Junk funds see $92 million inflow; Parmalat quietly higher

By Paul Deckelman and Paul A. Harris

New York, Jan. 2 - News that high-yield mutual funds closed out 2003 with a $92.1 million inflow, according to market participants familiar with the weekly fund flow statistics compiled by AMG Data Services of Arcata, Calif. was the highlight of a very quiet session in the junk bond market Friday.

Secondary trading was extremely muted, although the bonds of bankrupt Italian dairy products producer Parmalat Finanziaria SpA were being quoted higher ahead of the early market close.

As far as the AMG number is concerned, it was the ninth consecutive week that funds the key barometer of junk market liquidity trends had shown more money coming into the mutual funds than left them, the 14th in the last 15 weeks and the 36th week out the 52 that made up 2003, according to a Prospect News analysis of the figures. For the full year, inflows totaled $20.126 billion, including only those funds that report on a weekly basis and excluding distributions.

"It's a small number," said one sell-side source of the inflow. "But I think that it suggests that there is still strength out there."

Generally some of the primary market sources who spoke to Prospect News Friday suggested that players were extending their holiday hiatuses until Monday.

Terms were heard on a private placement deal from Irving, Tex.-based food processing by-products recycling company Darling International Inc.

The company priced $35 million of 12% senior subordinated notes due Dec. 31, 2009, with proceeds going to pay down the term loan under the company's senior credit facility.

Looking ahead to the Jan. 5 week, when Prospect News quizzed primary market sources as to how rapidly the market would develop momentum, opinions varied.

"We're looking for things to pick up pretty much where they left off before the holidays, and then ramp up," said one.

Another camp held that new issue business would resume at a somewhat more stately pace.

"We think that there will still be a lot of people away early in the week," said this sell-side official. "There are a couple of things coming, though, so I think some people will try to go out there and get things done."

A buy-side source speaking on background suggested that one name to look for in early 2004 is Stamford, Conn.-based advanced structural materials maker Hexcel Corp. However the source did not elaborate.

In the secondary market, activity was truncated by the half-day session (2 p.m. ET close) following Thursday's New Year's holiday, which had shuttered the debt markets completely. Many places only had skeleton crews in, with people doing routine paperwork and watching the clock so as to make their early getaways.

There was "absolutely nothing going on," one trader said. "I finished up pricing portfolios, finished closing out the books for last year and opening them up for this year, that kind of jazz."

But as far as doing actual trades, he said, he had seen none.

He did hear some quotes on the bonds of Parmalat, which seem to have stabilized around the lower 20s after having traded as low as 14 bid last month, when the giant diary products company collapsed under the weight of an Enron-like accounting debacle that landed it in Italy's equivalent of Chapter 11 as 2003 ended.

On Friday, he said, the bonds were actually heard quoted around a point-and-a-half higher across the board, with the company's dollar-denominated 6 5/8% notes due 2008 at 21 bid, 22 offered, up more than a point from where they had closed out on Wednesday.

Parmalat's euro-denominated issues - the bulk of its bonds - were likewise up about a point or more; the trader saw its 6¼% notes due 2005 having advanced to 21 bid/22 offered from prior levels at 18.5 bid, 19.5 offered. Its floating-rate notes due 2005 were more than a point better at 20 bid, 21 offered; the 6% notes due 2006 were at 21 bid, 22 offered, while the 6 1/8% notes due 2010 were quoted at 20.5 bid, 21.5 offered.

Back at home, however, he saw no movement in any issues - even "mad cow"-related names such as meatpackers Smithfield Foods and Swift.

"I didn't see levels on anything," he said. "It was extremely quiet. People were just getting ready to go home," although he held out the hope that things would get back into "full swing" on Monday.

At another desk, however, Smithfield's 7 5/8% notes due 2008 were seen "up a little," quoted a point better at 101 bid. Swift's 12½% notes due 2010 were unchanged at 105.75 while fast-food burger chain operator Jack in the Box's 8 3/8% notes due 2008 were likewise steady at 102.5 bid.

Charter Communications Inc.'s 10% notes due 2011 were heard half a point better at 88 bid, though in sparse trading, while its benchmark 8 5/8% notes due 2009 were quoted a point firmer, at 87.25.

Elsewhere, a trader decried the lack of any real activity. "Hardly anybody's in. There was hardly any trading at all - just a couple of small dealer things, but it's basically dead quiet. "

He opined that when trading resumes for real on Monday, "we'll see more of the same" relative to the kind of market dynamics seen in recent weeks before the holiday doldrums set in in mid-December.

"The market is very well bid, the economy seems to be on track and improving. There were stronger numbers [the Institute for Supply Management's index of activity climbed to 66.2 in December, while Wall Street had expected a decline to 61] and that sent the Treasury market down, but stocks are firm and I think our market is going to follow suit. You have a lot of people racing in, trying to get deal financings done as quickly as possible.

"So it's going to be more of the same - firm, and a heavy calendar. And money's going to continue to pour in, no question about it."

Another trader - after having noted, half jokingly that Friday had been "the slowest day of the year, so far," because "nobody wants to go back to work [after the holidays] and re-start the rat race, until Monday" - observed that the economic data "keep coming in strong; the factory index was a strong number."

He wondered aloud "how much high yield can hold up with governments getting pummeled the way they are," with the Treasury 10-year note down about a point in response to the ISM data.

However, he acknowledged that the junk market is an unpredictable beast - sometimes, it will move in tandem with Treasuries, while other times, it will decouple from governments and align itself with the movement seen in stocks. "It's got a mind of its own."

That having been said though, he cautioned that "it's got to give some ground, with spreads coming in, as tight as they are and whatnot."

Still, "there's an awful lot of money flowing in. We haven't had any [new supply] for two weeks, and all that interest keeps piling up, so I would imagine people will have to spend some money coming right out of the chute on Monday."

Also likely to help the junk market, at least in the short term, is the so-called "January effect," when investors will buy back at least some of the underperforming issues that they dumped in December for year-end tax purposes. Although some observers have questioned whether the junk market - and for that matter, the equity markets - will see such an event this year, given the broad strength of the junk and stock markets for most of last year, others, including this particular trader, say it's likely to happen, as usual, because "there was some selling toward the end of the year, some dumping. I think that money will recycle back into the market."

He further noted that the stocks of telecommunications equipment makers "were really making a move [Friday], with names like Nortel Networks Corp. and Lucent Technologies Inc., both telecom equipment bond bellwethers, having moved up.

On the bond side, he said, "nobody was around to trade them" - but Lucent in the long end "has been moving up in the last week or so," with the Murray Hill, N.J.-based telecom gear maker's 6.45% bonds due 2029 having firmed to 78.5 bid, 79 offered from around 77 bid in mid-December, up about a point and a half, "which is a lot more than the rest of the indexes are doing. So people seem to be more comfortable moving into the long end of some of those telecom equipment companies - which is a good sign."

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