Little pre-holiday market response to big funds inflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 30 - News of a record huge high yield mutual fund inflow number made little impact in a nearly deserted junk bond market Friday, as participants watched the clock and made early getaways ahead of the three-day Labor Day holiday break, the unofficial end of summer.

The Bond Market Association recommended a 2 p.m. ET close ahead of the holiday, which also completely shuttered U.S. financial markets on Monday, but the truth was that few people were even around by that "official" close - mostly traders puttering around their offices, catching up on their paperwork and cleaning up their desks.

"Absolutely nothing," a trader said when asked whether he'd seen anything happening.

About the only bonds he'd even heard quoted were United Air Lines' battered debt, with the troubled airline's 2004 notes retreating to offered levels around 25 from levels around 30 bid earlier in the week; he said the bonds were lower as a result of "all the garbage coming out" as 55%-employee owned UAL tries to wring concessions out of its balky labor unions in hopes of avoiding an emergency landing in bankruptcy later this year.

"Now we're hearing the union responses [to management's initiatives] and people panicked."

Chicago-based United, the nation's Number-Two air carrier, recently warned that unless it could get its costs under control and escape a slipstream of red ink, it might have to consider a possible Chapter 11 filing this fall, when $875 million of debt comes due. United has said that it would have to come up with about $2.5 billion in annual savings in order to ensure its recovery.

On Thursday, UAL said asked its employees to approve cutting labor costs by $1.5 billion annually over the next six years as part of its emergency restructuring plan. The cutbacks would include pay reductions and the scrapping of recently negotiated raises.

Reaction from the carrier's unionized employees was swift - and harsh. The union representing its 8,800 pilots - who in June had reached a new deal with the airline under which they agreed to accept a 10% wage cut valued at $520 million over three years in return for options for 9.75% of common stock and raises later on - dismissed the company's new request for additional concessions as "wholly unacceptable."

Meanwhile, the union representing its 26,000 flight attendants said that "while we will continue to meet with the company, there will be no concession talks under these circumstances." The flight attendants noted that United hasn't even selected a permanent successor to interim CEO Jack Creighton, and termed the giant carrier "an airline with no plan and no leader."

United's six unions are expected to meet this coming week to compare notes on what management has been asking them for and possibly form a united front to counter UAL's plan with their own.

The flight attendants "basically said 'to hell with you'" in response to management's demand, the trader said, causing nervous bondholders to look to bail out. UAL's shares meantime lost 18 cents (5.90%) to end at $2.87.

Apart from the United saga, the trader said, nothing else was trading. He said there was little response to AMG Data Services' announcement late Thursday after the market had closed that high-yield mutual funds showed an inflow of $1.556 billion in the week ended Wednesday - not only the biggest inflow this year to date, but the biggest seen since AMG began assembling statistics on the fund flows, which are seen by many market participants as a reliable barometer of overall junk market liquidity trends. It easily surpassed the previous weekly high total of $1.335 billion, notched in May 1997.

Normally, such a development would have attracted considerable market response - especially since the mega-inflow followed an 11-week stretch of outflows which saw the junk funds bleed out a total of more than $2.5 billion. But with the trading pits nearly deserted ahead of the holiday break, it was the classic example of a tree falling in a forest - this particular tree the size of a giant California redwood - but nobody being around to hear the crash it makes.

To be sure, the trader said, the inflow "was huge." But he opined that actually, "people had already reacted in the days leading up to [the AMG announcement]. You saw Nextel, which is 77.25 bid [for its benchmark 9 3/8% notes due 2009], and that's up 10 points in like two weeks. So we've seen the reaction."

He added that "people are a little hesitant in the face of the kind of lackluster earnings numbers that we've seen" to really plunge back into the junk market, but expressed the hope that "maybe if we get another couple of positive weeks in a row, maybe this trend will continue. Hopefully, it will be fun. I'd love to see people feel a little more comfortable taking some risk."

He also projected that "maybe if the AMG numbers are going to be like this and we get some nice inflow numbers, perhaps it will open up the new-issue market for some of these on-the-cusp kind of credits."

Another trader said that there was "nothing going on" beyond the AMG number, which he called "the biggest excitement of the day." The huge funds inflow, he said, "made sense, the way the market traded up this [past] week."

About the only issue he had seen going anywhere Friday was Charter Communications Holdings, continuing to ride the wave of investor sentiment anticipating industry consolidation in the wake of the recent big deal between investment-grade cable giants AOL TimeWarner, AT&T Broadband and Comcast. The tone of Charter's shares and bonds has also firmed recently on Securities and Exchange Commission filings suggesting that billionaire principal owner Paul Allen might consider taking the company private or buying a large chunk of its debt.

But Charter, he said "traded up a little stronger" Friday, "probably for some month-end pricing [by trading houses looking to establish the levels at which Charter is trading], they wanted to get some prints," more so than for any fundamental reason. He quoted its benchmark 8 5/8% notes due 2009, which had gone home Thursday quoted in the 67-68 bid area, as having traded up around 69 bid and then even as high as 70, a point or two gain from Thursday, although on extremely light trading.

Also in the cable sphere, debt from bankrupt Adelphia Communications Corp.'s Century Communications Corp. unit was quoted higher, with its 8 7/8% notes due 2007 seen three points higher, at 26 bid. On the downside, Revlon Consumer Product Corp.'s 8 5/8% notes due 2008 were a deuce lower, at 39 bid.

But overall, the trader said, it was "nothing of any consequence. We did absolutely zero. We cleaned up some accounting stuff, and a little off-lot trading here and there, but the Street is absolutely dead, there's no one around - and that was that."

In the primary market, although news was scarce sources reported that its complexion changed dramatically owing to the record-setting inflow to mutual funds - an inflow, they added, that came to well over half the total of the vaunted string of negative flows that have hung over the market for weeks.

Meanwhile Ball Corp. began unscrewing the cap on an acquisition involving 100% debt financing to fund its purchase of European beverage can manufacturer Schmalbach-Lubeca AG. And in a ratings release related to the deal, Moody's rated $300 million of new senior unsecured notes for the company.

Prospect News inquired of a buy-side source whether the dramatic turnaround of funds flows represents volatility in the market, or whether indeed high yield has planted its foot, pivoted and set off purposefully in the opposite direction.

"It's got me scratching my head," the portfolio manager said in an e-mail message.

"This sure looks like a 'V.' If they were passing out Olympic medals for capital market contortions I guess high yield would get one.

"For those of us with a long term perspective (which includes me), it didn't really make sense to get out in the first place. I suspect (with absolutely no data to support this) that people were pulling money out of funds that had taken positions in the big belly floppers. Note that the index is negative, as are an awful lot of funds. Now that the dust has settled a bit, they're realizing that there are high yields, spreads approaching those available in the early 90s, and a lot of companies in the index who still are covering fixed charges.

"It would be interesting to see the dispersion in which funds are getting the cash in," this manager added. "Is it widespread, or those who missed the headaches of the past couple of months?"

One sell-side source who spoke Friday with Prospect News expressed the opinion that such a dramatic reversal in funds flows possibly represents volatility and it might make the going tricky for the investment banks in the intermediate term.

"It was pretty shocking to everybody," the source said of the inflow. "It shows you how volatile our market is.

"I think this is going to generate optimism. People are going to be announcing deals left and right, I think. And it could make the calendar heavy. The thing you have to worry about is deals not getting done right."

However another market source saw nothing ominous in the dramatic turnaround.

"I think it has a lot to do with portfolio managers and investors feeling that prices were just off the charts and that spreads had widened just a little too much," this source said.

"I think it will probably set the stage for a pretty decent new issue market for all the high yield issues that had to be tabled in late June and July.

"I definitely think you have a good foundation for decent flows in September and October."

As sources made mention of a building forward calendar in the post-Labor Day high yield Prospect News casually inquired "Who?" and "How much?"

"I think that there will be a bunch of issues," one source from an investment bank offered.

This source nodded in the direction of investment grade-land, and said that a recently upsized deal from National Rural Utilities, $1.25 billion from an initially planned $750 million, is interesting to note.

"That National Rural deal could be a precursor for type of deals that we're going to have right off the bat after Labor Day," the source said.

This sell-sider pointed to recent news that Jefferson Smurfit Group plc would bring €900 million equivalent of 10-year non-call-five high-yield notes in dollar, sterling and euro tranches via Deutsche Bank Securities and Merrill Lynch. The official also made mention of the QwestDex deal expected to total somewhere near $1 billion .

"We hear that Jefferson Smurfit wants to get out pretty soon," the sell-sider said. "And that's what we're starting to hear about some of these other deals as well."

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