Hovnanian sells 10-year deal, bonds jump in aftermarket; American Achievement zooms on company sale

By Paul Deckelman and Paul A. Harris

New York, May 16 - Hovnanian Enterprises, Inc. hit the junk bond market Friday with a $600 million issue of secured bonds. The issue was heard to have been well over-subscribed, and to have shot up solidly when it was freed for secondary market dealings. Several traders expressed amazement that an issue from the Red Bank, N.J.-based homebuilder was so well received, wondering whether investors were getting carried away by some misguided sense of euphoria.

Hovnanian's existing bonds, meantime were also seen doing better - a departure from the usual junk market pattern of the established bonds giving up ground in the face of a big new issue.

SandRidge Energy Inc.'s new bonds, which priced on Thursday and then moved up in the aftermarket, continued to gain strength on Friday.

Elsewhere, American Achievement Corp.'s several series of normally little-traded bonds were seen having jumped 10 points or more to levels just below par, apparently pushed upward by news that the Austin, Tex.-based manufacturer of school rings, yearbooks, graduation products and other kinds of jewelry and items used to mark educational or other types of achievements has agreed to be acquired.

Apart from those names, the overall secondary market was seen quiet, though with a better tone. Primaryside activity was almost entirely oriented toward Hovnanian's quickly shopped, opportunistically timed - but very well-received issue.

Hovnanian oversubscribed

One issue was priced during Friday's primary market session.

Hovnanian Enterprises sold a $600 million issue of 11½% five-year senior secured second-lien notes at 99.064 to yield 11¾% in a drive-by.

The yield came in line with "high 11s" price talk, according to an informed source, who said that the order book was six-times oversubscribed.

Credit Suisse led the debt refinancing and general corporate purposes deal.

A sell-side source who was not directly involved in the transaction said that the Hovnanian deal was driven entirely on reverse inquiry, and added that the order book was never really opened.

Seven-week itch

Roundabout the market Friday, sources commented that presently high yield is a picture of technical strength.

One investment banker said that AMG Data Services has reported seven consecutive weeks of inflows to high yield mutual funds totaling $2.5 billion, counting just those funds which report to AMG on a weekly basis.

"If you count the monthly reporters that's another $1.1 billion," this banker said.

Other sources signed said those numbers appear correct.

The most recent of those inflows, reported last night, was $120.98 million for the week to May 14.

"There is a lot of cash in the market," a high yield syndicate official said.

"The term loan market is looking better. You're not seeing term loans getting done at bond-equivalent yields of 10% anymore. There is more rationality in that market.

"CLOs aren't coming back, but at least you've had some price improvement. That's why high yield has been improving over the past seven weeks."

The sell-sider also noted an apparent resurfacing among investors of a willingness to get beneath a greater amount of risk than had been the case in the late winter.

The source perused the past week's deals and noted that among them was Providence, R.I., building supplies company, Nortek Inc.'s $750 million of single B-rated 10% secured notes due 2013 (B1/B).

With seven consecutive weeks of inflows indicating that people could be piling back into junk, Prospect News asked this sell-sider if investors may be satisfied that they have seen, or at least presently have a view of, the bottom of the current business cycle.

This source replied with a "could be."

Others to whom the question was put during the Friday session merely passed on it, however.

The week ahead

The May 19 week will get underway with a very thin calendar.

Hong Kong-based commodities trading firm Noble Group will begin marketing a dollar-denominated offering of five-year fixed-rate senior notes (Ba1/BB+/BBB-), with roadshows in Asia, Europe and the United States.

Also Royalty Pharma remains in the market with a $200 million seven-year senior unsecured fixed-rate term loan via Banc of America Securities, which is being marketed to high yield accounts.

Beyond that, officials on several high yield syndicate desks profess visibility on pending transactions, especially from the energy sectors, including oil and gas exploration and development firms.

In round numbers sources are estimating that a full one-third of 2008's $27.3 billion of issuance comes from the energy sectors.

One high yield syndicate source said that two energy names could surface during the week ahead.

No one volunteered any names.

And with respect to the backlog of hung LBO risk, little news surfaced during the past week.

On Friday a banker said that the backlog, which started out north of $230 billion, is now thought to have gone below $150 billion, with approximately $80 billion of bank loan risk and $65 billion of bond risk.

Hovnanian is a big hit

Before the Hovnanian deal actually priced - when it was still circulating around the market - a secondary trader mused that "it will be interesting to see how one of the weaker homebuilders is received by the investment community."

While Hovnanian is not quite as badly off as such junk market homebuilder trainwrecks as Tousa Inc. or Kimball Hill Homes Inc., both of which are currently restructuring through the bankruptcy courts - or such other problem-plagued credits as Beazer Homes USA Inc., which has had to wrestle with bankruptcy rumors, default notices and even ongoing federal investigations - neither is it considered to be in the same class as the stronger names in the sector such as KB Home, D.R. Horton Inc. and Toll Brothers Inc.

He suggested that the deal's prospects would be helped by the fact that the notes are secured - "the second-lien part will enhance the interest [of market participants in the deal] - but I'm very curious to see how it actually pans out."

When it came time to price, another trader said, the new deal panned out quite well and he saw the new bonds shoot up to 102.75 bid, 103 offered when they were allowed to cross into the secondary market - well up from their issue price of 99.064 earlier in the session. A little later, he had seen the new bonds firm further to 103 bid, 103.75 offered.

Among the company's outstanding issues, he traded Hovnanian's 6% notes due 2010 at 86 and saw them trading elsewhere as high as 89 on Friday, way up from the 81 bid level of earlier in the week - and he was astonished.

"I guess everyone thinks that the homebuilders are gonna be OK, so long as they have access to the debt markets, they can continue raising cash - but I don't know. I think it's kind of foolish [for investors] to grab this stuff."

He acknowledged that Hovnanian would likely use the proceeds of Friday's deal to improve its balance sheet by taking out short-term debt obligations, replacing soon-maturing debt with 10-year paper, "but even so," it is still a gamble on the part of investors "who feel [the company] is going to live for another day.

"It seems like everybody is saying 'OK, risk is good again - let's jump in.'"

Even with surprisingly good housing-sector news announced on Friday, which certainly didn't hurt the Hovnanian deal - the Commerce Department said April housing starts jumped 8.2% to a 1.032 million-unit annual pace, the best rate seen since January 2006, and construction permit applications rose 4.9% to a 978,000-permit annual rate, the first such upturn in five months - the badly battered homebuilding industry still has many problems.

"It's tough turning around that ship" on such short notice, the trader said - "it's moving in one direction, and to get it to turn around and move the other way is going to take quite a bit of doing."

In the interim, he opined, "I wouldn't be putting my money to work there."

Others apparently disagreed. Another trader saw the new Hovnanian bonds having risen to 102.5 bid, 103.5 offered, while a third, later in the day, saw them going home as good as 103 bid, 103.5 offered.

Back among the company's outstanding issues, the latter trader saw Hovnanian's 7¾% notes due 2013 up as much as 5 points on the day at 69 bid, 71 offered.

A market source saw Hovnanian's 7½% notes due 2016 up about ¾ point at 73 bid, while its 6 3/8% notes due 2014 were a point better at 72.

Some other builders gain

One of the traders saw the strength in Hovnanian's bonds carrying over to other sector names - he pegged KB Home's 5¾% notes due 2014 half a point better at 89.5 bid, 90.5 offered.

However, at another desk, a trader - who said that from where he sat Hovnanian's 6 3/8s and its 6¼% notes due 2016 were unchanged at 70 bid - also saw Beazer's 11 5/8% notes due 2011 unchanged at 86, while Standard Pacific Corp.'s 7% notes due 2015 were steady at 74. The trader saw WCI Communities Inc.'s 9 1/8% notes due 2012 down 2 points at 41 bid, 43 offered.

New SandRidge, PNM bonds firm

Apart from Hovnanian, one of the traders saw other recently priced issues "continue to improve."

He saw SandRidge Energy's new 8% notes due 2018, which priced Thursday at par and which then moved up to bid levels around 101-101.5 in initial aftermarket dealings, continuing to gain. He quoted the bonds at 101.5 bid, 102 on Friday. Another trader saw the new bonds as good as 102.

The first trader also saw the pair of New Mexico utility deals priced a week ago - holding company PNM Resources Inc.'s 9¼% notes due 2015 and split-rated operating company Public Service Co. of New Mexico's 7.95% notes due 2018, both of which priced at par - as trading around 102 on Friday.

"A lot of people are looking at the new issues," yet another trader said. "Hovnanian is a good barometer."

Market indicators continue rise

Back among the established issues not having any new-deal links, a trader said, the widely followed CDX junk bond performance index, which on Thursday had risen by 5/8 point to 98 bid, 98½ offered - was "unchanged, unchanged, unchanged," in what he characterized as a fairly quiet session. The KDP High Yield Daily Index rose by 19 bps to 76.53, while its spread tightened by 4 bps to 9.06%.

In the broader market, advancing issues led decliners by an almost five-to-three margin. Activity, represented by dollar volume levels, fell 23% from Thursday's pace.

A trader said that "overall, I think there was a better tone. There seemed to be at least two buyers for every seller. Nobody wants to let any merchandise go - because they think it's going to be worth more [this upcoming] week."

American Achievement way up

A trader said that American Achievement's bonds "were up big today," quoting the company's 8¾% notes due 2012 at 99.75 bid, 100.75 offered, up 10 points on the day and its 14¾% notes due 2012 having soared even more, up a full 20 points on the day to 95.5 bid, 97.5 offered.

Another market source saw the company's AAC Group Holding Corp. 10¼% notes due 2012 as having also jumped to the 99 level. The AAC zero-coupon notes due 2012 were seen at 98.375 bid; they had previously been trading around the 80 level, earlier in the month, but had not traded for more than a week before Friday's big surge.

A trader who saw the bonds climb sharply noted that there was merger and acquisition news out about the company and suggested that investors had pushed the company's bonds up to around the par level in anticipation that the sale of the company would trigger a 101 change-of-control put.

On Friday, American Achievement - best known as a producer of high school and college class rings, yearbooks and other graduation products - announced that it had signed a definitive agreement to be acquired by Herff Jones, an Indianapolis-based company that markets similar products. Terms of the transaction were not immediately announced.

Harrah's bonds better

Elsewhere, a trader said that he had seen Harrah's Entertainment Inc.'s bonds "trade up quite a bit," with the Las Vegas-based gaming giant's benchmark 10¾% notes due 2016 "very firm right out of the box."

He saw the bonds ending around 87.75 bid, 88 offered, up from 87 the previous session and up even further from levels "straddling 86" at the beginning of the week, "so we've moved up quite a bit on the week." No fresh news that might explain the gain was seen out on Friday, but the trader suggested that in view of the overall firmer market, "everybody's happy with this stuff again."

Harrah's 5¾% operating company noted due 2017 were up ½ point on the day at 58 bid.

Sector peer Station Casinos Inc.'s 6% notes due 2012 edged up to just below the 86 level, while Isle of Capri Casinos Inc.'s 7% notes due 2014 gained nearly a point to end at 79.5 bid.

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