Albertson's bonds dive as company heads for junk; Northwest slide continues

By Paul Deckelman and Paul A. Harris

New York, Sept. 2 - Albertson's Inc., one of the largest supermarket operators in the country, said Friday that it would consider "strategic alternatives" to boost shareholder value - including the possible sale of the Boise, Ida.-based grocer. But while equity investors acted like bargain-hungry shoppers during a triple-coupon, 10-for-$10 sales promotion, debt investors took the company's notes out of their shopping carts and made for the exits, especially after two major ratings agencies threatened to downgrade Albertsons' precariously investment-grade ratings down to junk bond status.

Elsewhere, Northwest Airlines Corp.'s bonds continued to trend lower, as the Eagan, Minn.-based Number-Four U.S. airline carrier continued to get slammed on jet fuel prices and investors digested its latest dire warning, issued Thursday, that outlined just how much carnage those price hikes have caused for the company, as it fights to stay out of bankruptcy. Rival carrier Delta Air Lines Inc., which also seems to be edging ever closer to a Chapter 11 filing, was likewise lower.

Not much at all was going on in the primary market ahead of the 2 p.m. ET close recommended by The Bond Market Association ahead of the Labor Day holiday weekend, which would also close all U.S. financial markets on Monday.

The Albertsons bonds were "down substantially on the news," a market source said, pegging the bid-side yield on the company's 8% notes due 2031 as having widened out by about 125 basis points from previous levels, going from 220 basis points over comparable Treasury issues on Thursday to 345 bps over Friday. In nominal dollar-price terms, he said, that translates to the notes nosediving to about 103 bid from prior levels at 118.5.

He also saw Albertsons' 7½% notes due 2011 having widened out by that same 125 bps, to around 250 bps over, translating to a fall in the nominal dollar price to 105.75 from 111.5 previously.

Albertson's New York Stock Exchange-traded shares jumped $2.32 (11.19%) to $23.05 on the news of the possible sale. Volume of 57 million shares was 19 times the norm.

The company - which has retained Goldman Sachs & Co. and The Blackstone Group LP as its financial advisors - is the second-largest supermarket operator in the country, with 2,500 stores in 37 states across the United States, operating under its own eponymous Albertsons banner, as well as the Acme, Shaw's, Jewel-Osco, Sav-on Drugs, Osco Drug, and Star Markets, Super Saver and Bristol Farms nameplates. Much of the company has been built by a series of acquisition transactions in recent years, such as its $2.5 billion purchase of Shaw's the second-largest operator in the New England region, which was completed in early 2004. It competes with the other two major nationwide-chains, industry leader Kroger Co. and Safeway Inc., as well as with Wal-Mart Stores Inc., which has aggressively moved into the supermarket business by grafting grocery store sections onto its Wal-Mart superstores in many locations.

Despite its expansion, Albertsons' sales have lagged its rivals in many regions, driving its net income down to $444 million in fiscal 2004, nearly half of what it was in 2000.

"I don't know how they stay in business," said a trader who shops at an Albertsons store in the Southern United States "They're just so expensive. Yes, they run sales - but if you stray from that path [of buying the specials] they'll tear your arm off."

Wal-Mart, by way of contrast, charges prices that average about 15% lower than traditional supermarket operators like Albertsons - and is rewarded with annual grocery sales of over $100 billion, some three times Albertson's revenues, causing Albertson's management to look at other possibilities, including the outright sale of the company. By some estimates, Albertsons component pieces could fetch a price of about $16.5 billion.

But that prospect does not please Standard & Poor's which put Albertson's BBB- debt ratings on CreditWatch, with an eye toward a possible downgrade to junkbondland.

"Although the ultimate outcome of this process is uncertain, these strategic alternatives could potentially weaken bondholder protection measures," S&P cautioned.

Fitch Ratings meantime said it may cut Albertsons' BBB senior unsecured notes rating and its F-2 commercial paper rating.

There was no immediate word Friday from Moody's Investors Service about any possible ratings cut. Moody's rates Albertsons at Baa2.

Northwest, Delta down again

Elsewhere, Northwest Airlines, and Delta, were each seen lower Friday amid continued concern about rapidly rising jet fuel prices and possible supply disruptions. Those fuel problems, immediately caused by Hurricane Katrina, which closed several petroleum refineries along the U.S. Gulf Coast, are exacerbating an already serious fuel price problem that the two struggling airlines - and even other non-struggling carriers - have been having all year, making their respective fights to avoid Chapter 11 that much more difficult.

A trader in distressed bonds said that Northwest's benchmark issue, the 8 7/8% notes due 2006, retreated to 48 bid, 52 offered Friday from 56 bid, 58 offered on Thursday. Its 9 7/8% notes due 2007 dipped to 41 bid, 43 offered from 44 bid, 46 offered, while its 10% notes due 2009 retreated to 36 bid, 38 offered from 39 bid, 41 offered.

A trader at another desk, who also saw the 8 7/8s drop to around 48 bid, 50 offered, estimated they were down six points on the session, and saw the 10s three points lower at 35 bid, 37 offered.

Northwest was one of the few market features he saw at all, with the market having "pretty much shut down by noon time [ET]."

Market participants tried to gauge the impact of Northwest's disclosure in a Thursday filing with the Securities and Exchange Commission that rising jet fuel prices were eating away at its financial stability, and predicting that its total fuel expense in 2005 will be approximately $3.3 billion, versus the $2.2 billion spent in 2004 and more than double the $1.6 billion spent on fuel in 2003.

Northwest also said in that filing that it expects to lose some $4 million a day, or between $350 million and $400 million for the current quarter, which ends on Sept. 30, and warned that its cash balance has fallen to $1.7 billion, down from $2.1 billion on June 30.

As if those weren't headaches enough, Northwest also noted in the filing that it has a $3.8 billion shortfall in its pension plans, and is required to pay in $800 million next year and $1.7 billion in 2007.

Northwest's Nasdaq-traded shares lost 34 cents (8.56%) Friday, to end at $3.63, on volume of 16.2 million, more than three times the usual turnover.

Delta keeps dropping

The second trader also saw troubled Atlanta-based Delta Air Lines' bonds coming inexorably earthward, with the Number-Three U.S. airline carrier's 7.90% notes due 2009 down a point on the day at 15.25 bid, 16.25 offered, while its 8.30% notes due 2029 lost a quarter-point to 15 bid, 16 offered.

"There wasn't a hell of a lot of stuff to go on," he proclaimed. "The amount of business being done is a little spotty."

Another trader saw the 7.90s as low as 14 bid, 16 offered, down two points on the day, while the 8.30s were also two points down, at 13 bid, 15 offered, and its 10% notes due 2005 were at 16 bid, 17 offered, off a point. The company's benchmark 7.70% notes coming due on Dec. 15 were a point lower at 20 bid, 22 offered, as the bonds continue to compress their various trading levels - something observers believe is a sure tip-off that a Chapter 11 filing is likely to come sooner rather than later, since the bonds would all trade on top of one another in the event of a restructuring scenario. Delta is seen as a slightly more likely candidate than Northwest to seek protection from its bondholders and other creditors, though not by much.

Delphi down

Delphi Corp.'s bonds were also seen down about a point or so on the day, continuing the slide in which the Troy, Mich.-based automotive components maker's noteholders have found their securities.

A trader saw Delphi's 6.55% notes due 2006 two points lower at 79 bid, 81 offered, as were its 6½% notes due 2009, which closed at 74 bid, 76 offered. Its 61/2s due 2013 were a point lower at 71 bid, 73 offered, while its 7 1/8% notes due 2029 were unchanged at 68 bid, 70 offered.

Delphi's bonds have been steadily eroding over the past few sessions on a combination of factors, including generalized weakness in the automotive sector as General Motors Corp. reported weak August sales numbers, uncertainty regarding the possible outcome of talks Delphi is having with GM - its former corporate parent - and the United Auto Workers union, seeking help with its high employee costs, and speculation among market participants about the likelihood that Delphi might be headed for Chapter 11.

Meanwhile, GM's own 8 3/8% notes due 2033 were seen down a point, at 81.25 bid, 81.75 offered, while Ford Motor Co. 's 7.45% notes due 2031 closed at 79 bid, 80 offered, also down a point.

Primary looks forward

The primary market produced no news during Friday's abbreviated session as sources looked ahead to what is anticipated to be a busy post-Labor Day week in high yield.

As forecast, the week leading up to Labor Day saw no issues price. Thus the year-to-date issue total stood unchanged from the $67 billion in 262 dollar-denominated tranches reported the previous week.

Hence the primary market, in terms of year-over-year volume, lags $28 billion and 120 tranches behind 2004, which had seen almost $95 billion price in 382 tranches by the Sept. 2 close.

The month ahead

Throughout the week leading up to the Labor Day break, market sources expressed the expectation that business would see a significant pickup in September.

High yield syndicate officials professed knowledge of various deals expected to launch in the week to come, in some cases mentioning approximate sizes and syndicate names and even industry sectors. However there was the customary reluctance to impart issuer names.

Hence at Friday's close, among sources who could be reached, the only deal thought to conclusively be in the market is William Scotsman Inc.'s $300 million minimum of 10-year notes, in a debt refinancing deal via Deutsche Bank Securities, Citigroup, Banc of America Securities LLC and Lehman Brothers.

The Baltimore provider of modular space solutions is expected to kick off its roadshow Tuesday or Wednesday, with pricing expected during the week of Sept. 12.

What size, September?

One senior high yield syndicate official, asked whether September 2005 can be expected to top September 2004, which saw slightly less than $9 billion price in 33 tranches, responded that it depends upon "the big LBO deals."

"One of these big LBOs actually needs to happen," the source said. "Otherwise I don't think you get to $9 billion because you have lost a whole week of September already by the time we get back Tuesday."

Two financings would seem to fall squarely into this category as possible September business:

* The Neiman Marcus Group Inc.'s $3.9 billion debt financing, including an unspecified amount of senior secured notes, via Credit Suisse First Boston and Deutsche Bank Securities, to support acquisition of the company by Texas Pacific Group and Warburg Pincus LLC;

* And possibly closer at hand Gamestop Corp.'s $950 million senior unsecured guaranteed notes (Ba3/B+) via Banc of America Securities, to fund the company's merger with EB Games.

Some market sources expect Gamestop in late September.

A busy post-Labor Day week

The senior sell-side official said that in addition to possible mega-deals the market figures to be kept busy with transactions in the $100 million to $300 million range throughout the month of September.

Four such offerings are expected to launch early this week, and quite likely there will be more.

In addition to Williams Scotsman they include:

* Brookstone Inc.'s $190 million LBO deal via Banc of America Securities;

* NBTY Inc.'s $150 million minimum debt refinancing via JP Morgan; and

* Panolam Industries Inc. with $150 million of eight-year senior subordinated notes (Caa1), an acquisition financing via Credit Suisse First Boston and Jefferies & Co.

Also poised to launch early in the week is AmerisourceBergen Corp.'s substantially bigger $800 million minimum offering, in a debt refinancing led by Lehman Brothers.

Late in the week one high yield syndicate official professed knowledge of an approximately $350 million trade emanating from the energy sector that will likely launch by mid-week.

Another professed knowledge of two deals totaling $600 million to $650 million, but would disclose no further details.

Yet another source from another high yield syndicate desk said that a couple of deals not previously mentioned are being prepped as possible early September business.

And about the market, players are professing the expectation that opportunistic issuers can be expected to show up with drive-by transactions.

Katrina's impact going forward

A high yield investor told Prospect News on Friday that while scenes of pandemonium continued to be reported from New Orleans the ability of the Hurricane Katrina catastrophe to derail the capital markets has conceivably dwindled.

The source said that the key Louisiana Offshore Oil Port, known as the Loop, reportedly resumed some operations as early as Thursday.

"I think the news is going to be better than expected," the investor said.

"There are all sorts of supply disruptions of course. But it seems like things are coming back sooner than the markets expected.

"The casinos were clearly the ones that were destroyed. But you had other companies that lost 10% of their operations, which should not be immediately life threatening."

Fed pause? Don't hold your breath

Late in the week, as Katrina's deadly toll continued to be tallied, capital markets watchers began to speculate that the Federal Reserve and its chairman Alan Greenspan might be persuaded to back off of its "moderate pace" strategy of short term interest rate increases.

The hurricane, so the reasoning goes, drove up gasoline prices so dramatically that the result will be a dampening effect on the U.S. economy, engendering recessionary risk.

However the investor pointed to Friday's news that unemployment in the United States fell to a four-year low of 4.9% in August, with companies adding 169,000 jobs, and told Prospect News that a change in the Fed's direction seems highly unlikely.

"After today's unemployment number and with the way commodities are acting, it could be difficult for the Fed to pause," the investor said.

"If they do they will be seen as weak on inflation, and that's not what they want to do."

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