International Steel, Mueller among deals pricing; Hockey Co. up on buyout; funds see $88 million inflow

By Paul Deckelman and Paul A. Harris

New York, April 8 - International Steel Group Inc. was heard by high yield syndicate sources to have priced $600 million of new 10-year notes in a session Thursday that was abbreviated ahead of the three-day Good Friday/Easter holiday break - but which was still busy nonetheless, as issuers rushed to get their deals done before junk market activity officially wrapped up at 2 p.m. ET. Besides International Steel, issuers heard bringing dollar-denominated bond deals to market included Mueller Group Inc., Delco Remy International Inc. - both of them two-part offerings - and Superior Essex Communications LLC/Essex Group Inc.

In Europe, SEAT Pagine Gialle SpA brought an upsized euro-denominated mega-deal to fruition, while Ashtead Group plc was heard to have priced a downsized sterling-denominated deal.

Secondary market activity was seen as generally quiet ahead of the early Thursday close and Friday's complete market shutdown, continuing the trend in evidence the previous few sessions, when the Passover holiday also kept some market participants out.

Between the shortened session, people off for the whole holiday week, a reluctance by some investors to take the risk of being long anything over a three-day holiday break amid plentiful geopolitical uncertainty and, lastly, some junk marketeers splitting early to hop a subway up to the Bronx for the Yankees' home opener, "it was painfully quiet," a trader lamented. "He saw hardly anything."

Two normally little-seen issues which were quoted substantially higher in response to news developments, although actual trading in them was nil, were The Hockey Co. Holdings Inc.'s 11¼% notes due 2009, expected to be taken out as part of the Montreal-based ice-skate and hockey equipment marker's acquisition by Reebok International Ltd., and United Agri Products' 8¼% notes due 2011, which will be tendered for with part of the proceeds of the Greeley, Colo.-based agricultural chemicals producer's planned recapitalization. The Hockey Co.'s 11¼% notes were quoted having jumped to 119 bid, the likely takeout level, from 112 previously, while United Agri Products' 81/4s moved up to 112.5 bid from 106.

Late in the session, market participants familiar with the weekly high yield mutual fund-flow statistics compiled by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday April 7, $88.4 million more had come into the funds than had left them. That represents a reverse of the trend seen in the previous three weeks, when a net total of $645.6 million had bled from the funds, including $172.6 million in the week ended March 31.

Even with the latest week's inflow, and although inflows have now been seen in eight weeks out of the fourteen since the start of the year, the overall year-to-date trend is still decidedly negative, with a cumulative net outflow of $1.521 billion since the start of the year according to a Prospect News analysis of the AMG numbers, counting only those funds which report on a weekly basis and not including distributions. Funds reporting on a monthly basis show a $453 million cumulative net outflow for 2004 so far, for a total net outflow from bother varieties of funds of $1.974 billion.

After a strong start the first several weeks of the year, continuing the momentum seen in late 2003, the statistics - considered a reliable barometer of overall junk market liquidity trends - headed into negative territory in early February, with two consecutive weeks of net outflows of over $1 billion apiece completely erasing the inflows seen up till then. They have been choppy at best since then - here a week or two of inflows, followed by there a week or two of outflows, with a total cumulative net outflow of $2.887 billion in the 10 weeks since the large outflows began in the week ended Feb. 4, according to the Prospect News analysis.

But while the recent swing to net outflows over the past 10 weeks was seen having something of a sobering effect on the secondary markets after a robust January, high yield primary activity seems to have been not much impacted, with a busy schedule of pricings recently and the buildup of a substantial new-deal pipeline.

In the primary market Thursday, the shortened session before the three-day Easter recess turned out to be a busy one, with a total of eight tranches pricing.

Dollar-denominated issuance totaled well over $1.5 billion, with the largest dollar issuance of the day coming from International Steel Group, which sold $600 million.

That brought the total dollar denominated issuance for the four pre-Easter sessions to $3.89 billion.

Italian yellow pages deal upsizes

However the biggest deal of the session by far came from the Italian yellow pages operation SEAT Pagine Gialle SpA, which priced an upsized €1.3 billion of junk bonds.

The issuing entity was Lighthouse International Co. SA, which increased its issue of 10-year senior notes (B3/B) from €1.15 billion and priced the notes at par to yield 8%, at the tight end of the 8%-8¼% price talk.

Credit Suisse First Boston led the Turin, Italy-based yellow pages publisher's acquisition deal.

International Steel sells top dollar tranche

The second largest deal to price Thursday and the largest dollar-denominated one came from Richfield, Ohio integrated steel company International Steel Group. The company sold $600 million of 6½% 10-year senior notes (Ba3/BB) at 99.096 to yield 6 5/8%, in the middle of the 6½%-6¾% price talk.

Goldman Sachs & Co., UBS Investment Bank, Citigroup and JP Morgan were bookrunners on the debt refinancing and potential acquisition funding deal.

One market source advised Prospect News that the International Steel Group deal played to strong demand.

Also pricing Thursday was a $415 million two-tranche deal from Decatur, Ill.-based flow control products producer Mueller Group Inc.

The company sold $100 million of seven-year second priority senior secured floating-rate notes (B3/B-) at par to yield three-month Libor plus 475 basis points. Price talk was Libor plus 475 basis points.

Mueller Group also sold $315 million of eight-year senior subordinated notes (Caa1/B-) at par to yield 10%, at the wide end of the 9¾%-10% price talk.

Credit Suisse First Boston was the bookrunner.

A market source said that both pieces of the deal were three times oversubscribed.

Superior Essex Communications LLC and Essex Group Inc., an Atlanta-based manufacturer and supplier of copper and fiber optic communications wire, sold $275 million of 9% eight-year senior notes (B3/B) at 97.24 to yield 9½%, well wide of the 8¾% area price talk.

JP Morgan ran the books for the debt refinancing and acquisition funding deal.

Delco Remy International, Inc. also priced $275 million of high-yield bonds, which came in two tranches on Thursday.

The Anderson, Ind.-based company sold $125 million of five-year second priority senior secured floating-rate notes (B1/B-) at par to yield three-month Libor plus 400 basis points. Price talk was Libor plus 400 basis points area.

Delco Remy also sold $150 million of eight-year fixed rate senior subordinated notes (B3/CCC+) at par to yield 9 3/8%, at the wide end of the 9½% area price talk.

Credit Suisse First Boston and Deutsche Bank Securities ran the books on the debt refinancing deal.

Finally, Ashtead Holdings plc priced a downsized £120 million of 10-year senior secured second lien notes (B2/B-) at par to yield 12%.

That was wide of the 11½% area talk, which had been widened from the 10½% area. The deal was decreased from £130 million.

Citigroup and Banc of America Securities ran the books for the debt refinancing deal from the equipment rental company which is based in Surrey, U.K.

3 deals line up

The roadshow starts Monday and runs through Tuesday April 20 for CHC Helicopter Corp.'s offering of $250 million of 10-year senior subordinated notes (B2/B).

Merrill Lynch & Co. will run the books on the debt refinancing deal from the St. Johns, Newfoundland-based helicopter services company.

Extendicare Health Services, Inc. will run an April 12-14 roadshow for its $125 million offering of 10-year senior subordinated notes, with pricing expected on Thursday April 15.

Lehman Brothers is the bookrunner.

The Milwaukee-based operator of long-term care and home health care services will use the proceeds to repay debt.

Finally, the roadshow starts Thursday in Europe for a €475 million two-tranche offering of notes from Tele Columbus.

The Hanover, Germany cable television and communications services company plans to sell six-year senior notes and seven-year senior subordinated notes.

Merrill Lynch & Co. will run the books on the acquisition financing deal.

Most new deals up in trading

When the new International Steel 6½% notes due 2014 were freed for secondary dealings, they were heard to have firmed to par bid, 100.375 offered, from their issue price earlier in the session at 99.096.

Superior Essex's 9% senior notes due 2012 moved up about half a point after pricing, a trader said to 97.75 bid, 98.75 offered, versus their issue price at 97.24.

Traders saw Mueller Group's new 10% notes due 2012 push up to 102.5 bid, 103.5 offered from their par issue price.

A trader saw the new Seat Pagine euro-denominated 8% senior notes due 2014 at 101.25 bid, 101.75 offered, with "a lot of European accounts playing in it," as could be expected, "so they traded up a little bit."

And Allied Waste North America Inc.'s new 6 3/8% senior secured notes due 2011, which had priced on Wednesday at par and then firmed to 100.625 bid, 101 offered on the break, moved as high as 100.75 bid, before falling back from those highs to actually end "a little softer [Thursday]," the trader said, at 100.25 bid, 100.5 offered.

Allied Waste's new 7 3/8% senior unsecured notes due 2014, which priced at par on Wednesday and ended trading that session at 100.375 bid, 101.125 offered, got as good as 101.125 bid Thursday before coming off that peak to end at 100.625 bid, 100.75 offered.

Back among the established issues, "secondary flows were very light. The market seems about unchanged, maybe a little softer [Thursday] afternoon," the trader said.

Levi gains more

One issue which did seem to buck the trend was Levi Strauss & Co. Inc.'s bonds, which had already been moving up over the previous several sessions despite a lack of real news about the San Francisco-based blue jeans maker; some market participants attributed the rise to nothing more than short-covering.

Levi's 11 5/8% notes due 2008 were seen having firmed to 81 bid from prior levels at 80.5, while its 7¼% notes due 2006 moved up to 106 bid, up from 105.25 on Wednesday. Levi's 12¼% notes due 2012 were half a point better at 80.5, a market source said.

Rite Aid up on earnings

A trader saw Rite Aid Corp.'s bonds about half a point firmer after the Camp Hill, Pa.-based drugstore chain operator came out with what he described as '"good numbers" for the fiscal fourth quarter ended Feb. 28. He quoted Rite-Aid's 7 5/8% notes due 2005 as having firmed to bid levels around 102.75-103 from prior levels in the 102.l25-102.5 area. At another desk, a market-watcher saw Rite Aid's 9¾% notes due 2013 advance to 106 bid from 105.25 on Wednesday.

Rite Aid reported net earnings of $59.1 million (nine cents per share) in the latest quarter, well up from its year-ago net of $7 million (a loss of two cents per share, attributable to the cost of paying cumulative preferred stock dividends). Analysts had been looking for earnings of about eight cents a share.

Company officials cited strong promotions of health supplements in explaining the better results, as well as an intense flu season, which translated into strong sales of generic and private-label analgesic and other medications. They also noted a $56.2 million reduction in store closing and impairment charges from year-ago levels.

Fourth-quarter adjusted EBITDA was $216.8 million, a 21.8% gain from a year ago.

On the strength of the numbers, Rite Aid reiterated its previously released guidance for the 2005 fiscal year that ends next February. It projects sales of $17.4 billion to $17.6 billion, with same-stores sales improving 5.5% to 6.5% over fiscal 2004. The company expects net earnings for the fiscal year of between $112 million and $157 million, with adjusted EBITDA in the $800 million to $850 million range.

In the fourth-quarter same-store sales - the key measure of performance in the retailing industry - increased 6.4% in the quarter from year-earlier levels and 5.7% for the 2004 fiscal year.

Gap little changed

A number of high-yield retailers were out with their same-store or comparable-store statistics for March, measuring the performance of stores open at least a year, but little real movement was seen in their bonds, traders said, despite a generally favorable showing.

Gap Inc. reported an 8% rise in comps from year-ago sales at those outlets, a bigger rise than the 5.5% consensus projection of Wall Street analysts. But the San Francisco-based apparel retailer's bonds were seen little changed to perhaps a quarter point better.

"Some of their stuff is up a little bit it seems like but it was really difficult to get the focus [Thursday]. There just weren't a lot of people playing. On Monday we'll get a clearer picture on how the stuff is trading."

A trader quoted Gap's 6.90% notes due 2007 at 111.375 bid, 111.5 offered, up a quarter point on the session, while its 8.80% notes were unseen. He had seen the 6.90s earlier in the week around 111, "so there is an upward trend, they're up about half a point in the last few days." He said that he didn't know if the better numbers "were already built into the [bonds] price, everything is so inflated nowadays, it's tough for the stuff to keep going up."

Among other retailers, he saw Saks Inc.'s bonds "doing nothing" because of the half-day session, even as the Birmingham, Ala.-based retailer rang up a 9.5% increase in March same-store figures versus a year ago, better than the 7.5% Wall Street had been looking for. He quoted Saks' 8¼% notes due 2008 unchanged at 110.5

At another desk, a trader called J.C. Penney Co.'s same-store numbers "pretty much a non-event," with its 7.60% notes due 2007 perhaps a quarter point better at 110.25 bid, 111 offered.

Penney reported an 11.4% rise in same-store sales, well up from the 7% analysts had been expecting, causing the Plano, Tex.-based department store operator - currently in the process of unloading its unprofitable Eckerd drugstore franchise for $4.525 billion - to raise its first-quarter per-share earnings estimates to 20-to-25 cents versus the 15 cents per share analysts' consensus and the year-ago profit of a nickel per share.

Penney said that "operating profit through the first nine weeks is tracking above last year's levels, reflecting strong sales combined with positive gross margin trends."

Lucent rises

Apart from the retailers, Lucent Technologies Inc.'s notes were quoted at better levels, a market source pegging the Murray Hill, N.J.-based telecommunications equipment maker's 6.45% bonds due 2029 half a point up at 85 bid, its 7¼% notes due 2006 at 106, up three-quarters of a point on the session, and its 5½% notes due 2008 also three-quarter of a point better at 98.5.

A trader elsewhere, noting that Lucents were "stronger on the week," and quoting the bonds at similar levels, said he saw "no rhyme or reason" for their having firmed three or four points on the week, except perhaps on short-covering.

Some in the investment community are positive on Lucent for other reasons; on Thursday, UBS was reported to have put out a research note raising its assessment of the company's shares to "neutral" from "reduce" previously and upping its price target for the shares to $4.30 from $3.75; UBS cited likely further strengthening of Lucent's wireless equipment business, particularly given what it called "aggressive" network upgrades by Verizon Communications and Sprint PCS, with Lucent seen as a prime beneficiary.

The trader was not much impressed by the UBS argument; while acknowledging that the two big wireless networks will be throwing a lot of money Lucent's way and to sector peer Nortel Networks Corp. as well, saying "you're looking at $1 billion to $1.5 billion to be spent [by these companies] with Lucent restructuring their infrastructure and that's great," he added that "that having been said, that news is two or three weeks old, maybe a month old, so I don't know why [Lucent] is up so much this last week."

Anyway, Lucent has other problems. For instance, he said, "they fired some people in China this week and it looks like the FCC [Federal Communications Commission] is investigating their Chinese operation."

Lucent said in a Tuesday filing with the Securities and Exchange Commission that it had axed four top executives of its Chinese business, due to incidents and "control deficiencies" it uncovered during an investigation to make sure it was in compliance with the Foreign Corrupt Practices Act, which forbids U.S. companies operating overseas to pay bribes or kickbacks in order to drum up business. The Chinese scrutiny is part of a broader ongoing internal investigation into alleged corruption in Lucent's overseas operations.

"To me, anytime the FCC name is mentioned, it's obviously bad news," the trader added - "but for some reason, they continued trading up."

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