Terror news has little overall market impact; funds see $81 million inflow

By Paul Deckelman and Paul A. Harris

New York, July 7 - The news of the horrific terrorist bombings in the heart of London on Thursday initially shook global financial markets - but at the end of the day, it had little overall impact on high yield trading, participants said. While airline industry bonds, not surprisingly, were seen down as much as several points across the board, the market in general seemed to take its cue from equities, which bounced back from their early losses to actually end slightly higher.

Primary market activity was meanwhile very restrained, with no issues heard to have priced during the session. Standard & Poor's meanwhile released a mid-year report projecting lower issuance, reduced demand and decreased returns in the months ahead.

And after the generally quiet trading wound down for the session, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that some $80.77 million more came into the funds in the week ended Wednesday than left them, continuing the up-and-down pattern of one week an inflow, the next week an outflow, the next week an inflow, that's been seen since the beginning of June.

"These number just are not telling us anything," a sell-side source commented.

For instance, while this past week saw a modest inflow, in the week ended June 29 the net outflow was $177.6 million. That followed a $56.3 million inflow in the week ended June 22, which in turn had followed a $383.59 million outflow the week before that, while the stretch started off in early June with two weeks of inflows totaling slightly over $1 billion. Before that, outflows totaling more than $6.7 billion had been seen over 15 straight weeks dating back to mid-February, according to a Prospect News analysis of the AMG figures.

The latest week's inflow marks only the seventh such money injection by the funds in the 27 weeks since the beginning of the year, with outflows having been seen in the other 20 weeks, according to the Prospect News analysis. Outflows have totaled about $7.04 billion so far this year, down from $7.121 billion last week, the analysis indicated.

The fund flows are a widely watched gauge of market liquidity trends. The recent infusion - with net inflows totaling almost $661 million over the last six weeks - has helped to revive a junk bond primary market that seemed all but dead through most of May, and gave a boost to a secondary market that was staggering.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of overall liquidity trends - and because there is no reporting mechanism to track the movements of other sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

Secondary quiet

Back in the secondary market, things were "very quiet," a trader said. "The market started off half a point lower," as participants arriving at their desks in the United States saw TV screens filled with pictures of the carnage from London, where a series of bombs placed in subway stations and on a crowded commuter bus killed at least three dozen people and injured several hundred more.

That London news initially hammered stocks down, while spurring a short-lived "flight to safety" surge in U.S. Treasuries, but as the day wore on, the trader said, junk bonds "bounced back up with equities and ended pretty much unchanged."

"It was pretty quiet in high yield," another trader said. "I didn't see a whole lot of action. Stocks closed up on the day, with the Dow ending up 31" after being down over a hundred points earlier. In the junk bond market, he said, "it seemed like there were buyers. It seemed like some money is dribbling in."

"People were pretty much just watching the news all day," the first trader said. "Things started off down half a point - a lot less than people expected. People expected it to be off by a couple of points, but they were just down slightly. As equity traded back [up], so did high yield. Surprisingly," the terror attack "was pretty much a non-event" to junk market denizens.

Airlines lower on attack

Which is not to say that the market escaped totally unscathed. As could be expected, bonds of airlines - already on shaky ground due to high oil prices and self-imposed limits on fares - were lower on the evidence of renewed terrorism, although even those issues were down about two to four points tops, in restrained activity, with no huge sell-off seen.

A trader saw Delta Air Lines Inc.'s 7.70% notes due 2005 having dipped to 84 bid, 86 offered from prior levels at 88 bid, 89 offered, while the Atlanta-based air carrier's 10% notes due 2008 lost three points to end at 35 bid, 37 offered, and its 7.90% notes due 2009 and 8.30% notes due 2029 were each two points lower at 33 bid, 35 offered and 24 bid, 26 offered, respectively.

He meantime saw no activity in Northwest Airlines Corp., United Airlines parent UAL Corp. or ATA Airlines parent ATA Holdings Corp.'s bonds.

Another trader saw the 7.70s three points lower at 85 bid, 87 offered, with Northwest's 8 7/8% notes due 2006 1½ points down at 57 bid, 59 offered, and American Airlines parent AMR Corp.'s 9% notes due 2012 unchanged at 78 bid, 80 offered.

Yet another trader saw the Delta 8.30s a point off at 24.5 bid, 25.5 offered, while Northwest's 8 7/8s were also a point down at 58 bid, 59 offered.

Analysts quoted in published reports Thursday indicated that the airlines could be hurt in the short run because fears of terrorism in Europe will likely lead to reduced transatlantic bookings for the carriers - and right now, overseas travel in general and the transatlantic runs in particular are where the airlines are making a lot of what little money they are actually making.

According to data compiled by the main airline industry group, the Air Transport Association, international traffic accounted for $32 billion in revenue last year, or one quarter of the U.S. industry's total.

While U.S.-based airlines collectively lost $9.5 billion on their domestic operations last year, the association said they actually made money - $386 million - from their international operations.

But absent another big attack, most analysts did not think that London attacks would put the carriers back into an earth-bound tailspin like they suffered after 9/11.

Ironically, the attacks - and the prospect that it might curb airline travel, and thus, demand for jet fuel, helped to roll back crude oil prices - whose spike above $61 per barrel this week is seen as bad news for the carriers. Light crude settled at $60.73 per barrel, down 55 cents, on the New York Mercantile Exchange, after being down more than $2 per barrel earlier in the session. Along with the possibility of reduced travel, reported rises in stocks of petroleum distillates like heating oil helped bring the prices lower.

GM unchanged despite Moody's review

Back on the ground, Moody's Investors Service on Thursday said it was eyeing General Motors Corp.'s bonds for a possible downgrade to junk status from its current level at Baa3, citing the anticipated negative impact of its extensive price incentive program on the auto giant's bottom line, as well as the car-buying public's shift away from gas-guzzling SUVs and big pickup trucks - a source of lucrative profits for GM - in the face of escalating gasoline prices.

However, the threatened downgrade - which would bring the company's Moody's ratings in line with Standard & Poor's and Fitch's ratings, which are already at junk - was "pretty much a non-event," a trader said, quoting GM's benchmark 8 3/8% notes due 2033 essentially unchanged at 82.5 bid, 83.5 offered.

Collins & Aikman dips

Also in the automotive sphere, Collins & Aikman Corp.'s bonds, which had bounced around wildly Wednesday at sharply higher levels on news of a new financing plan, only to come off those highs and end up only modestly, were seen down a little in Thursday's dealings. The bankrupt Troy, Mich.-based auto components supplier's 10¾% senior notes due 2011 - which on Wednesday had initially zoomed up to levels as high as 33 bid from the mid-20s, only to end in a 28ish context - were seen trading at bid levels around 26-27 Thursday.

Collins & Aikman was in court on Thursday, hoping to get judge Steven W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan to sign off on the new emergency financing plan, which calls for Collins' six biggest customers - Detroit's "Big Three," plus the top three Japanese-based carmakers - to front the company $82.5 million in loans, agree to a 15% price hike over the next 90 days that will put another $82.5 million in Collins' depleted treasury, and help the company with another $140 million of capital costs it would otherwise have to incur on existing product lines and new launches.

However, the plan is not an easy sell. The company's banks - which loaned Collins & Aikman an initial $150 million of debtor-in-possession cash that has already been burned through - support the new plan, since it involves forcing the customers to pay higher prices, something the banks had long advocated. However, published reports said lawyers for other creditors argued against the plan at Thursday's hearing. No decision on the plan had been announced by the time the court's official closing time came, and several calls by Prospect News to the company and its attorneys seeking information about the hearing's outcome were not returned by press time.

Collins & Aikman also announced a major executive shakeup Thursday, aimed at putting experienced turnaround players in control of the company.

It appointed veteran turnaround specialist Stephen F. Cooper as chairman of its board of directors, replacing interim chairman Marshall A. Cohen, who stepped into that position on a temporary basis following the resignation under pressure in mid-May of then-chairman and chief executive officer David A. Stockman. Cohen will stay on as a director and serve as lead director. Collins & Aikman is the latest troubled company that Cooper, the chairman of restructuring firm Kroll Zolfo Cooper, will attempt to turn around; he also currently acts as interim CEO of Krispy Kreme Doughnuts Inc. and of Enron Corp.

Along with Cooper, Collins & Aikman appointed Frank Macher as president and CEO, replacing Charles E. Becker, who had assumed the CEO post on an interim basis after Stockman's ouster. Macher had most recently been the chairman and CEO of Southfield, Mich.-based auto parts supplier Federal-Mogul Corp., which is also in the midst of a Chapter 11 reorganization.

The company further announced that Leonard LoBiondo, currently senior managing director and co-chief operating officer of Kroll Zolfo Cooper, will formally join Collins & Aikman as a director - he and Cooper have been advising the company up till now solely in their capacities as principals of Kroll Zolfo, which is Collins' turnaround-management advisor. LoBiondo, Cooper and Macher will join current chief restructuring officer John R. Boken, who continues with the company, in a newly formed Office of the Chairman.

Cooper and LoBiondo will also become a part of a newly established board of directors restructuring committee, along with current directors Anthony Hardwick, Timothy D. Leuliette, and Daniel P. Tredwell. The new committee will be responsible for overseeing the development of the business plan, the valuation of the business and, ultimately, the negotiation of a plan of reorganization.

Stillness in the primary

As was the case on Wednesday, the primary market produced hardly a shred of news during the Thursday session.

No issues were priced and no roadshow starts were heard.

However some high-yield players were following the fortunes of an oversubscribed perpetual preferred deal from Brazilian steel maker Companhia Siderurgica Nacional SA.

Amid the uncertainty that trailed the news out of London, sources in Asia and Europe speculated that the underwriters might hold off closing the book until early in the week to come.

However by mid-day terms had emerged on the upsized $500 million offering (B1/BB-/BB-), which priced at par to yield 9½%.

Talk had tightened to the 9½% area from the 9 5/8% area.

Credit Suisse First Boston and Deutsche Bank Securities were joint bookrunners for the issue that had played to heavy demand, with sources having put the book size in excess of $1.5 billion, 10 times the initial $150 million deal size.

Iesy timing

Although Iesy Repository GmbH, the German regional cable services provider, was expected to price its downsized €360 million equivalent two-part offering of 10-year senior notes (Caa1/CCC+) on Friday in London, market sources suggested Thursday that given the present situation there it would not be surprising to see the deal held over into next week.

The company intends to sell the notes in both dollar- and euro-denominated tranches.

The notes were talked at 10¼% on Wednesday.

Citigroup, Deutsche Bank Securities and JP Morgan are bookrunners.

The Frankfurt, Germany-based company had postponed a €525 million equivalent two-part offering on April 28 due to unfavorable market conditions.

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