Bally bonds strong as restatements complete, JP Morgan hired; funds see first inflow in 12 weeks

By Paul Deckelman and Paul A. Harris

New York, Dec. 1 - Bonds of Bally Total Fitness Holding Corp. were looking mighty robust on Thursday, strengthened, in line with a big stock jump, on the news that the Chicago-based fitness club operator has hired JP Morgan & Co. to help it explore strategic alternatives. Bally also completed previously announced restatements of its results from the past few years and is now up to date in all of its financial reporting requirements.

Also on the upside was Calpine Corp., which was boosted by short-covering, traders said, even as the troubled San Jose, Calif.-based power generating company officially said - for the first time - that it could be forced into a bankruptcy filing.

For the fourth time this week the broad high-yield market traded higher on Thursday. One source marked it up an eighth to a quarter point on the back of a significant rally in stock prices.

Primaryside activity was limited, participants in that market said, but the calendar continued to grow. Indonesian coal producer Adaro PT priced an upsized $400 million in a deal that played equally to high-yield and emerging markets accounts.

And as trading was finishing up for the day, market participants familiar with the weekly fund-flow statistics compiled by AMG Data Services of Arcata, Calif., told Prospect News that $225 million more came into the funds in the week ended Wednesday than left them - the first inflow after 11 straight weeks of outflows, including the $250 million seen in the previous week (ended Nov. 23). During that long losing streak, which stretched back to mid-September, outflows totaled $3.306 billion, according to a Prospect News analysis of the AMG figures.

Even with the latest week's inflow, outflows have still been seen in 12 weeks out of the last 14 and in 18 weeks out of the past 21. During that latter timeframe, net outflows totaled $4.179 billion, according to the Prospect News analysis.

For the year so far, outflows have now been seen in 38 weeks of the 48 since the start of the year, against only 10 weekly inflows. Cumulative net outflows for the year total $10.993 billion, according to the Prospect News analysis, down from $11.218 billion last week.

The new inflow aside, it is still evident that the junk funds have recently reverted 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 away from the funds.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

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

A sell-side source remarked late in the session that the inflow reported Thursday does not appear significant, and commented that in general the recent high-yield mutual funds flow numbers "have not been very meaningful."

Adaro nearly four times oversubscribed

The only transaction to price in the primary market on Thursday came from Indonesian coal producer Adaro Finance BV.

In a deal that played just about equally to high-yield and emerging markets accounts, Adaro priced a $400 million issue of 8½% five-year senior secured notes (Ba3/B+) at 99.005 to yield 8¾%.

The Goldman Sachs and JP Morgan-led debt refinancing deal, which was upsized from $300 million, came at the tight end of the 8¾% to 9% price talk.

An informed source told Prospect News that the deal was oversubscribed approximately four times relative to the upsized amount, which implies that the book closed containing upwards of $1.5 billion of orders.

Two deals backing Murray acquisition

Meanwhile on Thursday, the forward calendar of deals expected to be priced before the end of the year took on some more heft.

Two of the announced deals are backing Jefferies Capital Partners' acquisition of Scotland-based Murray International Metals Ltd.

Jefferies & Co. is the bookrunner for both transactions.

Pipe Acquisition Ltd., a financing subsidiary of Murray International, began a roadshow for its $125 million offering of five-year senior secured floating-rate notes.

Also Edgen Acquisition Corp., a financing subsidiary of Baton Rouge, La.-based Edgen Corp., began a roadshow for a $30 million add-on to its 9 7/8% senior secured notes due Feb. 1, 2011 (existing ratings B3/B-).

Proceeds from the add-on will be used to finance the acquisition of Murray International Metals Ltd. U.S. and to repay a portion of Edgen's revolving credit facility.

The original $105 million issue priced at par on Jan. 25, 2005.

An informed source explained that Jefferies Capital Partners currently owns Edgen and is acquiring Murray International. The acquisition is being financed with Pipe Acquisition Ltd.'s $125 million offering and the Edgen add-on - proceeds from which would flow, through restricted payments, to Jefferies Capital Partners.

Also announcing a roadshow start was Spansion Inc., a Sunnyvale, Calif.-based maker of flash memory that is being taken public by its owners, Advanced Micro Devices, Inc. and Fujitsu Ltd. The company which will head out Friday with its $400 million offering of 10-year senior unsecured notes (//B-).

Citigroup and Credit Suisse First Boston are joint bookrunners for the debt refinancing deal.

Friday's primary market business

Three deals appear poised to price during the final session of the post-Thanksgiving week.

Plastipak Holdings Inc. talked its $250 million offering of 10-year senior notes at a yield in the 8½% area on Thursday.

Banc of America Securities, JP Morgan and Goldman Sachs & Co. are joint bookrunners for the debt refinancing deal from the Plymouth, Mich., blow-molded plastic packaging designer and manufacturer.

Elsewhere OrCal Geothermal Inc. plans to sell $165 million of amortizing senior secured notes due 2020 (Ba1//BBB-).

Lehman Brothers has the books for the debt refinancing deal from the geothermal energy producer, a subsidiary of Sparks, Nev.-based Ormat Technologies, Inc.

The bonds will be sold off the high-grade and high-yield desks.

And terms are anticipated from German-based tourism company TUI AG's approximately €1 billion of high-yield securities in three tranches.

The company is selling two tranches of senior notes (Ba2/BB). Its five-year floating-rate notes are talked at Euribor plus 160 to 170 basis points, and its seven-year fixed-rate notes are talked at a spread to mid-swaps of 187.5 to 200 basis points.

Meanwhile TUI's proposed €300 million of cumulative perpetual preferred securities (B1/B+) are talked at the 8¾% area.

Bally gains

Back in the secondary market, Bally's 9 7/8% notes due 2007 were seen having firmed smartly, with two traders quoting the bonds at 96 bid, 98 offered, up more than two points on the session.

However, a market source at another desk, who saw the bonds starting out at a higher level, said they moved as high as 99 bid, up more than four points on the day.

However, Bally's 10½% notes, which one of the traders said "never move," were steady at 102.5.

Bally's New York Stock Exchange-traded shares meantime shot up 71 cents (10.13%) to $7.72 on volume of 1.9 million shares, about four times the norm.

Bally's shares and bonds pushed higher after Bally announced the hiring of JP Morgan, which will assist in exploring strategic alternatives - including a possible sale or merger - to boost shareholder value.

However, the company's chairman and chief executive officer, Paul Toback, said on a conference call with investors following the release of its third-quarterly results that Bally had not yet received any "formal offers" from would-be buyers.

The company also announced that it had completed its previously announced restatements of its earnings for 2000 through 2003, which was made necessary after the discovery of improper accounting procedures that overstated revenue and understated expenses. It also completed its financial reporting for the 2004 fiscal year, and for the first three quarters of 2005, bringing Bally up to date in its required financial filings under Securities and Exchange Commission regulations and the requirements of its own bond indentures.

Bally announced that for the first nine months of this year it posted a profit versus losses in 2003 and 2004.

Calpine still active

But while Bally was the big price mover, Calpine clearly remained the most active issue as the company's bonds continued to bounce around in the wake of the dramatic news earlier in the week that company founder Peter Cartwright had been ousted from his positions as chairman, chief executive officer and president, and the accompanying exit of Robert D. Kelly as chief financial officer, at the behest of the underperforming company's board of directors. That boardroom coup sparked renewed financial market speculation that Calpine could be headed for a bankruptcy filing, probably sooner rather than later.

The company's bonds initially melted down Tuesday, with some issues off more than 30 points on the session, but over the next two sessions the bonds appeared to stabilize and then push up from the lows they hit on Tuesday.

On Thursday, a trader said, Calpine moved up "strictly due to short-covering," with its 7¾% notes due 2009 up three points at 33 bid, 35 offered, and its 8½% notes due 2008 "not up that much" at 29 bid, 30 offered, a gain of two points on the session.

"Once again, it was mainly Calpine," another trader said, although he only saw the latter issue at 28.5 bid, 29.5 offered, while Calpine's 8½% notes due 2011 were at 25.5 bid, 26 offered.

"They were down a point initially," he said, "but then they moved up a bit to where they were."

However, he said, later in the day, "there were nasty rumors floating around," spurred, he said, by an assessment from Fitch Ratings, which said that unsecured holders would likely do no better than 11 cents on the dollar - less than half their current value - while holders of secured bonds could expect recoveries between 94 cents on the dollar and par on the first- and second-lien notes.

He noted the company's announcement late in the session, seeking more time from the Delaware Court of Chancery to repay $313 million of asset-sale proceeds, which the court ruled last week had been improperly spent by the company to buy natural gas with which to fuel its power plants. Calpine asked the court to knock that amount down to $199 million, and asked for 90 days to restore the funds, saying that to force immediate repayment of the funds would lead to severe financial disruptions. The court has scheduled a special hearing Friday to determine how much Calpine should return to an escrow account holding those asset-sale proceeds, and on what timetable.

Calpine for the first time also began using the dreaded B-word, saying that it was continuing to evaluate its options, possibly including bankruptcy.

"They've changed their tune," he noted facetiously. "What a shock."

With Calpine pleading for more time and raising the specter of bankruptcy, "clearly, they've got issues," he declared. He speculated that ousted chairman/CEO Cartwright may have been too reluctant to bite the bullet and take necessary but painful steps that would lead to a bankruptcy filing because of his emotional attachment to the company he founded 20 years ago.

"It's difficult for guys who create companies to take them into bankruptcy," he opined, "and while they're milling around trying to determine what to do, the assets can degrade, and they'll take steps they shouldn't sometimes - short-term moves, and this company has been the master of the short-term moves to get liquidity.

"He rode it a little too far, and if it does go BK, the recovery on the sub[ordinated] debt is going to be lower, because they've sold off so many EBITDA-producing assets."

He predicted a long bankruptcy, "if it goes there" - and an ugly one, with conflicts between the various bondholder classes.

Besides updating its investors and the public on the latest developments in the Delaware court case - which revolved around Calpine's use of proceeds from the sale of its natural gas reserves earlier this year - Calpine also gave an update on a separate case in the New York courts pitting it against a holder of its convertible notes, Harbert Convertible Arbitrage Master Fund, Ltd.

And another Harbert fund separately gave its own update about yet another Calpine court case, this one involving bonds of a Canadian-based Calpine financing subsidiary and the use of proceeds from the sale of Calpine's British power plant earlier this year (see related story elsewhere in this issue).

Yet another trader called the Calpine bonds "active," pegging the 8½% 2008 bonds at 28.25 bid, 29.25 offered, its 7¾% notes due 2009 at 33 bid, 34 offered, and its 7 5/8% notes due 2006 - which were trading in the upper 60s at the start of the week - at 34. Among the secured bonds, which have held their own despite all of the bankruptcy buzz, the second-lien notes were at 78.5 bid, 80 offered.

GM, Ford down

Apart from Calpine, bonds of General Motors Corp. and Ford Motor Co. were easier after the sagging auto giants reported sales declines in November versus year-earlier totals - 11% for GM and 18% for Ford.

However, a trader said, the totals, bad as they were, came in at or slightly above market expectations, so the downside on the bonds was limited, with GM's benchmark 8 3/8% notes due 2033 down perhaps half a point at 67 bid, 68 offered, General Motors Acceptance Corp.'s 8% notes due 2031 little changed at 98 bid, 99 offered, and Ford's flagship 7.45% notes due 2031 off a point at 70.

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