XM Satellite Radio runs into static; Calpine powers up; Hovnanian brings new deal

By Paul Deckelman and Paul A. Harris

New York, March 19 - XM Satellite Radio Holdings Inc.'s bonds and shares lost altitude Tuesday after the company's auditors warned that it might not be able to continue as a going concern - although the company took issue with wire service news reports and downplayed the significance of the statement. On the other end of the spectrum, Calpine Corp.'s bonds firmed smartly amid generally bullish sentiment about the possibility of consolidation within the independent power producing sector.

In primary market activity Tuesday, homebuilder K. Hovnanian Enterprises brought a two-tranche offering of senior and subordinated bonds to market, while Britain's Enodis plc sold £100 million of 10-year notes, and Dresser Industries was heard to be preparing an add-on deal for its existing 9 3/8% notes.

And although Dresser was just one of four new deals to surface on Tuesday, various sources who spoke to Prospect News were continuing to digest the volume of mutual fund cash that has lately flowed into high yield.

"The market is hot," one sell-side official stated evenly, late in Tuesday's session. "Obviously we're urging everybody who has an interest to bring their deal now."

This source, along with two others from the sell side pointed to the combined mutual fund inflows reported by AMG Data Services for the two-week period ending March 13 - a total of $2.336 billion - as the highest-ever combined two-week inflow in the history of the high yield.

"The last two weeks' inflows just barely edged out the two back-to-back inflows from Nov. 4 and Nov. 11, 1998," one sell-side official commented, supplying the figures: Nov. 4, 1998: $1.0192 billion, and Nov. 11, 1998: $1.2214 billion, for a two-week total of $2.2406 billion.

This official also pointed to the inflow from the week previous, Oct. 28, 1998: $1.1846 billion, resulting in a three-week total of $3.425 billion.

"An interesting question is, 'Will next week's flow allow us to break the record for three consecutive weeks' inflows, which was set in that same period in late '98?'" this official said.

Prescott Crocker, portfolio manager of the Evergreen High Yield Bond Fund, conceded that the high-yield market is currently hot when he spoke to Prospect News Tuesday.

"There's not much going on because nobody wants to sell anything," Crocker added. "New issues are blowing out and you can't get invested.

"The forward calendar is $1.8 billion. And it's $1.1 billion a week. Plus not every Tom, Dick and Harry-company can get into the market.

"That's the key," Crocker said.

He added that it is his impression that most of the new issues pricing in the primary, at present, are rapidly spun back into action in the secondary market.

"They all go up on a short-covering underwriter's syndicate bid," he said.

On Tuesday, the last full day of Winter 2002, the lamps burned bright in a number of investment banks as four new offerings surfaced.

Biovail Corp. announced an offering of $275 million eight-year senior subordinated notes, set to hit the road Wednesday, via UBS Warburg. The pharmaceutical company is based in Mississauga, Ont.

Icon Health and Fitness is pumped and primed to bring $200 million of 10-year senior subordinated notes (B3/B-), also starting on the road Wednesday, via Credit Suisse First Boston.

Addison, Tex.-based energy industry equipment supplier Dresser, Inc. is set with a $200 million drive-by add-on to its 9 3/8% senior subordinated notes due April 15, 2011 (B2/B) via Morgan Stanley, which figures to price Wednesday or Thursday.

And Mohawk Industries, Inc., announced it would roll out the carpet for investors in April with $600 million of new seniors. The press release furnished no further information.

Term's on the last two deals to price in Winter, '02 emerged Tuesday.

Hovnanian Enterprises, Inc. priced both tranches of its $250 million high yield debt offering: $100 million of ten-year senior notes (Ba3/BB-) priced at 99.152 to yield 8 1/8% and $150 million of 10-year senior subordinated notes (B2/B) priced at par to yield 8 7/8%. Bookrunners were Salomon Smith Barney (on the left on both tranches), Banc of America Securities and Credit Suisse First Boston.

Also on Tuesday London-based commercial food preparation equipment-maker Enodis plc priced £100 million of 10-year senior notes at par to yield 10 3/8% via Credit Suisse First Boston.

Finally on Tuesday, price talk of the 12% area emerged on Penton Media, Inc.'s $150 million of 5.5-year senior secured notes (B3/B-). That deal is also being run by Credit Suisse First Boston and is set to price Thursday.

In the secondary market, "it was an uneventful, steady day," a trader said, noting that "everything pretty much was up," but the volume of activity was muted.

"We're seeing the new deal calendar slowly heating up," he continued, "but we're not seeing any deals in size." While noting that Hovnanian had sold $250 million of new debt in its two-part offering - not a terribly large deal by anyone's standards - he declared that Hovnanian "is not the best name among the homebuilders."

With the bonds of most names in the group having pushed up to or north of par as the industry has benefitted from lower interest rates lately, "you would have thought that its deal would do alright, but the new Hovnanian deal did not trade well" once it was cleared for secondary activity.

He quoted Hovnanian's new senior notes as having eased to 98.5 bid/99.25 offered from their issue price of 99.15, and saw the new subordinated bonds at 99.25 bid/99.75 offered, down from their par issue price.

"That's surprising, given how the rest of the new issues have been trading upward," he said, pointing out that Magnum Hunter Resources Inc.'s new 9.60% senior notes due 2012, which priced last Wednesday at par, "is trading at a four-point premium (i.e., around the 104 level). But, as I said, Hovnanian is not the highest quality builder out there."

Elsewhere among newly issued bonds, Huntsman International LLC's new 9 7/8% senior notes due 2009, which priced Monday at par, were being quoted in the 102.25 bid/102.75 offered area.

And Chiquita Brands International Inc.'s new 10.56% notes due 2009 were being quoted by market observers in the 105-106 range. The $250 million of new bonds are officially making their debut on the New York Stock Exchange during Wednesday's session.

All of the company's other debt was taken out on Tuesday, as the banana importing giant officially emerged from Chapter 11 after 111 days before the U.S. Bankruptcy Court in Cincinnati, Chiquita's home base. Under terms of the restructuring plan, $700 million of the company's debt, including all of its outstanding 9 5/8%, 9 1/8% and 10¼% junk bonds, was converted to equity in the reorganized Chiquita, giving its creditors 95% of the revamped company's equity. In anticipation that the old bonds would be taken out at or close to par, those bonds had run up to around the 99-par level, the last level at which one observer saw the 9 5/8% notes quoted as of Tuesday.

The market-watcher meanwhile saw XM Satellite Radio's 14% notes dip to 64 bid Tuesday from prior levels around 71; meantime, the company's shares likewise down $2 (13.33%) in Nasdaq dealings to $13, on volume of 9.5 million shares, an almost fivefold increase in the stock's usual turnover.

XM took its dive after the Washington, D.C.-based mobile satellite radio broadcaster's auditor, KPMG LLC, said in the company's annual 10-K report for 2001 to the Securities and Exchange Commission that "there is substantial doubt about [XM's] ability to continue as a going concern," given its need to raise anywhere from $40 to $65 million this year by issuing new debt or equity, so it can meet its goals of having 70,000 subscribers to its service by the end of this month and 350,000 by the end of the year. The SEC filing also acknowledged that further new funding will be needed next year as well.

XM offers 100 channels of music, sports, news, talk and other radio programming to subscriber motorists who buy a special radio receiver and pay a monthly subscriber fee, allowing them to seamlessly enjoy their digital-quality programming anywhere in the country without the usual fade-out that even the strongest local station's signal suffers once a conventional radio receiver is out of the coverage area. General Motors is expected to offer XM's system as optional equipment on 23 models this fall. "It's a pretty amazing system," noted a trader.

Company executives sought to dismiss the KPMG warning as essentially old news, putting out a statement expressing confidence in XM's prospects for raising money and continuing to survive and noting that the same advisory had been included in the 2000 and 1999 annual reports - and indeed, has been present in every quarterly report since it went public.

But that was all before the Enron Corp. debacle, the collapse of Global Crossing Holdings Ltd. amid allegations of fishy accounting by the same firm that kept Enron's books, the embattled Arthur Andersen LLP, and investor concerns about a number of other companies showing any kind of accounting or information reporting problems.

Having a "going concern" notice in a company's SEC filings "is never a good thing," the trader noted - but with the financial markets suffering from a severe case of what has been called "Enronitis," it's especially inconvenient right now.

Having seen how badly Andersen's alleged attempts to help its clients hide their bad news from regulators and the financial community seem to have backfired against the once-respected auditing firm, "I think the auditors will end up going through something along the same line as the rating agencies are going through now," he said. The agencies "watched all these credits like Enron blow up, with nobody having any idea that anything was wrong with it, so now you see a much more proactive stance among the ratings agencies - almost like they're in competition with each other to be the first to release something bad, or something good, or to clarify an issue that's out there, and be the first to put a [suspect] credit on watch or cut 'em or whatever. Having both the major agencies competing with each other is better for the industry as a whole."

By the same token, he opined, auditors who may have in the past hesitated to attach a negative assessment such as a "going concern" notice to a company's results are now probably more likely to slap it on, and financial markets which may have in the past treated such warnings as routine accounting-firm boilerplate language may pay more attention. As an aside, he also predicted that the imminent demise of Andersen may open up competition in a largely stagnant accounting industry, where the lion's share of the aauditing work had gone to the "Big Four" of Anderson, KPMG, PriceWaterhouseCoopers and Deloitte Touche. "Now maybe some of the other 'bottom five' auditors may get some of that business" that Andersen is giving up.

Elsewhere, Calpine Corp. bonds were seen up around three-and-a-half points across the board, issues like its 8 5/8% notes due 2010 seen having firmed to about the 80.5 bid region from prior levels around 77 levels. Calpine's shares were heard to have firmed (up 38 cents, or 2.84% to $13.85 on NYSE volume of about 25 million shares, 10 million above normal) on short covering and on market speculation that the independent power producer sector may be ripe for some consolidation. The bonds of fellow independent power operator AES Corp. were up about half a point on the session, its 9 3/8% due 2010 ending at 77.5 bid, while its shares gained 37 cents (4.20%) to $9.17 on NYSE volume of about 9 million shares, up from the usual 6 million.

A market observer said another area of strength of late has been the airline industry; he saw air carriers' bonds recently "running up, after having gotten pounded. Now they're making their way back up, almost to their pre-Sept. 11 levels."

He estimated that bonds of such operators as Continental Airlines, Delta Airlines and Northwest Airlines Corp. have tightened "at least 500 basis points" from where they had been in the days immediately following the terrorist strike. "They've moved dramatically back upward after everybody saw the airlines were going to stay in business, easily up five to 15 points (on a dollar price basis) in the past month alone. He pegged Northwest's new 9 7/8% notes due 2007 hanging in hanging in near their 99.515 issue price.

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