Record funds inflow breaks liquidity skid; Jefferson Smurfit lines up euro mega-deal

By Paul Deckelman and Paul A. Harris

New York, Aug. 29 - High yield trading was dead in the water Thursday, market participants said, as activity wound down in advance of the coming Labor Day holiday break. It was predicted to be even more restrained on Friday, with very few players expected to be around to react to news of a record large junk mutual fund inflow number - the first such inflow in 12 long weeks.

In the primary market, paper packaging products maker Jefferson Smurfit Group plc was heard to be reading a €900 million bond offering that could come to market as soon as early September.

Long after trading activity had wound down for the day - which for all intents and purposes means for the week - AMG Data Services' weekly tally of junk bond mutual fund flows were reported to have seen a record inflow of $1.556 billion in the week ended Wednesday. Not only was it the biggest inflow this year to date - in fact, it easily eclipsed the previous weekly high total of $1.335 billion, notched in May 1997.

The inflow marked the first week in which more money came into the junk funds than left them, following an 11-week losing streak that stretched back to mid-June. In that time, a total of more than $2.5 billion hemorrhaged from the funds, according to a Prospect News analysis of the weekly AMG numbers, which are seen by many market participants as a reliable barometer of overall junk market liquidity trends. The AMG statistics only count those funds which report on a weekly basis, and do not include distributions.

Inflows have now been seen in 19 weeks out of the 35 weeks since the beginning of the year. The most recent week's record robust inflow brings the inflow total for the year to date up to $4.465 billion from $2.909 billion in the week ended Aug. 21. That week saw outflows of $44.6 million, the smallest weekly total in the 11-week skid, which led a number of market players to predict - correctly, as it turned out - that following strong junk market trading upturns at the end of last week, a large inflow number for this week was likely.

But even though the cumulative total is back up to respectable levels, thanks to the huge gain in the Aug. 28 week, it is still well below the peak year-to-date inflow total of $5.656 billion, seen in mid-May, before the recent market slide began.

On the last full day of activity prior to the Labor Day recess, the high-yield primary market heard of another eurobond deal, as Jefferson Smurfit pulled open the box lid on a €900 million note sale.

Also, NCI Building Systems Inc., citing "market uncertainties," pulled the plug on its $50 million add-on.

Dublin, Ireland boxmaker Jefferson Smurfit could launch its €900 million equivalent of new notes early in September, a syndicate source told Prospect News Thursday.

The 10-year non-call-five notes will come in tranches of dollars, euros and pounds, according to the source.

Deutsche Bank Securities Inc. and Merrill Lynch & Co. are joint leads.

Timing hinges on regulatory approval of the sale of the company to Madison Dearborn Partners, the source said. Proceeds will be used to help finance the LBO (see related story in this issue).

In an earnings statement Houston, Tex.-based metal building products manufacturer NCI Building Systems cited "market uncertainties" as it dropped plans to do a $50 million add-on to its 9¼% senior subordinated notes due 2009, opting instead to increase the revolver portion of its new credit facility from $100 million to $125 million, increasing the size of the facility to $250 million.

Prospect News also heard Thursday from a market source that the bond piece of the Burger King Corp. LBO is also expected to come in tranches of dollars, euros and pounds.

According to the source, Burger King will bring $600 million of new notes. Leveraged loan market sources also anticipate that the financing will include a substantial credit facility

On July 25 Diageo plc announced that it agreed to sell Burger King to a group comprised of Texas Pacific Group, Bain Capital and Goldman Sachs Capital Partners.

A market source commented that Burger King's EBITDA is approximately $330-$350 million. The purchase price is $2.26 billion, which gives purchase a multiple of 6.5 times, the source said, adding that if one assumes the equity portion is 30%, leverage is approx 4.6 times.

The source also commented that given a bond piece that is $600 million the senior leverage is approximately 2.8 times.

"My guess is that this deal receives a good market reception," the source commented. "It has attractive credit attributes, a great brand name, good sponsors and reasonable credit stats."

The transaction is slated to close in the fourth quarter of 2002, however one source told Prospect News Thursday that Burger King could be late-September or early October business.

Other than Jefferson Smurfit and Burger King just about the only sound echoing around the high yield primary on Thursday was the familiar refrain: "No deals on the road; nothing expected to price."

"I think all the deals that were postponed in the June-July time frame are just waiting for the secondary market to show some signs of continuing to rally," a sell-sider said Thursday.

"As soon as spreads come down you're going to see the calendar starting to increase.

"Nothing will price next week," the source added. "I think you will hear deals announced late next week and early the following week. I don't anticipate a large calendar. I think things are going to be relatively modest over the next three or four weeks."

And which of the deals on the so-called shadow calendar will be the first one to be placed in front of the lights? Prospect News asked the source.

"I'll bet it will be something we haven't heard."

In secondary dealings, traders said little or nothing was going on in the last full trading session before the holiday break (The Bond Market Association has recommended a 2 p.m. ET close Friday, and all U.S. financial markets will be shuttered on Monday, Labor Day).

Even though Thursday was supposedly a "full" day, what little activity that occurred was concentrated in the front part of the day.

A trader noted, for instance that HealthSouth Inc.'s bonds - which had gotten hammered for two straight sessions Tuesday and Wednesday - seemed to be improved slightly on Thursday as "bids started filling in at the end of the day" - which he defined as about 1 p.m. ET, or around three hours earlier than usual.

Another trader said the clock was ticking even earlier, declaring that "things were quiet - everything that was going to happen, happened by 11 [a.m. ET]."

HealthSouth was one of the few names in which even minimal activity was seen; the first trader said that with the bonds having had their big drop over the previous two sessions, "I think we're going to see some bounce here." He saw the company's 8½% notes due 2008 quoted in a context of 83 bid/85 offered, perhaps a little firmer than where they had ended off on Wednesday.

At another desk, the company's bonds were said to have started the day easier, apparently continuing the slide of the previous two sessions, but then firmed later on to end essentially flat. HealthSouth shares, which were in critical condition after having gotten killed in heavy New York Stock Exchange trading the previous two sessions, were healthier Thursday, firming 62 cents (12.28%) to $5.67. Volume of 17 million shares was about five times the usual.

HealthSouth's shares and bonds had swooned badly on Tuesday and continued to retreat on Wednesday, after the Birmingham, Ala.-based provider of outpatient surgery and rehabilitative services announced plans to split itself in two, spinning off its profitable outpatient surgery centers, and warned of lower earnings and discontinued guidance due to changes in government Medicare reimbursement regulations. Those changes, and HealthSouth's actions to minimize their effects, prompted both Moody's Investors Service and Standard & Poor's to warn of possible ratings downgrades. Moody's currently rates the senior unsecured bonds at Ba1, while S&P gives them a precarious investment-grade rating at BBB-.

Apart from HealthSouth, the trader said "it was a quiet day. Nothing was trading, nothing of significance happened. It wasn't even worth coming in."

Another trader agreed, even expressing mock disbelief that anyone might seriously think that anything important had gone on.

Among the issues that he watches, "there were some odd-lot trades that took place in the Street [Thursday] morning, but telecoms - the Charters, the Nextels - seemed to be relatively flat."

Over the previous several sessions, Charter Communications Holdings' bonds had moved up, on market sentiment anticipating sector consolidation, with its benchmark 8 5/8% notes due 2009 firming to 67 bid, where they remained on Thursday. Nextel Communications Inc. bonds had likewise been steadily appreciating over the past few sessions - the wireless sector, too, has heard some consolidation buzz - with its bellwether 9 3/8% notes due 2009 hanging in around 77 bid and its 10.65% notes in the lower 80s, both levels which they continued to hold on Thursday.

The trader said that "retail was quiet, with Kmart, Rite Aid, Gap and Fleming status quo," Fleming after having had "a little bit of a run the past few days on CBO buying."

While crossover retailing credit Dillard's Inc.'s shares fell $3.15 (11.69%) to $23.79 as the Little Rock, Ark.-based department store operator reported second-quarter results, including weaker-than expected sales, its bonds were quiet, although the trader opined that "it looks like the bonds are going to soften up next week, even though it's illiquid."

He also saw gaming/leisure quiet, with "no real trades." After the 11 o'clock hour had come and gone, he said, "it just died out. The Street brokers went home, there was no liquidity, bid lists came in, we got a couple of things done, but nothing of any major consequence."

He further saw Qwest Communications International Inc. bonds staying "at the levels they've been all week," with the holding company 7¾% notes due 2008 anchored around the middle 50s. Even the indictment Wednesday of former WorldCom Inc. executives Scott Sullivan and Bernard Yates in connection with massive alleged accounting flim-flammery had little effect on the bankrupt telecom giant's bonds; they softened half a point to about 13 bid/14 offered, "but big deal; there was nothing worth mentioning" going on in the issue, he asserted. "I would have been better off staying at home."

Also in the telecom sphere, Nortel Networks Inc.'s 6 1/8% notes due 2006, continued to languish in the upper 40s, the level to which they had fallen on Wednesday after the Brampton, Ont.-based telecom equipment maker warned that due to the continued slowdown in the industry, it now expects revenues from continuing operations in the third quarter to be as much as 10% lower than second quarter revenues, and expects to cut an additional 7,000 jobs. Moody's is eyeing the Ba3 ratings on the bonds for a possible downgrade.

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