Novamerican prices, Alltel, Apria drop out; Tousa slides on bankruptcy buzz; funds see $632 million leave

By Paul Deckelman and Paul A. Harris

New York, Nov. 15 - Novamaerican Steel Finco Inc. priced a $315 million offering of new eight-year senior secured notes on Thursday. But that development was overshadowed by the latest ominous tidings to come out of the primary sphere, as Alltel Communications/Alltel Communications Finance Inc. was heard to have postponed its upcoming multi-billion-dollar mega-deal due to unsettled market conditions - and it wasn't the only prospective issuer to do so. Earlier in the session, Apria Healthcare Group Inc. also back-burnered its $265 million offering of 10-year notes, again due to unsettled condition in the credit markets. Meanwhile speculation continued over the fate of United Rentals Inc.'s planned $2.55 billion note deal, which is linked to whether the Greenwich, Conn.-based equipment rental company is to be acquired by Cerberus Capital Management LP; while that LBO underlying the bond deal looked like a dead duck on Wednesday after Cerberus formally withdrew its offer, attention on Thursday also focused on Cerberus' indication that it might be willing to talk with United Rentals about a revised acquisition transaction.

Elsewhere in the new-deal arena, price talk emerged on offerings for Gastar Exploration USA Inc. and Connacher Oil & Gas.

In the secondary market, United Rentals' bonds, which had gotten crushed on Wednesday on news that the Cerberus deal was off - at least for the moment - were seen continuing to retreat on Thursday. Sector peer Neff Corp. went along for the downside ride.

But the dog of the day came out of the distressed precincts, with homebuilder Tousa Inc.'s bonds getting hammered after the Hollywood, Fla.-based company released bad quarterly numbers and warned that it might have to consider a bankruptcy filing if it cannot successfully restructure its debt.

And negative talk also swirled around beleaguered mortgage lender Residential Capital LLC, pushing its bonds ever lower in fairly active dealings.

Overall a November chill crept over the high yield market, which one source marked ½ point lower on the day.

Funds deeper in the red with $632 million loss

And as trading wound down for the session, market participants familiar with the weekly high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif., said that in the week ended Wednesday $632.2 million more left the weekly-reporting funds than came into them.

One market source characterized the figure as the biggest negative flow of cash from high yield mutual funds in two years.

And one sell-side source characterized it as "massive."

It was the second straight weekly outflow, following the $13 million exodus seen in the previous week, ended Nov. 7, and would seem to bring to a crashing halt the recent zig-zag trend of alternating inflows and outflows, mostly fairly modest in size, which had been seen over the preceding four weeks.

The latest week's outflow was the third in last eight weeks, versus five inflows, several of them fairly sizable - but the $632 million hemorrhage goes a long way toward counterbalancing those additions. During that eight-week period, net inflows have totaled $264.4 million, according to a Prospect News analysis of the AMG figures.

That recent inflow-dominated stretch has followed a lengthy string of outflows which had begun around mid-year, completely wiping out the roughly $1.6 billion cumulative inflow that had built up over the first half of the year and plunging the year-to-date fund flow numbers deeply into the red, where they remain to this day.

Even with the recent net inflows, the 2007 cumulative total remains decidedly on the downside, at $1.831 billion, well up from the prior week's $1.199 billion.

However the funds which report to AMG on a monthly basis saw $11.3 million of inflows during their most recent reporting period, which extends their year-to-date inflows to $6.56 billion.

Hence the year-to-date aggregate flows, which tally both the weekly reporting and monthly reporting numbers, stood at $4.728 billion at Wednesday's close.

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.

Friday energy

Two deals from the energy sector, which investors tend to perceive as a "defensive" one partly because of surging crude oil prices, are on tap to price Friday.

Connacher Oil & Gas set price talk for its $600 million offering of eight-year second-lien senior notes (B1/BB) at the 10% area.

Credit Suisse, RBC Capital Markets and BNP Paribas are leading the debt refinancing, capital expenditures and working capital deal from the Calgary, Alta.-based Canadian oil sands, development and production company.

Elsewhere Gastar Exploration USA set price talk for its $100 million offering of five-year senior secured notes (Caa2/CCC) on Thursday.

The notes are expected to have a 12¾% coupon and an issue price in the range of 99.50 to 99.75.

Jefferies & Co. is leading the debt repayment and general corporate purposes offering from the independent oil and gas exploration, development and production company which operates in Australia and the United States.

Alltel postpones

On to Thursday's bad news, Alltel Communications and Alltel Communications Finance, Inc. postponed the sale of a portion of their LBO-related cash-pay notes due to market conditions.

A portfolio manager from a high yield mutual fund told Prospect News that lead bookrunner Citigroup had built an order book sufficient to place $1 billion of the notes, but elected not to do so because of apprehensions that the deal would not trade well.

Earlier on Thursday price talk circulated, having the notes pricing at a to-be determined discount to yield 11%.

Goldman Sachs, Barclays and RBS Securities were also in the deal.

The bonds were part of the overall $7.7 billion of Rule 144A and Regulation S bond and/or bridge debt financing in connection with the merger of Alltel and Atlantis Merger Sub, Inc. on Thursday.

The deal was launched with a "to-be-determined" size two weeks ago, when one informed source told Prospect News that it was highly unlikely that underwriters, who were wary of flooding the market, would attempt to place the entire $5.2 billion.

Shortly after the launch the scuttlebutt held that Alltel might sell as much as $4 billion.

However as last week drew to a close the murmured size had shrunk to $2 billion to $3 billion.

Early this week a buy-side source said that $2 billion appeared to be nearer the mark.

When the price talk emerged Thursday the expected size was $1 billion to $2 billion.

Apria Healthcare postpones

Apria Healthcare also pulled its $265 million offering of 10-year senior subordinated notes (B1/BB-) on Thursday due to market conditions.

Goldman Sachs & Co. and Banc of America Securities LLC were joint bookrunners.

Proceeds were to have been used to pay for acquisition costs.

Novamerican priced and closed

Elsewhere on Thursday Symmetry Holdings Inc. (Novamerican Steel Finco Inc.) disclosed in a press release that it has priced and closed its $315 million issue of senior notes due Nov. 15, 2015 (B3/B-).

A market source said that the notes priced at par to yield 11½%. However, the source added, the notes were only partially placed.

The notes, which had been talked to yield 12% to 12¼%, were priced at the 11½% bridge cap, according to a market source.

JP Morgan and CIBC World Markets were joint bookrunners for the acquisition financing.

A trader said that he had not seen the new Novamerican Steel 11 ½% notes due 2015 in secondary dealings.

Key bonds around issue price

The trader also said that the new Windstream Regatta Holdings Inc. 11% notes due 2017, which priced Wednesday at par, "kind of came and went," adding that he was "kind of shocked by in the Street, at least" the lack of noticeable aftermarket activity, and that he shop "did not really play much into it."

He said the new Key Energy Services Inc. 8 3/8% senior notes due 2017, which priced at par on Wednesday and then rose only modestly after that in initial aftermarket action, "kind of hung right around their issue price." At the end of the day, he said, the bonds were trading down into a 100.125 bid, with "no follow, which probably left them, with the way things have been, around par-100.25, kind of how they were hanging around all day." He said there was "nothing too exciting" going on in them, just the same story - going out with some weakness."

Tousa tumbles

Tousa's bonds "got smushed," the trader said, in the wake of news reports indicating the company is considering a possible bankruptcy filing, "really beat up." He added that "that's really not much of a surprise, as they've only gone one way over the past couple of months" - down. He quoted its 9% senior notes due 2010 at 36 bid, down from 40 on Wednesday and down further still from levels around 41 bid, 42 offered early in the week.

A market source who saw the bonds open at 39 bid, saw them go home at 36, well down from Wednesday's close around 41.

Another trader saw the 9s drop to 35 bid, 37 offered from 40 bid, 41 offered on Wednesday, while its 8¼% senior notes due 2011 fell to 36 bid, 38 offered from 41 bid, 43 offered previously.

He also saw its subordinated 10 3/8% notes due 2012 erode to 3.5 bid, 5.5 offered from 5.5 bid, 7.5 offered.

The company's nearly-worthless New York Stock Exchange-traded penny stock shares meantime plummeted 13 cents, or 52%, to end at 12 cents, on volume of 4.7 million, more than five times the usual daily turnover.

The bonds stumbled and the stock tumbled after the company reported a third-quarter loss of $619.7 million, or $10.43 per share - far worse than its year-ago deficit of $80 million, or $1.34 per share. The latest red ink included a charge of $504.5 million to write down the value of assets.

With its home base in Florida - one of the states hardest-hit by the ongoing housing slump - the former Technical Olympic said that its revenues for the quarter fell 16% to $492.9 million, versus $576.8 million a year ago, as orders dropped by one third and cancellations hit a staggering 47%.

Faced with those kinds of numbers and carrying a debt load far too large to be sustainable - including debt it assumed from its ill-fated Transeastern Homes joint venture - Tousa warned that it may be forced to file for bankruptcy. In its statement releasing the numbers, the company said that it believes "there is substantial doubt" about its ability to continue as a going concern. To that end, it is looking at all its options, which could include filing for bankruptcy if it cannot restructure its debt. The company also said it has asked its bondholders to organize a debt-for-equity swap.

'Where is the bottom?'

With nothing but bad news coming out of the company, or about it - the NYSE has said it may de-list the stock for its inability to trade at or above $1, while Moody's Investors Service said it lowered Tousa's corporate family rating to Ca from Caa2 and its probability-of-default rating to C from Caa2 - market-watchers are wondering where the bottom is.

"It was well-expected that these guys would post weak numbers," an analyst said. "And they absolutely lived up to that expectation."

With operations costs softer and "huge" write-offs, the analyst believes that the company is positioning itself for a bankruptcy filing, which he expects in December or January - likely triggered by coupon payments due at that time.

But with 44% of the company's inventory in Florida and "a good portion" in Phoenix and Las Vegas - once booming housing markets which have also fallen upon hard times with the current slump - the analyst said the question becomes "Where is the bottom?"

"A lot of folks are trying to assess that," the analyst said of the floundering real estate market. "It is a real finger-in-the-wind type of thing."

And with so many questions being left unanswered, it is not surprising that "there is a reluctance to step in and buy these [bonds] at these prices," the analyst said. "You have to ask, 'What are their assets worth?'"

Earlier this year, when Tousa was dealing with issues surrounding its Transeastern joint venture, it was widely believed that in the event of a bankruptcy, the company had enough assets to cover its debt. But as real estate values have steadily declined since that time, it has become harder to believe.

"Folks still believe that the senior notes are the fulcrum security," the analyst said. "They would need a severe write-down from here for that to not be the case."

"In order to be betting on these bonds at this point, you need to be able to take a stand and say [this is where the bottom is]," he continued. Alas, "fewer and fewer buyside accounts are willing to take that stand."

Bill Featherston, managing director at J Giordano Securities in Stamford, Conn., opined that Tousa is an example of a "a homebuilder in the troubled area . . . that has already been flushed out of most of the traditional holders' [accounts] - so it's probably mostly in the hands of hedge funds now."

These, he said "are willing to perhaps live with their bets - unless things get dramatically worse."

Other homebuilders in retreat

With Tousa leading the way downward, other homebuilder names were also seen on the downside in a generally bearish market. Hovnanian Enterprises Inc.'s 6 3/8% notes due 2014 were being quoted down 1 point at 76 bid, for instance.

A trader saw Standard Pacific Corp.'s bonds "down a couple" of points, with the 7% notes due 2015 at 66 bid, 68 offered versus Wednesday's 68 bid, 70 offered.

Beazer Homes USA Inc.'s 8 5/8% notes due 2011 were down 1 point at 78 bid, 80 offered.

Residential Capital covenants seen endangered

As the homebuilders continue to head south, they are marching in lockstep with the mortgage lenders, perhaps none more so than Residential Capital, the Minneapolis-based mortgage arm of GMAC LLC.

A trader saw several of the Residential Capital issues all trading around the same lower levels - the 6% notes due 2011, the 6½% notes due 2012, the 6½% notes due 2013 and the 6 7/8% notes due 2015. They finished at 56 bid, 58 offered, down from 58 bid, 60 offered in the morning and well down from 63 bid, 65 offered on Wednesday, when he said the bonds also fell.

ResCap, another trader said, "got pushed lower." He said that he had heard that "at some of the bigger shops, it was being moved from the high yield desks to the distressed desks. That may have caused some of the additional pressures [on the name] as people repositioned."

A market source saw ResCap's 8 3/8% notes due 2015 down 3 points on the session at 59, while the 7s of 2011 were likewise down a trey, also at 59.

Meanwhile, in the credit-default swaps market, the cost of hedging against a possible default in the company's bonds has jumped to 500 basis points, along with an up-front cost of 37% - a record high level and a sign that those in the market are fearful of such an event, especially with ResCap edging toward a possible financial covenant violation.

Under the terms of its nearly $4 billion in bank loans, ResCap is required to maintain a tangible net worth of at least $5.4 billion. According to a filing with the Securities and Exchange Commission, its net worth as of the end of the third quarter on Sept. 30 was $6.2 billion - leaving it with just an $800 million cushion, not all that much in an environment in which mortgage lenders, banks and other financial companies are taking writedowns and posting losses in the billions of dollars.

Gimme Credit analyst Kathleen Shanley noted in a report Wednesday that "if it turns out that ResCap needs to take significant loss provisions" against its Business Lending Portfolio, "the tangible net worth covenant could be triggered." She said that while ResCap owner GMAC has signaled a willingness to support ResCap, neither GMAC nor the latter's principal owner, Cerberus, have "commented publicly on how far they are willing to go with this, if conditions continue to deteriorate."

Shanley warned that ResCap "continues to trade much wider than GMAC in the CDS market, suggesting that investors fear the parent company, and the bankers, may step away from the situation and allow ResCap to default." The analyst also noted that GMAC's decision to appoint a new CFO for GMAC separate from the CFO at ResCap - Sanjiv Khattri previously held both positions - "suggests the parent may be thinking about the need to put some distance between the two organizations."

GMAC's 8% notes due 2031 slipped to 82.5 bid, 83.5 offered from 85.5 bid, 86.5 offered, while its 7¼% notes due 2011 moved down more than 4 points to 85. Its 6 7/8% notes due 2012 were down 2 points at 84.

United Rentals moves lower

Elsewhere, United Rentals' bonds - which on Wednesday plunged into the low-to-mid 90s from previous levels about 10 to 12 points higher, after the company said that Cerberus had pulled out of its leveraged buyout deal - continued to bulldoze their way south. A market source saw United Rentals' 7% notes due 2014 down an additional 4 points on the session at 91 bid, while its 7¾% notes due 2013 were seen down 1¼ points at 93.75.

Sector peer Neff's 10% notes due 2015 meantime, were seen down another point at 64 bid, 65 offered. Another market source saw them at 65 - but called that a 2 point loss.

Young's plunges on no news

A market source said that Young Broadcasting Inc.'s 10% notes due 2011 fell more than 5 points to 88 bid.

At the same time, the New York-based television station group owner's Nasdaq-traded shares rose 9 cents, or 8.11%, to $1.20, on unusually heavy volume of 648,000 shares, more than 15 times the usual daily turnover.

There was no fresh news seen out on the company, or any other immediate indication why the bonds were down so much, or why the stock was being so actively traded.

Last week, Young reported a wider net loss of $24.82 million, or $1.10 per share, versus $15.74 million, or 72 cents per share, a year ago. The company said that quarterly revenues were $47.52 million, down from the $53.55 million reported for the same period last year, primarily due to a $4.3 million decrease in net political revenue. On a year-to-date basis, Young's net loss widened to $68.37 million, or $3.06 per share, from $57.36 million, or $2.69 per share, in the corresponding period last year. Revenues for the first nine months of the year were $146.33 million, down 7.8% from $158.69 million in the same period last year.

Stephanie N. Rotondo contributed to this report.

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