Dynegy stronger on financing rumors; $1.3 billion fund inflow; Radnor, Playboy price deals

By Paul Deckelman and Paul A. Harris

New York, March 6 - Dynegy Inc. bonds and shares were quoted strongly higher on Thursday, as rumors - as yet unsubstantiated - that the Houston-based energy company was close to lining up new financing made the rounds of the investment community.

In the primary market, Radnor Holdings Corp. brought a $135 million seven-year offering to market, while Playboy Enterprises, Inc. completed its quickly shopped bond offering, upsizing the deal slightly to $115 million.

The primary and secondary markets - still enjoying the bounce they got from last week's report that $1.54 billion more came into high-yield mutual bond funds than left them in the week ended Feb. 27 - are expected to get another healthy boost on the latest fund flow numbers. According to market participants familiar with the weekly statistics compiled by AMG Data Services of Arcada, Calif. Net inflows to the funds totaled $1.328 billion in the week ended Thursday. Over the two-week span, $2.868 billion more has come into the funds than has left them, according to a Prospect News analysis of the AMG figures. Market participants watch the behavior of the junk bond funds as a reliable barometer of overall junk market liquidity trends.

So far this year, net inflows have totaled $4.446 billion, up from $3.118 billion a week earlier, with inflows seen in five of the nine weeks since the beginning of 2003. The strong surge of inflows dates back to about mid-October, with inflows seen in most weeks, punctuated here and there by an outflow. The liquidity symbolized by the junk fund inflows has been the key factor in both the strong primary market activity in the last quarter of 2002 and on into the first two months of 2003, and the rebound seen since mid-October in the formerly beleaguered secondary market .

Shortly after the inflow news began circulating the market Ali Balali, chief of high yield research for Banc of America Securities, told Prospect News that it has been almost exactly a year since the high-yield took in back-to-back billion dollar-plus inflows: an inflow of $1.1 billion was reported for the week ending March 7, 2002, Balali said. It was succeed the following week by an inflow of $1.2 billion.

As he was digesting Thursday's funds flow data, Balali said that among a variety of factors that could be attracting money into high yield, one especially stands out, to his way of thinking: declining defaults.

"The (Moody') U.S. speculative grade default rate dropped to 5.98% in January," he said. "We were hovering around 11.5% around January of 2002. This is a huge drop.

"So as fewer companies default, the chance of investors collecting that coupon gets better.

"As a money manager you look at the declining default rates - and you know where the trouble spots are - so high yield starts looking very attractive."

With pockets bulging, high-yield investors bought two new issues during Thursday's session. PEI Holdings, Inc., a subsidiary of Playboy Enterprises pinned up an 11% yield to its new seven-year notes. Ditto, Radnor Holdings, whose new seven-year junk bonds also came with an 11% yield.

And Dallas lodging firm La Quinta Properties, Inc. checked in with a new $250 million eight-year deal that is set to spend the coming week on the road.

One informed source told Prospect News on Thursday that investors were discernibly attracted to the upsized Playboy Enterprises deal, which, the source said, came with a book that was two times oversubscribed.

Playboy priced $115 million - increased from $110 million - of seven-year senior secured notes (B2/B) at par to yield 11%, spot on to the 11% area price talk. Banc of America Securities was the bookrunner on the deal and Lazard was co-manager.

The source said the Playboy notes hit the aftermarket as high as 103.5, gradually retreating to 103-103.25.

Terms also surfaced Thursday on Radnor Holdings Corp.'s $135 million of seven-year senior notes (B2/B-), which priced at par to yield 11%, at the wide end of the 10¾%-11% price talk, via Deutsche Bank Securities Inc.

One new deal took up a position on the forward calendar, Thursday. A syndicate source told Prospect News that the roadshow starts Friday for La Quinta Properties, Inc. $250 million of eight-year senior notes (expected ratings Ba3/BB-). The roadshow on the deal, from bookrunner Lehman Brothers and co-managers CIBC World Markets, JP Morgan and Fleet Securities, is expected to wrap up on Friday, March 14.

Finally on Thursday price talk of 10 1/8%-10 3/8% emerged on Hexcel Corp.'s $125 million of five-year senior secured notes (B3/B). The Stamford, Conn. structural materials manufacturer's deal, via bookrunner Goldman Sachs & Co. and co-manager Fleet Securities, is expected to price on Friday.

Diane Keefe, portfolio manager of the Pax World High Yield Fund, spoke to Prospect News on Thursday, hours before the news of the second consecutive billion dollar-plus inflow began to circulate the market. However, like Banc of America Securities' Balali, Keefe reckoned that part of what is presently making the high-yield asset class attractive is the decline in the default rate.

"The high-yield market is a lot richer than it used to be but it could still tighten somewhat," Keefe commented. "It depends on what happens with the economy. If the economy keeps high-yield companies afloat, and there are not as many defaults as there were in the last couple of years, we still have an above-average spread so it still makes sense to own.

"But it depends on the default picture," she added. "It does seem to me that defaults are going to be concentrated in airlines and independent power producers. So if you keep your nose clean by not owning those you could do pretty well."

Keefe, whose Pax World High Yield Fund submits credits to social issues screens, said that she was having a look at two deals presently in the new issue market.

"I'm looking at the iStar deal that's in New York today because I already own the outstanding bond and it's Ba1/BB+, and a very strong credit," she commented. iStar Financial Inc. is bringing $150 million of five-year senior notes (Ba1/BB+/BBB-). The deal, via Deutsche Bank Securities, is expected to price during the week of March 10.

Keefe also said she was having a look at Moore North America Finance, Inc.'s $400 million of 10-year senior notes (B1), an offering via Deutsche Bank Securities, Salomon Smith Barney and Morgan Stanley, also scheduled to price during the week of March 10.

"I went to the Moore deal roadshow, Wednesday," the portfolio manager said. "I think it's a pretty crummy business but their leverage is so low at this time in the market. The business they're acquiring, Wallace, has a capacity-utilization in the mid-50s and their capacity utilization is in the low-70s. So they're just going to take out a lot of capacity."

When the new Radnor bonds were freed for secondary dealings, they actually eased a bit to 99.5 bid/100.5 offered from their par issue price earlier in the session.

Back in the secondary sphere, Dynegy was up substantially, although there was no fresh news out on the energy company; the Internet advisory service Briefing.com, noting the better than 10% rise in its shares, attributed the jump to a "rumor that new financing was coming into place."

A trader said that such financing scuttlebutt had "been out there for a while," but the bottom line was that the bonds and shares did rise, and substantially.

A trader quoted the company's 8 1/8% notes due 2005 at 77 bid/79 offered, well up from levels earlier in the week at 70.25 bid/72.25 offered, exclaiming "have those things run up over the last few months!"

At another desk, a trader saw Dynegy's bonds up anywhere from five to eight points across the board, with the 8 1/8s at 77 and the company's 8¾% notes due 2012 - what he called "one of the more active issues - at 65 bid/68 offered.

"It's obvious that the stock had a nice little pop as well," he added. Dynegy's New York Stock Exchange-traded shares were up 21 cents (10.61%) to $2.19, on volume of 13.5 million shares, up from the average 9.7 million.

Dynegy - like many rival power producers, merchant energy distributors, energy traders and pipeline companies - has been languishing at sharply lower levels ever since the dramatic demise of leading energy trader Enron Corp. in late 2001 - an event which brought droves of federal and state regulators down on the companies, while bond and stock investors headed for the doors. Many players, like Dynegy, saw their formerly investment-grade credit ratings knocked down deep into junk bond territory.

But there still exists some hope for the remaining players. Companies such as Dynegy and sector peers El Paso Corp., and Williams Companies Inc. have been shedding assets, trying to pare down debt and lining up new financing from lenders. El Paso was recently successful in putting together a big credit facility and selling $700 million of new bonds, which helped to give its bonds a big boost, and if the Briefing.com explanation of Thursday's jump in Dynegy is to be believed, the latter's investors also see some light at the end of the tunnel.

"People are starting to realize that maybe some of these guys can survive - or think they can survive," said the trader. "The banks will give them enough [funding] to crawl through the next couple of years, and maybe they'll work their way out of their situations. People feel a little more of a comfort level coming into that kind of thinking."

But while the optimism about Dynegy (and the continued afterglow from El Paso's recent success) may have heartened investors in the until-recently beleaguered sector, carryover into other bonds there is a sometimes, hit-and-miss thing. In Thursday's dealings, the trader saw El Paso a little lower, with Williams up "a smidgen." AES Corp. paper was pretty much unchanged, he said.

He did see Mirant Corp. debt two to three points higher, opining that "people are probably speculating on Mirant being a likely candidate to announce some sort of refinancing in the not-too-distant future."

But at another desk, a trader said that he hadn't seen Mirant doing anything, quoting its 7 5/8% notes due 2006 at 56.5 bid/57.5 offered, unchanged on the session. "The others [besides Dynegy] didn't go anywhere," he said, describing the day's action as "Dynegy-centric." He saw Calpine Corp.'s 8½% notes due 2011 unchanged at 47.5 bid/48.5 offered, and Williams as unseen.

A market observer quoted El Paso's bonds as "down a couple of points on the day." with the company's 7% notes due 2011 at 71 bid/73 offered, the same level its 2009 paper eased to. Its 2007 paper was at 72 bid/75 offered, while its 2005 paper was at 79 bid/80 offered,

Apart from the energy sector, Gap Inc.'s were little changed, even though the San Francisco-based apparel retailer posted a strong 8% gain in February same-store sales versus a year ago - the latest positive number that Gap has posted since its turnaround after several years of doldrums, a bounce that began late last year.

A trader, in quoting Gap's 6.90% notes at 100.75 bid/101.25 offered, up about half a point, said the bonds "didn't have much further room to go [up].

San Francisco-based jeans maker Levi Strauss & Co.'s bonds were "weaker out of the blocks" Thursday morning, a trader said, falling about two points to 90 in morning dealings before coming part of the way back to end at 91 bid/92 offered, down a point. At another desk, its 11 5/8% notes finished at 99 bid/par offered, up two points from its lower earlier levels.

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