German deals start to take shape; secondary slips quietly into holiday break

By Paul Deckelman and Paul A. Harris

New York, Sept. 3 - The high-yield market marked time until the 2 p.m. ET pre-holiday close Friday, with many participants not even bothering to show up for the abbreviated session and many of those who did show up cutting out early to take advantage of a three-day weekend that included Monday's market close.

The primary market remained dead in the water, with the only real news coming from two European-based issuers. Further details were heard on German retailer Hornbach-Baumarkt AG's planned €200 million Rule 144A offering, while another German company - Grohe AG - was heard getting ready to hit the road Tuesday to sell its proposed €335 million 10-year offering.

The secondary market meanwhile remained extremely quiet and rangebound, just as it was all week long, only more so Friday. Few issues were seen moving around.

One of the few was Continental Airlines Inc., whose 8% notes due 2005 were quoted up a point at 92.5. The Houston-based air carrier on Thursday said that it had identified an additional $200 million of annual cost savings, which, combined with previously announced revenue generation and cost savings initiatives, add up to a total of about $1.1 billion in annual savings.

The extra savings will be realized chiefly via a reduction of some 425 positions through staff cuts, attrition and the elimination of unfilled positions. A majority of the reductions involve management and clerical positions, and, together with earlier reductions in force, will result in a 24% reduction in the carrier's management and clerical workforce since 9/11, which threw an already under-pressure U.S. airline industry into a severe tailspin that it has still not fully pulled out of nearly three years later.

The latest job reductions come on top of and in addition to the company's recently announced reduction of 253 reservations positions.

Besides the job cuts, Continental said that it is "continuing to negotiate savings from numerous suppliers, demonstrating that its best business partners are willing to continue to work with the company and support it in these difficult times. The company is also continuing to pursue other savings initiatives, including a variety of fuel savings, facilities cost reductions, reductions in distribution costs, and technology-enabled productivity enhancements."

And after the markets closed Friday, Continental announced that it was taking advantage of recent changes Congress enacted in pension funding requirements, and will not be making any pension contribution this year.

The Pension Funding Equity Act temporarily lifts some pension funding requirements for the steel and airline industries through next year.

Continental, in opting to take the federal pension loophole, cited the uncertain economic environment and record high jet fuel costs. It said that the relief afforded by the act "will help us achieve an unrestricted cash balance target of $1.5 billion - which is appropriate in these uncertain times."

Land O'Lakes higher

Elsewhere, a trader saw Land O'Lakes Inc.'s bellwether 8¾% notes due 2011 push up a point, in very thin dealings, to above 95 bid, although he had no new information about the Arden Hills, Minn.-based maker of butter and other dairy products. "Don't ask me why," he shrugged.

On the downside, he said, Toys "R" Us bonds "are drifting, and keep getting a little weaker" from recent levels, as the market continues to digest the Wayne, N.J. -based toy retailer's recent statements, which seemed to indicate that it was going to separate its underperforming toy-selling business from its lucrative Babies "R" Us operations, and that it might decide to get out of the former area altogether to concentrate on the latter. However, at another desk, its 7 7/8% notes due 2013 were seen having inched up ¼ point to 99 bid.

Thursday's news that Nortel Networks Corp. and its principal subsidiary, Nortel Networks Limited, will now delay the filing of its previously announced restatements for the year 2003 and the first and second quarters of 2004 until the end of October had little impact on the Brampton, Ont.-based telecommunications equipment maker's 6 1/8% notes due 2008, which remained at 101.

Nortel - which announced the restatements earlier this year after having discovered certain accounting irregularities - had previously been shooting for the end of the current calendar quarter on Sept. 30, but cited "the volume and complexity of the work involved, including completion of the Company's work and the related audits and reviews of results by the company's and [Nortel's] independent auditors" in explaining the new filing delay.

R.J. Reynolds unchanged

A trader saw no activity in the bonds of R.J. Reynolds, even after Moody's Investors Service warned that the debt of the Winston-Salem, N.C. -based cigarette company, corporate parent Reynolds American Inc. and such industry peers as Altria Group Inc. - the recently named Philip Morris - and British-American Tobacco plc could face a downgrade should a pending massive federal lawsuit against the cigarette makers' produce an unfavorable verdict.

He saw Reynolds' 7¼% notes due 2012 unchanged at 99 bid, par offered, saw its 7¾% notes due 2006 and its 6½% notes due 2007 at 101.5 bid, 102.5 offered, also unchanged.

The feds are suing the tobacco makers for some $280 billion of what Washington says were "illegal" profits. Trial is supposed to begin on Sept. 21, although the tobacco companies have motioned to delay the proceedings until Jan. 10.

Moody's said that multi-notch debt rating downgrades could result for those companies if they are forced to disgorge large amounts of past profits and forced to "dramatically " change their U.S. business practices to the point where domestic cash flow from tobacco is sharply reduced.

Amkor bonds unmoved by Moody's cuts

Moody's downgrade of Amkor Technology Inc.'s Speculative-Grade Liquidity rating to SGL-3 from SGL-2 also was a tree falling in the forest with nobody around to hear it scenario, at least as far as bondholders were concerned. A market source said he "didn't see anything happening' in the bonds of the West Chester, Pa.-based semiconductor industry company, with its 9¼% notes due 2008 remaining at 96.5 bid and its 7¾% notes due 2013 likewise unchanged at 84.75.

"Weak earnings results and guidance recently published by competitors suggests that Amkor's disappointing operating results reflect weak overall market demand for outsourced packaging and test services," Moody's warned.

As a result, the ratings agency "no longer believes that the market will be robust enough in the near term for Amkor to generate sufficient operating cash flow to maintain cash balances at levels appropriate for an SGL-2 rating.

"The new rating of SGL-3 represents the expectation that Amkor's liquidity is expected to be adequate over the next 12 months, but that cushion to manage through downward volatility will be thin," Moody's added. It left the senior implied rating unchanged at B1, though with a negative outlook.

Kmart muddle

Kmart Corp. announced late Thursday that it had decided to sell 45 of its stores to Sears, Roebuck and Co. for $524 million, and might sell the Chicago-based department store operator an additional six stores for up to $65.25 million above the $524 million, subject to conditions that would have to be met within the next 15 days.

Those 45 stores - or 51 stores, if the conditions are met - are among 54 stores which the Troy, Mich.-based discount retailer said on June 30 that it would likely sell to Sears.

Locations of the 45 stores were not disclosed, but will be released as the transactions are finalized in the coming weeks.

Kmart - which emerged from Chapter 11 last year and which has been selling locations of stores it closed as it reorganized to Sears, The Home Depot Inc. and Kohl's Corp. - has a number of real-estate secured bonds out - but the news that these transactions will take place, with a portion of the proceeds to be paid to bondholders whose notes are secured by the sold properties, is not being greeted as good news by the secured bondholders, a trader said. He noted that right now, the whole secured real estate area is "a muddled mess."

He said that "supposedly, the people that own the secured paper are suffering tremendous writedowns" on their holdings, because in the opinion of some in the market, Kmart is not getting as much for the properties as it could, meaning less income from the sales are going to the secured bondholders. Another problem, he said is that the properties have been "cherry-picked" - with the best locations sold off, leaving the bonds secured by less desirable assets.

The bonds had been flying high earlier in the year, but have since come down significantly, with the structured 8.99% notes recently seen attracting sellers in a 54-55 range, while its D-R structured 9.35% notes due 2019 around the 71.5-72.5. range. Its 8.54% structured notes recently saw sellers around 38. The bonds are likely to now be languishing at somewhat lower levels.

"The properties are getting cherry-picked, and it looks like people are taking tremendous writedowns on the [property-secured] bonds that they own, because the properties aren't selling for as much as they thought they would.

"Everybody is angry, and people are saying that the bonds they bought lately - they're losing a fortune on them.

"Instead of a bond [secured by the real estate] being worth, say $1,000, now it's worth maybe $400, because of the writedown."

The situation, he continued "is a nightmare. Suffice it to say they're selling the stores, and on the surface [anyway], it looks like the bondholders are not getting as much of the proceeds as they thought they would. Their principal is eroding," between the lesser number of properties Kmart has to sell and the lower price it is getting for those properties, he said. "The total value is eroding."

Grohe roadshow to start

Friday's abbreviated pre-holiday session in the primary market remained consistent with the preceding four sessions in that very little news was heard.

German plumbing fixtures manufacturer Grohe AG was heard to be headed for the road.

Starting Tuesday the company will begin marketing €335 million of 10-year senior notes, with pricing expected to take place during the week of Sept. 13.

Credit Suisse First Boston, Citigroup and Deutsche Bank Securities will be the underwriters the LBO financing.

Grohe joins Fisher Communication Inc., which announced earlier in the week that Tuesday will see the roadshow start for its $150 million of 10-year senior notes (B2), via Wachovia Securities, with pricing expected Sept. 15.

Grohe and Fisher Communications, sources said, are the only two deals now considered to be in the market.

Elsewhere Friday Hornbach-Baumarkt-AG, a German firm that operates do-it-yourself retail markets and garden centers, was heard to be headed for the high-yield market with as much as €200 million of bonds.

The deal, via Deutsche Bank Securities, is expected in October.

No supply, nothing offered says Difley

Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, told Prospect News Friday morning that although he has been working for the past couple of weeks, he has found the junk bond market to be a rather lonesome one.

"It's been sort of tough to do things in the market because it has been sort of spotty, in terms of people who are actually engaged," Difley commented.

"And given that there was no supply it's been tough to find anyone who really wants to sell anything.

"It's just sort of grinding higher because there is no calendar, so the focus was on the secondary."

Difley went on to express the belief that the supply situation will change in short order.

"I think there is going to be a calendar coming after Labor Day," he said. "Right now there is nothing on it, but I think you are going to hear deals announced.

"We've had basically no supply for two or three weeks, but I have to think that there are deals out there."

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