Talk out on Citgo deal, Radio One shops notes; secondary firm again, funds back in the black

By Paul Deckelman and Paul A. Harris

New York, June 17 - Citgo Petroleum Corp. - whose senior secured bond offering has been sitting on the high yield forward calendar since mid-May and considered "day to day" for much of that time - may actually get done after all, according to junk primaryside syndicate sources; they heard price talk emerge Thursday on the by now radically downsized deal, which is expected to come to market during Friday's session.

Radio One Inc. began shopping a $100 million issue of seven-year secured notes around as part of larger financing program announced by the Lanham, Md.-based media company that includes a $400 million senior secured credit facility and an exchange offer for two series of its existing bonds.

Away from the new issue arena, traders saw the overall secondary market continuing its recent firming trend, even in the face of an anemic advance in equities on Thursday.

Energy was once again the focal point - but besides such familiar Gulf of Mexico oil rig disaster-related names as ATP Oil & Gas Corp., BP Capital Markets plc and Transocean Inc. - the latter two attracting some junk market interest despite their nominally high-grade ratings and relatively low coupons - there was more activity in OPTI Canada, Inc., and some activity in Chesapeake Energy Corp., the latter up on the reports that several big Asian sovereign wealth funds plan to invest $1.5 billion in the Oklahoma City-based natural gas company.

Away from energy, Visteon Corp.'s bonds drove upward on judicial approval of a financing deal between the restructuring automotive components company and its bondholders.

Junk funds gain $271 million

As activity was winding down for the session, participants familiar with the weekly high yield mutual fund-flow numbers compiled by AMG Data Services of Arcata, Calif. - considered a reliable barometer of overall junk market liquidity trends - said that in the week ended Wednesday $270.7 million more came into those funds than left them - the first inflow the junk market has seen since the $220 million cash infusion recorded in the week ended April 28.

The latest inflow snapped a six-week string of outflows, including the $309.6 million cash exodus seen the previous week, ended June 9. During that six-week losing streak, the junk funds saw a net outflow of $4.613 billion, according to a Prospect News analysis of the figures provided by market sources. There were two huge outflows seen during that time - a $1.35 billion cash bleed in the week ended May 26, and an even more massive $1.69 billion hemorrhage in the week ended May 12, the largest such outflow in at least five years and by some accounts, the third-largest since record-keeping started in 1992.

Those six weeks of outflows - a sign of continued investor unease with the junk market - coincided with a sharp falloff in high yield primary issuance, as well as a slide in secondary market performance, seen both anecdotally in the reports of traders as well as in various statistical measures of secondary market strength, or the lack thereof.

Conversely, this week's inflow did not really come as a surprise to many traders, who noted a considerably firmer market tone over the last few sessions as well as positive daily flows into the mutual funds - signs of a nascent rebirth of investor confidence in the junk market's viability.

Counting the latest week's upturn, inflows have now been seen in 15 weeks out of the 24 since the beginning of the year, including a 10-week winning streak that stretched from late February through the end of April, during which time $4.443 billion more came into the funds than left them, according to the analysis. There have been nine outflows in 2010 - the six most recent, as noted, and three other cash drains recorded in January and in February, with the latter two each over $900 million, for a total of $1.9 billion.

The inflow in the latest week brought the year-to-date cumulative total for the weekly-reporting funds to $205 million net outflow, according to the analysis of the data, versus the $475 million 2010 net outflow recorded the previous week, the biggest year-to-date negative number seen so far this year. The funds had hit a peak cumulative inflow total for the year of approximately $4.086 billion in the week ended April 28.

EPFR sees $164 million cash gain

Another fund-tracking service - Cambridge, Mass.-based EPFR Global, whose methodology differs somewhat from AMG - meantime also reported an inflow, as $164 million more came into the funds than left them in the latest week.

That cash infusion follows a $313 million outflow seen the previous week, ended June 9. More or less in line with the pattern seen in the AMG figures, the EPFR statistics show it to be the first inflow after five weeks of outflows totaling $6.27 billion.

EPFR's analysts said in a research note on Thursday night that "a string of fair to good macroeconomic data drew the spotlight away from the sovereign credit issues that have bedeviled global markets since early May." They noted that over $37 billion flowed out of relatively safe but low-yielding money market funds during the week, "highlighting the desire of investors to put their money to work" in riskier, but more rewarding investment vehicles, including many types of equity funds and emerging market and other global bond funds. They further said "that reduction in risk aversion also opened the door" to the influx of fresh money into the junk funds.

Reflecting the difference between the ways AMG and EPFR calculate their respective fund-flow totals - EPFR includes results from certain non-U.S. domiciled funds as well as the domestic funds - the service's year-to-date net inflow total now stands at $2.434 billion. That is up from last week's $2.27 billion, but thanks to the recent outflows, well down from the peak inflow level of about $8.59 billion seen in the last week of April after 10 straight weeks of inflows starting in late February.

Any and 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 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.

Citgo talks downsizing deal

The primary market pace remained slow on Thursday.

Citgo Petroleum talked a downsized $300 million offering of seven-year senior secured first lien notes (Ba2/BB+) to yield 11¾% to 12%.

Pricing is expected on Friday.

RBS Securities Inc., UBS Investment Bank, BNP Paribas Securities Corp. and Credit Agricole CIB are the joint bookrunners.

The deal, which was downsized and restructured from a $1.5 billion two-part offering - originally including a 10-year tranche - was presented on an investor roadshow in mid-May, and subsequently sidelined due to market conditions, as well as other factors pertaining specifically to the deal, sources say.

In conjunction with downsizing of the notes offer, the Houston-based refiner upsized its credit facility.

The notes are secured by a first lien on the issuer's three refineries in the United States, as well as inventory, certain equity interests and other assets securing the company's credit facility.

Proceeds will be used to repay debt and for general corporate purposes.

Micheal Foods well spoken-for

The only other deal presently in the market is Michael Foods Group, Inc.'s $430 million offering of eight-year senior unsecured notes.

The deal launched with an investor luncheon on Thursday, according to a trader from a high-yield mutual fund.

The notes are well spoken-for, the trader said, adding that participants in the bridge loan are rolling into the new notes.

Initial guidance on the deal is 10% to 10½%, the trader said.

The deal is expected to price on Tuesday.

Goldman Sachs & Co. is the left lead bookrunner. Bank of America Merrill Lynch and Barclays Capital are joint bookrunners.

Proceeds will be used to help finance the LBO of the company by GS Capital Partners from Thomas H. Lee Partners LP.

Market indicators keep rising

Back among bonds not related to the new-deal realm, a trader saw the CDX North American HY Series 14 Index up ½ point on Thursday to finish at 96¾ bid, 97¼ offered, after having gained ¾ point on Wednesday, the latest of several sizable gains that included a full 1 point rise on Tuesday.

The KDP High Yield Daily Index, meantime, climbed by 43 basis points on Thursday to end at 70.57, after having jumped by 45 bps on Tuesday and then rising another 24 bps on Wednesday. Its yield narrowed by 15 bps to 8.65%, after having come in by 8 bps on Wednesday, on top of a 16 bps tightening on Tuesday.

Advancing issues topped decliners Thursday for the fifth day in a row, although their nearly nine-to-five advantage seen on Wednesday narrowed a little to around eight to five.

Overall market activity, represented by dollar-volume levels, fell by 4% on Thursday, after having slowed by 10% on Wednesday.

A trader said that the high yield market "opened up this morning very well bid, and really held in, despite the fact that the equity market struggled through most of the day and was up and-down." The bellwether Dow Jones Industrial Average spent most of the day under water, before finally turning north toward the end of trading to end up 24.71 points, or 0.24%, at 10,434.17. Broader indexes, such as the Standard & Poor's 500 and the Nasdaq composite, also showed anemic gains on the day.

But in Junkbondland, the trader said: "We opened up a point, and held that, and there have been buyers all day."

He said that at his shop, they saw "a couple of guys that were in liquidating positions the last couple of days, but most of that has been sort of inherited portfolios, that kind of thing - with the market up and things firm, they're just blowing out of not big positions, just housekeeping, clean-up type items." He also saw "one guy come in with a decent-sized buy program. It wasn't too difficult finding the majority of the bonds" he was looking for.

Overall, he characterized Thursday's session as "a very solid day, once again - we've had a couple of days in a row now where we've seen very solid buying."

Among the credits he saw moving around were Vanguard Health Systems Inc.'s 8% notes due 2018, trading around 97¾ bid; Dollar General Corp. 10 5/8% notes due 2015, around 109½ bid and Biomet Inc.'s 11 5/8% notes due 2017, around 1081/4.

He also saw "decent buying interest" in the relatively short-dated issues of Ford Motor Co. and its Ford Motor Credit Co. auto-financing arm.

He also saw activity in "a variety" of Tenet Healthcare Corp. bonds, the legacy debt of the former Lehman Brothers Holdings Inc., trading at about 20¼ bid, Nuveen Investments Inc. and shipping operator TeeKay Corp.

All energy all the time?

A trader said: "it seemed like everything coming across my screen today was oil and gas related."

He saw some activity in Houston-based energy exploration and production outfit ATP Oil & Gas, quoting its 11 7/8% second-lien senior secured notes due 2015 as having opened at 75 on Thursday, up from a Wednesday going-home level in a 74 context. However, by the end of the day, he saw that early strength having faded, with the bonds back down to about the 72½ bid level.

Another trader said "we tried to get involved in ATP," noting that the bonds traded as high as a 74-75 neighborhood, although they later came back to 71½ bid, 72½ offered late in the day. So, "they were very volatile, up and down."

He said that "there was a report about on Bloomberg [Thursday] morning - that a lot of [drilling] rigs are now exiting the Gulf, which is bad news for ATP. That's their area of operations. The conventional wisdom is that the six-month moratorium on [deepwater] drilling could put them under. They refinanced their bank loan with their $1.5 billion bond issue" - which priced on April 19, just one day before the Deepwater Horizon exploded, burned and capsized, killing 11 employees, injuring 17 and creating the gigantic environmental catastrophe that neither well owner BP plc nor the government has been able to get a handle on yet.

"So those guys could be sunk. I don't know what the recoveries are, but they would have to sell a majority of their assets, I would imagine."

Yet another trader also saw the bonds "spike up" in the morning to as good as 73½ bid, 75 offered, before ending at around 72, calling them "not much different from [Wednesday].

BP not killed as CEO is grilled

Traders meantime saw BP's bonds seeming to hold their own, despite the televised testimony of the oil giant's chief executive officer, Tony Hayward, before a clearly skeptical and at times hostile congressional panel, and the news circulating later in the day that BP may sell between $5 billion and $10 billion of bonds to meet expenses growing out of the accident and its aftermath, including its promised establishment of a $20 billion escrow fund to pay claims of those hurt by the massive oil spill.

A trader said that "when talk came out about BP [possibly] doing a $10 billion deal, it seems you've got junk guys who are interested in getting in at these levels - it's kind of like the falling knife has hit the cutting board, and people are starting to grab it."

He saw "a ton of paper trading," although he added that "the perception that we're getting from accounts is that it's off the high-grade desks. We do have some junk guys playing around in it and it seems like everyone is a better buyer of the paper."

He saw about $200 million of BP's 1.55% notes due 2011 trading "anywhere between" 94¼ and 95 throughout the day, calling it pretty much unchanged from Wednesday's levels.

Among the longer BP paper, he saw the 4¾% notes due 2019 pretty much unchanged right around the 85 3/8 bid level, on volume of about $100 million.

BP's 5¼% notes due 2013 gained around ½ point at the 93¾ bid level, as more than $200 million traded.

"At one point during the day, you may have had [BP bond] down ¼ to ½ point, then you had them up, and they pretty much hung where they were for most of the day."

He said there was no great move to dump the paper, even with BP CEO Tony Hayward getting grilled on Capitol Hill about the decision-making went into drilling the well and BP's actions in the aftermath of the accident.

"Even with his stellar performance," the trader said, ironically, and the ratings downgrade by Standard & Poor's, "they basically didn't change. Anything that traded large size pretty much stayed intact to where it went out [Wednesday] night."

He also said that "the impression I'm getting from the high-yield guys is that there seemed to be more buyers out there at these levels than sellers, at least in the high-yield space. I don't see high-yield guys coming in and hitting bids to short the paper - I see them coming in and wanting to buy the paper."

"When the news broke on CNBC that BP is in talks for a debt offering, that sparked a lot of talk and conversation [among junk accounts] - some guys won't touch it, but at the right price other guys will."

A second trader said that BP's 3 7/8% notes due 2015 and the 4¾% notes were both right around the 85 mark, "up a few points from [Wednesday], 2 to 3 points, I'd say."

Transocean, Anadarko better

A trader said that 'we saw some quotes in RIG," referring to Transocean the operator of the destroyed Deepwater Horizon drilling rig, but not really a lot of activity." He said "that paper was up, depending on what issue, by between 3 and 5½ points."

The most active Transocean issue, he said, was its 5¼% notes due 2013, with "north of $30 million" traded. He quoted those bonds up at least 2½ points, ending around the 96 level.

The company's other bonds, he said, "just had a couple of million of each trading, so on a trade of $1 million or $2 million, it might be up by 5 points. The real volume was in the 51/4s today."

Another trader said that Transocean's bonds "are still in the 90s," seeing the 6% notes due 2018 and the 6.80% bonds due 2038 in a 91-92 context.

A trader saw Anadarko Petroleum Corp.'s 5.95% notes due 2016 up 3 points on the day, around the 90 bid area, on volume of over $120 million. Anadarko owned 25% of the Deepwater Horizon.

He meantime saw its longer paper, such as the 6.20% bonds due 2040, racking up about $50 million in trades, with the bonds up 2 points to the 85 level.

"Most of its paper was up 2 to 3 points, depending on what issue, and how much volume there was, but there was good volume in all the names there."

OPTI Canada, Chesapeake gain

Aside from the Gulf of Mexico-related energy names, a trader saw Canadian oil-sands operator OPTI Canada's bonds several points better; he noted that the company's chief executive had told an investment conference earlier in the week that OPTI expects to complete some kind of a strategic transaction by the end of the year - it could be an asset sale, or even a corporate sale - in order to improve its balance sheet.

He also cited news reports indicating that three Asian sovereign wealth funds, those of South Korea, China and Singapore, had agreed to invest some $1.5 billion into natural gas producer Chesapeake Energy.

"The thinking was that if the Chinese [and the others] are getting involved in Chesapeake, it would be a natural for them to also look at OPTI Canada - they had expressed interest in OPTI before."

He indicated that sitting on a giant oil sands field in Canada, OPTI's asset values could be attractive to Asian sovereign or other investors.

He said that OPTI Canada's 9% secured notes due 2015 and its 8¼% notes due 2014 "are up several points" at 101½ bid and 88 bid, 89 offered, respectively.

He meantime saw Chesapeake's 9½% notes due 2015 at 109 bid, 110 offered, versus 107 bid, 108 offered at the start of the week, citing the news reports of the $1.5 billion investment, which has not yet been officially confirmed by any of the governments involved.

Visteon pops on case news

Away from energy, Visteon's debt moved up a couple points, a trader said, as the bankruptcy judge overseeing its case approved a deal made between bondholders and the company.

The trader said both the 7% notes due 2014 and the 8¼% notes due 2010 ended around 107, versus 103½ bid, 104 offered previously.

Another trader placed the 7% notes at 107 bid, 109 offered, up from 103 bid, 104 offered in Wednesday's session.

The judge's approval of the bondholder agreement allows for senior noteholders to provide $1.25 billion in exit financing for the Van Buren Township, Mich.-based automotive parts supplier. The approval came despite objections from secured lenders and shareholders.

A hearing on Visteon's disclosure statement is scheduled for Monday and Visteon extended its plan confirmation deadline to Oct. 4.

Elsewhere in the autosphere, a trader said General Motors Corp.'s benchmark 8 3/8% notes due 2033 were on a "rollercoaster," hitting a high of 34½ before slipping back to 33½ bid, 34 offered.

"That's still better on the day," he said.

Stephanie N. Rotondo contributed to this report.

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