Leucadia prices upsized deal; junk generally retreats but Calpine up; funds see $31.8 million outflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 20 - The nascent revival of the junk market's new-deal parade continued on Thursday, with Leucadia National Corp. stepping forward to price an upsized offering of eight-year bonds. The new paper was seen having traded up slightly when it was freed for aftermarket activity.

In the primary market, the strong sentiment of the previous two sessions, fueled by the unexpectedly large and proactive 50 basis point rate cut by the Federal Reserve, seemed to be fading away, traders said, as the junk market took its cut from downturns in both the stock and the Treasuries market. Even Hovnanian Enterprises Inc., whose bonds had been firming strongly over the prior three sessions on the strength of the positive results from last weekend's big price-cutting promotion, were seen not really doing very much.

But mortgage-lender names such as Countrywide Financial Corp. and Fremont General Corp. were up, as was GMAC LLC, which has sizable exposure to the mortgage business through its Residential Capital Corp. unit.

Outside of the financial names, Calpine Corp. was seen as a big gainer, apparently pushed upward by investor hopes that the bankrupt San Jose, Calif.-based power generating company's newly filed amended plan of reorganization will mean greater value for its bondholders.

Sources marked the high yield tracking CDX index at 97¼ bid, up three-sixteenths on the day Thursday.

One source told Prospect News that it was the highest close for the index since July 9.

A hedge fund manager commented that the CDX has seen a huge move since the Federal Reserve's Federal Open Market Committee lowered the Fed Funds interest rate by 50 basis points on Tuesday.

Last Friday, Sept. 14, the index closed at 94¼ bid, 94½ offered, the manager said, adding that Thursday's close is 2 full points higher by comparison.

The source described it as a "huge" move.

The hedge fund manager added that on June 26, with the Dollar General Corp. $1.9 billion high-yield notes deal still in the market, the CDX was 98 ½ bid.

In the intervening months, against the backdrop of a dramatic sell off in the credit markets, sources say the index hit an intraday low somewhere in the 88s.

$31.8 million outflow

And as trading was winding down for the session, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., reported that weekly reporting funds saw a $31.8 million outflow in the week ended Wednesday. It was the second consecutive loss of capital from the funds, following the $153.6 million outflow seen in the prior week, ended Sept. 12.

Those two outflows, in turn, trailed two consecutive weeks of positive numbers, the most recent being a $196.8 million inflow for the week up though Sept. 5. Before those two inflows, however, AMG reported 11 straight weeks of outflows totaling almost $4 billion.

The latest figures extend to $2.10 billion the year-to-date outflows among funds that report to AMG on a weekly basis.

Meanwhile funds that report on a monthly basis have now seen $4.48 billion of year-to-date positive flows.

Hence year-to-date aggregate flows, which tally both the weekly and monthly reporting funds, remain squarely in the black at slightly less than $2.39 billion.

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.

Leucadia upsizes

In an otherwise quiet primary market, Leucadia National priced an issue of 8 1/8% notes due 2015 (Ba2/BB+) that was upsized to $500 million from $350 million. The deal came at 98.307 to yield 8.42%.

Jefferies & Co. ran the books for the quick-to-market deal, which generated $481.5 million of proceeds.

Market sources told Prospect News that there had been no price talk.

In the wake of near-dormancy in the high yield primary market since the summer began, Leucadia is the second upsized quick-to-market deal to clear in as many days.

On Wednesday R.H. Donnelley Corp. priced an upsized $1 billion issue of 10-year senior notes (B3/B) at par to yield 8 7/8%, in the middle of the 8¾% to 9% price talk and increased from $650 million.

Syndicate sources told Prospect News that between 40 and 45 accounts were involved in the Donnelley deal.

The back-to-back drive-bys from Leucadia and R.H. Donnelley represent the highest volume of drive-by deals since Sierra Pacific Power Co. and OPTI Canada Inc. both priced junk in quick-to-market deals on June 25.

Leucadia slightly firmer

When the new Leucadia 8 1/8% notes were freed for secondary dealings, a trader saw them at 98.625 bid, 99.125 offered, up from their 98.307 issue price.

Another trader saw the bonds at 98.5 bid, 99.25 offered, but observed that it was "another [deal] that got put away."

He saw the new R.H. Donnelley Corp. 8 7/8% notes due 2017, which priced at par on Wednesday and then got as good as 101.5 bid, 102 offered in initial aftermarket dealings later that session, "staying in that same tight range" around 101 on Thursday.

He said that the new CompuCom Systems Inc. 12½% notes due 2015, which priced at a steeply discounted 94.613 on Wednesday, were quoted around 94.75 Thursday morning, but the issue "wasn't very active."

Junk gains, slips back

Back among the established bonds, a trader said that the overall market "was kind of up, and then the Treasuries market got whacked" on inflation concerns in the wake of the big Fed rate cut. Then this afternoon, everything softened up." He said it "started out strong, but then kind of got weaker on the day."

The lone big exception to that rule, he said, was Calpine, which was "really flying."

Calpine gains on valuation hopes

The trader saw the company's 8½% notes due 2011 at 107.5 bid, 108.5 offered, up from 105 at the open, citing Wednesday's news of the filing of the amended plans and raised valuation expectations of investors.

Another trader saw the bonds at 107 bid, 108 offered, up 2 ½ points.

At another desk, a trader saw Calpine's 8½% notes due 2008 up 2 points at 107 bid, 108 offered, and also saw its convertible bonds up - the 7¾% notes due 2015 up 5 points at 90 bid, 92 offered, the 6¼% notes due 2014 up 2 points at 82 bid, 84 offered, and the 4¾% notes due 2023 up 2½ points at 91.5 bid, 93.5 offered.

Calpine - which hopes to emerge from Chapter 11 by the end of the year - said in a court filing Wednesday that the amended plan provides for an updated valuation of the company no later than five business days before the voting deadline. It said that its advisor, Miller Buckfire, will update the valuation analysis to provide Calpine's total enterprise value as of that time.

The company also acknowledged that a court fight is likely over creditor claims that the company's value has declined in the past three months.

Calpine asked the U.S. Bankruptcy Court in Manhattan to set aside four days in December for a hearing on confirmation of its plan to emerge from Chapter 11 protection.

Housing lackluster

Elsewhere, a trader said, "there was stuff - but nothing in particular to talk about."

The housing sector, which had been strong the past few sessions following the lead of Hovnanian and given strength by the Fed rate cut, was doing little or nothing Thursday.

He said that Hovnanian, a recently hot issue on the strength of its successful weekend sales promotion, was "up small, maybe about a point," with its 7 5/8% notes due 2017 at 80 bid, 82 offered, "not up much from [Wednesday]. Its 7½% notes were also better, at 81 bid, 82.5 offered, from bid levels around 80 on Wednesday.

Another trader said he had "not seen Hovnanian at all."

Among other housing names, Beazer Homes USA's 8 5/8% notes due 2011 were down 1¼ points to 80.5 bid, 82.5 offered.

Tousa Inc.'s 9 % notes due 2010 lost 1½ points to end at 70.5 bid, 72.5 offered.

And Standard Pacific's 9¼% notes due 2012 were down 1 point at 69 bid, 71 offered.

Mortgage names continue gains

But while the housing sector seems to have topped out, at least for now, barring another rate cut, mortgage lender names were mostly better, continuing to draw strength in the aftermath of the rate cut and market expectations that interest rate cut will make more capital available.

Countrywide Financial Corp.'s 3¼% notes due 2008 were up 1 at 94 bid, 95 offered.

Fremont General Corp.'s 7 7/8% notes due 2009 were up 2 points at 89.5 bid, 91.5 offered. And Thornburg Mortgage 8% notes due 2013 were seen unchanged at 88.5 bid, 89.5 offered.

GMAC - a major residential lender through its ResCap unit, as well as an automotive lender - was seen solidly better, a source quoting its 7¾% notes due 2010 up about 3 points to the par level. However, former GMAC parent General Motors Corp.'s bonds were seen unchanged to easier, as the giant carmaker remains in contract talks with the United Auto Workers union, after the old contract's expiration. While progress has been made, the two sides remain apart on a number of issues.

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