billion of new capital via a private-placement sale of seven-year bonds carrying an astronomical initial coupon of 18%. That plan replaced an earlier effort to sell $1 billion of convertible notes.

Thornburg was required by the terms of an agreement with its lenders announced last week to have raised at least $948 million by Thursday. There was no official word from either the company or its lenders as of press time on Thursday evening whether it had fulfilled that condition.

Opportunity knocks for smaller financial firms

Overall, a trader said, "the market was off a little."

Another trader characterized the session as "kind of a weird day."

Yet another opined that even with all of the credit-crunch-induced turmoil in the financial markets over the past few months, and the overall falloff in junk bond primary and secondary market activity as some investors prudently hug the sidelines, some smaller shops may be able to move out from the shadow of the larger industry players - because the current troubles have cut the big guys down to size.

"I've worked for major bulge-bracket firms and for privately-owned small firms," he said, and now "is the opportune time for small firms to excel in their business activity in the market, because it's never been a more level playing field."

He explained that in the past, "you had the smaller firms that don't take risks having to compete with the bulge-brackets who were putting out firm markets [in risky credits] to increase their market share." The smaller firms were overshadowed and left in the dust, forced to find other niches where they could do well.

But now, he added, "there's very limited risks being taken by the larger bulge-bracket firms, and it's the most level playing field that I've seen in over 20 years as far as the 'David and Goliath' theory - a small, privately owned firm can now compete with the larger bulge-brackets."

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