CEVA deal put off; Beazer bounces; junk follows stock rise; funds see $493 million outflow

By Paul Deckelman and Paul A. Harris

New York, Aug. 2 - Even as the high-yield market showed some resiliency on Thursday, with most issues seen better and benchmark indexes improved in line with Wall Street's gains, there was yet another reminder that the corner has by no means been turned - yet another sizable deal, this one for CEVA Group plc, was postponed due to unsettled market conditions. That postponement came after all kinds of efforts to make the deal more palatable - among them adding a second-lien tranche to what had been an unsecured deal, downsizing it by $1 billion and raising the anticipated yield level - failed to lure in the buyers at this time.

It was the latest in a long string of deals over the past several weeks which have been postponed, cancelled outright, replaced by bank loans, downsized or otherwise restructured in order to calm the fears of investors made wary by the sudden switch from what had been a red-hot primary market over the first half of the year, to an ice-cold one.

But the secondary market seemed hot, even if the primaryside was not.

Beazer Homes USA Inc. - whose bonds had taken a wild ride on Wednesday and had gotten a thorough pounding at the hands of investors spooked by bankruptcy rumors - which the company hotly denied - continued Wednesday's late-session trend of coming back from the lows they had hit earlier.

Another one of Wednesday's big losers seen better was Six Flags Inc., even though that paper was going first down, and then back up without the benefit of any firm news one way or another to drive it.

The big automotive benchmarks, General Motors Corp. and arch-rival Ford Motor Co. were seen up in active trading, their investors apparently unfazed by continuing signs of weakness in the domestic automotive industry.

Sources on the buy-side and the sell-side said the junk market opened the Thursday session with an impressive rally and largely held it throughout the session.

"We're off from the morning highs, but we're an eighth of a point higher on the day," a high yield syndicate official told Prospect News at the Thursday close.

Meanwhile a money manager from a mutual fund said that "real bonds" were up on the day.

To illustrate, the source selected a bond that priced last November as part of the Firestone Acquisition Corp. (Freescale Semiconductor Inc.) $5.95 billion four-part transaction.

The investor's bond of choice was the Freescale 8 7/8% senior notes due 2015, which priced at par in a $2.35 billion tranche.

Characterizing it as a relatively volatile bond that trades a lot because of its liquidity, the buy-sider said that near Thursday's close it was trading at 92 bid, 92½ offered, up from 89¾ bid, 90¼ offered earlier in the session.

"Not everything is up that way, but for whatever trading volume there was, prices have moved up quite a bit," the investor commented.

Funds see eighth straight outflow

Focusing, meanwhile, upon the technical forces at play in the junk market, news on the liquidity front remained negative on Thursday as AMG Data Services of Arcata, Calif., reported a $493.4 million outflow for the week to Aug. 1, according to market participants familiar with the weekly high yield mutual fund flow numbers.

It was the eighth straight outflow, including the $366 million leakage seen in the previous week, ended July 25. Those outflows, collectively have now made the $1.6 billion of cumulative inflows which had built up over the first half of the year, through early June, just a vanished memory.

For the year to date, the latest outflow sends the weekly-reporting funds deeper into negative territory: negative $1.099 billion.

A market source told Prospect News that the present string of eight consecutive outflows has seen a total of $2.7 billion leave the high yield mutual funds, and added that the last time there were eight consecutive outflows was the eight-week period to May 31, 2006, when outflows totaled $1.2 billion.

Hence the most recent run of redemptions is more severe.

The most recent bigger run of consecutive outflows was the 11-week string that concluded on Nov. 23, 2005, which saw $3.36 billion leave the funds.

The biggest run of consecutive outflows going back to 2000 was the 15-week, $6.8 billion negative streak that came to a conclusion on May 25, 2005, the source said.

Returning to the most recent week's data, the funds which report to AMG on a monthly basis saw a modest $94 million inflow during the most recent period, extending the year-to-date positive flows among the monthly reporting funds to $4.783 billion.

Hence the aggregate year-to-date flow, tallying both the weekly and monthly reporting funds, was $3.685 billion for the week to Wednesday.

The sudden shift over the last few weeks has come about even though inflows have still been seen in 19 weeks out of the 31 since the start of the year, versus just 12 weekly outflows - because the inflows to date were relatively small in most of those weeks, while the recent outflows have been more sizable, some of them considerably so, as cautious investors pulled their money out of what were perceived to be risky asset classes that included high yield, heading for the relative safety of Treasuries.

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 10% to 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, most recently, hedge funds.

Junk gains in trading

Back in the secondary arena, the market "traded up," one participant said, ending up what he called "a little stronger."

That trader saw the widely followed CDX index of junk market performance up ¼ point on the day at 92 5/8-92 7/8. Among other indexes, the KDP High Yield Daily Index advanced 0.35 to 77.62, while the Banc of America Securities High Yield Broad Market Index had a total return of 0.42% on the day.

However, the trader said, overall activity levels lagged.

"It was pretty much the same thing everywhere," he said - "everyone is waiting for the [July] employment number" slated to be released Friday morning by the Labor Department.

GM continues to show strength

The trader said that GM "was actually up pretty good," with the giant carmaker's benchmark 8 3/8% notes due 2033 up 2½ points to 84.75 bid, 85.25 offered. Those gains come on top of several previous days of advances which have lifted these widely traded bonds to current levels from prior levels last week in the mid-70s. GM was helped by the sharply higher than expected second-quarter profit it reported last week.

The trader also said that Ford's flagship 7.45% notes due 2031 "did pretty well" as well, gaining 1½ points to finish at 77.5 bid, 78 offered.

He said that investors had apparently pretty much shrugged off Wednesday's news that Detroit's share of the domestic car market continues to shrink, falling below 50% for the first time ever.

But while GM bonds were generally up - besides the '33s, GM's 8¼% bonds due 2023 gained more than a point to end at 83.625, while its 7 1/8% notes were up 1 point at 88 - probably the most actively traded issue, the 8% notes due 2031 issued by GM's former financing arm, General Motors Acceptance Corp., still 49% owned by GM, finished on the downside, off more than 1½ points at 95.375 on apparent profit-taking on its nearly 5 point gain Wednesday.

Beazer bounces back

Elsewhere, Beazer Homes' bonds - which on Wednesday had fallen pretty much across the board as low as the upper 60s, a 10 to 15 point drop on bankruptcy rumors, before firming from those depths to only finish down about 6 or 7 points in the 70s - were seen having firmed about 2 to 4 points off their Wednesday close on Thursday, although that leaves them still down a couple of points from where they had been before all the commotion started.

A market source saw Beazer's most actively traded bonds, the 8 3/8% notes due 2012 as having gained about 4 points on the session to finish around 82. The company's 8 5/8% notes due 2011 moved up about 2½ points, also to the 82 area, while its 6 7/8% notes due 2015 and 6½% notes due 2013 each finished around 77, up 2 points and 4 points, respectively.

Another trader said that the 61/2s finished at 77 bid, 78 offered, but called that only a 1 point gain.

Beazer's New York Stock Exchange-traded shares, which on Wednesday had lost as much as 42% of their value at one point before closing down almost 18% on 14 times their usual volume, shot back up by $1.56 (13.59%) to $13.04 Thursday, on volume of 12.8 million, more than four times the norm, investors apparently interpreting the disclosure in a regulatory filing that New York-based hedge fund Citadel Investment Group LLC has raised its stake in the Atlanta-based homebuilder residential builder to 5.7% as a vote of confidence in Beazer's continued solvency.

The bonds and shares had started bouncing back from their early lows on Wednesday, a bounce which continued into Thursday, after Beazer emphatically denied the bankruptcy speculation in the market.

Six Flags comes back

Also better on the day after suffering losses Wednesday was Six Flags, as those bonds recovered from the 4 point downturn seen on Wednesday.

The New York-based theme park operator's 8 7/8% notes due 2010 were up 2 points to 85.5 bid, 87 offered. A trader also noted that the company's shares were a little better - but as was the case when the bonds and stock plummeted, there was no fresh news out on the company.

CEVA douses deal

In keeping with the overall negative tone it has maintained for most if not all of the past month the primary market produced very little news on Thursday.

And the news it did produce was bad.

CEVA Group postponed its $400 million offering of seven-year second-lien notes (B3/B-) on Thursday due to market conditions, according to a market source.

In place of the bonds, a bridge loan will be funded, and the company will revisit the market at a more opportune time.

On Wednesday the company increased the price talk, offering the bonds with a 10% coupon at a significant original issue discount to yield 11%, up from previous talk of 10% area.

Prior to the price talk revision, the company restructured the deal, eliminating proposed euro-denominated and floating-rate tranches.

CEVA initially came to market with a $1.4 billion equivalent bond offering.

However last week the company slashed the deal by $1 billion equivalent, also replacing proposed dollar-denominated and euro-denominated senior unsecured bonds with bridge financing.

The company was in the debt markets to help fund its acquisition of Netherlands-based logistics and supply chain management company, EGL Inc.

Credit Suisse, Morgan Stanley, Bear Stearns, UBS Investment Bank, JP Morgan and Goldman Sachs & Co. were joint bookrunners.

Meanwhile, early Thursday morning, a buy-side source reported that another deal thought to still be in the market, Aeroflex Inc.'s $370 million offering of notes, was restructured.

The source said that the deal was now expected to include a PIK tranche and a senior cash pay tranche, with the company offering some equity to junk investors who participated.

Although other market observers reported hearing more or less the same story, a source close to the deal declined to comment.

Goldman Sachs & Co. is the bookrunner for the LBO deal.

Prohibitive at par

A high yield syndicate official who spoke to Prospect News on Thursday said that one force that is impeding the new issue market is a reluctance on the part of investors to get into any paper that issuers attempt to price at or near par.

"It's not as though no one has cash," the banker insisted.

This source went on to make an assertion that requires something of an intuitive leap, but perhaps makes a kind of diabolical sense in a market that has seen recent low-rated issues undergo drastic price drops.

The banker said that investors who bought a deal at par but which is now trading at 80 cents on the dollar may elect to stay with that paper if they have cash to put to work, the haircut notwithstanding.

They may prefer something they know really well, at 80 cents on the dollar, over a new bond at par, the banker said.

External forces

Meanwhile a mutual fund money manager said that presently the high yield market is exhibiting an acute sensitivity to changes in equity prices, as well as to news from hedge funds and the housing sector.

"If equities tick down, high yield ticks down a quarter of a point," the investor asserted, adding that, conversely, if stocks close up a hundred points, the high yield market finishes strong.

The investor said that lately the junk market has seen a meaningful reduction in the number of "marginal players, such as the structured products and the hedge funds."

That reduction has been equalized, somewhat, by the fact that a lot of highly leveraged deals have been pulled because they need to be restructured in order to attract attention from the players that remain in the game.

Given this approximate equalization, and given that the economy seems okay, equities seem to be in a trading range, and Treasuries are "sort of stable in a trading range," better quality high yield bonds - which have undergone a big price adjustment and a big spread adjustment - "frankly look pretty attractive," the investor said.

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