Energy firms off lows; some metal companies improved; good demand for Vail deal

By Paul Deckelman and Paul A. Harris

New York, Nov. 16 - After falling for a second straight session, energy-sector bonds managed to bounce off their intra-day lows Friday and recover some of their losses - although not all of them - as crude oil prices also recovered from their most recent troughs. Some issues in the hard-hit metals sector also seemed to be firmer.

In the primary market, meanwhile, Vail Resorts, Inc. saw strong demand for its offering, which was upsized and priced at the tight end of guidance.

Vail increased its deal - a $160 million add-on to its 8¾% notes due May 15, 2009 - from a planned $100 million and priced it at a yield of 9 5/8%, at the tight end of the 9 5/8%-9¾% price talk.

"Vail was four times oversubscribed," a syndicate source told Prospect News. "The very blue chip investors bought it."

Evergreen High Yield Fund manager Prescott Crocker told Prospect News that he had played Vail Resorts.

"I loved it," Crocker said. "These are signature properties two hours outside of Denver, very attractive; free cash flow if you're not investing for further sales or further growth; low maintenance cap-ex.

" I think you could pay back your debt in four years if you stopped building and expanding.

"The only downer is if all the skiers get terrified of flying, like my wife."

Crocker also said he is in the market for the some of the Vicar Operating Inc. $150 million seven-year notes set to price Monday via bookrunner Goldman Sachs & Co.

"I gotta own it," he said. "They have very high margins in the testing sector. They charge you all outdoors to test your dog for a virus, something like 40% relative to what you get for testing humans.

"It has really good growth potential," Crocker added, "It's the only one of its kind. It has nice numbers in terms of leverage and coverage, and the fact that it has a lot further to go."

With regard to the Vicar deal, price talk of 9 7/8%-10 1/8% emerged Friday.

Although FelCor Lodging, LP's $100 million add-on to its 9½% notes due Sept. 15, 2008 was also set to price Friday, late in the session terms on the deal had not emerged. And market sources told Prospect News that the deal might not come until Monday.

The FelCor add-on was part of a negative ratings action from Moody's Investors Service, which cut the company's senior notes, including the upcoming offering to Ba3 from Ba2.

"That was expected," one syndicate source told Prospect News, late Friday. "They were just waiting for that to officially get into the market."

Hence, the FelCor remained pending as Prospect News went to press late Friday. Nevertheless, factoring in Friday's Vail Resorts add-on, a total of $1.16 billion priced on the high yield primary during the week of Nov. 12, including the upsized Allied Waste $750 million that priced on Nov. 15.

One syndicate source commented that high yield market observers need merely take a close look at the fund flows in order to be persuaded that it is a seller's market, and that issuers should take note.

"We're already in a market with too much cash chasing too few goods," the official commented. "Supposedly the mutual funds were as much as 8% cash, in August.

"I calculate that the cumulative funds flow since Sept. 11 is only negative $38.5 million. So we've almost made up for what we lost since Sept. 11. The situation's almost corrected itself, as the money that left the high yield market post 9/11 has flowed right back in, almost."

Further, this official commented, the past month has seen almost $1.5 billion flow back into the market.

"If you take the combination of that fund flow, plus the usual, normal coupon clipping, plus the fact that institutions were long-cash heading into Labor Day, there's a lot of cash out there that needs to be put to work.

"That's why you're seeing a lot of the add-on activity: Compass Minerals came out last Thursday and they priced through talk. It's a very, very good market right now."

Evergreen's Crocker sized up the current state of the high yield market by asking a rhetorical question: "Why is everybody buying this stuff?

"The answer is we're on the sunny side of the economic-recovery slope," he said.

In the secondary, traders noted activity was generally dull, wrapping up one holiday-abbreviated week and heading into another (the bond markets were closed on this past Monday for Veterans Day and will be shuttered this upcoming Thursday for Thanksgiving).

"There was not much going on," a trader said. "Oil and gas was the focus of a thinly traded market."

Traders playing in the bonds of exploration and production companies and oil-service companies kept a wary eye on crude oil's gyrations on the New York Mercantile Exchange. Over the previous two sessions, NYMEX crude had fallen a staggering 20% on market perceptions that the Organization of Petroleum Exporting Countries and such large non-OPEC energy producers as Russia and Mexico would fail to come to an agreement on cutting production to boost prices back above the $20 per barrel level.

It looked like it would be three straight days on the downside in the energy pits, as crude for December delivery traded as low as $17.30 a barrel, before reversing field and ending at $18.03 a barrel, up 58 cents on the session.

In the junk bond market, "everything got hit pretty good (as crude prices initially kept tumbling), but started to come back late in the day, when news hit the tape that OPEC might reach an agreement with the non-OPEC members to control their output," the trader said. "A lot of the oilfield service bonds got crushed early on, and they came back after noon, when the stock market turned." He said the rebound not only affected the drilling companies, but the exploration and production names as well.

The better rated and better quality energy junkers "moved up nicely from their lows, but the bonds are still down a couple of points from the levels they held before Thursday," he said.

One E&P operator taking it on the chin the past two sessions had been Nuevo Energy Corp., which fell about six points from their mid-week levels. They ended Friday with Nuevo's 9½% notes at "a very wide" 94 bid/96 offered, while the 9 3/8% paper was at 93 bid/95 offered. The trader also saw oilfield service company Parker Drilling's bonds getting hit, falling from mid-week levels around par to 96.5 before rebounding to end at 97.5 bid/98.5 offered.

Also following that pattern was Key Energy's 14% notes, which ended down a couple of points on the week at 113.5 bid/115.5 offered.

Chesapeake Energy's recently priced 8 3/8% senior notes due 2008 closed at 98.5 bid/99 offered, down about a point-and-a-half on the day, while the Oklahoma City-based oiler's 8 1/8% notes finished at 99 bid/99.5 offered. Its 7 7/8% notes, at par bid but with no right (offered) side "haven't budged much, just because you can't find them."

But Pioneer Natural Resources' 9 5/8% note, however, "was the one bond that didn't really move" downward, the trader noted, hanging in at 111 bid/111.5 offered. "They're just a solid credit. I expect them to be investment grade pretty soon."

Outside of the energy sector, the $64,000 question on the lips of many junk bond watchers was whether the beleaguered Global Crossing Holdings Ltd. would make sizable interest payments due Thursday on several series of its junk bonds.

And the answer was . . . yes. A Global Crossing spokeswoman told Prospect News that it was her understanding that the Nov. 15 interest payments had been made, although there had been no formal announcement by the close of trading on Friday.

Global Crossing did, however, acknowledge in its third-quarter earnings report during the week that it would require modifications of certain terms of its financing agreements in order to remain in compliance with covenants of those agreements requiring the maintenance of certain financial ratios and other covenants. Global Crossing said it has entered into discussions with its senior loan facility lenders aimed at modifying certain covenants in order to provide additional future operating flexibility.

Standard & Poor's late Thursday lowered the Bermuda-based global telecom network company's credit rating by two notches, to B from BB-, while its Asia Global Crossing affiliate's rating was lowered one notch, also to B. But there was little or no response seen Friday, as the bonds continued to hold around 15.5 bid.

Retailing issues were seen stronger, with sector bellwether Kmart Corp.'s 9 3/8% notes at 91 bid/91.5 offered, and its 9 7/8% paper at 89.25 bisd/89.75 offered, both about a point firmer.

Among the metalmakers, Kaiser Aluminum's debt firmed smartly Friday, after the company announced that it has extended the expiration date of its credit agreement from Dec. 15 to Aug. 1, 2002.

The Houston-based metals producer said that the extension of the borrowing-based credit agreement will let it accumulated the funds needed to retire the $177 million of 9 7/8% senior notes which remain outstanding on or before their maturity date this coming Feb. 15.

Those notes were quoted at par Friday, up from 97.75 bid previously. Kaiser's 10 7/8% notes did even better, pushing up 87 bid from 81. Its 12 ¾% notes were up four points, to 65.

Oregon Steel Mills Inc.'s 11% notes, due 2003, closed at around 96 bid, up from 92 on Thursday; they are up almost 10 points from week-earlier levels, part of a larger move which has seen them heading up in the last month or so.

"It's a decent credit, with an 11% coupon, and unlike most of these steel companies (either in bankruptcy already or headed there) they're not about to go out of business," a trader said in explaining the market's new attraction for the steelmaker's bonds. Also a possibility, he said was buying by CBOs (collateralized bond obligation accounts.)

He also saw AK Steel's 9 1/8% and 9 7/8% notes stronger, the former around 102 bid and the latter in the mid-90s. AK is considered the best-managed and most profitable steel company in the high yield steel sector and stands out in the steel industry overall - an industry mostly dominated by bankrupt or near-bankrupt names like Bethlehem Steel Corp., LTV and Wheeling-Pittsburgh Steel Corp.

"This is not a sector move," he declared, noting that the really junky steelers continue to languish at low levels. "It's just credit-by-credit-by-credit."

End

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