Mac-Gray, Sierra Pacific price, Revlon, Chesapeake deals on deck; Blockbuster gyrates after downgrade

By Paul Deckelman and Paul A. Harris

New York, Aug. 10 - Sierra Pacific Resources and Mac-Gray Corp brought new deals to market Wednesday - the latter offering upsized to meet demand - but the big news in the primary market seemed to be what's waiting in the wings, with well-known junk issuer Revlon Inc. and Chesapeake Energy Corp. heard by high-yield syndicate sources to be readying drive-by deals for pricing Thursday. While Revlon's offering is a smallish add-on to an existing tranche of bonds, Chesapeake's deal is slated at half a billion dollars.

Among secondary market developments, traders saw Blockbuster initially banging around at sharply lower levels after Standard & Poor's downgraded the Dallas-based video rental industry leader's credit ratings by two notches - but those bonds did recover most of their lost ground later in the session, to end only modestly lower.

A name seen pushing higher was Great Atlantic & Pacific Tea Co. Inc., after the Montvale, N.J.-based corporate parent of the venerable A&P supermarket chain, plus a number of other store chains, announced plans to tender for all of its outstanding 7¾% notes due 2007 and 9 1/8% notes due 2011.

Overall the third session of the Aug. 8 week ended more or less like the preceding two, one high yield sell-side official said late Wednesday: the market closed somewhat softer.

The source cited no specific reason, but conceded that stocks, which junk bonds often track closely, were off on the day and crude oil prices continued their climb into record territory.

The source also said that the yield of the 10-year Treasury note went higher, but added that its impact would be most felt by the higher-rated, lower-yielding junk. Bonds yielding between 9% and 11%, the source said, should not be greatly impacted by the sell-off in Treasuries.

Meanwhile the primary market saw a pair of deals totaling $375 million price in two tranches, one apiece from Sierra Pacific Resources and Mac-Gray Corp. Both priced at the tight end of price talk.

Oversubscribed Sierra Pacific tight to talk

The biggest of the session's two deals was priced by Reno, Nev.-based Sierra Pacific Resources.

The company priced a $225 million issue of 12-year senior unsecured notes (B2/B-) at par to yield 6¾%, at the tight end of the 6¾% to 6 7/8% price talk.

Merrill Lynch and Co. had the books for the debt refinancing and general corporate purposes deal.

Mid-morning Wednesday a source told Prospect News that the deal was two-times oversubscribed.

Mac-Gray a blowout

Elsewhere Cambridge, Mass., laundromat company Mac-Gray Corp. upsized to $150 million from $125 million its issue of 10-year senior notes (B1/B+).

The notes priced at par to yield 7 5/8%, tight to the 7¾% area price talk.

JP Morgan ran the books for the debt refinancing deal.

A source told Prospect News that the small deal was a blowout.

Drive-bys coming for Chesapeake, Revlon

The drive-by market continued to operate on Wednesday.

Chesapeake Energy Corp. showed up with a $500 million offering of 12-year senior notes (Ba3/BB-) that it plans to price on Thursday afternoon.

An investor call will take place at 11 a.m. ET Thursday morning.

Banc of America Securities, Bear Stearns & Co., Lehman Brothers and UBS Investment Bank have the books for the debt refinancing deal from the Oklahoma City-based independent natural gas producer.

In mid-April, Chesapeake Energy priced a $600 million issue of 6 5/8% senior notes (Ba3/BB-/BB) at 99.069 to yield 6¾%, which was the wide end of the 6 5/8% area price talk.

And Revlon Consumer Products Corp. plans to price a $75 million add-on to its 9½% senior notes due April 1, 2011 (existing ratings Caa2/CCC) on Thursday via Citigroup.

The original $310 million issue priced at par on March 11, 2005.

Ahern Rentals talks eight-year notes

Also expected to price Thursday is Ahern Rentals Inc.'s $175 million offering of eight-year second-priority senior secured notes (B3/B-), via CIBC World Markets.

The Las Vegas-based equipment rental business talked the notes at 9¼% to 9½% on Wednesday.

One source said that given the price talk the deal should do well.

Keefe parses interest rate scenario

Finally on Wednesday, Diane Keefe, portfolio manager of the Pax World High Yield Fund, allowed that the Fed's 25 basis points increase in the short-term interest rate, on Tuesday - pushing the rate up to 3½% - might be perceived by some to have been a "business as usual" move.

Keefe, however, said that the credit forces at currently at play are far from usual.

Conceding that it has thus far been a comparatively busy August in the junk market, Keefe suggested that issuers who had been having difficulty making up their minds may be feeling compelled to jump into the market by the rising yield of the 10-year Treasury against the backdrop of Fed tightening.

"Goldman Sachs came out Tuesday and increased their expectation of economic growth," the Pax World portfolio manager said.

"If that's the case people are not sure when the Fed is going to stop tightening. People who used to think that they were going to stop at 4¼% are now probably reconsidering. People who had been thinking that the yield on the 10-year Treasury would not go higher than 5% may now be thinking it will go higher."

Keefe said that a yield curve that is presently flat, and that might conceivably become inverted, are usually symptoms of a recession, and not those of an economic expansion, which is currently said to be underway in the U.S. economy.

"In this situation the world is buying so much of our debt, and hedge funds have become so big that they are leveraged buying long-duration assets," she said.

"We have never had these conditions in place before, so looking at history might not give us the answers."

Lamar up in trading

The new Sierra Pacific Resources and Mac-Gray deals came too late in the session for any kind of meaningful aftermarket activity.

However, a trader said that the new Lamar Media Corp. 6 5/8% notes due 2015 "did surprisingly well, despite its tightness." He saw those bonds - which had priced Tuesday afternoon at par - hovering around 101 bid.

Blockbuster drops, recovers most lost ground

A trader saw Blockbuster's 9% senior subordinated notes due 2012 "at first down four points, but now they're down just ¾ point, maybe a point on the day," following the downgrade by S&P, which cut the company's corporate credit rating two notches to B from BB- previously.

He saw the bonds start out Wednesday around Tuesday's close at 85.5 bid, 86.5 offered, then drop to below 82 on news of the downgrade, before coming back up to end at 84.25 bid, 86.25 offered.

"They got really hammered, and now they're coming back," he said.

Another trader saw those bonds ending around those same levels "off a touch from those highs, but not nearly as low as where they were" earlier.

In downgrading Blockbuster - and S&P said it could cut the ratings again if things don't improve - the ratings agency cited the company's "weak" operating performance, as well as unfavorable industry conditions. It also expressed skepticism over whether recent Blockbuster initiatives, such as ending late fees and launching a national rental and online subscription program will have the desired effect of attracting customer traffic and reviving its business.

A&P rises to tender price

A trader saw A&P's issues moving up on news of the tender offer for the 7¾% and 9 1/8% notes.

"Yeah, they're going to trade right around their tender price," he said, pegging the 9 1/8s going from 109.25 bid to 109.75 bid, 110 offered, while the 73/4s moved up from 104.25 bid previously to 104.75 bid, 105 offered.

"Those bonds have [already] been trading based on the tender, so [there was] really no big difference here."

The 73/4s, he said, had been "quoted at 103.5 bid, 104.5 offered 'forever.' They should now be at 104.5 bid, 105 offered," while the 9 1/8% notes, which had been 108.5 bid, 110.5 offered, were now trading at 109 bid, 110 offered.

"They've been there pretty much since they did their deal" to sell the company's Canadian unit and use the proceeds to eliminate debt, he said. "That was just a wait-and-see."

"They were pretty much wrapped around it the past two weeks - so no big run there."

"That company," the first trader said of A&P, "made a heck of a comeback, and that spurred a lot of buying" in the real estate-backed securities of such other retailers as Winn-Dixie Stores Inc. and Kmart Corp., "because they're real estate plays."

Other real estate names up

For instance he saw some of Winn-Dixie's 8.181% pass-through notes, which are secured by the bankrupt Jacksonville, Fla.-based supermarket operator's real estate.

He saw those real-estate bonds go from 74.5 bid, 75.5 offered to 79.5 bid.

At the same time, Winn-Dixie's regular 8 7/8% 2008 junk bonds "have been going lower every day," and on Wednesday, they were at 71 bid, 73 offered - well down the 75 bid, 76 offered levels at which those bonds had started.

"They're finally going in opposite directions," he declared, "which is what they should do."

He also said that the list of Kmart real-estate linked paper was way too long to read out, but "all of the Kmart pass-through paper is ridiculously well bid for right now, because it's collateralized by real estate - which is considered the best collateral in the market right now."

Land O' Lakes keeps rising

The trader saw Land O' Lakes Inc. bonds continuing "on a pretty good tear," with the Arden Hills, Minn.-based dairy product producer's bonds up "on rumors that it's IPO is coming," with details supposedly to be announced any day soon.

He saw the company's 8¾% notes at 104.75 bid, 105 offered, and its 9% senior secured notes due 2010, "which people are betting on are going to be tendered," at 109 bid, 109.5 offered. The company's 7.45% notes due 2028 are bid around 90-90.25, "just about the highs.

"There's rumors of an IPO, and the company wants to become an investment-grade company, and a lot of people are taking a good, hard look at that."

Cott steady

The trader saw the bonds of another food processing company soda bottler Cott Beverages Inc. 8% notes due 2011 - pretty much unchanged, and unaffected by the news the Canadian-based producer of private retailer-brand soda and non-carbonated soft drinks will buy British bottler Macaw (Holdings) Ltd. for $135 million, to be paid with bank debt (see related story elsewhere in this issue). He quoted the 8s holding steady at 105.25 bid 106 offered. "They very rarely trade," he observed.

Curative Health plunges

A trader saw Curative Health's 10¾% notes due 2011 fall badly after the company's bonds were downgraded to a CCC level.

"Their numbers came out [Tuesday] and were horrific," he said. "They were expecting to lose like eight cents [per quarter] - but they lost 37 cents.

"These bonds were bid up from the mid 70s last week, all the way up to 86-88. " He said the best bid he saw Wednesday was 80, in the morning, or maybe 81," "and then they got cut; all bids faded, and from what I could see, there were a couple of sellers out there, the 'bid wanted' stuff."

The best bid he saw was 76 bid, down about 10 points over the previous two sessions.

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