Funds down $619.6 million in second outflow; Alon scrubs deal; Charter up on asset sale, loan talk

By Paul Deckelman and Paul A. Harris

New York, May 29 - Everyone said that the recent red-hot pace in the high-yield primary market and the rollicking rally in the secondary - both fueled by ample dollops of liquidity - couldn't last forever. The market got further evidence Thursday that retrenchment might indeed be coming - if it isn't already here.

Alon USA postponed its $150 million eight-year offering, becoming the second would-be issuer in just three days to walk away from the table due to "market conditions" - something which previously hadn't been seen since back in February.

As further proof that what Alan Greenspan might term an "irrationally exuberant" junk market seems to be pulling in its horns, market participants familiar with the weekly high-yield mutual fund flow statistics compiled by AMG Data Services of Arcata, Calif. told Prospect News that for a second consecutive week, more money flowed out of the funds than came into them - a likely harbinger of further allocations out of high yield as an investment vehicle, even though junk bonds have solidly held their own versus stocks, Treasuries and other asset classes so far this year.

The sources said that in the week ended Wednesday, net outflows totaled $619.7 million, counting only those funds which report on a weekly basis and excluding distributions. In the week ended May 21, outflows had totaled $257.7 million - meaning that over the past two weeks, a total of $877.3 million more has trickled from the funds, which many market players use as a barometer to gauge overall high yield liquidity trends.

In absolute terms, that's still a relatively small leak. According to a Prospect News analysis of the AMG figures, net inflows for the year are still a robust $12.703 billion as a result of inflows having been seen in 15 weeks out of the 20 since the start of the year. Still, even that impressive cumulative total has been trimmed from the peak year-to-date inflow total of $13.581 billion, seen in the week ended May 14.

The two- week slide follows a virtually unprecedented run of 12 consecutive weeks during which inflows were recorded - and in seven of those weeks, they topped $1 billion, and came close in two other weeks. That kind of easy liquidity, dating back to mid-February, sparked a solid rise in the secondary and a firestorm of activity in the new-deal arena. Market players aren't yet saying that the party is over - but the yellow caution flag would appear to be out.

Indeed from the primary point of view, it was good news/bad news as the pace picked up Thursday after the moderate tempo of the previous two sessions in the four-day post-Memorial Day week.

The good news: California homebuilder Ryland Group, Inc., which priced a drive-by $150 million offering of five-year bullets, appears to have printed an all-time low yield on its new notes: 5 3/8%. And investors appeared to go for the new 10-year notes issued by Morristown, N.J. insurance company Crum & Forster Holdings Corp., which upsized its deal by $100 million.

The bad news: the fund outflows and Alon USA postponing its offering, citing "market conditions," as did Huntsman LLC, which yanked its deal on Wednesday.

During conversations with Prospect News on Thursday, sources on the sell side, for the most part, continued to insist that it is premature to announce a turning of the tides in high yield.

Noting a phenomenal build-up in the forward calendar during the run-up to Memorial Day, observers say that the performance of the market can only be measured deal-by-deal.

"The technical indicators might seem to be cooling off," commented one sell-side official shortly after the news of the $619.7 million outflow from the funds was reported late Thursday. "But that doesn't necessarily mean that the market is cooling off," the source added.

"Plenty of junk deals are still going to get done because there is so much cash in the market. It's still hot. But you're probably not going to see $1.5 billion inflows every week.

"A couple of weeks of small outflows like this doesn't mean everything grinds to a halt."

Another sell-sider, however, characterized the this week's outflow as "more meaningful," and added that observers would no doubt be looking at it in conjunction with pulled deals, delayed deals and deals pricing wide of their price talk. Doing so they would likely come to the conclusion that the market might not be as hot as it was in late April and early May.

Nevertheless, not all of Thursday's news was negative, by any means.

Ryland sold $150 million of five-year senior notes (Ba1/BB+) at par, Thursday, to yield 5 3/8%, an interest rate that appears to limbo under the lowest-ever junk bond yield. It beat the previous record holder, Korea First Bank, which priced $375 million of 10-year subordinated notes on March 5 to yield 5.783%. The previous low for a U.S. issuer is believed to be iStar Financial, Inc. which sold a $35 million add on on April 7 at 6.339%.

UBS Warburg was the bookrunner on Ryland's five-year bullets.

Also on Thursday, Crum & Forster's upsized offering of $300 million 10 3/8% senior notes due June 15, 2013 (B1/BB) priced at 96.985 to yield 10 7/8%. The notes were increased from $200 million and priced in the middle of the 10¾%-11% talk, via JP Morgan.

Terms also emerged Thursday on a quick-to-market transaction brought by St. Louis-based wire products manufacturer International Wire Group, Inc., which sold $82 million ($78.8 million proceeds) of 10 3/8% senior secured notes due Feb. 28, 2005 at 96 to yield 13%. Credit Suisse First Boston was the bookrunner.

Some sources who spoke to Prospect News, Thursday, also reported the expectation that by session's close terms would emerged on a quick-to-market deal from Lamar Media Corp. The issuer was offering a $125 million add-on to its 7¼% senior subordinated notes due Jan 1, 2013 (Ba3/B) via JP Morgan. However late in the session neither terms or price talk were heard, sources said. Hence, they added, Lamar is anticipated to be Friday's business.

And the market learned Thursday that Dallas-based petroleum products marketer and refiner Alon USA has postponed its offering of $150 million of eight-year senior notes (B3/B), citing market conditions.

Rumors had circulated the market on Tuesday and Wednesday that Alon, along with several other deals, was getting pushed back and restructured, and that the price talk was widening. However one informed source told Prospect News that the 11% area price talk on Alon had not widened, nor had the deal been restructured. Merrill Lynch and Credit Suisse First Boston had been joint bookrunners on the refinancing deal.

Word of two roadshow starts circulated Thursday.

The roadshow is set to begin during the week of June 2 for Domino's Inc. $450 million of eight-year senior subordinated notes (B3/B-), according to a company spokesperson. JP Morgan will run the books on the deal.

And a July roadshow start is expected on Medco Health Solutions, Inc.'s $500 million of senior notes due 2013 (Moody's issuer rating Ba1), according to a source from the company who identified Citigroup, JP Morgan and Goldman Sachs as underwriters.

The company, a wholly owned pharmacy benefits management subsidiary of Merck & Co., Inc., which is being spun off, will use the proceeds to pay a portion of the cash dividend to Merck.

Price talk of 10% area was heard Thursday on Texas Industries' $600 million of eight-year senior notes (B1/BB-), which are expected to price on Friday via Banc of America Securities and UBS Warburg.

And price talk in the 8½% area emerged Thursday on Triton PCS, Inc.'s $500 million of 10-year senior notes (B+), also expected to price on Friday, with Lehman Brothers, Citigroup, JP Morgan and Merrill Lynch as joint bookrunners.

And finally, although details were sparse two other issuers appeared headed into the high-yield market.

Tulsa-based natural gas firm Williams Cos. announced that it intends to bring an off-the-shelf offering of $500 million senior notes. And Vantico Group SA said Thursday that it plans an offering of $325 million of senior secured notes in connection with its debt restructuring.

In secondary dealings Thursday, Charter Communications Holdings LLC bonds were on the upside, buoyed by news of an asset sale and speculation the beleaguered St. Louis-based cable operator might get some covenant relief at a meeting with its bankers scheduled for Friday.

Charter's 8 5/8% notes due 2009, which had been quoted going home Wednesday around 69.5 bid/70.5 offered, opened Thursday at 70 bid/71 offered, and had risen to 72 bid/73 offered by the end of the day, "not a bad move at all," a trader said.

At another desk, Charter's bonds were seen "continuing to grind higher," a trader said. Charter's 11 1/8% notes due 2011 pushed up to 72.5 bid, a three-point gain on the session.

Charter's shares meantime moved up 28 cents (10.93%) to $2.79 on active Nasdaq volume of 13.6 million, about double the usual turnover.

Charter announced that it had signed a definitive agreement with WaveDivision Holdings, LLC for the sale of its Port Orchard, Wash. cable system in a transaction valued at $91 million. Charter said that the sale was one of several transactions involving properties which it has deemed "geographically non-strategic."

While $91 million isn't that much - Charter is trying to use asset sales to pare down a debt load estimated at more than $18 billion - it's still seen by investors as a step in the right direction.

Another such step in the company's efforts to get its financial house in order may come out of Friday's bank meeting; there is speculation that Charter may be able to cinch a desired amendment to its credit facility, although the specifics were unknown. There was also some talk that progress was being made on a commitment by principal owner Paul Allen to invest $300 million that would allow Charter to remain in compliance with its debt covenants.

Elsewhere, Qwest Communications International Inc. had good news for investors. The Denver-based telecommunications company said that its first-quarter profit totaled $150 million (9 cents a share), although that included a $206 million gain due to an accounting rule on retiring the value of long-term assets.

Not counting the gain, Qwest posted a three-cent-per share loss for the quarter, although that was a smaller loss than the nine-cent-per-share deficit analysts had been looking for.

That's a sharp turnaround from the year-ago quarter, in which Qwest lost $23.9 billion ($14.32 a share), although most of that red ink was due to a $23.1 billion charge to write down the value of goodwill and other intangible assets related to its 2000 acquisition of U S West.

Qwest also said that the ongoing decline in the number of its residential telephone access lines slowed for a third consecutive quarter. Lines in service dropped 4.1%, a smaller decline sequentially than that seen in the fourth quarter.

On the financing side, Qwest said its Qwest Corp. subsidiary had obtained a commitment for a $1 billion four-year senior term loan, which according to syndicate sources is expected to launch on Tuesday.

And the company further said that it has cut its debt by $500 million so far this year - $210 million from debt maturity payments and another $290 million through private exchanges of bonds. Regarding the latter, Qwest said it plans more of the same, although it declined to give any details.

One bond trader was not much impressed with Qwest Thursday; he grudgingly pegged them as unchanged to up half a point, saying: "I didn't see any spike."

At another desk, however, a market observer quoted the 7¼% notes due 2007 issued by Qwest's LCI unit up a hefty four points on the session at 65, while its 13.5% notes due 2010 were a point better, at 114 bid.

Qwest Capital Funding's 7¾% notes due 2006 were meantime three points better at 90.5 bid.

But financing news didn't do much for the bonds of Rite Aid Corp., whose 7 1/8% notes due 2007 were quoted up perhaps half a point at 96.75 bid. The Camp Hill, Pa.-based drugstore chain obtained $1.85 billion of new secured financing that allows it to push off some of its credit facility debt maturities by three years.

Retailer J.C. Penney's debt showed little reaction to Standard & Poor's one-notch ratings downgrade, which dumped the Plano, Tex.-based department store operator's bonds squarely into junk bond land at BB+ (Moody's Investors Service had previously lowered Penny's bonds to Ba3).

"They're down half a point at the most," a trader said. "They were on negative watch for a while, so everyone knew this was coming and the news was baked in" to the price.

A market watcher agreed that Penney's bonds were down about half a point across the board. Its 8¼% debentures due 2022 went home at 97 bid.

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