J.C. Penney bonds rebound after Thursday plunge; downsized Sunstate deal prices

By Paul Deckelman and Paul A. Harris

New York, April 1 - J.C. Penney Co. Inc. bonds were on the rebound Friday, recovering some of the large amount of ground they had lost on Thursday when investors were spooked by news stories indicating the Plano, Tex.-based retailer might be the target of a leveraged buyout deal that would load it up with new debt and push existing obligations down a few rungs on the ladder.

The primary market finally showed a few signs of life after several days of near-hibernation at the end of the calendar first quarter, as Sunstate Equipment LLC/Sunstate Equipment Co. priced a downsized, restructured offering of eight-year fixed-rate notes. Elsewhere in the new-deal arena, Stile Acquisition Corp./Masonite International Corp. was heard to have shelved its planned $825 million two-part offering in favor of doing a bank-debt deal - the second such switch seen this week, including a similar decision by White Birch Paper Co.

Hence the March 28 week came to a close with a paltry $155 million pricing in two tranches. Aside from Sunstate, the week's only deal was a $30 million add-on from Terphane Holding Corp., which priced at the very beginning of the week.

Tuesday, Wednesday and Thursday passed with no deals pricing.

Year-to-date the market has seen $31.25 billion price in 121 dollar-denominated tranches as 2005 continues to trail further and further behind 2004 in year-over-year totals. At the same point in 2004 the market had seen $45 billion price in 182 dollar-denominated tranches.

Boring week

One investment banker told Prospect News late Friday that the March 28 week had been a boring one.

"The market on Friday was a little better than it had been," the sell-sider said.

"It was perhaps slightly higher. A couple of bonds that had sold off earlier in the week made some gains back on Friday.

"All in all, though, it was pretty quiet."

Liquidity in question

The official also said that the exodus of cash from the high-yield mutual funds likely mirrors cash movement in the much larger institutional high-yield investment sector.

The source was referring to the $1.13 billion outflow for the week to March 30, as reported by AMG Data Services. It was the 16th negative flow in the past 18 weeks.

Trailing the $1.49 billion outflow for the week to March 23, the two week total of negative $2.62 billion comprises the largest combined two-week exodus of cash from the funds since the week to May 19, 2004.

"Tracking the fund flows at the institutional level is more difficult, but there is probably some similarity between what is happening with the AMG number and what is happening at the institutional level," the sell-side source said.

"One interesting thing we're seeing is accounts asking dealers to speed up settlements, which are typically T+3 or T+4, to T+1 because they are having a lot of redemptions and they are trying to get their hands on this money faster.

"The traders say that it doesn't seem like people have a lot of shorts on. They are just trying to get out of things to raise cash for various reasons, which could include redemptions.

"We thought that with the economic news Friday morning we would have a stronger secondary, and possibly some new deal announcements.

"But no such luck."

Sunstate downsizes, restructures

Consistent with the recent operation of the primary market since the sell-off that began in mid-March, Sunstate Equipment LLC, issuing in conjunction with Sunstate Equipment Co., priced a downsized, restructured deal at the wide end of price talk on Friday.

The Tucson, Ariz. based rental equipment firms sold $125 million of eight-year second priority senior secured fixed-rate notes (B3/CCC+) at par to yield 10 ½%, at the wide end of the 10¼% to 10½% price talk. The deal was reduced from $175 million.

Banc of America Securities ran the books for the deal, proceeds from which were slated to repay debt, repurchase membership interests, and make a certain member distribution.

The bond was changed to an eight-year fixed-rate structure from a seven-year floating-rate structure.

When the new Sunstate Equipment 10½% notes due 2013 were freed for secondary dealings, they were heard to have moved up slightly to 100.25 bid, 101 offered from their par issue price earlier in the session.

Damovo sets start date for €350 million

Late in the session news circulated of a pending launch for a bond deal from a European company.

Scottish information technology company Damovo Group III SA will start a roadshow on April 11 for its €350 million two-part offering of notes via Deutsche Bank Securities.

The company plans to sell seven-year non-call-four fixed-rate notes. Damovo also plans to sell seven-year floating-rate notes, although the call structure for the floating tranche remains to be determined.

The tranche sizes for the debt refinancing deal also remain to be determined.

Masonite backs away

Meanwhile Friday the biggest LBO deal to recently run the high-yield road, the on-again off-again $825 million two-part offering from Ontario-based building products company Masonite, was heard to be off, again.

According to market sources, the company has opted to postpone the bonds pending more favorable conditions in the high-yield primary market.

Instead the company will obtain an $850 million 18-month bridge loan.

According to a market source, price talk had widened out on both tranches of the $825 million two-part Stile/Masonite deal.

The $300 million eight-year non-call-two senior floating-rate tranche (B3/B-) was seeing demand at Libor plus 400 basis points, according to a source. Initial price talk had been Libor plus 325 basis points area.

Meanwhile the $525 million 10-year non-call-five senior subordinated notes (Caa1/B-) were seeing demand at 10%. Initial price talk was 9% to 9¼%.

Deutsche Bank Securities, UBS Investment Bank and Scotia Capital were joint bookrunners for the bonds, which were to have backed Kohlberg Kravis Roberts & Co.'s acquisition of Masonite.

A flight to safety

A sell-side source late Friday concurred with color heard throughout the March 28 week that high yield is presently in the process of repricing itself.

The source also thought that estimates that the repricing may amount to 75 to 100 basis points on a yield basis sounded fair enough

"Some bonds are getting hit harder than others," the source added.

One issue getting hit harder, according to the source, was Del Monte Corp.'s 6¾% senior subordinated notes due 2015, that priced in a $250 million drive-by in late January.

"That paper was solidly above par for a long time, and now it has gotten whacked down to 97.50 bid from 101.0 in the course of a few days," the source said.

"You are seeing people move up the capital structure into more secured paper," the official added.

"You can see the weakness in the high-yield market, but there is still a fair amount of strength in the second-lien bank market which also indicates that people are moving up the capital structure.

"It's a flight to safety."

J.C. Penney rebounds

Back among the established issues, J.C. Penney was seen to have come back, with its most volatile issue, the 7.40% notes due 2037, having bounced back to 91 bid, 93 offered, up from prior levels around 86.5 bid, 88.5 offered. Those bonds had plunged to those mid-80s levels Thursday from around 102.5 bid, 104.5 offered on Wednesday on the leveraged buyout buzz.

Women's Wear Daily, a clothing industry trade publication, had reported Thursday that Cerberus Capital Management LLP and the Carlyle Group had joined forces to make a bid for Penney, raising the specter of a mostly debt-funded leveraged-buyout transaction that would leave Penney groaning under a mountain of new debt, structured so as to be senior to the existing obligations. But Penney itself dismissed the story as "rumors," and news reports later in the day Thursday mentioned that there was considerable skepticism in the market that such a deal would get done. When Friday came and went with no further indications that talk of such a deal was anything more than so much hot air, the bonds crept part of the way back up.

A trader quoted Penney's 8% notes due 2010 Friday as having opened at 101 bid, 102.5 offered, and then having risen to 102.5 bid, 104 offered by the close; on Thursday, those bonds had fallen about even or eight points to around the par level.

He also saw the company's 7 1/8% notes due 2023 up two points on Friday to 101 bid, and its 9% notes due 2012 likewise up a point.

Toys ends decline

Also in that same retailing sector, the trader saw Toys "R" Us Inc. bonds showing "a little strength and actually firming, after nearly a week on the downside. He saw the Wayne, N.J.-based toy retailer's 7 5/8% notes due 2011 having firmed to 95 bid, 95.75 offered, up from 94.5 bid, 95 previously, while its 88¾% notes due 2021 "came back as well," firming to 89.25 bid, 90.25 offered.

The Toys "R" Us bonds had initially jumped about five or six points across the board more than a week earlier when the company indicated in a Securities and Exchange Commission filing that it might tender for its outstanding bonds as part of its pending acquisition by a syndicate led by Kohlberg Kravis Roberts & Co. However, those bonds subsequently came off those highs and then continued to head lower a little each day for the next week, after it had issued a clarification of its initial statement, indicating that no tender is imminent - and such a buyback might not happen at all, if the acquirers don't specifically ask for it.

Delphi lower

Elsewhere, Delphi Corp. bonds "came off a bit," a trader said, apparently reacting to news that the FBI has joined a previously announced investigation by the SEC and the U.S. Postal Service of the Troy, Mich.-based automotive electronics manufacturer's accounting practices.

Its 6½% notes due 2009 dropped half a point to 88.25 bid and its 6½% notes due 2013 were likewise down half a point at 80.5.

However, another trader, while seeing the bonds off half a point, said that the widening of the existing federal probe "wasn't much of a story" from the perspective of bond market activity.

Delphi had previously said that it had improperly accounted for $237 million in cash payments for warranty claims to its former parent, General Motors Corp., in 2000.

Those accounting glitches led to the recent resignations of Delphi's chief financial officer and controller.

Ford, GM sales weak

The ongoing Delphi probe is just one more piece of bad news for an already battered automotive supplier sector, which in turn is attuned to the bad news lately coming out of the larger auto industry that it supplies. On Friday, GM and Ford Motor Co. announced their March sales figures - and the news was not good.

GM, the world's largest vehicle maker, said sales were down 1.3% from year-ago levels, dragged down by an 8.1% fall in new-car sales, which overshadowed a 3.8% gain in truck sales.

About the only really good thing one could say about the figures was that they were certainly better than February's, when the Flint, Mich.-based carmaker reported a slide of more than 12% and instituted production cutbacks.

So far this year, GM's total vehicle sales are just under one million units, down 3.9% from where they were a year ago. Car sales are down 8% for the year.

The news was no better at Number-Two carmaker Ford, which reported a 5% drop in total U.S. sales for the month. While car sales were off 1.75% - though up 5.1% for the year so far, helped by the hot-selling Ford Mustang and the growing popularity of the new Mercury Montego sedan - sales of Ford, Lincoln and Mercury brand trucks and sport utility vehicles, the company's mainstay, slid 6.6% in March and are off by 7.6% so far this year. Among Ford's big SUVs like the Explorer and the Expedition, sales for that subsector skidded 25% in March from a year earlier.

And looking ahead, "Ford and GM are going to continue to get pounded on," said high-yield automotive and industrial analyst Joseph J. Farricielli of Imperial Capital LLC in Beverley Hills, Calif.

"You just keep hearing the same statements out of Toyota and Nissan how they're gunning for growing their market share, and on a North American basis, Ford and GM are still going to be hurt by that. They've yet to show a lot of product with prospect."

He also opined that GM and Ford's truck market "is going to get hammered. The truck market is the last frontier for U.S. producers. While historically people wouldn't think of the transplants [i.e. the U.S. factory operations of foreign-based vehicle makers such as Nissan, Toyota and Honda] building a work-quality truck, I think Nissan and Toyota are gaining on them in that regard, it's just a matter of time."

Farricielli noted that some of the auto component suppliers are fairly well diversified so they don't have all of their eggs in the basket of Detroit's Big Three in general and Ford and GM in particular. Others in the group have particular exposure to one or the other, including Delphi, a former GM unit that still does the bulk of its business with its erstwhile corporate parent, and Visteon Corp., which is in a similar position with Ford.

Even with some degree of diversification away from the Big Three's top two, Farricielli sees a bumpy road ahead for the supplier sector in the face of generally soft North American sales for all of the carmakers, foreign and domestic, especially over the next six to nine months.

"They're going to start to get tougher for the [supplier] companies," he asserted. For instance, looking at Dura Automotive Systems Inc., "the first half of '04 was relatively strong and the second half fell off, and as you on an LTM basis [last 12 months, a trailing indicator for financial performance] start to roll into the second and third quarter, and then obviously the year end, things are going to be down," with no help seen in sight from suddenly revived vehicle sales.

The analyst explained that "in the first half of '05, they're going up against tough year-over-year performance [comparisons]. So things are definitely going to be getting weaker."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.