Bally's bonds swoon on SEC probe, CFO exit; Triad prices; funds see $246 million outflow

By Paul Deckelman and Paul A. Harris

New York, April 29 - Bonds of Bally Total Fitness Holding Corp. were quoted sharply lower Thursday as the Chicago-based fitness center operator delivered a 1-2 punch to investor confidence, announcing the resignation - effective immediately - of its chief financial officer and announcing that the Securities and Exchange Commission is investigating a recent results restatement by Bally.

Bally is the second notable junk issuer in as many days to announce a senior executive change and other news related to accounting problems, following Nortel Networks Corp.'s announcement Wednesday.

In the primary market, Valmont Industries Inc. and Seneca Gaming Corp. were heard by high yield syndicate sources to have priced new deals on Thursday, Valmont's a 10-year issue and Seneca's an upsized eight-year offering. Late in the day, Triad Hospitals Inc. came in with a $600 million eight-year deal, downsized from the $650 million originally shopped around the market.

Also late in the session, market participants familiar with the weekly high yield mutual fund-flow statistics compiled by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, $245.5 million more had left the funds than had come into them.

It was the third consecutive week in which an outflow had been seen, including the previous week's $425.8 million drop in the funds. The outflow over the three weeks has totaled $688.3 million, according to a Prospect News analysis of the AMG numbers.

The fund-flow numbers - considered by many market denizens to be a key barometer of overall junk market liquidity trends, even though the funds make up a relatively small percentage of the money coming into the wider junk market universe - have taken on a decidedly negative cast over the last several months, after having started the year with a continuation of the strong inflow surge seen in the latter part of last year.

After that first month of continued strong inflows, things turned around in early February with two straight weeks of $1 billion plus outflows, and ever since then, the pattern has been choppy at best, with a week or two of inflows alternating with a week or two of outflows. Since the turnaround began with the first of the $1 billion outflows in the week ended Feb. 4, there has been a total cumulative net outflow of $3.576 billion in the 13 weeks since those large outflows began, according to the Prospect News analysis.

For the year to date, outflows have now been seen in nine weeks, against eight weeks, and in the latest week, the cumulative net outflow ballooned to $2.21 billion from $1.964 billion the previous week, according to the analysis of the AMG statistics, counting only those funds which report on a weekly basis and not including distributions.

High yield secondary market performance, as gauged by indexes published by the major investment houses, has pretty much moved in tandem with the fund flows - strong gains in the first month of the year, followed by an uneven pattern, generally zig-zagging up and down more or less in sync with the fund flows.

While primaryside activity has cooled off from the red-hot pace seen earlier in the year, new issuance is still getting done, with a respectably sizable number of upcoming issues in the new-deal pipeline.

Rising Treasury yields may hurt

One sell-side official who spoke to Prospect News in the wake of the outflow news seemed largely unimpressed.

"The fund flows have not had much of an impact so far," the sell-sider said.

"But there is definitely going to be some pressure relative to what is happening in the Treasury market. In the last five days the yield on the 10-year Treasury has moved out about 18 basis points."

The official spotted the Thursday close of the 10-year at 4.55% versus Wednesday's 4.49% close, and noted that Thursday's closing yield of 4.55% for the 10-year is the highest since Sept. 2, 2003, when it was 4.6%.

"The smaller story credits are going to suffer," the source concluded.

Bally down 6½

In Thursday's secondary dealings, Bally Total Fitness's 9 7/8% notes due 2007 were quoted at 80 bid, 82 offered, down 6½ points on the session following the morning announcement that John W. Dwyer had resigned as CFO under the terms of a separation agreement with the company, effective immediately. The company did not elaborate.

A trader saw the bonds opening at a wide 70 bid, 80 offered following the news and then tighten and creep back up to around their eventual closing levels.

He saw Bally's 10½% notes due 2011, which on Wednesday had finished out the day at 97 bid, 98 offering, open Thursday 89 bid, 91 offered, before ending Thursday at 91.5 bid, 92.5 offered.

Bally's New York Stock Exchange-traded shares meantime dropped 90 cents (16.67%) to $4.50, on volume of 2.3 million shares, about five times the usual daily handle

Bally tapped its senior vice president of finance, William G. Fanelli, to serve as acting CFO and has retained an executive search firm to look for permanent candidates for the post, which could also include Fanelli.

Bally said that in a separate matter, the SEC's Division of Enforcement has begun scrutinizing the company's recent restatement regarding the timing of recognition of prepaid dues. Bally said that it is cooperating fully with the SEC on this matter.

Bally explained in its statement that its full-year results for 2003, which were reported on April 2, included a restatement to correct errors in a portion of its revenues relating to non-obligatory prepaid membership dues. It said that the errors that caused the restatement had accelerated dues recognition for certain prepaying members, and totaled about $43 million during the seven-year restatement span, which includes each annual and quarterly period from Jan. 1, 1997 through last Sept. 30. Bally said that it made changes to its systems and processes related to the deferral of prepayments of non-obligatory dues, and believes its current controls over such systems and processes to be effective.

Bally's bombshell followed by a day Nortel's disclosure that it had fired chief executive officer Frank Dunn and two other senior executives, CFO Douglas Beatty and company controller Michael Gollogly "for cause" and had put four other executives whom it did not identify on paid leave - as Beatty and Gollogly had already boon - amid a widening internal investigation of the Brampton, Ont.-based telecommunications equipment manufacturer's accounting practices and further results restatements.

Bally and Nortel are just the latest two of a slew of high yield issuers - among other companies - who have become embroiled in accounting problems in recent years, and while some companies, such as Xerox Corp., were able to successfully restate their problematic results, make changes to the satisfaction of the SEC and other regulators and put their problems behind them, other companies have suffered harsher fates, up to and including bankruptcy or even criminal proceedings against former executives, as was the case with Enron Corp., Adelphia Communications Corp. and World Com Inc.

Nortel falls further

Nortel's 6 1/8% notes due 2006, which on Wednesday had fallen about 2½ points to a par bid level in response to the surprise firing of Dunn and the other executives and the wider accounting probe, were heard down another half point on Thursday to 99.5 bid.

Elsewhere, a market source said he saw J.C. Penney Co.'s bonds "drop a little," and then heard talk later in the session that the bonds had recovered, but added "I didn't see any bounce."

He quoted the Plano, Tex.-based department store operator's 7.65% notes due 2016 at 112 bid, down a point on the session, while its 7.95% notes due 2017 were likewise a point lower, at 114. Penney's 6.90% bonds due 2026 were at 98.25 bid, down from 99.

Level 3 off on earnings

On the earnings front, Level 3 Communications Inc.'s bonds were seen lower, after the Broomfield, Colo.-based telecommunications facilities-based network operator reported that for the first quarter ended March 31 it had a consolidated net loss of $147 million (22 cents per share) versus a $121 million loss (18 cents per share) in the preceding quarter, which ended on Dec. 31, 2003.

Level 3's bonds have recently been on the slide, although they had appeared to have broken out of their slump over the past session or two, but they were back on the downside Thursday, the benchmark 9 1/8% senior notes due 2008 quoted down a point at 72 bid. Level 3's 10¾% notes due 2011 were down two points at 89.5 bid.

At another desk, its 11¼% notes due 2010 were seen down a point at 73 bid, as were the zero-coupon notes due 2010, which finished at 67. The 11% 2008 notes also lost a point to 74.5 bid.

Level 3 reported consolidated OIBDA (operating income before depreciation and amortization) of $128 million in the latest quarter, little changed from $129 million in the preceding quarter, but better than the $110 to $120 million that the company had been expected for the quarter (see related story elsewhere in this issue).

Titan International up

A trader saw Titan International Inc.'s bonds as "a big mover," quoting the Quincy, Ill.-based maker of automotive and aircraft wheels up about seven points to 96.5 bid, 97.5 offered as the company swung to a profit in the latest quarter, earning $5.276 million (25 cents a share) versus a year earlier $5.878 million loss (28 cents per share).

He saw the bonds of Winn-Dixie Stores Inc. - scheduled to report numbers on Friday - dropping on apparent investor worries about the Jacksonville, Fla.-based supermarket operator's latest results.

The company's 8 7/8% notes dropped to an offered level of 91, with no bid, from 92.5 bid, 94.5 offered on Wednesday.

Five tranches transacted

Meanwhile the primary market saw $1.050 billion and €475 million of business in five tranches Thursday - and issuers continued to jump aboard the forward calendar.

And those issuers did so despite the evidence that money is flowing out of the high yield asset class.

Late in Thursday's session terms were heard on Triad Hospitals Inc.'s $600 million of eight-year senior notes (B2/B+), which priced at par to yield 7%.

Citigroup, Credit Suisse First Boston, Goldman Sachs, Banc of America Securities and Merrill Lynch & Co. ran the books on the debt refinancing deal from the Plano, Tex.-based manager of hospitals and ambulatory surgery centers, which came wide of the 6¾%-6 7/8% price talk.

Also on Thursday Hanover, Germany cable, telecommunications and internet company Tele Columbus priced €475 million in two tranches.

The company priced an upsized €245 million of six-year senior floating-rate notes (B1/B) at par to yield three-month Euribor plus 375 basis points. Revised price talk was in the Euribor plus 375 basis points area, increased from 325-350 basis points. The floating-rate tranche was expanded from €195 million.

Tele Columbus also sold a downsized €230 million of eight-year fixed-rate senior subordinated notes (B3/B-) at par to yield 9 3/8%. Revised price talk was for a yield in the 9¾% area, increased from the 9% area. The issue sized was decreased from €280 million.

Merrill Lynch & Co. ran the books.

Seneca Gaming Corp. priced an upsized $300 million of eight-year senior notes (B2/BB-) at par to yield 7¼%, at the tight end of the 7¼%-7½% price talk, via Merrill Lynch & Co. and Banc of America Securities. The deal was increased from $225 million.

One sell-side source not connected to the deal saw the new Seneca 7¼% notes trading up to 101.625 bid, 101.875 offered, and said that the deal was reportedly a blowout.

Finally Valmont Industries, Inc. sold $150 million of 10-year senior subordinated notes (Ba3/B+) at par to yield 6 7/8%, via Credit Suisse First Boston.

That yield was inside of the 7%-7¼% price talk.

A sell-side source said that the tight execution could be attributed to the low leverage of the Omaha, Neb.-based manufacturer of engineered support structures for irrigation equipment and provider of coating services.

"That deal got done well because it's an understandable sector," the source said. "It's rated Ba3/B+. And through the bonds that thing is levered only 2.8 times, which is very low leverage for the sector. You can lever this stuff up over four times, and still get it done.

"So the low leverage definitely helped the execution."

Metris pulls bonds, ups bank deal

The market heard Thursday that Metris Cos. Inc. postponed its offering of $250 million of five-year senior secured notes, while upsizing its credit facility to $300 million from $175 million.

Goldman Sachs & Co., Deutsche Bank Securities and Banc of America Securities were bookrunners on the bond deal from the Minnetonka, Minn.-based bankcard issuer.

UGS PLM, Consolidated Container start roadshows

Looking ahead, UGS PLM Solutions will begin a roadshow during the week of May 3 for an offering of $550 million of eight-year senior subordinated notes, which are expected to price on May 18.

Citigroup, JP Morgan and Morgan Stanley are joint bookrunners for the offering from the Plano, Tex.-based provider of software and related services.

Also Consolidated Container Co. LLC. will run a May 3-10 roadshow for an offering of $170 million of senior secured second lien three-year PIK notes due June 15, 2009.

Deutsche Bank Securities will run the books for the debt refinancing deal from the Atlanta-based manufacturer of rigid plastic containers.

Finally on Thursday, price talk of 9¾% area emerged on Wise Metals Group LLC/Wise Alloys Finance Corp.'s planned $150 million of eight-year senior secured notes (B2/B), expected to price on Friday.

Deutsche Bank Securities and Wachovia Securities are underwriters.

Seneca up in trading

When the new Seneca Gaming 7 ¼% senior notes due 2012 were freed for secondary dealings, they "got a nice little pop," a trader said, breaking at 100.75 bid, 101.25 offered, up from their par issue price, and then moving up to 101.75 bid, 102.25 offered.

However, Valmont's 6 7/8% senior subordinated notes due 2014 "traded up to 100.125 [from their par issue price] and then the bid got whacked," another trader said. "No great shakes there."

A trader saw Sea Containers Ltd.'s new 10 ½% senior notes due 2012 "rally pretty well" to 98.75 bid, 99.25 offered, from their late-Wednesday issue price at 97.369.

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