Hilcorp prices downsized deal, Concentra also completed; aaiPharma gains on merger news

By Paul Deckelman and Paul A. Harris

New York, Aug. 5 - Hilcorp Energy Co. - whose offering of seven-year notes was heard Monday to have been struggling to make it to market - finally priced Tuesday, although as expected the deal had been downsized. Concentra Operating Corp. also priced its seven-year offering, although no downsizing was needed in the latter case.

In secondary market activity, traders said most issues were lower, reflecting investor caution in the face of an overloaded forward calendar, a glut of new paper already in the market and the continued travails of Treasuries, which retreated on strong data and a weak sale of new three-year notes. aaiPharma Inc. bonds firmed on news the drugmaker will buy a smaller rival, CIMA Labs Inc.

Tuesday's session in the primary produced terms on two junk bond deals, as Hilcorp Energy priced a deal that had shed considerable weight, downsizing to $275 million from $350 million and pricing at the wide end of revised talk.

And Concentra concentrated investors' attention sufficiently to sell $150 million in a transaction that also came at the wide end of price talk.

Although a buy-side source who spoke to Prospect News on background Tuesday remarked that high yield has entered a "period of indigestion," two more servings appeared from the investment bank kitchens as Williams Scotsman, Inc. and Maracay Homes Arizona I, LLC expressed intentions of tapping the junk bond market.

However according the investor who spoke to Prospect News during the session the market these companies have chosen to tap has lately developed something of a limp.

"The market is on very fragile ground because of this incredible push-out in Treasury rates," said the investor, adding that Tuesday's Treasury auction "went poorly," with yields on the three-year reaching their highest levels in five years.

"Treasuries are down," reiterated the buy-sider. "The 10-year is down a point and that is really putting pressure on the market.

"Anecdotally," added the investor, "it looks like [high-yield funds] people are getting redemptions. What you have here is a real period of indigestion."

This buy-side source remarked that the Treasuries sell-off is not merely impacting the highest rated junk bonds, which are said by some market observers to have a greater sensitivity to Treasury yields but is also impacting the "middle-tier" credits as well.

"When the higher credit bonds go up in yield, the spread gets even narrower to the middle-tier stuff. So eventually it just rolls back on everything. And that is what you're seeing. And if you're actually seeing redemptions it's not just a fundamental or relative spread. It's actual money and people need to sell."

This investor specified that the current flight of capital from the high-yield asset class is not merely a matter of money flowing into more compelling securities.

"Stocks are down too," said the buy-sider. "Here it's a question of all of the financial markets being down. You have equities down. High yield is down. And Treasuries are down.

"Maybe the books say that things are not supposed to work like that. But that is what happened.

"When Greenspan talked about deflation back in May he really caused an excessive bubble in Treasuries," added the source. "So I think a lot of this is just unwinding the bubble. And as prices come down it has put selling pressure on Treasuries and it has rolled over into all the markets."

Until news of two consecutive weeks-only outflows from high-yield mutual funds recently circulated the market - $91.5 million for the week ending July 23 and a whopping $1.061 billion outflow for the week ending July 30 -high yield had been roundly reported to be enjoying a phenomenal period of liquidity that stretched clear back to the beginning of 2003 and beyond.

So how rapidly can such liquidity dry up? Prospect News asked this investor.

"How fast have Treasuries backed up?" the buy-sider shot back.

"There's nothing like a little negative momentum feeding on itself," added the source. "From the time Treasuries started to back up it took a while but then high yield is just starting to fade."

Throughout its final marketing stages Hilcorp Energy was reported to be riding the fader. Having presented a seven-year senior notes deal (B3/B) in the amount of $350 million with price talk of 10% area to investors, the market learned Monday that the privately held Texas company had downsized to the deal to $300 million and revised the talk to 10¼%-10½%.

When terms on the Deutsche Bank Securities and Lehman Brothers-led deal surfaced on Tuesday the amount had downsized again to $275 million and the deal priced at the wide end of the revised talk.

Also pricing at the wide end of talk was Concentra Operating Corp., which sold $150 million of seven-year senior subordinated notes (B3/B-) at par to yield 9½%. Price talk on the Credit Suisse First Boston and Citigroup-led issue was 9 3/8% area.

However news of recent chop in the new issue market apparently did not discourage a couple of other issuers from having a go at the junk bond market.

Williams Scotsman, the Baltimore mobile office and storage company, will start a roadshow Wednesday for $150 million of five-year non-call-three senior secured second lien notes via Deutsche Bank Securities, Banc of America Securities and CIBC World Markets.

Meanwhile Maracay Homes was heard to be on the road with $25 million of seven-year non-call-three senior subordinated notes via Friedman Billings Ramsey. The non-rated deal is expected mid-to-late during the week of August 11.

The investor whose remarks appear above told Prospect News that while junk bond yields seem recently to be reflecting a new reality in the market the process may not yet be complete.

The investor pointed to two deals on which pricing news was heard Tuesday.

Price talk of 7 1/8%-7 3/8% emerged on Bio-Rad Laboratories, Inc.'s $200 million of 10-year senior subordinated notes (B3/BB-), expected to price on Wednesday via Goldman Sachs & Co.

And according to the buy-side source revised talk of 7¾%-7 7/8% had been heard on Fisher Scientific's $200 million of 10-year non-call-five senior subordinated notes (B2/B+), expected to price Wednesday via JP Morgan.

"For the decent names like Fisher Scientific and Bio-Rad the price talk has adjusted, but it really needs to adjust some more," said the investor, who had attended the Fisher Scientific roadshow.

"I want to keep some liquidity so I'm going to pass on the deal," said the buy-sider. "I won't be leaving any money on the table in that case."

When the new Hilcorp 10½% senior notes due 2010 were freed for secondary dealings, they were quoted in a par-to-100.5 bid range, versus their par issue price earlier in the session.

No initial activity was seen in Concentra, the terms of which surfaced fairly late in the session.

Back among the established issues, one standout was the normally little-noticed aaiPharma, whose 11% notes due 2010 rose nearly three points on the day, to 112.75 bid, on the news that the Wilmington, N.C.-based pharmaceuticals maker plans to buy smaller rival CIMA Labs, of Eden Prairie, Minn., in a $350 million stock deal.

Combination of the two drugmakers is expected to produce what their management termed a "more powerful" player in the specialty pharmaceuticals field, in which aaiPharma currently produces pain relievers such as the widely prescribed Darvon and Darvocet, while CIMA produces medications for larger drugmakers such as Alavert, Wyeth Labs' over-the-counter knockoff of Schering-Plough's popular Claritin allergy remedy.

aaiPharma, which recorded $231 million of revenues in 2002 and CIMA, which booked $47 million, anticipate combined pro forma revenues of between $350 million and $365 million for 2003, with combined 2003 operating income of $90 to $95 million. For 2004, they see revenues and earnings per diluted share in the range of $405 million to $415 million and $1.25 to $1.30, respectively.

Elsewhere, a trader said, "the whole market was off, everything came in about a point."

It seemed to him that accounts are seeking to raise cash. "I don't know that they're all still so flush with cash as the calendar finally catches up with them," he commented, nothing that the parade of new issues, such as Dynegy Inc.'s new three-headed $1.45 billion offering, which priced last Friday, has helped to sop up much of the cash that had built up.

He saw Qwest Communications International Inc.'s debt - which had firmed anywhere from three to five points across the board on Monday on the news that the Denver-based regional telecommer will offer its local and nationwide business customers Sprint Corp.'s nationwide wireless service - as essentially "kind of where they were [Monday], but staying firm."

Qwest's 7.20% notes due 2004 hung in at 100.5 bid, 101 while its Qwest Corp. 8 7/8% notes due 2012 hovered at 103.5 bid, 104.5 offered. Its Qwest Service Corp.'s 13% notes were at 106 bid, 107 offered while its 13½% notes were at 109.5 bid, 110.5 offered.

On the earnings front, the trader said, Tommy Hilfiger Corp. reported net income of $17 million (19 cents a share), a sharp turnaround from its year-ago net loss of $438.8 million ($4.88 a share). Even excluding special items, such a $430 million charge a year ago as a result of an accounting rule change and a $7.2 million gain in the latest period from the settlement of a lawsuit, the Hong Kong-based marketer of designer-label clothing still earned $9.8 million (11 cents a share) in the latest period, versus Wall Street's four-cent-per-share estimate and versus $2.6 million (three cents a share) a year ago.

"Tommy's numbers were really good," the trader said, quoting the company's 6.85% notes due 2008 as "firm" at 99.5 bid, par offered. "It's always nice to see retailers [which includes clothing manufacturers and marketers] firm."

Cablevision Systems Corp. posted a second-quarter profit, due to its sale of wireless licenses - $162.1 million (56 cents per share), including an unspecified one-time gain from the sale of wireless licenses of Northcoast Communications, versus a year-ago net loss of $98 million, or 34 cents.

But the Long Island, N.Y.-based cable operator said that without the gain it would have incurred an unspecified loss for the 2003 quarter.

On top of that, analysts said its revenues and cash flow, while above last year's, were below expectations. And Cablevision itself said that it had discovered additional accounting irregularities, although it sought to reassure investors by adding that it would not have to restate any results due to the accounting issues.

Still, Cablevision shares lost $1.73 (8.24%) to end at $19.27 on New York Stock Exchange volume of 7.4 million shares, about triple the usual turnover.

On the bond side, the company's CSC Holdings Inc. 7¼% notes due 2008 were a point-and-a-half lower at 97 bid. Its 7 5/8% notes due 2011 ended at 96.5 bid, 97 offered, its 7 78% notes due 2018 eased to 91.5 bid.92.5 offered and its 7 5/8% notes due 2018 were a point behind that.

Back on the upside, Williams Companies Inc.'s 8 5/8% notes due 2010 were a point better at 99; the Tulsa, Okla.-based energy operator was reported in talks with Koch Industries to sell a 220,000-barrel per-day Alaska refinery for an undisclosed price.

But upsiders were rare exceptions Tuesday, a trader said, as there was pressure on everything. "It was a lousy day. Nobody could get anything accomplished. People were licking their wounds."

For instance, he said, the recently issued Calpine bonds "were down with everything else," ahead of the scheduled release Wednesday of the San Jose, Calif.-based power producer's second quarter numbers.

He pegged Calpine's new 8½% notes due 2010 as having fallen to 87 bid, 87.75 offered from 89.25 bid, 90 offered on Monday and its 8¾% notes due 2013 two points lower at 86.5 bid, 87.25 offered. Its new floating-rate notes were a point down at 90 bid, 91 offered.

"People just put their heads in a foxhole," he said, "and I can't really say that I blame them [after the recent fade-out of the previously strong junk market rally]. A lot of people lost a lot of money."

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