Titan, AEP, Fraser deals price; Toys 'R' Us off on buyout reports; funds see $141 million outflow

By Paul Deckelman and Paul A. Harris

New York, March 10 - Titan Petrochemicals Group, AEP Industries Inc., Fraser Papers Inc. and Noble Group Ltd. successfully brought new deals to market Thursday, with AEP's offering well received when it broke into the secondary market.

Among existing secondary issues, Toys 'R' Us Inc.'s bonds were seen lower on news reports that the Wayne, NJ.-based toy and children's products retailer had received at least one, and possibly two buyout bids, raising the specter of a leveraged buyout transaction which could push the company's current bonds well down in the pecking order beneath new debt that would be issued to fund such a deal.

Also on the downside, Delta Air Lines Inc.'s bonds rapidly lost altitude after the troubled Atlanta-based air carrier warned that it expects big losses in 2005, and likely will have trouble meeting its capital needs. Delta's Securities and Exchange Commission 10-K filing also mentioned bankruptcy as a possible scenario under certain conditions.

And market participants familiar with the weekly high-yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that $140.7 million more left the funds than came into them in the week ended Wednesday - the fourth consecutive week in which the funds have bled money, including the $96.3 million outflow seen the previous week, ended March 3.

Over that four-week span, net outflows have totaled $562.3 million, according to a Prospect News analysis of the AMG figures.

The fund flow numbers are considered a measure of junk market liquidity trends.

Outflows have now been seen in seven weeks out of the 10 since the start of the year. The year-to-date 2005 cumulative outflow rose to $1.487 billion from $1.346 billion the week before, according to the Prospect News analysis. The figures exclude distributions and count only those funds that report on a weekly basis.

Still, as they have been doing for months, sell-side sources continued to insist that although the high-yield mutual funds flows may once have been an accurate indicator of the junk asset class, that is no longer the case. For evidence they point to the seemingly tight and generally well-subscribed transactions that priced during Thursday's session, as well as to the active new issue calendar which, even with Thursday's $1.5 billion cleared, still tops $4 billion of deals in the market.

"You can tell from these transactions today that there is still cash to be put to work," one investment banker said.

Another sell-sider said that mutual funds have declined appreciably as a fraction of the universe of high yield investors.

There are other types of investors, "especially hedge funds," the source insisted.

"Also there is a lack of supply in investment-grade bonds," the source added.

"And where else besides high yield are you going to go to get any yield?"

Primary springs to life

After three comparatively quiet sessions to open the week, the primary market burst into action on Thursday with well over $1.5 billion pricing in five deals.

A pair of Asian-based issuers led the pack, including Noble Group Ltd., the Hong Kong shipping and commodities company, which completed the session's only upsized deal: $700 million, up from $500 million.

All told, of the five tranches, two priced at the tight end of talk, two in the middle of talk and one at the wide end.

And roadshow start dates were heard Thursday for two deals, one in dollars and the other in euros.

Asian issuers complete deals

Noble Group Ltd. priced an upsized $700 million of 10-year notes (Ba1/BB+) at 99.059, at a spread of Treasuries plus 225 basis points, which was the tight end of the 225 to 237.5 basis points price talk. The deal was increased from $500 million.

JP Morgan ran the books.

Titan Petrochemicals Group Ltd. priced a $400 million issue of seven-year senior unsecured notes (B1/B+) at par to yield 8½%, right on top of the 8½% area price talk.

Morgan Stanley ran the books for the debt refinancing deal from the Hong Kong-based trader of petrochemicals and oil products.

Order books on both deals were said to have been well oversubscribed.

Three U.S. issuers

Thursday also saw the completion of AEP Industries Inc.'s $175 million issue of eight-year senior unsecured notes (B2/B), which priced at par to yield 7 7/8%, in the middle of the 7¾% to 8% price talk.

Merrill Lynch & Co. ran the books for the debt refinancing deal from the South Hackensack, N.J.-based manufacturer, marketer and distributor of plastic packaging products.

Also Fraser Papers Inc. priced $150 million of 10-year senior notes (B3/B) at par to yield 8¾%, on the wide end of the 8½% to 8¾% price talk.

Credit Suisse First Boston ran the books for the debt refinancing deal from the Toronto-based manufacturer of writing, printing and publishing paper.

And Activant Solutions Inc. priced $120 million of five-year senior floating-rate notes (B2/B+) at par to yield three-month Libor plus 600 basis points, tight to the 600 to 625 basis points price talk.

JP Morgan and Deutsche Bank Securities were joint bookrunners for the Austin, Texas-based technology provider's deal, proceeds from which will be used to purchase outstanding shares of common stock of Speedware Corp. Inc.

Telcordia re-markets $300 million deal

There were also further developments Thursday from Tecordia Technologies Inc.'s junk deal, which had been canceled on Wednesday, when the notes were scheduled to settle.

On Thursday the Piscataway, N.J., telecommunications software company re-marketed its $300 million issue of eight-year senior subordinated notes, and expects to re-price the deal on Friday.

The bonds originally priced on Feb. 25. However the deal was canceled on Wednesday because of questions about the company's compliance with a "material adverse conditions" clause.

No revised price talk had been heard Thursday as Prospect News went to press.

Price talk on Friday, Monday business

Exide Technologies downsized its offering of eight-year non-call-four senior notes to $290 million from $350 million and talked the (Caa1/B) notes at 10¼%-10½%. The deal is expected to price on Monday.

Deutsche Bank Securities and Credit Suisse First Boston are the bookrunners.

The company shifted $60 million to an offering of convertible floating-rate notes from the senior notes.

Revlon Consumer Products Corp.'s $205 million of six-year non-call-three notes (Caa2/CCC) were talked Thursday at a yield in the 9½% area. They are expected to price on Friday via Citigroup.

Also Rexel SA, the Paris-based electrical equipment supplier, has talked its €600 million equivalent offering of 10-year non-call-five senior subordinated notes (Caa1/CCC+) at 9¼% to 9½%. Pricing is expected on Friday via JP Morgan.

A pair of roadshow starts

Smart Modular Technologies (WWH) Inc. will start a roadshow Friday for its $125 million offering of seven-year non-call-one senior secured second-lien notes (B2/B), with pricing expected on March 21.

Citigroup and Lehman Brothers will run the books for the debt refinancing deal from the distributor, manufacturer and supplier of memory technology and provider of related services, with corporate headquarters in the Cayman Islands.

And Escada AG, the German designer and marketer of upscale women's apparel, will start a roadshow on Monday for its €200 million offering of seven-year non-call-four senior notes, with pricing expected late next week.

Deutsche Bank Securities and HVB are the underwriters on the bonds which are being sold to repay debt and improve the company's capital structure.

AEP jumps in trading

When the new AEP Industries 7 7/8% notes due 2013 were freed for secondary trading, a trader saw those bonds get as high as 102.25 bid, 103 offered, while another saw them at a tighter 102 bid, 102.5 offered, both well up from the bonds' issue price at par earlier in the session.

However, the other new-deal names failed to follow suit. A trader saw Fraser Papers' new 8 ¾% notes due 2015 "just straddling their [par] issue price, at 99.875 bid, 100.125 offered.

A trader saw Titan Petrochemicals' new 8½% notes due 2012 "not doing too well," having broken at 100.75, up from their par issue price, before dropping back to 99.875 bid, 100.375 offered. However a source at another desk said late in the session that their shop had seen the bonds still above par.

Noble Group's new 6 5/8% notes due 2015, which priced at a discount to par (99.059), were seen going home at 99 bid, 99.5 offered.

Revlon dips on accounting error

Revlon Consumer Products Corp.'s bonds - which had firmed earlier in the week when the New York-based cosmetics maker reported its first quarterly profit in six years and it was learned that the company was doing a $205 million bond offering - were seen lower Thursday after the company said that it had uncovered an accounting error in its sales-return estimate. The error is not large - $1.2 million - and was disclosed in the company's annual report filed with the SEC. Revlon said it had "implemented additional controls and procedures in order to remediate this deficiency."

Revlon's 8 5/8% notes due 2008 - which had gotten as high as 97.375 earlier in the week on the quarterly profits news before coming that peak level slightly - were seen "off a touch" on the news, a trader said, quoting the bonds at 96 bid, 97 offered. He saw Revlon's 8 1/8% and 9% notes, both due 2006"pretty much where they already were," at 95 bid, 96 offered.

Toys 'R' Us lower

Among issues having no new-deal links, Toys 'R' Us' bonds were seen down a point or more, following the story in The Wall Street Journal saying that an investment group including Cerberus Capital Management LP had made an opening offer last month of $23.25 a share for the entire company, or about $5 billion total. The Journal said the Cerberus group also includes investment banker Goldman Sachs Group Inc. and real-estate investment trust Kimco Realty Corp.

Toys 'R' Us last year announced plans to separate its profitable Babies 'R' Us infant-wear stores operation from the flagship toy business, which has lost its once-dominant position as the nation's biggest toy seller to the ubiquitous Wal-Mart Stores Inc. The financial markets have speculated that the company would try to find a buyer for the toy business, freeing it concentrate on the more lucrative Babies business.

The Journal said that while the company was at first was unreceptive to the takeover offer, it may now be softening its stance. The paper also said that, according to one person close to the matter, the $23.25 a share offer "may be an old number," - and suggested that other offers may be on the table, from such bidders as the buyout firm Kohlberg Kravis Roberts & Co., a partnership of Apollo Advisors LP and Permira Advisors Ltd., and an alliance between Bain Capital LLC and Vornado Realty Trust.

Meanwhile The Times of London separately reported that KKR had made an offer to buy the company, after having originally only bid for the toy-selling segment.

But while Toys 'R' Us' New York Stock Exchange-traded shares were up 62 cents (2.69%) to $23.67 on the reports, on volume of more than eight million, four times the norm, the bonds were headed the opposite way, with Toys' 8¾% notes due 2021 seen having dipped as low as 96 bid, before coming off that low to end at 97 bid, 98 offered, a trader said, two points off on the bid side from Wednesday's close at 99. He saw the company's 7 5/8% notes due 2011 and 7 7/8% notes due 2013 both down about 1½ points at 98.5 bid, 99.5 offered.

At another desk, a source quoted the company's 7 3/8% notes due 2018 as having fallen three points to 90 and saw the rest of the bonds about where the first trader had pegged them.

"The thought process" among junk-bond investors, the first trader said, "is that there's no real covenant protection for the bonds - a make-whole call or take-out [provision], or anything of that nature. So what [investors] are saying is if they do some sort of deal, and it's highly leveraged, this [existing] paper will become subordinated [to any new financing] and it won't bode well for the existing paper."

If the company is sold in pieces - say a buyer just takes the toy business - that too would be problematic, he said, "because now you're taking away one of the divisions, and you have less revenue, less income and that could bode not too well for the [existing] bonds either."

Delta falls

Elsewhere, Delta Air Lines' bonds fell after the carrier warned that it expects a "substantial" loss in 2005, and faces a severe liquidity crunch that could conceivably drive it into bankruptcy.

Delta's benchmark 7.70% notes due 2005 were seen by one trader as having fallen as low as 85 bid, 87 offered from prior levels around 90 bid, 92 offered, before coming off those lows to finish at 89 bid, 90 offered, down only about a point.

But he saw Delta's 10% notes due 2009 dropping to 52 bid, 54 offered from 57 bid, 59 offered, while its 7.90% notes due 2009 were six points down at 43 bid, 45 offered, and its 8.30% notes due 2029 were down four points at 35 bid, 37 offered.

Delta's NYSE-traded shares swooned 56 cents (11.45%) to $4.33, on volume of 10.8 million, around three times the usual activity level.

Delta has $3.4 billion in obligations in 2005 related to leases, interest on debt, debt maturities and funding of employee pensions, and it said that it doesn't think its cash flows from operations will be sufficient to meet all of its needs and will have to tap its available cash and the final $250 million it borrowed late last year from American Express Co.

Delta also said in its filing that its cash reserves would be much lower at the end of 2005 than last year unless it can sell assets or raise money in other ways. However, Delta's ability to borrow more money is tightly constrained since it has already pledged most of its assets as collateral on previous loans.

Delta further warned in the filing that if it cannot access the capital markets to meet its operational needs or its cash levels fall to an "unacceptably low" level, or if the assumptions in its turnaround plan fail to materialize, it might have to seek Chapter 11 protection.

A trader said he didn't know why the bonds fell as much as they did, since "everything they put out isn't that much of a shock to anybody, that's for sure." He suggested that "maybe putting it in print makes it seem more real."

Noting that the company's bonds, and its shares, had both climbed sharply last fall when Delta was finally able to dragoon its pilots' union into accepting a $1 billion permanent pay cut as part of the company's cost saving efforts, the trader suggested that people may have gotten a little giddy, buying into a now-Delta-will-survive scenario - and not realizing how many more hurdles the company still faces.

"As they said in their 10-K, they need everything to work perfectly for them for them to continue on. They've got a lot of moving pieces" that have to fall into place.

"A lot of people were looking at them, and saying 'they've got the pilots' agreement,' and the bonds traded up seven or eight points, and that's just not enough. They need a lot more than just the pilots' agreement, and I think what this is showing is the reality, that this isn't just one or two things to fix it. It's 10 different things - and if they get all 10 things, then they've got a shot. This [filing] pointed out that it's a little more difficult than getting a wage agreement."

Anchor Glass lower

Anchor Glass Container Corp.'s bonds were lower on the news that the chief executive officer of the Tampa, Fla.-based maker of glass packaging containers for the beverage industry, Darrin J. Campbell, will resign, effective March 31, although he will continue to serve as a consultant to the company until Dec. 31, focusing on strategic issues, sales and labor relations.

Anchor said its board hired search firm Heidrick & Struggles to select a new CEO, while it also continues its search for a permanent chief financial officer.

Anchor's 11% notes due 2013 were "off a couple of points," a trader said, ending at 99 bid, par offered, down two.

Six Flags gains on earning

Six Flags Inc.'s bonds were a bit higher, as the underperforming theme park operator reported 2004 results and said that 2005 would be a considerably better year, powered by its planned capital spending of $135 million - well up from $75 million the previous year - with most of the money going into new rides and attractions at its various theme parks and water parks, including the world's highest and fastest roller coaster, opening up this spring at its park in Jackson, N.J. The company also reported that it had made substantial 2004 progress on liquidity and debt issues (see related article elsewhere in this issue).

Six Flags' 8 7/8% notes due 2010 firmed to 98.75 bid from 98 previously.

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