Market quietly fades into Fourth; sees second straight outflow, $144.296 billion

By Paul Deckelman and Paul A. Harris

New York, July 3 - The high yield market may have recently been hotter than the proverbial firecracker (at least the primary side of things), but on Thursday, it was more like a soggy skyrocket as activity ground to a halt in an abbreviated pre-Fourth of July session.

With the week's forward calendar having been cleared by Wednesday, primary side players came in late, read their e-mails and then left early, if they came in at all. Secondary denizens meantime showed no real desire to buy anything, holding to the conventional wisdom that militates against being long anything over a three-and-a-half-day holiday weekend.

And there was virtually nobody around by the time the few last stragglers still on the job in the late afternoon got word that high yield mutual funds - seen as a reliable barometer of overall junk bond market liquidity trends - had shown a second straight weekly outflow, although not a terribly significant one.

Market participants familiar with the statistics compiled by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, $144.296 million more left the funds than had come into them, excluding distributions and counting only those funds which report on a weekly basis.

In the previous week, ended June 25, the outflow was $177.184 million, bringing the total outflow for the two-week stretch to $321.48 million.

One primary-side source also pointed out that the outflow was the fourth in the last seven weeks - possible reason for caution.

But that loss of liquidity is still just a drop in the bucket, compared with the overall numbers for the year, which has generally seen week after week of inflows - some of them more than $1 billion - punctuated here and there by a week or two of generally modest outflows.

According to a Prospect News analysis of the AMG figures, even including the last two weeks of red ink, - indeed, even with the four outflows in the last seven weeks - inflows have still been seen in 18 of the 26 weeks since the beginning of the year, for a healthy cumulative infusion of $15.868 billion.

Analysts credit the flow of mutual fund money into the junk market - and by extension, the overall flow of funds from all sources - to the fact that high yield as an asset class has had a barn-burner of a first half, with total return percentages in the high teens, far outstripping Treasuries and beating most equity vehicles as well.

The seemingly never-ending supply of new cash has produced a positively sizzling primary market, with $69.285 billion of new paper having come clattering down the chute through June 30 - handily beating the total for all of last year, $59.6 billion, according to data compiled by Prospect News.

And the junk market pretty much seems positioned to pick up after the holiday break right where it left off, with an ample stock of new deals sitting on the forward calendar, ready to go.

While not much was happening in new-deal-land Thursday, price talk of 8 ¾%-9% emerged on Ardagh Glass €175 million of 10-year non-call-five senior notes (B1), with the Dublin bottle-maker's deal,via BNP Paribas and Citigroup, expected to price early in the week of July 7.

In addition to the Ardagh Glass offering, the market anticipates transactions to be completed by at least three other issuers during the July 7 week.

Calpine Corp. is expected to bring a sizeable offer of high yield notes as part of its $1.8 billion second-priority senior secured notes and term loans package, with Goldman Sachs running the books. The San Jose, Calif.-based independent power producer will also obtain a new $500 million first priority lien working capital revolver.

Also during the July 7 week Rockwood Specialties Group Inc. is expected to sell $375 million of eight-year senior subordinated notes (B-), via JP Morgan, Merrill Lynch and Goldman Sachs, on or around July 10.

And Barcelona-based automotive metallurgical products maker Teksid SPA is expected to price €250 million in two tranches (dollars and euros) of eight-year senior notes (B2/B-), via JP Morgan.

One sell-side official commented on Thursday that in spite of mixed fund flow numbers heard during recent weeks, the high yield remains notably liquid.

"There is a lot of cash out there and until it dries up the market will remain open," asserted the source.

"Everything will be determined by liquidity," the official added, noting that a coming round of second-quarter corporate earnings reports and other economic news will likely be of secondary importance.

"Most people think the convert market is overbid and the high yield market is overbid," the official stated. "But as long as there is cash out there I think the deals will continue to get done."

The secondary market - which had been struggling before the surge of inflows began last fall and continued on through the first half of this year - has also benefited hugely from the easy liquidity conditions, with the need to put cash to work pushing portfolio managers to buy whatever paper is out there.

However, that's not been an unalloyed blessing. Some traders and other participants have lamented the fact that as the junk market's higher-quality credits, such as most of the homebuilders and gaming issues and such hardy survivors of the telecom industry debacle as Nextel Communications Inc., have been pushed up to levels at an above par - "too rich" for the blood of some participants, they've carried even lesser-quality stuff along on their coattails to levels that some traders consider crazy, considering the credit quality and economic fundamentals of those issues - even some which could be considered shaky by any definition aren't trading that far south of par anymore.

Case in point: Health South Corp., one of the few names actually seen having done anything during Thursday's abbreviated session, which officially shut down at 2 p.m. ET ahead of the holiday break, but which in reality had really rolled things up long before that.

A story in Thursday's editions of The Wall Street Journal indicated that the troubled Birmingham, Ala.-based provider of diagnostic imaging and outpatient surgery and rehabilitation services - which is under investigation by the Securities and Exchange Commission on allegations that it had inflated earnings by as much as $2.5 billion over several years - was seeking new funding in order to ward off a possible bankruptcy filing.

The paper said that HealthSouth has been in talks with investment banks and turnaround specialists that might be able to help it raise money and appeared close to nailing down a deal with Credit Suisse First Boston

Citing people familiar with the situation, the Journal said that the company would have to raise more than $500 million to pay off a $345 million convertible-bond issue that has already matured, while other issues that are technically in default would also likely have to be restructured.

HealthSouth bonds had been steadily rising for most of the week already, in apparent response to the company's announcement that it would meet with creditors and shareholders in New York on Monday afternoon. On Thursday, a trader said, the Journal story "just drove prices up again."

He quoted HealthSouth's 12% notes as having firmed to 81.25 bid, 82.25 offered from prior levels 79.5 bid, 81.5 offered, and saw the company's convertible bonds bid at 62.5 "and looking, with no bonds out there to be bought," up from 59 bid, 61 on Wednesday night.

Noting that the company is in theory just a step or two removed from possible bankruptcy - underscored by the report in the Journal - and still faces many, many problems, he mused "I just don't understand it. There are a whole lot of variables. Their numbers are undefined. They have big potential liabilities with Medicare. And there's still the SEC to be dealt with" - yet the bonds rise anyway.

"Most accounts [that deal in the paper ]0apparently don't understand the situation either," he added, noting that they keep bidding it up.

On the equity side, investors were just as quick to see the glass as being half full rather than half empty, with HealthSouth's pink-sheet-listed shares up 20 cents (30.43%) to 90 cents a share on Thursday's news.

Elsewhere, Moody's Investors Service lowered its outlook for Levi Strauss & Co. debt to negative from the previous stable, while affirming its current ratings (senior unsecured at B3), citing the San Francisco-based apparel maker's recent disappointing results and its warnings that 2003 full-year sales - which had been expected to improve from 2002 levels - would be essentially flat.

But the trader said "the news was out there, but there was no one to hear it," quoting Levi's 12 ¼% notes at 85 bid and its 11 5/8% notes at 87.5 bid, 88 offered.

Another trader opined that with the market having already heard Levi's earnings warnings and seen the soft earnings, the Moody's message was not unexpected and was already "baked in" to the bonds' recent levels in the mid-to-upper 80s.

In the gaming industry, Thursday was B-Day, as Boyd Gaming Corp. and MGM Mirage opened their glitzy, billion-dollar Borgata gaming palace in Atlantic City - the first new hotel/casino in the seaside resort in over a dozen years. Still to be determined is whether the huge, flashy new pleasuredome pulls in so many visitors that it grows the overall Atlantic City gaming market the way the opening of the Mirage revitalized Las Vegas in 1989, as A.C.'s city fathers and other optimists hope - or whether it merely cannibalizes the clientele from the incumbent gaming operators and sparks a costly promotional war as they try to retain market share, as some pessimists fear may happen, at least in the short run.

While the activity at the long-awaited new casino's dice tables, slots and roulette wheels was busy on its first day of operation, bonds of its two owners were anything but, hanging in at the same levels they've recently held, all well above par.

A trader saw MGM Mirage's 6 5/8% notes due 2005 at 103.5 bid and its 6 ¾% notes due 2007 at 105.75 bid, and he pegged its 8 ½% notes due 2010 trading "at a nice premium" to par, at 117.5 bid.

Boyd's 9 ¼% notes were also way up there, at 110.5 bid, 111.5 offered.

Trump Hotel and Casino Resorts is the new Borgata's neighbor in Atlantic City's marina district and could be one of the operators hurt if Borgata starts to pull gamblers - particularly the high-rolling, big-spending "whales" - away from its three properties in the city. Even so, Trump's Atlantic City Funding's 11 ¼% first mortgage bonds due 2006 held steady at 79 bid, 79.5 offered.

Among recently priced issues, a trader saw "some activity" in Cincinnati Bell Inc.'s 7 ¼% senior notes due 2013, which had priced at par on Wednesday. He saw the Ohio telecommer's new bonds quoted around 100.5 bid, 100.75 offered as of mid-morning, but didn't see anything happening in them after that.

And French media giant Vivendi Universal's new 6 ¼% senior notes due 2008, which had also priced at par on Wednesday, had crept up to be quoted at 100.375 bid, 100.75 offered during the morning, but with no actual trading seen.

Another desk had Vivendi's no better than around par bid, 100.625 offered, while the Cincinnati Bells "just tread water" at 100.5 bid, 100.75 offered.

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