Utility sector remains strong on financing talk; three new issues price

By Paul Deckelman and Paul A. Harris

New York, March 7 - The utility sector continued to hum along like a turbine on Friday, junk market participants said, the formerly battered and beleaguered group empowered by the recently successful financing efforts of El Paso Corp. and, for a second straight session, continued talk of impending new financing for Dynegy Inc.

In the primary arena, the market finished the week of March 3 with terms emerging on three high-yield transactions. Montreal forest products firm Tembec Industries, Inc. logged a quick-to-market $100 million add-on. Stamford, Conn.-based structural materials-maker Hexcel Corp. sold $125 million of notes due 2008. And chocolate-maker Barry Callebaut Services priced an upsized €165 million of seven-year notes in a deal that was reported to have been massively over-subscribed.

Also on Friday Peabody Energy announced it would send its $500 million of 10-year notes out the chute for investors to inspect during the middle part of the March 10 week.

Secondary trading was considered relatively quiet and surprisingly subdued, considering that the market was the recipient of a net $1.328 billion of new junk bond mutual fund money in the week ended Thursday - the second consecutive week in which inflows of more than $1 billion were recorded, the first time that's happened since March of last year.

Despite the inflow, a trader said, "it was quiet - but everything did seem firm to higher."

Another trader dismissed the day's activity, declaring that the market "opened crummy. We didn't do a damn thing. It just died," and then reeling off a list of familiar names and sectors which were either unchanged or, at the most, a quarter to a half point better in restrained trading.

He opined that the big inflow reported Thursday night by AMG Data Services of Arcata, Calif. and related to Prospect News by several market sources "had already been built in" during the price movements of the previous few days and hence elicited little real response. The strong secondary market turnaround seen since last fall has been attributed almost entirely to a liquidity surge that began in mid-October and has kept right on going since then; the weekly junk fund inflow figures are seen by many market participants as a reliable barometer of overall high-yield market liquidity trends.

At yet another desk, however, a trader took an opposite view; the market, he said, "was in good shape, and continued to benefit from all of the inflows.

"A lot was happening," he said, with a good deal of the action liquidity driven.

This was especially true in the new-deal sector; noting the quick rise in Playboy Enterprises Inc.'s new 11% senior secured notes due 2010 to the 103 bid level following its pricing at par earlier Thursday, he said of the recent new deals that virtually "all of these things are trading up like crazy. All of these new issues were way, way above par."

Among already established bonds in the secondary, he saw particular firmness in a lot of the utility names. He saw the 8% first mortgage notes of Edison International - corporate parent of Southern California Edison, pushing as high as 105.5 bid from prior levels around 104.5. He also saw more demand for the bonds of PG&E Corp., parent of another large California utility, the bankrupt Pacific Gas & Electric Co.

"You can tell that there's a lot of demand because the high-quality stuff is trading," he said. "People hadn't traded any of the PCG paper for a month, and now all of a sudden, everyone's bidding for PCG floating-rate notes, PCG first mortgage notes - all this stuff is up a point. It's amazing. Guys are reaching for yield."

The power crisis that wracked the Golden State in late 2000 and early 2001 eventually drove PG&E's Pacific Gas unit into Chapter 11 and almost did the same to Edison's Southern California Edison, but since then, things have brightened considerably for both companies, as seen in the movements of their bonds; the trader noted that names like PG&E and Edison - which were dumped by a lot of high-grade accounts during the California power debacle, when the debt ratings of the parent companies and their subsidiaries were chopped down to junk - are now suddenly looking more attractive to high-grade accounts.

"Some of these names are now shifting back into the high-grade accounts.; now they're going the other way - the distressed guys are starting to put them back to the high-grade guys."

Elsewhere on the utility and energy generating scene, he saw "one of the big movers, which benefited not only from all of the money coming into the market, but also from positive fundamentals, or rumors of positive fundamentals was Dynegy."

The Houston-based utility and merchant energy company's bonds and shares had been quoted strongly higher on Thursday, on unsubstantiated rumors that Dynegy was close to lining up new financing.

The rumors were still unsubstantiated Friday - but that didn't stop the bonds from going up for a second consecutive session, as the financing scuttlebutt continued to make the rounds. The trader saw Dynegy's 8 1/8% notes due 2005 at 78 bid, up another two points on the session. Dynegy's New York Stock Exchange-traded shares, which on Thursday had jumped 10.61% on the financing talk, were up another 11 cents (5.02%) to $2.30, on volume of 10.8 million shares, slightly better than normal.

Dynegy had also been seen continuing to benefit from El Paso's recent success in scoring some new financing, which has been interpreted as a hopeful sign for the whole beleaguered sector, now trying to turn itself around after the Enron Corp. debacle.

On Friday, El Paso's 7 5/8% notes due 2011 pushed as high as 74 bid/75 offered from 66 bid/68 offer at Thursday's close, with one distressed-debt trader explaining that it was up "on hopes its bank loan would come through."

The Houston-based company announced Feb. 25 that it had lined up a loan commitment of $1 billion from Salomon Smith Barney and Credit Suisse First Boston. Proceeds will be used to pay off approximately $825 million of Trinity River financing connected to a series of off-balance sheet partnerships used to finance capital projects and other assets.

Meanwhile, "Mirant [Corp.'s] short- and long-term paper saw some action [Friday]," said the trader.

Mirant's 7.20% and 7.40% notes due 2004 were seen bid in the low 60s. The move followed gains of two to three points on Thursday on speculation that Mirant would likely announce a refinancing plan in the not-too-distant future. At the end of February Mirant said it hired Blackstone Group as a financial advisor.

Outside of the energy sphere, Fleming Companies Inc. paper continued to slide in response to the Dallas-based wholesale grocery distributor's troubles, which led to the ouster earlier in the week of chairman and CEO Mark Hansen. Fleming's 10 1/8% senior notes due 2008 dropped to 53 bid/55 offered from 56 bid/57 offered earlier, while its 10 5/8% subordinated notes due 2007 tumbled to 18 bid/21 offered from 23 bid/25 offered.

Chiquita Brands International's bonds and shares were solidly higher Friday, after the Cincinnati-based banana giant announced plans to sell its Chiquita Processed Foods LLC vegetable canning unit to Seneca Foods Corp. for $125 million in cash and stock, plus the assumption by Seneca of $81 million of Chiquita's debt.

Chiquita's 10.56% notes due 2009 were quoted up nearly three points on the session, at 106.5 bid. Its NYSE-traded shares jumped $1.96 (21.92%) to $10.90, on volume of nearly two million shares, almost seven times the norm.

Chiquita - which emerged from bankruptcy a year ago - said it would use most of the proceeds to reduce debt, and expected to realize a $10 million earnings gain on the Seneca transaction. The company is the world's leading banana producer, and said sale of the canning business would allow it to focus on its fresh produce operations.

Talk among primary market participants Friday centered, as might be expected, on the previous session's news that high-yield mutual funds had taken in $1.3 billion of cash for the week ending March 6 - the second consecutive billion dollar-plus inflow, trailing the previous week's $1.5 billion.

One sell-side source, reckoning an approximate total of $2.8 billion of inflows over the two-week period ending March 6, told Prospect News that it is a history-making sum.

"It is the largest consecutive weeks of inflows going back at least to 1993," the official said. "The second highest was last March, which came to a total of $2.3 billion of inflows."

As Prospect News has been pressing its market sources to explain the derivation of the cash and the reason for its injection into high yield, those sources have pointed to a forlorn equities market (while the Dow Jones Industrial Average pushed ahead 66 points on Friday, for the week of March 3 it declined 151 points), and also to recent declines in the default rate.

"Agreed," one sell-side source told Prospect News late in last Friday's session.

"But don't underestimate the impact of the Oracle of Omaha," the sell-sider added, noting that billionaire investor Warren Buffett, citing share prices that he sees as still over-valued, is buying junk bonds, and has reportedly increased the Berkshire Hathaway stake in that asset class six-fold during 2002 to $16 billion.

"He made a splash last Wednesday, when Fortune magazine ran that story," the source added. "People just follow suit: 'If he's buying there's no reason that you don't buy.'

"Of course he's already made his move; it was probably done in the last quarter of 2002."

Another sell-side source advised Prospect News last Friday that the history-making inflows have set the stage for companies to move more quickly than investors might find acceptable in other circumstances.

"You're seeing quick-to-market deals, and you're seeing deals getting upsized," the official said.

"Playboy came and went on Thursday," the source added, referring to an upsized drive-by offering by Playboy Enterprises, Inc. issuing through PEI Holdings, Inc. of $115 million seven-year senior secured notes (B2/B) that priced Thursday to yield 11%.

"Tembec came and went today," the official added, pointing to Tembec Industries, Inc.'s quick-to-market $100 million add-on to its 8 5/8% senior notes due June 30, 2009, which priced at 100 to yield 8 5/8%, spot-on to the 100 area price talk, via Goldman Sachs.

"These are deals you would typically see on the road for a little while," the sell-sider commented.

"People are just jamming the market. They're not willing to market the deal. They're not willing to take the market risk to take five days to roadshow their deal, mainly because they want to price before the onset of war. They'll price it maybe 25 basis points behind where the credit should come. They build huge books and drive down price talk."

A case in point, perhaps, was a eurobond deal from Barry Callebaut Services, which priced Friday.

The Swiss chocolate-maker upsized to €165 million from €150 million its seven-year senior subordinated notes (B1/BB-) and priced them at par to yield 9¼%, at the tight end of the 9¼%-9½% price talk, via Credit Suisse First Boston.

According to one informed source the book on that deal was over €1 billion, and was six to seven times oversubscribed.

Another source said that investors developed a crush on the eurobond deal because the covenants gave noteholders a more advantageous position in the capital structure.

In addition to Barry Callebaut and Tembec, terms also emerged Friday on Hexcel Corp.'s $125 million of 9 7/8% senior secured notes due 2008 (B3/B). The Stamford, Conn. company's new paper priced at 98.952 to yield 10 1/8%, at the tight end of the 10 1/8%-10 3/8% price talk, via Goldman Sachs.

One roadshow was announced Friday - a short one, as it happens. Peabody Energy will market its $500 million of 10-year senior notes Tuesday through Thursday, according to a market source who added that the deal is expected to price on March 14.

Lehman Brothers and Morgan Stanley are joint bookrunners.

The Rule 144A notes are non-callable for five years.

Finally on Friday price talk of three-month Libor plus 750 basis points emerged on Global eXchange Services' $175 million of five-year senior secured floating-rate notes (B1/B+). That deal, via bookrunner Credit Suisse First Boston, is expected to price Tuesday or Wednesday.

(Carlise Newman contributed to this report.)

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