Hertz, TRW, Graphic Packaging gain on numbers; Rock-Tenn hits the road; funds see $76 million outflow

By Paul Deckelman and Paul A. Harris

New York, Feb. 21 - Hertz Corp. investors were in the driver's seat on Thursday, as the Park Ridge, N.J.-based car-rental giant's bonds firmed after it reported solidly better fourth-quarter numbers, although it also issued cautious guidance for the coming year.

Also motoring higher on better numbers were the bonds of parts manufacturer TRW Automotive Holdings Corp. and Graphic Packaging International Inc.

But Community Health Systems Inc. had negative earnings and gave up early gains to close unchanged to off a little.

Wolverine Tube Inc.'s bonds were seen down points, although traders had seen no specific negative news about the Huntsville, Ala.-based maker of industrial pipe and tubing.

Overall sources were marking the broad high yield market flat to slightly higher on Thursday.

Meanwhile the primary market sprang back to life. A syndicate source disclosed that Rock-Tenn Co. will start a roadshow on Friday for a downsized $200 million offering of eight-year senior notes (Ba3/BB-).

Banc of America Securities, Wachovia Securities and SunTrust Robinson Humphrey are joint bookrunners for the acquisition deal from the Norcross, Ga., manufacturer of packaging products

The bond portion of the financing was downsized from $400 million, with $200 million of proceeds shifted to the company's term loan A, which was upsized to $550 million from $350 million.

The overall size of the credit facility was upsized to $1.2 billion from $1.0 billion.

Fund flows off $76 million on the week

Meanwhile, a market source familiar with the high yield mutual fund flows statistics generated by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, $75.9 million more left those weekly-reporting funds than came into them.

It was the first downturn after two consecutive inflows of $3.2 million in the previous week ended Feb. 13 and $141.6 million the week before that, ended Feb. 6, and is a reversion to the pattern of outflows which had been seen over the first five weeks of 2008, according to a Prospect News analysis of the AMG statistics.

The latest week's cash exodus brought the net outflow total for the year through Jan. 20 up to approximately $674.7 million from around $598.1 million the previous week. Outflows have now been seen in six weeks so far this year, against the two inflows. In 2007, outflows among the weekly reporters totaled $2.75 billion.

However, as has been the case for much of the past year, the overall trend was somewhat different among those funds which report on a month-by-month basis rather than reporting weekly. Those portfolios have seen $215.4 million of inflows for 2008 to the Wednesday close.

Hence the year-to-date aggregate flows, which tally both the weekly reporters and the monthly reporters, ended the most recent week at negative $549.3 million.

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, more recently, hedge funds.

Market indicators mostly positive

A trader said that the widely-followed CDX index of junk market performance eased by ¼ point on the day Thursday to 87¾ bid, 88¼ offered. Meanwhile, the KDP High Yield Daily Index firmed by 0.10 to end at 73.90, while its yield narrowed by 3 basis points to 9.67%.

In the broader market, advancing issues led decliners by about a five-to-four ratio. Overall activity, reflected in dollar volumes, rose by 25% from Wednesday's levels.

A trader said that things he saw were "very quiet and not much changed."

Another trader said that "the market opened up firm - but with equities really trailing off towards the end of the day," the early stock rally faltering on bearish Philadelphia Manufacturing Index data and the bellwether Dow Jones Industrial Average closing down almost 143 points - "our market really kind of sold off a bit."

Flow-wise, he said, "it started out looking like it was going to be a decent day, but then it just kind of dried up, with nothing going on."

Hertz higher as earnings double

Traders said that car-rental powerhouse Hertz's bonds were cruising higher, propelled along by a favorable earnings report for the fourth quarter. One of them saw the company's 8 7/8% notes due 2014 up 1½ points to 92.5 bid, 93.5 offered, attributing the gain to "good numbers."

Another market source saw those bonds up nearly 2 points on the session to 93.25 bid, although that was well down from the day's peak level around 95, in keeping with the market pattern of retreat from earlier high levels. Yet another source pegged those bonds at just above the 93 level, up more than 1½ points.

The bonds' advance was fueled by parent Hertz Global Holdings Inc.'s announcement that its fourth-quarter earnings doubled, helped by the company's increased focus on its international business.

Hertz earned $80.7 million, or 25 cents per share, around double the $39.8 million, or 14 cents per share, that it earned in the 2006 fourth quarter.

On an adjusted basis, excluding one-time gains and losses, net income was $93.9 million, or 29 cents per share. Revenue meanwhile rose 7% to $2.14 billion, from $1.99 billion a year ago. Those results topped Wall Street's projections of adjusted net earnings of 25 cents per share, on revenues of about $2.05 billion.

But while posting its stronger results, Hertz also issued an adjusted 2008 profit prediction under Wall Street's expectations, and said its cost-cutting efforts would entail job cuts. The company expects adjusted net income of $450 million to $470 million, or $1.38 per share to $1.44 per share, on sales of between $8.9 billion and $9 billion. That is slightly under the latest consensus analysts' estimates of $1.45 per share of adjusted net income, on $9 billion of revenue.

TRW drives higher along with earnings

Another earnings-fueled winner on the day was TRW, whose 7¼% notes due 2017 were being quoted up 2 points to 91 bid.

That followed the Livonia, Mich.-based automotive parts maker's announcement that its net earnings rose to $56 million, or 55 cents per share, in the fourth quarter, from $33 million, or 32 cents per share, a year earlier. Excluding tax benefits, TRW earned 44 cents per share in the quarter, about a nickel per share more than most analysts were expecting.

The earnings rise was chiefly attributed to TRW's stronger-than-expected production in North America and Europe and improved operations after restructuring.

While TRW's results looked pretty good, its bonds, "like much of the high yield market, are still trading several points below where they were last fall," noted analyst Shelly Lombard of the Gimme Credit advisory service in a research note Thursday.

Despite the well-publicized problems of the auto parts suppliers, whose fortunes are tied closely to the sagging sales of Detroit's "Big Three" carmakers, TRW, Lombard wrote, "is well positioned for the long-term due to growing demand for its safety products, geographic and customer diversity, and some of the best credit ratios in the high yield auto supplier universe."

However, "dramatic EBITDA upside is probably limited by the presence of large, deep-pocketed competitors who keep pricing competition intense."

All told, the Gimme Credit analyst opined, although TRW's credit ratios stand out, "near-term operating results will be under pressure from uncertain volume, competitive pricing, and higher raw materials prices. TRW is still one of the safer auto credits but the bonds are 'priced for perfection,' and we see limited upside."

Graphic Packaging goes up as loss goes down

A trader saw Graphic Packaging's 9¼% notes due 2013 up a point at 93 bid, 94 offering on "a good quarter and good numbers" for the Marietta, Ga.-based producer of paperboard and containerboard packaging products. Another market source saw the bonds up a deuce at 94 bid.

While the company - which has a $1.8 billion merger deal pending with Altivity Packaging LLC - is still losing money, it is losing less of it; its fourth-quarter deficit was $74.6 million on $2.4 billion in sales, an improvement, relatively speaking, from its year-earlier loss of $100.5 million on $2.3 billion in sales.

Less-than-healthy Community hospital earnings

But not everyone benefited from their quarterly numbers. A trader said that Community Health Systems bonds "were up a little bit but gave all of that back," especially after the Franklin, Tenn.-based hospital operator reported a fourth-quarter loss versus a year-ago profit.

He saw the company's 8 7/8% notes due 2015 get as good as 98.5 bid, 99 offered, before retreating to 97.5 bid, 98 offered, unchanged on the day.

Another market source saw the bonds down 3/8 point on the day and down ¾ point from their peak levels, finishing at 97.5, in active trading.

Those gyrations followed the company's report of a fourth-quarter net loss of $88.3 million, or 94 cents a share, versus year-earlier earnings of $53.6 million, or 57 cents a share.

Excluding one-time items such as the change in estimates of contractual and bad debt allowances following the completion of the company's acquisition last summer of smaller rival Triad Hospitals Inc., continuing operations earnings for the quarter fell to $34.8 million, or 37 cents a share, from $54.9 million, or 58 cents a share, a year earlier, and also missed Wall Street's expectations of continuing operations earnings of around 40 cents per share.

Wolverine bonds off

Another loser, a trader said, was Wolverine Tube, although he failed to see any fresh news out on the company that might explain the drop in its 10½% notes due 2009. Those bonds were seen off 2 points at 90 bid, 91 offered.

Early gains fade

Elsewhere a trader said that First Data Corp.'s bonds "were up a little bit, but sold off in the afternoon."

That, he said, was pretty much in line with the overall pattern in the market - "stuff was up a point, opened up maybe ½ to ¾ point, then was back down to unchanged."

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