Huge inflow stuns market; Nextel up on Buffett news; Quality Distribution revives deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 29 - With not much real trading actually going on in Friday's abbreviated pre-holiday session, junk marketeers watching the clock whiled away the hours till getaway time at 2 p.m. ET talking about - among other things - the gigantic $3.258 billion high yield mutual funds inflow number reported late Thursday. The consensus: the inflow had been expected, the size of the inflow certainly had not been, and it was likely to give the market a big boost when trading resumes Tuesday.

Aside from discussion about the mega-inflow, the only real feature in Friday's market was Nextel Communications Inc., which was quoted higher - though on limited trading - with the news that legendary Wall Street wise man Warren Buffett had bought nearly half a billion dollars of the telecommunications company's bonds and preferred shares in the year's first half.

The primary arena saw a blast from the past, as Quality Distribution LLC - a Tampa, Fla.-based transportation company which in mid-June scrubbed a $175 million offering of five-year senior secured notes due to restructuring issues that became more complex throughout the deal's extended marketing period - announced an offering of $125 million of unsecured notes in a Securities and Exchange Commission filing on Friday.

"Oh my G-d, it was huge!" was the reaction one trader had to the $3 billion-plus inflow. "But there was no one really around to react to it" - the classic paradox about whether a tree falling in the forest makes a sound if no one is around to hear it come crashing to earth.

"The bids are up - there were some odd-lot kind of bids up - but there's nothing really going on."

"We did a couple of little clean-up trades," another trader said, "but other than the market being stronger because of that [AMG] number - which was just unbelievable - there was zero activity.

"A couple of retail guys - bid wanted, offer wanted - really small pieces. The institutional guys were not around. I heard some short - like six-month [to maturity] high yield paper trade today in the Street, a couple of million bonds. That was about it."

From the primary side, at least one vacationing investment banker emailed to confirm that the inflow news was actually true.

Two other sources who communicated with the Prospect High Yield Daily primary desk on Friday expressed suspicions that to a considerable extent the inflow could represent the activity of "market timers."

However the sell-side official had a slightly more elaborate take.

"I think it came from a variety of places," said the source. "I think it was end-of-the-month type guys. I also think there was money coming in from high grade land. And I think there was some money coming in from equities.

"People are getting confident," this official insisted. "The economy is improving."

And while expressing an appreciation for its size this source said that the inflow ought to be considered in relation to the size of the overall market.

"It's huge, I'll grant you that. Of course three or four years ago, when a $1 billion inflow was enormous, the market was $500 billion. Now it's $900 billion. When you look historically, in that context, there is really nothing to compare this market to because it continues to grow in size.

"You can't compare everything dollar-for-dollar."

However it must be noted that among the contacts who took time to speak with Prospect News as the clock ticked down toward the Labor Day weekend, the above-quoted official was the only one to offer somewhat jaded color on the inflow.

Another sell-sider insisted that the titanic load of cash that was reported Thursday to have berthed in the junk market caught everyone off guard.

"No one expected the magnitude," said this source. "I think the timing was perfect because we were just hoping that the market had the ability to reset itself post-Labor Day after the past couple of weeks.

"This gets us on a strong footing."

Yet another sell-side official said: "Most people thought the fund flow number was going to be better, but this doubles the previous record. It's pretty amazing."

Asked if the massive cash infusion bodes for a busy September in the new issue market this source expressed guarded optimism.

"It certainly gives the market a more positive tone," said the official.

"I think things have been trading a little better. But how much credit do you give that, because there has not really been a lot of volume as we headed toward the Labor Day weekend?

"I think people will be looking to see if that market tone continues when everyone comes back."

The only other news for primary desks was that Quality Distribution is heading into the pipeline with $125 million of unsecured notes.

The Tampa, Fla.-based transportation company disclosed the bond sale in a filing for a $115 million initial public offering of common stock to be led by Credit Suisse First Boston, Bear Stearns and Deutsche Bank Securities. In addition the company plans to obtain a $215 million credit facility.

Last June 16 Quality Distribution, LLC and QD Capital Corp. postponed an offering of $175 million of five-year senior secured notes (Caa1/B-) via Credit Suisse First Boston, commenting at the time that it faced restructuring issues that became more complex throughout that deal's extended marketing period.

Sources around the market claimed to have no other information on the deal, such as syndicate names or timing. However one source remarked that the reappearance of Quality Distribution hours after the market learned of the massive inflow to the funds makes for an interesting coincidence of events.

"There is nothing on the calendar right now so you may as well come first," this sell-side official said.

"Of course it wouldn't make any sense to announce timing now," the source added. "In a worst-case scenario you could have some blow-up over the long weekend.

"They'll just announce it on Tuesday morning."

This official told Prospect News that in spite the massive inflow, all was quiet in the skeletally staffed high yield.

"The secondary market is up but besides that nothing is going on," the sell-sider said.

About the only name seen doing anything was Nextel, which got a double-dose of good news. First, the market got word that the Reston, Va.-based wireless operator - fifth largest in the U.S. - gets favorable mention in the new edition of Business Week, which quotes money manager Graham Tanaka of Tanaka Capital Management as believing that the company's shares - which have already risen more than 150% over the past year - "could double in 18 to 24 months, based on the rapid earnings growth we see," with the appreciation being driven by expected growth, especially in Nextel's government business.

Later in the morning, there was an even bigger shot in the arm, particularly for debtholders, as The Street.com reported that Berkshire Hathaway Inc. - billionaire Warren Buffett's investment vehicle - had invested $468.6 million in Nextel bonds and preferred shares as of June 30, according to filings which Berkshire, which controls the Geico and General Re insurance companies, made with the National Association of Insurance Commissioners.

A trader quoted Nextel's 7 3/8% notes due 2015 as quoted at par bid, 101 offered, up about a point-and-a-half on the session, and said the benchmark 9 3/8% notes due 2009 were at 105.75 bid, although he said that is probably low, since they had gone home late Thursday at 106.25 bid, 107. "So with the other ones [the 7 3/8s] up, they should be higher - maybe more like a 106.5-107 bid."

Another trader, also quoting the 7 3/8% notes north of par, a jump of a point-and-a-half or so, opined that "obviously they will be stronger on Tuesday [when trading resumes], but there was nothing today. No one traded it."

On the equity side, Nextel jumped $1.27 (7.03%) to $19.33 in busy Nasdaq dealings of over 31 million shares.

According to TheStreet.com, the filings indicated that the Omaha-based Berkshire and its insurance subsidiaries had purchased $68.2 million in Nextel 10.65% notes due 2007 in December and January. From December through May, Berkshire, Geico and General Re had also purchased $110.6 million in 9¾% notes due 2007, as well as $68.2 million of 9.95% senior notes 2008, $45.9 million of 9 3/8% notes due 2009 and $14.3 million of 9½% notes due 2011. Berkshire also purchased $161.5 million in Nextel preferred shares between October and June.

The website further noted that "since the filings only run through June 30, it wasn't clear if Berkshire was still acquiring Nextel debt or preferred stock."

Buffett - known as one of the savviest of all investors - had historically shunned the telecommunications sphere in favor of more old-fashioned, prosaic names, thus missing both the meteoric late 90s rise of the telecom bubble and its inevitable demise over the last two or three years or so. Nextel is his second major telecom play since the dust settled over the wreckage of the once red-hot sector, following Buffett's earlier investment in another one of the few survivors from the high-yield telecom constellation, Level 3 Communications Inc., and an investment in WilTel Communications - the company formerly known to junk investors before its bankruptcy court reorganization as Williams Communications Group Inc.

And The Street.com also reminded its readers that the only American with more money than Buffett, Microsoft founder (and the Oracle of Omaha's frequent bridge partner) Bill Gates, owns about $93 million of stock (about 5.2%) in Nextel's affiliate, Nextel Partners Inc.

Apart from Nextel, proceedings were as dry as dust, traders said. One noted, for instance that although HealthSouth Corp. was a name very much in the news this week, after its bankers allowed the troubled Birmingham, Ala.-based provider of diagnostic imaging and outpatient surgical and rehabilitative services to make interest payments due on its 10¾% senior subordinated notes due 2008, causing the company's bonds to firm smartly on Thursday - "I haven't even seen it mentioned today [Friday]. That's how dead things are."

Among the higher quotes seen amid the generally firmer tone to the market were such names as Premcor Refining Group Inc., whose 8 7/8% notes due 2007 were seen a point-and-a-half better at 101.5 bid. The whole refining sector including other names such as Tesoro Petroleum, Giant Industries and Frontier Oil has been helped by the simple supply-and-demand economics of intense demand for gasoline (although that's expected to fall off once the summer vacation season is over) plus supply constraints.

The major topic of conversation, however, was the gigantic inflow, and what effect it might have on both the primary and the secondary markets going forward.

"It will be interesting to see what happens," the trader said. "We'll see how much it sparks up new-issuance. Will Charter [Communications Inc., which cancelled a $1.7 billion junk bond deal on Aug. 14] or anyone else that didn't get it done in the last month rush back in? If they do, we'll see if it puts the secondary on ice, like it did the last time."

Another trader noted that "it's going to be a stronger market on Tuesday" because of the AMG number, which was the largest weekly inflow total on record since AMG began keeping the fund flow statistics more than a decade ago.

A third trader observed that "there was a lot of money whipping around, market timing money." He said that he had "talked to people, who saw inflows coming in all week. That it was a positive number came as no surprise. But everybody was shocked by the inflow size."

"It just about wipes out most of the outflows we've had in the past month, so we're right back where we started, " the second trader said.

He said that in the secondary market, "stuff had been creeping up over the past week or so - you've seen that there's been some interest but no real flurry, but now people are buying again, gobbling up whatever paper they can find. Price doesn't seem to stand in the way."

He noted that "this is what happened two months ago," when the huge amount of money in the market needing some place to go pushed prices on existing paper up and made it disappear, even as new deals continued for a while to actively price.

"Then you had five or six weeks of paper loosening up" as the inflows stopped and accounts began selling paper, "and secondary guys like myself having a much better time of it.

"When it just goes straight up, it gets squeezed - and that's where it looks like we're going to be headed in September, unless something happens in the next couple of weeks."

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