Wesco Distribution deal prices; Calpine bonds bounce around; funds see $329 million outflow

By Paul Deckelman and Paul A. Harris

New York, Sept. 22 - Wesco Distribution brought a new offering of 12-year paper to market Thursday, the only pricing seen during the session, while price talk emerged on Res-Care Inc.'s upcoming tranche of eight-year notes, which is expected to price Friday.

In the secondary market, Calpine Corp.'s bonds, which got pounded around on Wednesday amid investor angst centering on a dispute over the San Jose, Calif.-based power generating company's use of proceeds from its recent sale of natural gas assets, initially took a pounding, but managed to bounce off their lows later in the session to end essentially little changed on the day, traders said.

Delphi Corp.'s bonds, which on Wednesday had firmed solidly as the troubled automotive supplier disclosed that it still has some liquidity left under its credit facility - contrary to market scuttlebutt - were seen having come in a little from those gains, while Dana Corp.'s recently reeling bonds were seen pretty steady for a second straight session, having apparently stanched the bleeding seen last week after the company warned of sharply lower earnings and saw its debt ratings cut to junk status.

Meanwhile, as Hurricane Rita barreled toward the Texas coast late Thursday, a category four hurricane that is displacing more than a million people and threatening approximately one-fourth of the U.S. oil refining capacity, sources in the junk market who stuck around hoping for good news late in the day might just as well have gone home early.

After trading had wrapped up for the day, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that some $329.1 million more came into those funds in the week ended Wednesday than left them.

It was the second sizable outflow seen in as many weeks, coming in the heels of a $199.5 million hemorrhage from the funds in the week ended the previous Wednesday, Sept. 14.

In those two weeks, outflows have totaled $528.6 million, according to a Prospect News analysis of the AMG figures. Outflows have now been seen in three weeks out of the last four, and nine weeks out of the past 11. During that latter timeframe, net outflows have totaled approximately $1.381 billion, according to the Prospect News analysis.

For the year so far, outflows have now been seen in 29 weeks of the 38 since the start of the year, against only nine weekly inflows. Cumulative net outflows for the year total around $8.42 billion, according to the Prospect News analysis, up from about $8.091 billion last week.

The latest run of negative numbers is a throwback to the trend seen earlier in the year, when outflows totaling about $6.776 billion were seen in 15 straight weeks from mid-February through late May, according to the analysis. After that, there was a short period in which no clear trend could be seen, with about a month of inflows and outflows showing up on alternating weeks - but since July, money has been almost consistently flowing from the funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

The specter of redemptions

One senior sell-side official said that the mutual funds used to be a much better indicator of the liquidity of the junk market three years ago when mutual funds made up 30% to 40% of the market.

That has changed, the official added, with the emergence of hedge funds as major players in high yield.

"There is no question, however, that in the near term people are going to be looking for other asset classes because there is an expectation that default rates are going up, and yet yields, generally speaking, are still very tight across the board in high yield," the official added.

"So it's is a concern," the source said, referring to the persistent redemptions from mutual funds reported by AMG.

"People aren't putting in the order sizes that they typically had been. Instead they're putting in scaled orders based on pricing.

"In a hot market they typically take what they can get. Now they're being a little more selective."

The source also said that investors at present are tending to follow the lead of the larger funds.

"They're certainly talking to each other," the official said.

Wesco is sole new deal

Although a source from a hedge fund told Prospect News that the market had actually improved during Thursday's session, and spotted the CDX 100 index coming off a morning low of 99.125 bid to close at 99.625 bid, 99.75 offered, the preponderance of voices told a different story.

Two sell-siders marked junk off a quarter of a point on the day.

Others pointed to a definite weakness in the primary market which produced very little news on the day.

Only one issue priced, Wesco Distribution, Inc.'s $150 million of 12-year senior subordinated notes (B2/B), which came at par to yield 7½%, wide of the 7 1/8% to 7 3/8% price talk.

The culprit in the primary market, sources agreed, is a forward calendar that contains more potential new issues than investors presently seem disposed to buy.

One senior sell-side official told Prospect News that the easy deals have now been done.

"Now you are left with the deals that need to be marketed with roadshows," the source said, and pointed to a pair of mammoths which are presently on the road and are expected to price next week: Neiman Marcus Group, Inc.'s $2.175 billion and Affinion Group's $750 million.

"These are big, highly leveraged transactions," the source commented, and noted that it will be a moment of truth in the junk market "when these things attempt to price."

Mostly quiet in the primary

The above-mentioned Wesco deal, a $150 million issue of 12-year senior subordinated notes (B2/B), pricing at par to yield 7½%, was Thursday's sole transaction.

The yield came wide of the 7 1/8% to 7 3/8% price talk, and in so doing became eighth deal among an even dozen that have priced during the past five sessions to come wide of the price talk.

Goldman Sachs & Co. and Lehman Brothers ran the books for the debt refinancing and acquisition financing deal from the Pittsburgh, Pa., distributor of electrical construction supplies.

Elsewhere price talk of a yield in the7¾% area was heard on Res-Care Inc.'s $150 million offering of eight-year senior notes (B1/B), via JP Morgan and Goldman Sachs.

Pricing is expected Friday afternoon.

Also expected to price Friday is Brookstone, Inc.'s $190 million of seven-year senior notes (B3/B) via Goldman Sachs, talked Wednesday at 10¼% to 10½%.

In addition, School Specialty Inc. is expected to price $650 million in two parts: $425 million (increased from $350 million) of eight-year senior notes (B3/CCC+), talked at 9¼%-9½%, and $225 million (decreased from $300 million) of 10-year subordinated notes (Caa2/CCC+), talked 200 basis points behind the seniors. The bookrunners are Banc of America Securities LLC, JP Morgan and Deutsche Bank Securities.

Finally, DriveTime Automotive Group issuing jointly with DT Acceptance Corp. is in the market with $150 million of eight year senior notes (B2/B-) via UBS Investment Bank. The notes were talked Wednesday at 10¾% to 11%.

However late Thursday the market bristled with rumors of widening price talk and structural changes.

Wesco up in trading

When the new Wesco 7½% notes due 2017 were freed for secondary dealings, a trader saw them firming to 100.75 bid, 101.25 offered from their par issue price earlier in the session.

Among other recently issued bonds, a trader saw Pogo Producing Co.'s 6 7/8% notes due 2017, which priced at par on Wednesday, hanging in around those levels in Thursday's dealings, at par bid, 100.375 offered.

Calpine drops, recovers

Back among the established issues, Calpine initially fell sharply, traders said, continuing the slide seen Wednesday as controversy developed over how the company was spending the proceeds from its recent sale of natural gas assets.

At one point, a market source said, most Calpine issues were down anywhere from three to five points, with one - the 8¾% notes due 2007 - falling a whopping nine points to 63 bid, from 72 on Wednesday.

The source also saw Calpine's 7 5/8% notes due 2006 plunge to 85.25 bid from 91.75 on Wednesday.

However, a trader at another desk said, while Calpine "did get hit, it ended up rallying by the end of the day, as the rest of the high yield market did."

He saw the company's widely traded 8½% notes due 2011 fall as low as 50 bid, 52 offered in the early going, before coming off those lows to finish at 55.5 bid, 57.5 offered, about unchanged, while another widely traded issue, the 8½% notes due 2008, dropped to 56.5 bid, 58.5 offered in the morning but finished little changed on the session at 62 bid, 64 offered.

Another trader said that Calpine "went all around" during the session. "It got clobbered, but then moved back up and rebounded at the end of the day."

He saw the 7 5/8s ending at 85 bid, 86 offered, up from their lows, while the 81/2s of '08 went out at 62.5 bid, 63.5 offered, "where they went out yesterday [Wednesday], having firmed back up from 56 bid, 57 offered in the morning.

"There was a lot of activity in Calpine," he said, "it seemed like there were a lot of bonds trading today. They all dropped five or six points, but then bounced back. The 81/2s "went on a wild ride."

Another market source initially quoted the 83/4s at 61 bid, which he called down nine points, but then said by the end of the day that the bonds were down only about four or five points to the 65 level.

The first trader said that those movements "will give you an idea about the kind of volatility they were experiencing today."

He said it was a combination of factors; "we did see some buyers step in at the lower levels, because the company got whaled over the past two or three days, with stuff down 10 or 15 points, especially on the long end. People just saw some value there."

In addition, he said, "the high-yield market took a little turn for the better at the end of the day, and I think that really supported the [Calpine] bonds and helped them climb back a little bit."

He said the overall market "found a bid, after being down a point," and ended pretty much unchanged to up ¼ point, "at best.

"We're still down, we haven't retraced our losses from two days ago, but it wasn't worse, certainly, at the end of the day."

Calpine confirmed Thursday what had been talked about in the markets for the previous two sessions - that it is being blocked from withdrawing $400 million from an escrow account because of a dispute with its bondholders over how it spent some of the proceeds from its more than $1 billion sale of natural gas assets in July. Under the restrictions imposed by lenders, Calpine had to put the proceeds from that sale into escrow, and was strictly limited as to how it could spend those proceeds.

While the company had said it would use the money for debt reduction, it hit a snag when the holders of most of its second-lien notes chose not to go along with a company offer to buy back their debt, apparently hoping Calpine would sweeten the bid. Calpine instead used about $360 million of the funds to buy natural gas - a permissible use of the proceeds under the terms of the asset sale, Calpine said, but some of the bondholders took exception and said the company had violated the terms it had agreed to.

This week, a Bank of New York escrow trustee froze the funds, saying the company would not be able to access them until the matter was settled. Calpine said it had received the notice, and was considering appropriate legal remedies.

Also muddying the waters were reports that Morgan Stanley has shelved a $400 million preferred offering for the company, and other reports that CEO Peter Cartwright sold over 1 million of his shares in the company.

Delphi ends gains

Elsewhere, Delphi's bonds, which had climbed on Wednesday, were seen having come in somewhat Thursday, with a market observer quoting the troubled Troy, Mich.-based automotive components supplier's 6.55% notes due 2006 at 72.75, down from 74, while its 6½% notes due 2009 eased to 68 bid from 69.5, its 6½% notes due 2013 at 65.5 bid, down from 68.5, and its 7 1/8% notes due 2029 at 62.75 bid, off from 64.25.

A trader at another shop saw the latter bonds fall to 61 bid, 63 offered, before coming off their lows to end at 62 bid, 64 offered.

Delphi's bonds had risen Wednesday after the company said it still had $300 million of its $1.8 billion of bank credit facilities available, and after chief executive officer Steve Miller said he would prefer not to take the company into Chapter 11.

Dana steady, Dura higher

Also in the auto sector, Dana's bonds were seen little changed, with the Southfield, Mich.-based auto drivetrain components supplier's 7% notes due 2028 and 2029 each at 79, unchanged, and its 6½% notes due 2008 and 2009 also each unchanged, at 93.5 bid and 92.5 bid, respectively.

Dura Operating Corp.'s 9% notes due 2009 were quoted two points better at 69 bid. Executives of the Rochester Hills, Mich.-based auto systems maker delivered an upbeat presentation at a Bank of America conference in San Francisco (see related story elsewhere in this issue).

DRS down on acquisition

DRS Technologies Inc.'s 6 7/8% notes due 2013 dropped to 97.75 bid from prior levels at 100.75, a trader said, after the company announced plans to acquire Engineered Support Systems Inc. for $2 billion, financing the deal with a mixture of bank debt, bonds and convertible debt (see related story elsewhere in this issue). Both Moody's Investors Service and Standard & Poor's said they might cut the company's debt ratings because of the expected big increase in leverage.

Tekni-Plex lower on accounting trouble

On the earnings front, Tekni-Plex Inc. bonds were off after the Somerville, N.J. -based packaging company said it would have restate some of its results due to accounting errors it discovered. Its 12¾% notes due 2010 dipped to 57 bid from 59.5, its 8¾% notes due 2013 lost a point to end at 84, and its 10 7/8% notes due 2012 were half a point lower at 105.5

Rite Aid dips on earnings

Rite Aid Corp.'s bonds were "pretty much down a half [point]," a trader said, with its 6 1/8% notes due 2008 dipping to 92.5 and its 6 7/8% notes due 2013 closing at 84.

The Camp Hill, Pa.-based drugstore chain operator said it lost $1.6 million (three cents per share) in the latest quarter versus a year-ago profit of $9.9 million (break-even per share). Adjusted EBITDA fell to $149.3 million from $170.9 million a year ago.

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