Airlines dip only slightly after terror alert; Constellation prices, funds see $129 million inflow

By Paul A. Harris

St. Louis, Aug. 10 - The consensus among high yield market watchers on Thursday was that junk generally held in well in the face of news from London that police there foiled a major terrorist plot to destroy multiple passenger jets - possibly all bound for the United States.

Following the Thursday session's close a trader said that high yield was generally muted aside from trade driven by headline and credit specific news.

"It was resilient in light of the global fears," the trader maintained. "We didn't really rally because of oil being down two bucks, but neither did we crap out with airline terrorism fears.

"It looked like we were going to get some negative action on the terrorism news, but that negative sentiment fizzled out in the first hour or two."

The air carriers themselves showed only small losses in response to the news.

However while airline paper for the most part maintained altitude, the junk bonds of Movie Gallery, Inc. unreeled significantly as the Dothan, Ala., video rental chain's second quarter earnings report did not play well before its creditors.

Over in the primary market, beverage company Constellation Brands Inc. priced a massively upsized $700 million issue and Reichhold Industries, Inc. priced a $195 million transaction. Both deals came at discounts, rendering the day's primary market proceeds $886.69 million.

In the euro market BCM Ireland Finance Ltd. (eircom Group plc) priced a €350 million issue at the tight end of talk in a transaction said to have played to €4 billion order book.

And for the third consecutive week AMG Data Services reported an inflow to the high yield mutual funds, this time just over $129 million, making it three inflows for the first time since 2004, according to one high yield syndicate official.

Constellation Brands upsizes

Beverage firm Constellation Brands' bond deal bubbled up to $700 million from $500 million on Thursday, as the company priced its new 7¼% 10-year senior notes (Ba2/BB) in the middle of talk at a 245 basis points spread to Treasuries.

The notes, which had been talked at Treasuries plus 240 to 250 basis points, came at a dollar price of 99.20, resulting in a 7.389% yield.

Citigroup and JP Morgan were joint bookrunners for the debt refinancing deal.

The paper traded into a firm bid as soon as it hit the secondary market, sources said.

Almost immediately after the terms had been heard, one trader said that bids for the 10-year paper, which came at 99.20, were in the 99.25 to 99.375 context.

"This was a 'straight down the fairway' type of deal," the trader said, noting the upsizing and pricing in the middle of talk.

Later in the afternoon New York time, another source spotted the new Constellation Brands 7¼% notes due 2016 trading at 99.50 bid, 99.875 offered.

Meanwhile another source spotted the new paper at 99.50 bid, 99.625 offered and well after the close another trader marked the notes at the same level.

Reichhold prices $195 million

While the Constellation Brands deal had come in quick-to-market fashion via an investor conference call on Wednesday, Durham, N.C. chemical coatings company Reichhold Industries had traveled the high yield roadshow circuit with its $195 million offering.

The 9% eight-year senior notes (B2/BB-) priced Thursday at 98.608 to yield 9¼%, 25 basis points beyond the wide end of the 8¾% to 9% price talk.

Banc of America Securities LLC and Wachovia Securities were joint bookrunners for the debt refinancing and dividend funding deal.

Shortly after terms had circulated, a market source saw the new Reichhold 9% notes trading at 98.875 bid, 99.375 offered, up 1/8 to ¼ point.

Soon after another source had the notes, which had priced at 98.608, trading at 98.75 bid, 99.25 offered.

However, after the close a trader reported seeing only one trade in the new Reichhold 9% notes, into a 98.75 bid, just slightly above the issue price.

"We heard there was one lead buyer on the deal," the trader said.

eircom massively oversubscribed

When the New York primary market session got underway, terms had already circulated out of London on Irish telecommunications company eircom's €350 million issue of 10-year senior floating-rate notes (B2/B), which had priced at par to yield three-month Euribor plus 500 basis points.

The yield came at the tight end of the Euribor plus 500 to 525 basis points price talk.

Credit Suisse, Deutsche Bank Securities, JP Morgan, Barclays Capital and Dresdner Kleinwort ran the books for the acquisition financing.

According to an informed source there were over €4 billion of orders for the notes, with 275 accounts participating.

Positive flows continue

As the session was winding down, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday $129.1 million more came into the funds than left them - the second consecutive week the asset class has seen triple-digit inflows.

And it was the third straight week of inflows, including the $336.2 million infusion the funds saw in the previous week, ended Wednesday, Aug. 2.

A high yield syndicate official reckoned that the inflow news that circulated Thursday represents the first time since late 2004 that AMG has reported three consecutive weekly inflows.

It was also the fifth inflow in the last six weeks - a rarity in a fund-flow landscape so far this year that has been almost completely dominated by outflows. Over those five weeks, net inflows have totaled $618.2 million, according to a Prospect News analysis of the statistics.

Even with the latest gains, though, outflows have now been seen in fully 22 weeks out of the 32 since the start of the year against only 10 inflows, counting the latest.

The latest inflow represents the tally of funds that report to AMG on a weekly basis.

The funds that report on a monthly basis saw $171.5 million of inflows for the most recent period, according to AMG.

Counting the most recent numbers, the weekly funds are now negative $3,021.6 million year to date, according to the market source, while the monthly reporters are in the black for the year to the tune of $2,265.8 million.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise between 10% and 15% of the total monies floating around the high yield universe, far less than they used to - 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.

Airlines weather terror plot

By the end of the session, the news that had dominated headlines around the globe - that police in England had arrested more than 20 people in connection with an alleged attempt to blow up passenger jets, some reported to have been bound for the United States - failed to create a significant downdraft for the most likely victim, the airlines sector.

"I think people initially dropped their bids, but the offering really didn't come down," one trader said shortly after the mid-day mark.

"People just widened out their markets a little with regard to what was going on, but it hasn't been too much of an issue so far."

Later, right around the New York close, another trader also said that airlines had held in, and added that the moves in that sector's securities had not been nearly as dramatic as might have been expected, given the "terrorist scare.

"The outlook was much more grim in the morning, when the equity markets opened," the trader said.

"But airlines proved pretty resilient."

For instance, said the trader, the bonds of AMR Corp. had only been nudged a little. The AMR 9% notes due in 2012, "one of the most liquid issues," were only down a point or so at 98 bid, 99 offered.

Ditto for the distressed carriers, the trader said, marking Delta Air Lines' 8.3% notes due 2029 down a point to 24 bid, 25 offered, and Northwest Air Lines' 8 7/8% notes maturing in 2006 down a point to 47 bid, 48 offered.

A little earlier another source was spotting AMR's 9% bonds due 2012 at 97 bid, 98 offered, down a point.

Meanwhile the source saw Delta's 7.9% paper due 2009 at 24 bid, 24.50 offered, down 0.75, and Northwest's 8.7s due 2007 at 46.50 bid, 47.50 offered, down 1 ½ points, but improved from 45 bid, 47 offered at the Thursday open.

Movie Gallery flickers on earnings

Earnings news sent Movie Gallery's bond issues sharply lower on Thursday.

During the second quarter the second largest North American video rental company saw same-store total revenues decrease 4.6% from the comparable period last year.

The drop, according to Thursday's press release from the company, reflects "continued softness in the video rental industry."

The company reported a net loss of $14.9 million, or $0.47 per diluted share in the second quarter of 2006. The company's year-to-date net income was $25.5 million, or $0.80 per diluted share.

Alabama-based Movie Gallery also disclosed that it has retained the services of turnaround and restructuring firm, Alvarez & Marsal.

That last piece of news, according to traders who spoke with Prospect News on Thursday, was not particularly well received by the company's debt holders.

One source, commenting that Movie Gallery was the "disaster du jour," said that the company's 11% notes due 2012 finished the session at 68.50 bid, 69.50 offered, down 12 points.

Shortly thereafter a trader commented that Movie Gallery paper "got walloped," and marked the 11% notes due 2012 closing at 68 bid, 70 offered, down almost 15 points.

Blockbuster dragged down

The negative news from Movie Gallery apparently created a slipstream that pulled the debt of Blockbuster Inc. south, sources said.

One source had Blockbuster's 9% notes due 2012 at 92.50 bid, 93.50 offered, down 0.75 on the day.

A trader, meanwhile, giving precisely the same bid-offer levels, marked Blockbuster down a point on the session.

And before the houselights came up, one source also saw the notes of Imax Corp. unspooling during the Thursday session, down 9 points on the day.

The trader noted that Imax is having difficulty coming up with a buyer, based upon the company's valuation of itself. And to compound its troubles the Securities and Exchange Commission is investigating its accounting practices.

The trader marked Imax's 9 5/8% due 2010 lower by 9 points at 95 bid, 97 offered.

Tenet bonds active

In the health care sector, the paper of Tenet Healthcare Corp. traded higher on news that the hospital chain surprised analysts by turning a tidy profit during the most recent quarter. The company showed some pricing power while keeping labor costs under control.

One source saw Tenet's paper "trading a lot," and marked the company's 9¼% bonds due 2015 at 93.25 bid, 94 offered, up 0.75.

A trader, meanwhile, saw Tenet's 9 7/8% bonds maturing in 2014, "the benchmark issue," closing out at 96 bid, 96.50 offered, up about a point from 94.75 bid, 95.25 offered earlier in the session.

"They were sort of bid all day," said the trader.

"Admissions are still not where they want them to be but the cost-cutting steps seem to be coming through.

"EBITDA was up a little more than people anticipated. Revenues were in line to a little higher than expectations.

"The numbers were very unclear, but on the surface it seems like they're okay."

Rotech on the rocks

Meanwhile it was an entirely different story for Rotech Healthcare Inc., which is under investigation with regard to patent issues.

A trader marked Rotech's bonds are down 6 to 8 points, spotting the company's 9½% bonds at 62 bid, 64 offered, down from Wednesday's 70 bid, 71 offered.

"They had terrible earnings," the trader commented, adding that a report is circulating that the bankruptcy potential for the company is very high.

Autos trade lower

In the automobile related sectors there was some wilting seen on Thursday.

One source said that the paper of Ford Motor Co. and General Motors Corp. had been up half a point on Wednesday, but on Thursday "gave all of that back and more."

This source marked the General Motors 8 3/8% bonds maturing in 2033 at 82.25 bid, down half a point.

Elsewhere the distressed paper of automotive interiors supplier Collins & Aikman Corp. dropped.

One trader saw the company's 10¾% notes due 2011 down 3 points to 10 bid, 11 offered.

"Their third quarter is expected to be disastrous," the trader commented.

Another trader, later, spotted those same bonds at 10 bid, 12 offered, down 2 points.

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