Bon-Ton bounces on better EBITDA, outlook; AIG up on CEO pledge; funds lose $90 million, end seven-week run

By Paul Deckelman and Paul A. Harris

New York, Aug. 20 - Bon-Ton Department Stores Inc.'s bonds shot up solidly in very active trading on Thursday, buoyed by the York, Pa.-based retailer's revised guidance - showing a smaller net loss for the year than previously projected - and improved EBITDA numbers for the just-passed second quarter.

Also on the upside were American International Group, Inc.'s bonds, in line with a surge in the troubled insurance giant's shares, following brave promises by the company's new chief executive officer that AIG would be in a position to repay the billions of dollars of assistance it has received from the federal government over the past year.

Elsewhere, traders saw Watson Pharmaceuticals Inc.'s new two-part, split-rated bond issue - which was priced earlier in the week just under par for both tranches off the high grade desks, but which attracted interest from some junk market accounts - as having firmed to levels above 101 bid for both its five-year and its 10-year issue.

Apart from those specific names, Junkbondland saw a largely uneventful session, although with a generally stronger tone. Junk firmed in line with stock gains, as Wall Street was heartened by a rebound in recently hard-hit Chinese equities and a surprise expansion in U.S. regional manufacturing results.

Funds down $90 million, break seven-week streak

But toward the end of the day came some sobering news, as market participants familiar with the high yield mutual fund flow statistics generated by AMG Data Services of Arcata, Calif. - a key barometer of overall market liquidity trends - said that in the week ended Wednesday $89.9 million more left those weekly-reporting funds than came into them.

That outflow broke a stretch of seven consecutive positive weeks during which a net total of $3.549 billion had come into the funds, according to a Prospect News analysis of the AMG figures, including the $713 million inflow seen in the previous week, ended Aug. 12.

The latest week's outflow was the first since the $110.1 million cash exodus seen all the way back during the week ended June 24, according to the analysis, and only the fifth outflow all this year, against 28 weekly inflows, including an incredible 14-week run of consecutive inflows, dating from mid-March through mid-June, during which time the funds grew by a record $9.1 billion.

Counting the latest week's number, the year-to-date net inflow for the weekly-reporting funds declined modestly to $15.013 billion from the previous week's cumulative total of $15.103 billion, the peak level for the year so far.

A market source also said that in the latest week, flows into and out of the funds which report on a monthly basis rather than weekly were unchanged versus the previous week's $148.8 million inflow. That kept the year-to-date cumulative inflow for such funds at $10.113 billion.

The source further said that on an aggregate basis, consolidating the inflows for the weekly and the monthly reporting funds, a total of $25.126 billion more has come into the funds so far this year than has left them, off from the 2009 peak level so far of $25.216 billion.

Those sustained inflows have helped the junk market bounce back nicely from last year's staggering 25%-plus loss and sharply reduced primary activity totals. Total returns so far this year - while slightly off their peak level of a bit north of 40% seen earlier this month - continue to impress, with the authoritative Merrill Lynch High Yield Master II index still reading a formidable 38.6% as of the close Wednesday, handily beating virtually every other major investment asset class. Meanwhile, the $86.709 billion of new high yield debt issued so far this year globally, as of Wednesday's close -- $71.798 billion of it domestic - is running almost 42% ahead of the anemic pace of last year's global primary tally. Domestic new issuance is almost 48% ahead of its year-ago levels.

But EPFR sees inflows continuing

While AMG was announcing the modest outflow from the weekly-reporting junk funds, another fund-tracking service, Cambridge, Mass.-based EPFR Global - which uses a different methodology - saw things from a differing perspective.

Analysts there calculated a $69 million inflow to the funds - the 22nd such cash infusion in the last 23 weeks. However, they also pointed out in a research note that the funds' only modest gain "represented their second-worst showing since mid-March." It was less than one-tenth of the $925 million inflow which the service had reported the week before. The inflow brought the year-to-date total up to $16.64 billion from $16.57 billion the week before.

While the EPFR junk figures most weeks point essentially in the same direction as AMG's - this week being the rare exception - the precise weekly and year-to-date numbers almost always differ somewhat due to EPFR's inclusion of some non-U.S. funds in its universe. 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 used to - because there is no similar reporting mechanism to accurately track the movements of cash coming into the junk market from other, larger sources seen in recent years such as insurance companies, pension funds and hedge funds.

The end of the trend?

The AMG report of a negative fund-flows number in the latest week did not come as a shock to anyone in the market, given the gradual cooling-down which junk has lately seen since peaking earlier in the month. Back on Aug. 11, for instance, the Merrill Lynch index stood at an elevated 40.41% year-to-date reading - nearly two full percentage points above its current level.

That same session, the KDP High Yield Daily Index rose to its recent closing peak level of 67.20, more than 1½ percentage points above current levels, while its yield that day dipped down to 8.96% -- more than 50 basis points tighter than where now stands.

The CDX Series 12 High Yield market performance measure meantime last week lost more than three full percentage points from where it had been the previous week, and even with a gain recorded Thursday, is some 3½ points below that midpoint peak level north of 91.5.

A trader called the outflow report "the end of a trend," while at a buyside shop, a market source opined that from where he sat, "it feels - rightly or wrongly - like capital is rotating out of credit into riskier assets like equity." He added "that being said, if equity continues to rally, credits will obviously still benefit."

On the other hand, a market source said earlier in the week that "AMG confirms cash is coming in on a consistent basis," raising the possibility that the outflow might be more of a seasonal blip rather than a turning point.

A banker commented after Thursday's close that the $89.9 million of outflows seems negligible when compared to the more than $15 billion of inflows that the funds have seen year-to-date.

Nevertheless, market sources - especially ones from the buy-side - have commented throughout the present week that there presently seems to be a certain amount of weakness in high yield.

That was the sentiment of one asset manager whose high-yield mutual fund saw its biggest year-to-date outflow earlier this week.

On Thursday another mutual fund manager said that the negative cash flow is not surprising.

Where can it go from here?

The outflow might be a partial explanation for the "slight weakness" lately seen in the high-yield market, said the investor.

"That may be why we're seeing some scattered one-off sales," added the buy-sider who gave spots on NRG Energy's 8½% notes due 2019 of 96 bid, 97 offered.

"A week ago they were wrapped around par," the investor said.

"That's high-quality paper, so it's not being offered for credit reasons, but rather for liquidity reasons: you're seeing outflows, so you have to sell something."

The outflow likely reflects "a short-term trade move," rather than redemptions driven by fundamental weakness, the buy-sider asserted.

"There has been so much money made in high-yield from mid-March until now, people are bound to step back and ask themselves, 'Where can it go from here?' and take some money off the table."

This investor believes that the outflow is not related to any recent weakness in stock prices.

Later in the afternoon an investment banker, while declining to take issue with that assertion, did point out that during the Aug. 12 to Aug. 19 week, in which the high-yield mutual funds saw approximately $90 million of outflows, the Dow Jones Industrial Average fell approximately 90 points.

If quiet is what you like...

Meanwhile with each passing session of inactivity in the primary market conviction seems to be growing among the syndicate bankers that there will be no further new issue activity until trading resumes on Sept. 7, following the three-day Labor Day holiday in the United States, the market's traditional summer-fall terminus.

Again on Thursday a syndicate official professed visibility on a couple of pending deals, but specified that both are likely post-Labor Day business.

A mutual fund manager also expects the high-yield primary to remain dormant until after Labor Day.

However, the investor added, there is no reason not to expect the new issue market to return to a robust pace once fall gets underway.

Market indicators move back up

Looking at the numerical indicators Thursday, the CDX high yield index, after having gained lost ¾ point on Wednesday, was seen up by 3/8 point on Thursday, with a trader quoting it finishing at 87¾ bid, 88¼ offered.

The KDP index, which had lost 16 basis points on Wednesday, rose by 9 on Thursday to end at 65.67, while its yield tightened by 5 bps to 9.49%

In the broader market, advancing issues - which led decliners by a narrow margin on Wednesday for a second consecutive session - really, just a handful of issues separating them - remained in control on Thursday, by about a 12-to-11 ratio.

Overall market activity, reflected in dollar-volume totals, was down some 21% from Wednesday's pace.

A trader, when asked what was new and exciting in the market, shot back "not a whole lot.

"It was a pretty lackluster day - it feels more and more like people are sneaking out for summer vacations."

That having been said, he added that "things did bounce back a little," after having been softer earlier in the week.

He said that "even with the [AMG] outflow numbers, things kind of firmed up a bit today. There was nothing dramatic, but I didn't really see much of a selloff. It seemed like it was pretty much unchanged, maybe a smidge better than where things had gone out on Tuesday and Wednesday."

Another trader exclaimed "it was blah. Sorry - it's August. And [Friday] is going to be worse. Friday is disappearing day" for a lot of market participants.

Bon-Ton bonds better

The stand out performer of the day was probably Bon-Ton Department Stores after the company released quarterly numbers and better projections for the full fiscal year and previously.

A trader said that Bon-Ton's 10¼% notes due 2014 "did get into the high 50s," with "a boatload" of bonds trading in a 58-60 context, well up from Wednesday's trading in the upper 40s and lower 50s. "Call them 8 or 9 points higher," he said.

Another trader saw $20 million of the Bon-Ton bonds trade, making them among the busiest of the session. He saw them going out at 58½ bid, up 6 points on the day.

A market source at another desk noted that the bonds - last seen on Wednesday trading just under the 50 mark - had shot up 6 points at the opening, and got as good as the 61 level, a gains of some 11 points on the day, before falling back to finish around 58, still up about 9 points on the day, or 6 points on the session counting only round-lot dealings.

Bon-Ton's Nasdaq-traded shares meantime jumped $1.18 on the day, or 29.14%, to end at $5.23. Volume of 808,000 shares was over eight times the norm.

For the fiscal second quarter ending Aug. 1, Bon-Ton reported total sales of $609.2 million, compared to sales of $673.4 million the year before. Gross margins improved by 130 basis points to 37.1% of net sales.

"It's the same story as other retailers," a trader noted. "Sales are down, but margins have increased."

The department store operator also posted an operating loss of $10.6 million - which was an improvement from the previous year's operating loss of $32.3 million.

Net loss increased slightly to $34.8 million, or $2.04 per share, versus a net loss of $33.8 million, or $2.01 per share, in the second quarter of 2008.

EBITDA increased by $2.7 million to $19.3 million, versus $16.5 million a year earlier.

"We continued to carefully manage inventory levels and control costs and are pleased to report results that exceeded our expectations, resulting in revised full-year guidance," Bon-Ton's president and chief executive officer, Bud Bergren, said in the earnings release.

"I am very proud of how our team is managing through this difficult economic period and want to thank all of our associates for their continued focus on execution.

"Looking ahead, while there has been some encouraging news regarding the macroeconomic environment, we plan to continue to manage our business conservatively," Bergren added.

"With two important quarters approaching, we feel very good about our execution during this recession and believe our assortment of differentiated quality merchandise at outstanding values is well aligned with our customers' needs for the fall and holiday seasons. Lastly, maintaining strong cash flow and liquidity remain a key priority for the company."

Bon-Ton revised its full-year guidance on EBITDA to $150 million to $170 million and its loss per diluted share to $3.70 to $2.50.

The company estimates that cash flow will be in the $15 million to $35 million range, "permitting us to mange and reduce our debt levels," said the company's chief financial officer, Keith Plowman.

GameStop not going so good

While Bon-Ton was hot, another big retailer reporting numbers definitely was not.

A trader saw the GSC Holdings Corp. 8% notes due 2012 issued by GameStop Corp. down about ½ point on the day at 101 bid, 102 offered, after the Grapevine, Tex.-based Number-One videogame and game console retailer put out disappointing second-quarter numbers.

"Their profits fell," he said, "and they cut their forecast. Their [same-store] comps were down, and they predicted that third-quarter [earnings per share] would be 27 cents to 33 cents, while analysts were predicting 41 cents - so they're guiding a good 10 cents lower than expectations." And they missed [analysts' forecasts] by 5 cents [per share] this quarter."

GameStop - which has over 6,200 stores in the United States, Canada, Australia and Europe - reported that for the fiscal second quarter ended Aug. 1, earnings came in at $38.7 million, or 23 cents a share - down 32% from $57.2 million, or 34 cents a share, a year earlier.

Revenue was $1.74 billion, a 3.7% decline, as same-store sales at company outlets which have been open at least a year - considered the key retailing industry performance metric - tumbled 14% from a year ago.

Analysts said that the recession caused consumers to hang on to their wallets and spend less on videogames and on the pricy electronic gadgets on which they are played, such as Sony Corp.'s PlayStation and Microsoft's Xbox consoles. They also said that a weaker lineup of games - and a lack of price cuts on the game consoles - cut into sales.

Going forward, GameStop lowered its full-year earnings forecasts to $2.40 to $2.64 a share - well below the roughly $2.75 per share Wall Street has been looking for.

AIG up on chief's promise

Elsewhere, a trader said American International Group's bonds were higher "across the capital structure," in line with a rise in its equities on "their good news" - as the company's new chief executive officer said that AIG would pay back the roughly $80 billion in taxpayer assistance it has received and would pursue asset sales to raise cash - although these would have to be "at the right time and for the right price."

He saw AIG's hybrid perpetual preferred securities as among the most active junk issues, with $25 million traded, seeing them jump to 43½ from 37 on Wednesday. He also saw AIG's regular 6¼% bonds due 2037 rise 5 points to 38 bid from 33, with $23 million traded.

At another desk, a market source saw the big New York-based insurance company's 5.05% notes due 2015 having gained more than 4 points on the day to 65 bid, although the company's American General Finance unit's 5.375% notes due 2012 lost a point to end at 68½ bid.

AIG's New York Stock Exchange-traded shares meantime climbed $5.66%, or 21.25%, to $32.30. Volume of 132 million shares was more than six times the usual turnover.

The bonds and shares got a boost after newly installed CEO Robert Benmosche declared in an interview that "we believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well."

He said that he plans to rebuild AIG's once robust and profitable insurance operations, while carefully pursuing selected asset sales to generate the cash needed to repay the government bailout money.

"The government is working with us," Benmosche added. "They want us to do things that are very prudent."

CIT sinks back to inactivity

Also among the financials, a trader said that he "didn't see much razzle dazzle" in commercial lender CIT Group Inc.'s bonds. He quoted the 7 5/8% notes due 2012 at 593/4, about where they were quoted [Wednesday]. There was virtually no activity, small activity."

The short end of the curve also "looks pretty unchanged," with its 2010 paper staying at 62-64.

Among the CIT Group Funding Corp. of Canada bonds which had risen sharply on Tuesday in heavy dealings on suggestions their holders might be able to get a bigger recovery than thought in the event of a bankruptcy filing by the New York-based parent, a trader said that its 5.20% notes due 2015 were ½ point higher at 73 bid, on just $1 million traded. Its 4.65% notes due 2010 dipped to 81 bid from 82½ on Wednesday, also on just $1 million traded.

Watson is well watched

A trader said that Watson Pharmaceuticals Inc.'s new bonds had firmed smartly from the levels at which they had priced on Tuesday, as well as from where they had been trading on Wednesday.

The split-rated (Ba1/BBB-/BBB-) bonds have drawn interest from junk market accounts looking to play in new deals, now that the high yield primary seems to have dried up for the summer, as well as from traditional high-grade accounts. The issue was priced off the high-grade desk of the underwriting banks.

The trader saw the Corona, Calif.-based drugmaker's 5% notes due 2014 trading at 101½ bid - up from 100½ on Wednesday, and up further still from the 99.589 level at which the company had priced that $450 million of bonds. He saw some $23 million of the bonds trading, making it one of the day's busier issues.

On a spread basis versus Treasuries, a market source quoted the bonds at a spread of 243 bps - about 5 bps tighter than their levels on Wednesday, and in considerably from the 262.5 bps level at which they had priced.

Watson's other issue, the $400 million of 6.125% notes due 2019, had firmed to 101 5/8 bid from 101½ on Wednesday, and from 99.796 at Tuesday's pricing. There were $22 million of the bonds changing hands.

The market source quoted the Watson 10-years at a 221 bps over spread - well in from its levels in the 240s on Wednesday and in still further from the issue's 262.5 bps spread at pricing.

Little activity was meantime seen in other recently priced junk or split-rated issues.

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