Chesapeake Energy prices 10-year; Tenneco gone; funds see $989 million outflow

By Paul Deckelman and Paul A. Harris

New York, May 20 - Chesapeake Energy Corp. was heard by high-yield syndicate sources to have priced a $300 million issue of 10-year notes Thursday and secondary market traders said that the new deal was well received when it was freed for aftermarket activity later in the session.

Those signs of life stood in marked contrast to Tenneco Automotive Inc.'s somber morning announcement that it was spiking its proposed $420 million offering of senior subordinated notes. The Lake Forest, Ill.-based auto parts maker thus becomes the latest prospective issuer to pull a deal off the table because of unsettled, volatile market conditions.

Also on the new-deal front, Clean Harbors Inc. tinkered with the tenor and non-callable status of its upcoming senior subordinated notes deal.

In the secondary market, activity remained pretty much muted although Delta Air Lines Inc.'s battered bonds were seen heading higher - even as rival Carrier Continental Airlines Inc.'s notes lost some altitude.

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 $989.1 million more left the junk funds in the week ended Wednesday than came into them.

While the nearly billion-dollar bleed was nowhere near as severe as the astonishingly massive $2.145 billion outflow - second largest on record - seen the previous week (ended May 12), nobody is yet singing "Happy Days Are Here Again."

For one thing, it represented a sixth straight week of outflows. The flow of money into and out of the high yield mutual funds is closely watched by investors, traders, analysts and other market participants as a reliable barometer of overall junk market liquidity trends, even though the funds make up only a percentage of the money floating around the overall high yield universe.

Over the past six weeks, outflows have now totaled $4.024 billion, according to a Prospect News analysis of the AMG statistics, and on a year-to-date basis, have swelled to $5.545 billion, with outflows having been recorded in 12 of the 20 weeks that have elapsed since the beginning of the year.

The lopsided hemorrhage of funds from the market has been even more pronounced if you throw out the atypically strong inflows seen in the first four weeks of the year, which represented a continuation of the record strong flows seen in the final quarter of 2003. Since the week ended Feb. 4 - when outflows returned with a vengeance after a long absence, the funds losing over $1.5 billion of their assets that week - the picture has been decidedly negative. Outflows have been recorded in 12 of the 16 weeks since then including the week ended Feb. 4, with only four inflows in that time, and the total net outflow during that time - counting only those funds which report on a weekly basis and not including distributions - has ballooned to $6.911 billion, according to the Prospect News analysis of the AMG figures.

The result has been a choppy, uncertain junk bond secondary market since then, zig-zagging between advances and declines, in contrast to the strong gains notched earlier in the year. In the primary sphere, the loss of the funds has seen a gradual cooling down of what had been in the first weeks of the year a red-hot new deal market.

Primary activity since then has continued along at a respectably busy pace, with over $63 billion of new dollar-denominated fully junk-rated or unrated bonds issued in the U.S., almost half-again as much as the $44 billion that had been sold up to this point a year ago. But in recent weeks, the pace has slowed markedly, with both the loss of market liquidity and interest-rate fears and other market factors combining to act as a drag on new-deal issuance.

One sell-side source told Prospect News that the current string of negative numbers calls to mind a five week period that began during high summer 2003, with news of a $91 million outflow for the week ending July 23, 2003.

That five-week period, said the sell-side official, saw nearly $5 billion flow out of the junk funds, including the $2.56 billion outflow for week ending Aug. 6, 2003, which some market sources refer to as the current record-holder among outflows.

However, the sell-sider continued, that streak of outflows was snapped in dramatic fashion when AMG reported a $3.3 billion inflow for the week that ended Aug. 27, 2003

"For the Aug. 6 week we had a $2.56 billion outflow and for the Aug. 27 week we had over $3 billion of inflows," the official recapped.

"I think the key question is, over the next two to three weeks will we see a decisive inflow number such as we did last August?

"Or will the outflows continue, so that what we have here is maybe just an early start to the summer of 2004?"

Chesapeake sells $300 million drive-by

As has been the case throughout the May 17 week so far, the high-yield primary market was a low calorie news day Thursday.

One deal priced, one roadshow start was heard, one deal was significantly restructured, and one deal was pulled.

The only deal to price Thursday was a $300 million issue of 7½% 10-year senior notes (Ba3/BB-) from Oklahoma City independent natural gas producer Chesapeake Energy Corp.

The notes priced at 98.269 to yield 7¾%, spot on the 7¾% area price talk.

Bear Stearns & Co., Banc of America Securities, Credit Suisse First Boston and Lehman Brothers ran the books on the quick-to-market transaction.

The proceeds will be used to help fund the $425 million acquisition of Greystone Petroleum LLC.

Late in the session a source spotted the new Chesapeake notes up nearly a point at 99.25.

Clean Harbors restructures deal

Clean Harbors Inc. substantially restructured its $150 million high-yield bond offering (Caa1/B) on Thursday.

The Braintree, Mass. environmental remediation and hazardous waste management company is now in the market with eight-year non-call four senior notes. Previously the deal had been structured as 10-year non-call-five senior subordinated notes.

Price talk remains for a yield in the 10¾% area on the deal that is being led by Credit Suisse First Boston and Goldman Sachs & Co.

Herbst kicks off Monday

The market heard news of only one new offering in the market.

A two day roadshow kicks off Monday for Herbst Gaming, Inc. $150 million of eight-year senior subordinated notes (expected ratings B3/B-), with pricing expected to take place Thursday, May 27.

Lehman Brothers will run the books for the debt refinancing deal from the Las Vegas-based gaming company.

And finally, Tenneco Automotive, which had been parked on the horizon with a $420 million debt refinancing deal, pulled the plug on Thursday.

"The company determined that currently, given recent volatility in the bond markets, the pricing of the new senior subordinated notes is not sufficiently attractive in light of the company's intended use of the proceeds," the Lake Forest, Ill. auto parts maker stated in a news release.

In light of the postponement a sell-side source told Prospect News "There have been 14 global high yield deals canceled, representing $4.4 billion of volume, since the non-farm payroll report on May 7.

"That seems to have been the turning point."

Chesapeake up in trading

The new Chesapeake Energy 7½% senior notes due 2014 "traded well" when they moved into the secondary, one trader said, quoting them as having moved as high as par from their 98.269 issue price, before dropping slightly from that peak level to finish at 99.75 bid, 100.25 offered.

He called it a "surprisingly great break," given that the Tulsa, Okla.-based oil and gas company's existing bonds have recently "been sucking wind. I really didn't think [the new bonds] would perform that great.

"I don't know why they broke so strongly - but they did." He suggested that the issue was helped by the fact that the 7½% notes came "at a deep discount" - but then added that "everybody [already] owns Chesapeake paper."

Then again, he continued, "maybe they'll get an investment-grade rating pretty soon." Standard & Poor's, which rated the new bonds at BB-, affirmed that rating late Thursday and changed the company's outlook to positive from stable.

The trader noted that Chesapeake was the second recent deal to trade well in the aftermarket; he noted that UGS Corp./UGS PLM Solutions' new 10% senior subordinated notes due 2012, which had priced at par on Wednesday, were also doing quite well at 103 bid, 104 offered.

"The new-issue market is very selective," he said. "It seems like they have ready buyers for the few issues that are making it through."

However, he said, the current market climate "scares me. I don't feel like getting tagged" by going out on a limb for newly priced issues. He noted the fact that, for instance, the Invista/Arteva Specialties' 9¼% senior notes due 2012, which came at par back on April 23, and which then traded as high as 101.25 after breaking, "were trading a few minutes ago at 95-7. So there's just a small window there to get yourself moving and get out. It's dangerous."

Another trader, having seen the new Chesapeake bonds trade as well as 100.25 bid, 100.75 offered, called the new issue's rise "a nice move," and said that it seemed to him like "the market is doing a little bit better."

He said that it was his take that "it's starting to go the other way, with some of these leverage players getting back involved in the market. I think as people get the perception that the Fed is not going to be as fast and furious" about raising interest rates, "they'll start putting on these carry trades again. With a lack of deals, possibly we'll get a little more follow-through on this rally."

The trader said there's money to be spent and "not as much merchandise out there as people thought there was. A lot of these deals may have been put away by now at distressed prices."

He said that the Case New Holland Inc. 6% senior notes due 2009 deal, which had to be repriced about five points down from the levels at which it originally priced earlier in the month "kind of cleared the market out, for some reason. It seemed like it kind of did a rinse on it, which is good."

All told, with the equity markets beginning to show some resiliency after having recently taken a pounding, refusing to sell off on the Philadelphia Federal Reserve economic activity index number released Thursday, for instance, which he called "a good sign, I think the [junk ] market is going to do better - but it will do so lethargically."

Delta rises

The trader quoted Delta Airline's 10% notes going home about 52 bid, 54 offered, up a point or two on the session, while the Atlanta-based carrier's 7.70% notes firmed to 63 bid, 65 offered, the 7.90% notes to 49 bid, 51 offered, the 10 3/8% notes due 2011 at 49 bid, 51 offered and the 8.30% bonds due 2029 were at 42 bid, 44 offered, up a point on the day.

"Bids are creeping in there - and the stock did better, up 82 cents, a big move."

The rise in Delta shares translated to a 15.86% jump, to $5.99, in New York Stock Exchange trading of 11 million shares, twice the normal volume.

Delta got a boost, both on the stock and the bond sides, another trader said, after Lehman Brothers upgraded its rating on the stock to overweight from equal weight, and increased its target price for the stock to $10.

What's more, Lehman analyst Gary Chase wrote in a research note, while acknowledging that Delta certainly faces hurdles, not the least of which is getting its pilot's union to agree to the big cost-saving concessions the airline says it must have to stay competitive, the shares could be worth even as much as $20 - if Delta can get the pilot's to sign off on a 30% reduction in pilot costs (the union is so far not budging from the 9% offer it made some weeks ago). That lofty price also assumes a 33% equity dilution in exchange for the concessions, and an 8% cut in non-labor costs.

The other trader expressed some degree of astonishment at Lehman's reasoning, given the struggle Delta faces to get its pilots to agree to further concessions. But whatever their reasoning, he said, Delta's bonds continue to head skyward after having hit recent lows on company warnings that the concessions were absolutely needed.

He saw the 8.30% bonds having moved as high as 41 bid, 42 offered, before ending at 40.5 bid, 41.5 offered - well up from levels several days ago of 37.5 bid, 39 offered.

Continental sinks

While Delta is gaining altitude, rival Continental Airlines was headed in the opposite direction, with its 8% notes due 2005 pegged at 88 bid, down two points, driven down from prior levels after Standard & Poor's revised the ratings outlook for Continental to negative from stable late Wednesday.

The ratings agency cited the potential impact of high fuel prices on the Houston-based carrier's cash position over the long term.

A trader who saw the bonds in that same 88 context, noted that Continental had recently been well into the 90s recently, before heading lower as the price of fuel kept heading higher.

At another desk, Northwest Airlines 8 7/8% notes due 2006 dipped to 78 bid, 79 offered, down two points.

Back on the ground, the news that Tenneco had scrubbed its new bond deal and had sharply throttled back the size of its tender offer for its 11 5/8% notes due 2009 (see Tenders and Redemptions elsewhere in this issue) was seen having little impact on the company's bonds.

"You would think [the 11 5/8s] would have dropped," a market source said - but he reported them unchanged around 107 bid, while the company's 10¼% notes due 2013 were at 108.5, also unchanged on the day.

All told, he said, Thursday was "one of the quieter days we've seen in a while."

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