Williams tumbles on S&P cut to junk; Graham Packaging, Mobile Storage deals pulled

By Paul Deckelman and Paul A. Harris

New York, July 23 - Williams Cos. Inc. bonds tumbled Tuesday after Standard & Poor's dropped the faltering energy company's debt ratings down to junk levels. Also from that same troubled sector, Dynegy Inc. debt also was also sharply lower on that company's first official day as a full-fledged junker.

Meanwhile the continued bloodletting in the equity markets prompted two companies - Graham Packaging Co. and Mobile Storage Group, Inc. - to postpone their junk bond deals during Tuesday's session in the high-yield primary market.

But Portland, Ore. pulp and wood products company Pope & Talbot, Inc. managed to price a small add-on deal, which not only came in around pre-deal market price talk but was actually slightly upsized - although the formerly investment-grade company also had to price the bonds at a substantial discount.

And Wisconsin-based crane-maker, The Manitowoc Co., prepared to swing its new $175 million offering in front of investors on a roadshow set to get underway on Wednesday.

In the wake of Tuesday's two postponed deals, Prospect News inquired of ING Pilgrim High Yield Fund manager Ed Schriver whether, as sources reported late last week, the new issue market is presently open.

"It has been open," Schriver said. "But the past four days may have changed that.

"When things get knocked down this much...I don't want to use the word 'panic'...but people tend to sit back and reassess," he added. "They get scared.

"If people are seeing withdrawals they become nervous about spending their cash. They'd rather sit on it in a bear market when people may be taking money out."

Here's what happened regarding Tuesday's two postponed deals, according to syndicate sources.

Graham Packaging Co. LP/GCP Capital Corp. I cited equity market conditions as it postponed the $100 million add-on to its 8¾% senior subordinated notes due Jan. 15, 2008, via Deutsche Bank Securities and Salomon Smith Barney. In addition the York, Pa.-based company postponed the remainder of its recapitalization plan including the $550 million term loan, the $150 million revolver and - the cause of the problem - the approximately $250 million IPO. Proceeds were slated to repurchase $169 million ($155.7 million accreted value) of senior discount notes and to repay bank debt.

La Crescenta, Calif. portable storage company Mobile Storage cited market conditions as it postponed its $160 million of seven-year senior notes (B2/B), via Lehman Brothers and Credit Suisse First Boston.

One sell-side source told Prospect News on Monday that there was some interest among investors in the new Mobile Storage notes at the price talk of 12½%-12¾%. However, the source added, the plunging equity markets were heard to be taking their toll on the transaction.

The company intended to use the proceeds to repay debt.

One deal did price on Tuesday. Pope & Talbot increased to $60 million from $50 million its add-on to its 8 3/8% senior notes due June 1, 2013 (Ba3/BB) via BMO Nesbitt Burns. The deal priced at 86.415 to yield 10½%.

A source from the company mentioned late Tuesday that the offering had been oversubscribed but acknowledged that the company had been hoping to bring in the deal with a tighter yield.

"When we started talking about it four weeks ago the market was a lot better," the company source said.

Finally Tuesday saw one new deal emerged as business to be transacted early in the coming month of August.

The roadshow starts Wednesday for an offering of Manitowoc's $175 million of 10-year senior subordinated notes (B2/B+), according to a syndicate source who added that the deal is likely to price Aug. 1.

Deutsche Bank Securities and Credit Suisse First Boston are the bookrunners on the deal from the Manitowoc, Wis.-based company that produces lattice-boom cranes and tower cranes for the global construction industry.

In the secondary, Williams Cos. bonds - which had fallen into the lower 40s from prior levels around 65 on Monday after the company warned that it now expects a second-quarter loss from continuing operations instead of the previously expected profit - continued to slide badly on Tuesday, as Standard & Poor's cut the Tulsa, Okla.-based pipeline and energy trading company's corporate credit two notches to BB+ from BBB previously, citing Williams' deteriorating liquidity position especially in the near term. The ratings agency also lowered Williams' senior unsecured debt rating to BB from BBB- previously, and the company's short-term rating was withdrawn. The ratings were also placed on Creditwatch with negative implications.

S&P analyst Jeffrey Wolinsky warned that "[t]he deterioration of the company's liquidity position, combined with the fall in the company's stock price after announcing a severe dividend cut, makes the possibility of issuing equity in the near term unlikely," and he also cited Williams' inability to renew its $2.2 billion 364-day credit revolver, which was slated to expire Tuesday. Williams has said that it is in talks with its banks and hopes to be able to arrange a credit line of more than $1 billion in the next week to ten days, but Wolinsky noted that it will not be able to get that credit line on an unsecured basis - i.e. without putting up collateral - and said that this was "not commensurate with an investment grade rating."

S&P also noted the company's heavy debt obligations, including $800 million of debt at Williams and its Transco subsidiary that mature later this month and early in August, and about $180 million that could come due from existing ratings triggers. Additionally, it said, "margin calls ranging from $175 million to $600 million may come due because of the sub-investment grade rating of the company."

Following the downgrade, a market source was quoting all of Williams' issues as having fallen to around the 32 bid level, regardless of maturity - which savvy junk-watchers usually interpret to mean that the company is probably headed for a reorganization, sooner or later, since the bondholders in such a scenario would all get the same return on their bonds, no matter what the length. At another desk, a source said he had been hearing much the same kind of speculation from bondholders he had been talking to.

Equity investors apparently agreed that a deluge was coming - after having taken the company's shares down $3.15 (61.05%) on Monday, they dropped them another 82 cents (40.80%) Tuesday to $1.19. New York Stock Exchange volume of 52 million shares in Williams was almost nine times the usual level.

Interestingly, Williams debt was still being traded off the investment grade desks at a number of shops, even though it is now split-rated (Moody's continues to rate the bonds Baa3 - for the moment) and even though it is trading at deeply-distressed junk prices. But a junk trader said that following the rapid fall in the bonds' prices in the past two sessions and the downgrades by S&P and on Monday by Fitch Ratings, his desk would likely get the Williams bonds by Wednesday or Thursday.

The same held true, he said for the bonds of another battered energy trader, Dynegy Inc., whose ratings were cut down to junk levels by S&P on Monday, completing its unceremonious fall from investment-grade grace. S&P lowered the Houston-based concern's corporate credit rating to BB from BBB-, while also cutting its senior unsecured debt to B+ from BB+. S&P said it lowered Dynegy "because the erosion in its core merchant energy business has become more pronounced." It said the separation between the ratings of Dynegy's senior secured and senior unsecured debt "reflects the increased use of secured financing that places the unsecured debtholders at a disadvantage."

"We had people ask about Dynegy," a distressed-debt trader said, "but saw no markets in it." He predicted that his desk would have the formerly investment-grade-rated credit "very soon."

At another desk, a source was quoting all of the Dynegy debt around 35 bid, down from the levels in the upper 40s seen Monday for its 8 ¾% notes due 2012 and its 7.45% notes due 2006. On Monday, those bonds had fallen 10 or 11 points, from the lower 50s, to close at those levels.

Dynegy shares swooned $2.15 (63.61%) in NYSE trading Tuesday, to $1.23, on volume of 37 million, about five times the usual.

Other junk-rated energy generation and trading companies continue to head lower, what with Williams and Dynegy both getting pounded, former industry leader Enron Corp. still languishing in bankruptcy and other still-investment-grade players coming under scrutiny from various quarters (the New York Times, for instance, ran a lengthy , critical article Tuesday about El Paso Corp.'s accounting that began "While other energy companies rush to simplify their businesses and balance sheets in hopes of escaping Enron's taint, one industry giant, the El Paso Corporation, is growing ever more reliant on deals so complex that securities experts call them incomprehensible.")

AES Corp.'s 9 3/8% notes due 2010 were being quoted as low as 40 bid, around a 10 point drop from prior levels, although at another desk, they were seen off a more conservative six points, to end at 46 bid. An observer there said that AES, and companies like Calpine Corp. and CMS Energy Corp. were "getting the tar kicked out of them." Equity players were equally unforgiving; AES's shares plunged 66 cents (22.76%) on the NYSE to $2.24.

He saw Calpine's 8½% notes due 2011 dropping to 46 bid from 53.5 bid on Monday, while at another desk, the San Jose, Calif.-based independent power producer's 8 5/8% notes due 2010 were 4½ points lower, at 50.5 bid. Its shares were down 96 cents (23.53%) to close at $3.12. After the market had closed - and too late to avert the carnage in its securities - Calpine announced that its second-quarter earnings, which are due to be released on Aug. 1, would be slightly better than Wall Street is looking for. The company projected second-quarter earnings of 18 cents to 19 cents a share, slightly above the 17-cent consensus of most analysts. Calpine declared that it is "continuing to meet the challenges facing our industry today."

CMS Energy's 7½% notes due 2009 were seen down four points to 68, while its 8½% notes due 2008 lost 4.50 to finish at 50 bid. A trader, noting the Dearborn, Mich.-based power producer's announcement that it had sold its oil and gas exploration and production unit for about $232 million, said that given the current context of power producers and traders in such trouble, the sale was relatively small potatoes.

Outside of the power sphere, Charter Communications debt was seen continuing to fall Tuesday, its 8 5/8% notes due 2009 quoted a point lower at bid levels in the 53-55 area. Bankrupt rival cabler Adelphia Communications Corp.'s bonds were seen "down a bunch, dipping to 31 bid from 38 previously, while Adelphia's Century Communications unit's bonds likewise dropped from 23 bid to 18.

© 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.