Duane Reade prices seven-year deal; AMC bonds off after buyout announced

By Paul Deckelman and Paul A. Harris

New York, July 23- Duane Reade Inc. was heard by high-yield syndicate sources to have successfully priced a new offering of seven-year notes Friday, the sole new issue to come to market during the session.

On the secondary side, things were pretty quiet, traders said, with many players sidelined by weak equities and a ramp-up of terrorism-related talk, between the release this past week of the 9/11 commission's long awaited report, the burgeoning "Bergergate" kerfuffle over secret papers allegedly socked away in a former national security advisor's socks, and Monday's opening of the Democratic convention in a jittery Boston.

"As expected, the day has been a real snoozer," one trader declared, with stocks weak, Treasuries well-bid for - and none of the junk marketeers wanting to be long heading into the weekend.

One name which was seen around, albeit in restrained trading, was AMC Entertainment Inc., which announced late Thursday that it is to be taken private by equity investors in a deal valued at around $2 billion. The Kansas City, Mo.-based movie theater chain operator's bonds were heard down about two to three points on the session.

In addition to Duane Reade's new deal, the forward calendar continued to build notably.

However for the second consecutive session the Prospect News primary market desk heard cautionary words from the investment banks.

"I get mixed signals," said one investment banker shortly after the high-yield market was shuttered on Friday.

"The market feels very strong. People are pushing deals despite the volatility of Treasuries, which are moving around, and the equity markets selling off.

"Duane Reade priced this afternoon even with people taking off early for the weekend and the Dow off 88 points at the close."

Misleading fund flow picture?

This official, in a manner somewhat reminiscent of two sell-siders who spoke to Prospect News at the end of Thursday's session, suggested that the high-yield fund flows picture - showing a $197 million inflow, the third consecutive positive weekly flow in the most recent week - is possibly a misleading one.

"Outflows over the course of the year are still pretty high," the source reasoned. "People around here are hearing that we may be returning to an environment of outflows again in the near term after three weeks of small inflows.

"We've been saying all year that there is plenty of cash around because so much money came in last year. But that's not the sense I get over the past few weeks. I think some of the cash is drying up.

"Certainly new issuance has set records. We're on pace to have the biggest year ever in high yield issuance.

"So outflows plus a heavy volume of new issuance equals a drying up of cash."

Duane Reade sells $195 million

In the only deal to price on Friday Duane Reade sold $195 million of seven-year senior secured notes (B3/CCC+) at par to yield 9¾%.

Banc of America Securities, Citigroup and Credit Suisse First Boston were joint bookrunners for the deal from the New York drugstore chain, which priced at the wide end of the 9½%-9¾% price talk. Proceeds will help fund a leveraged buyout of the company.

Busy late July/early August calendar

Meanwhile the new issue calendar continued to build on Friday.

Borden U.S. Finance Corp. and Borden Nova Scotia, both financing subsidiaries of Columbus, Ohio-based Borden Chemical, Inc., announced plans to begin a roadshow Tuesday for a two-tranche $475 million high-yield bond deal, according to market sources.

Credit Suisse First Boston and JP Morgan will be joint bookrunners for the acquisition deal.

The company plans to sell six-year non-call-two second priority senior secured floating-rate notes and 10-year second priority senior secured fixed-rate notes. Tranche sizes remain to be determined.

Meanwhile Cincinnati funeral home and cemetery company Alderwoods Group, Inc. will attempt to inter old debt with a $200 million offering of eight-year senior notes (B) that it plans to launch later in the week.

Banc of America Securities and Morgan Stanley will be joint bookrunners.

Elsewhere the roadshow started Friday for United Refining Co.'s $200 million offering of 10-year senior notes (B3/B-).

The Citigroup-led deal is expected to price Thursday or Friday.

The company is a Warren, Pa. refiner and convenience store operator. It will use the proceeds to repay debt and fund a dividend payment.

The roadshow also started Friday for Stanadyne Corp.'s $160 million offering of 10-year senior subordinated notes (Caa1/B), which are expected to price during the week of Aug. 2.

Goldman Sachs & Co. is the bookrunner for the acquisition deal from the Windsor, Conn.-based provider of technology and services for engine components and fuel systems.

Summer's last European deal

In what several sell-side sources in Europe anticipate will be the last European junk deal to price before Labor Day, Hungarian telecom Invitel said it would start a roadshow on Monday for a €140 million offering of eight-year notes to be issued by Matel BV, a holding company.

Pricing is expected to take place Friday July 30.

Credit Suisse First Boston and BNP Paribas will run the books for the debt refinancing deal.

July 19 week biggest since mid-May, says Deutsche

Finally, in Friday's One-Stop Weekly, Deutsche Bank's weekly organ of high yield research, strategists David Bitterman, Andrew W. Van Houten and Hunkar Ozyasar commented on both recent funds flow picture and the recent level of new issuance.

"As far as the measures of aggregate supply and demand go, the week saw a further weakening of fund flows, declining from $340 million to $197 million," wrote the Deutsche strategists.

"The average weekly mutual fund flow is continuing to decline and has now reached almost insignificant levels. Considering that the size of the high yield market is almost $650 billion right now, an in- or outflow under $500 million appears rather insignificant. For eight out of the last nine weeks the flow number has been below $500 million.

"Issuance, however, picked up steam over the last week. $4.4 billion in new issues priced since our last report, making this the most active week since the seven-day period ended May 13, 2004."

Duane Reade dips in trading

When the new Duane Reade 9¾% notes due 2011 were freed for secondary activity, "they were heavy," a trader said, with the bonds trading into a par bid "immediately" and ending at 99.25 bid, 100.25 offered, down from their par issue price.

The trader thought that "without a doubt" it was entirely possible that the market may have gotten its fill of drugstore operators, the Duane Reade sally following the two-part $1.2 billion Jean Coutu Group offering that priced Tuesday, which initially pushed higher and then has been slowly easing down ever since.

"My sense is, yeah, there's only so much of this kind of paper you can hold - drugstore-retailer - and they were probably lucky to get it done."

He said that the "people that bought it, own it, and the flippers that got it, there was not going to be a par bid for them."

The underwriters "weren't saying anything in the street - so we'll see what happens Monday."

On the other hand, he said that the new Fisher Scientific 6¾% notes due 2014 - which had priced at par Thursday and then got as good as 100.375 bid before going out Thursday at 100.25 bid, 100.5 offered - remained well-bid for, "locked in at 100.5."

Most investors who bought Fisher "seem content to hold it," he said. "There were a few [flippers] - but it was well-spoken for. Fisher is obviously sort of a very safe investment. It came tight, but I think people are happy to hold it."

Another trader saw the new Refco Financial Holdings 9% notes due 2012 at 99.875, off a skosh from their par issue price Thursday and from the par bid, 100.5 offered level at which the bonds had gone home later Thursday.

Market softer

"It was a quiet day," the first trader said. "The market was softer, basically across the board, with the weakness in stocks [the Dow Jones Industrial Average ended down 88.11 at 9962.22, the Nasdaq lost 39.97 to close at 1849.09, and the S&P 500 dropped 10.64 to end at 1086.20] and no bids to the Treasury market, leaving our stuff flat to offered."

He said that "the last run-up that we had over the last week or so - stuff up two, three, four points - some of that has been given up."

He saw the Iasis Healthcare 8¾% notes, for instance, going from 106 bid, 107 offered, to being offered at 106 without a bid, or maybe 105 bid, 105 offered, and "probably lower than that, if you had to hit a bid."

Likewise, Mediacom Communications Corp. was "way down," dropping to the 103 bid, 104 offered level from prior levels at 107 bid, 108 offered. "That's down pretty significantly," he declared. They're "still at a pretty good premium and the bonds are still pretty yieldy - but this 'buy at any price' mentality has left the market. Most of the customers we talk to do not believe that these kind of spreads are sustainable."

With the Democrats' convention opening Monday in Boston and the Republicans coming a few weeks after that in New York, and with officials and news media talking heads talking up the possibility of terrorism aimed at influencing the political process somewhere in that time span, "a lot of people are nervous. The market is going to get thinner now going into August rather than the other way around. People want to get [their positions] aligned exactly where they want to be, either before vacation - or something else happens."

AMC down on buyout

In Friday's secondary market among the established issues, AMC's 8% notes due 2014 were seen having dropped to about 94.5 bid. One desk called that a swoon of some 5½ points, although another, having pegged the bonds lower to begin with, saw only about a 2½ point drop to that level.

That retreat follows word Thursday evening that the cinema operator is to be taken private by Apollo Management LP, the company's current majority owner, and J.P. Morgan Partners, the private equity arm of J.P. Morgan Chase & Co.

The deal would include $1.67 billion in equity, at $19.50 a share for the current holders, and the assumption of $748 million in debt less $399 million in cash and equivalents.

Little response to earnings

Elsewhere, a number of companies had earnings out Friday - but bond traders didn't see much in the way of market response. For instance, Great Atlantic & Pacific Tea Co. - the parent of the venerable A&P supermarket chain - reported a wider-than-expected loss of $42.8 million ($1.11 per share) versus a year-ago profit of $11.9 million (31 cents a share). Analysts had only been expecting $1.05 or red ink this time around. EBITDA slipped from $75.2 million to $72.5 million, while EBITDA margin eased to 2.21% from 2.33%.

However, the Montvale, N.J.-based store operator's 9 1/8% notes due 2011 were unchanged at 88.5 bid, while its 7¾% notes due 2007 were also steady, at 96.5

Xerox Corp. had favorable earnings and raised its full-year guidance. But the Stamford, Conn.-based copier king's 7 1/8% notes due 2010 were seen unchanged at 104.25, and its 6.60% notes due 2011 were just a quarter point better, at 99.5.

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