Junk rebound continues; more Rite Aid gains; TreeHouse set for Friday; funds off $916 million

By Paul Deckelman and Paul A. Harris

New York, Feb. 18 - The high-yield market continued its comeback Thursday from the low levels seen at the end of last week, with statistical indexes again doing better and a number of names showing solid gains of 2 points or more. These included paper maker NewPage Corp. - which came out with fourth-quarter earnings and gave guidance on its debt and liquidity profile - and Clear Channel Communications Inc., although traders cautioned that volume was relatively light and may not be that indicative of the market's real state.

Another gainer, for a second consecutive session, was Rite Aid Corp., whose bonds had firmed smartly on Wednesday on the news that sector peer Duane Reade Inc. is to be bought out in a $1.1 billion deal, with Rite Aid itself -- the Number-Three U.S. drugstore chain operator - now seen in play by some analysts.

The junk bond primary market continued stirring on Thursday, with price talk emerging on TreeHouse Foods Inc.'s $400 million offering of eight-year notes. The Westchester, Ill.-based private-label food company's issue is expected to price on Friday afternoon, and if it does, it would be the first new deal to successfully run the daunting market conditions gauntlet in more than a week. From across the pond came word that British betting operator Ladbrokes Group Finance plc is planning a sterling-denominated offer of seven-year bonds.

Funds see $916 million outflow

But that nascent new-deal revival - which will depend on continued market liquidity - could be jeopardized if cash flows into Junkbondland were to be interrupted. And there was an ominous sign late in the session that such a development is quite possible, as market participants familiar with the high yield mutual fund-flow statistics generated by AMG Data Services of Arcata, Calif. - a closely watched indicator of overall junk market liquidity trends - reported that in the week ended Wednesday $916 million more left those funds than came into them.

It was the second consecutive week in which outflows approached $1 billion, following the $984 million cash exodus seen in the previous week, ended Feb. 10, the third in the last four weeks, including a $75 million outflow in the week ended Jan. 27, and the third this year, against four inflows, according to a Prospect News analysis of the figures.

Over the past four weeks - a negative stretch broken only by a lonely little $42 million inflow seen in the week ended Feb. 3 - net outflows from the funds have totaled $1.933 billion, according to the Prospect News analysis. On a year-to-date basis, what had been a healthy inflow total of as much as $1.576 billion has now swung into the red, dropping to a 2010 net outflow of $357 million from the previous week's $559 million net inflow. According to the Prospect News analysis that is the first time the junk market has shown a year-to-date net outflow from the funds since the week ended April 2, 2008, when the cash hemorrhage stood at $694.6 million.

EPFR sees $614 million cash exit

Another fund-tracking service - Cambridge, Mass.-based EPFR Global, whose methodology differs somewhat from AMG - meantime reported that $614 million more left the funds than came into them in the latest week, on top of the more than $1 billion outflow seen in the previous week, which the company said was the biggest outflow it had tracked since the third quarter of 2008.

However - reflecting the difference in the way AMG and EPFR calculate their respective fund-flow totals - the latter said that on a year-to-date basis, the mutual funds are still showing a new inflow of $452 million, although that is still down from over $1 billion in the previous week.

EPFR's analysts said in a research note late Thursday that the junk funds lost cash "as investors fretted that the Greek crisis and the huge demand from sovereign borrowers at a time when central banks are beginning to close the taps will make it harder to issue or refinance riskier debt."

All cumulative fund-flow totals, whether for AMG or EPFR, can include unannounced revisions and adjustments to figures from prior weeks.

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 comprise less of the total monies floating around the high yield universe than they did in the past.

A trader - noting the fact that the junk market had shown a better tone over each of the three sessions following Monday's legal holiday, suggested that the vast bulk of the fund redemptions responsible for the latest week's big outflow total had probably taken place a week ago, on Thursday and Friday, Feb. 11-12, when the market was in the process of getting hammered due to mounting investor angst, an equity market downturn and a deteriorating new-deal environment which caused a number of issuers to pull or postpone their respective upcoming new issues.

On the other hand, another trader noted that "for high yield, as we all know, the most significant contributor to performance is cash, and if cash continues to leave the marketplace, although [the exodus] did slow toward the end of [this week], and leaves bond funds in general, then this market is going to get a lot more treacherous and volatility will definitely take off.

The trader said that any kind of outflows "in the $900s is worth paying attention to, and you've had almost $2 billion leave over the past two weeks - a pretty notable outflow."

A hedge fund manager noted that the combined two most recent weeks of outflows reported by AMG represent the biggest back-to-back weekly outflows that the market has seen since March 2005.

The four-week trailing average of outflows intensified to $479 million from $112 million, the manager added.

Meanwhile flows to the bank loan funds remain positive.

Bank loan funds saw $161 million of inflows, according to AMG.

It was the 12th consecutive week of positive flows for the bank loan funds, although the inflow was not as robust as the previous week's $196 million.

Year-to-date the bank loan funds have seen $1.4 billion of inflows.

Market indicators up again

A trader saw the CDX Series 13 index gain a point on Thursday to end at 97 bid, 97½ offered -- although he said that once the AMG numbers had had begun to make the rounds after the official index close, the market measure had lost about ½ point in after-hours trading. The index had gained 5/8 point on Wednesday.

The KDP High Yield Daily Index meanwhile rose by 20 basis points on Thursday to finish at 70.15, building on 65 bps zoom seen in Wednesday's dealings. Its yield tightened by 8 bps to 8.48%, after having come in by some 22 bps on Wednesday.

Advancing issues topped decliners for a third consecutive session on Thursday, continuing to hold a better than eight-to-five edge.

Overall market activity, as measured by dollar-volume levels, rose by 4% from Wednesday's pace.

Even so, a trader called Thursday's volume "relatively light" by normal standards, while a second characterized the day's dealings as "thin."

One of the traders said that "most of the activity on Trace has been in paper in the crossover space."

That having been said, a trader noted that Thursday's session "had a nice tone to it," adding that he saw "a lot of things up today, across the board. I'm sure that the high yield index was up a point or two. Definitely people came back in, buying things."

Another trader agreed that "it did feel like people put some money back to work. The market has been firm the last couple of days."

He said "with the lack of a new-issue calendar, I think guys are going to have a little cash-build now," leaving things "in decent shape."

Rite Aid rise continues

A trader said "there's definitely volume" in Rite Aid Corp.'s bonds, continuing the trend of considerable activity seen on Wednesday, when the Camp Hill, Pa.-based Number-Three U.S. drugstore operator's bonds had firmed between 2 and 4 points on merger and acquisition buzz in the pharmacy sector following the announcement of Walgreen Co.'s plans to buy Duane Reade.

He saw Rite Aid's 9½% notes due 2017 ending around 81, "pretty much unchanged," though on notable volume, while its 9 3/8% notes due 2015 were "up a couple" of points to 831/2. Its 10 3/8% notes due 2016 gained a point to 105 bid.

"There was a lot activity," he said of the name, adding that "depending which one, [it] is unchanged to up a couple of points."

At another shop, Rite Aid's 8 5/8% notes due 2015 were being quoted up 3 points on the session to above the 84 level, on top of the previous day's gain of more than 2 points.

With Walgreen, the top U.S. pharmacy operator, taking over Duane Reade and its 257 stores, most of them in New York City, Rite Aid will become "the last remaining major drug store asset in the U.S. with meaningful exposure to dense urban markets," UBS Securities analyst Neil Currie said in a note to clients. Interested parties could include Walgreens, its CVS Caremark rival, the Number-Two operator - or retailing Behemoth Wal-Mart Stores.

However, some believe that Rite Aid could be acquired in pieces rather than whole.

"We don't think Rite Aid will be acquired as a whole in the near term - although certain of its geographic locations might be of interest to an acquirer (e.g.. its California stores)," wrote Gimme Credit analyst Kim Noland in an afternoon comment.

Duane Reade's notes were meantime on the quiet side after the midweek rush. A trader called the 11¾% notes due 2015 unchanged around 124.

Another trader saw those bonds - which had jumped nearly 20 points Wednesday on news of the company's coming acquisition - at about 125 bid, 125½ offered and "still active."

Standard & Poor's said it was considering upgrading the company on the back of the Walgreens acquisition.

Clear Channel cleans up

A trader said he had seen Clear Channel Communications Inc. bonds "bouncing around," with the San Antonio, Tex.-based broadcasting and outdoor advertising company's 10¾% notes due 2016 at 78 bid, up 4 points on the day, on "a lot of volume."

He saw its 11% PIK toggle notes due 2016 "even more active," ending up 4½ points on the day in a 67-68 context.

At another desk, the 11s were up nearly 5 points to end just under 68, while Clear Channel's 5½% notes due 2016 likewise gained 4 points to close at 46½ bid.

A market source said that the Clear Channel issues were among the most actively traded junk names on Thursday, with over $32 million of the 11s having been traded by mid-afternoon, along with over $17 million of the 103/4s.

There was no fresh news out on the company that might explain the rise, although earlier in the week, Moody's Investors Service raised its rating on the company to Caa2 and changed its outlook on Clear Channel to stable from negative previously.

In its upgrade announcement, Moody's said that Clear Channel has an "ample covenant cushion" to stay in compliance following the refinancing of a $2.5 billion loan to subsidiary Clear Channel Outdoor, repayment of about $2 billion in debt, and cost cutting.

NewPage gains after numbers

A trader said that NewPage Corp.'s paper "bounced around a little bit," even as the Miamisburg, Ohio-based coated-paper company reported fourth-quarter earnings.

He saw the 10% senior secured second-lien notes due 2012 up 4 points on the day around 57 bid, while its 11 3/8% senior secured notes due 2014 were "up a couple of points" at 94 bid, 95 offered.

Another trader noted that after the earnings data were released, "NewPage did their conference call, and there were no surprises."

He said of the 11 3/8% notes that "while you never say they're as good as 100% covered - they're as good as 100% covered, I think." With the bonds trading in the lower 90s, "it's something that people should look at, for the simple reason that in the event of a bankruptcy, it's a first-lien note, and you're probably going to get paid off without too many questions."

New Page reported fourth-quarter net sales of $857 million, compared with net sales of $977 million in the same period of 2008. Sales volume of coated paper improved during the fourth quarter but declined for the full-year 2009. The company said that the decrease in net sales also reflected lower coated paper prices in the 2009 period.

It posted a $55 million net loss attributable to the company in the fourth quarter, compared with a $42 million net loss in the 2008 period.

On its conference call, company executives said that they are optimistic that a portion of NewPage's planned $150 million of asset sales could be realized in the first half of 2010, and are comfortable with its liquidity position regardless of the outcome of the sales based on recent business trends.

NewPage closed 2009 with $224 million of liquidity, consisting of $5 million of cash and cash equivalents and $219 million of additional borrowing capacity under its revolving credit facility. It had net debt of some $3 billion.

Elsewhere in the paper sector, a trader saw NewPage rival Appleton Papers Inc.'s 10½% senior secured notes due 2015 having come back to 93½ bid, 94½ offered - still well under the 98.035 level at which the $305 million deal priced to yield 11% on Jan. 29, but well up from recent quoted levels as low as 89-90.

"So paper has had a good snap-back" after having gotten beaten up last week, the trader said.

Manitowoc moves up

A trader said "one thing that jumped" was Manitowoc Co.'s recently priced 9½% notes due 2018, $400 million of which had priced at par on Feb. 3 to yield 9½%.

The trader said that the Manitowoc, Wis.-based crane and industrial heavy equipment manufacturer's paper had recently been quoted around 98¾ bid, 99¾ offered, but by the end of the day on Thursday, the bonds were trading up at 100½ bid.

"What that means to mean is that whatever supply was around is getting cleaned up - it's leaving dealer hands and going into investor hands.

"If anybody really likes the credit and cares on it, they should buy what's around [Friday] regardless of what's going on, because a week from now, you're not going to be able to find an offering."

TreeHouse price talk

The primary market continued to pay out a meager amount of news.

TreeHouse Foods, Inc. talked its $400 million offering of eight-year senior notes (Ba2/BB-) at the 7 7/8% area on Thursday.

Books are closed for all accounts other than those on the U.S. West Coast, for which the books will close at noon ET on Friday.

The deal is set to price on Friday afternoon.

Bank of America Merrill Lynch and Wells Fargo Securities are joint bookrunners for the acquisition deal.

Also on Thursday, Ladbrokes Group Finance plc announced plans to make an offering of new sterling-denominated seven-year fixed-rate notes.

The deal comes in conjunction with a tender offer for £250 million of Ladbrokes 7 1/8% notes due 2012.

Holders who tender will have priority in allocation of new notes.

The tender, via dealer managers Barclays Bank plc and Royal Bank of Scotland plc, and agent Deutsche Bank AG, is set to expire on Feb. 25.

The Harrow, England-based gaming firm is bringing both the bonds and the tender in order to extend its debt maturity profile.

-Stephanie N. Rotondo and Jennifer Lanning Drey contributed to this report

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