Kodak falls on further junk downgrades; Ashtead, Digicel, Interpublic price; funds see $53 million outflow

By Paul Deckelman and Paul A. Harris

New York, July 21 - Eastman Kodak Co.'s recently junked bonds were seen lower Thursday as the major ratings bodies kicked the venerable Rochester, N.Y.-based photography giant's debt deeper into junk territory after it posted its third straight quarterly net loss on Wednesday, and said it would cut up to 10,000 more jobs, as the once-mighty industrial icon struggles with the collapsing traditional film market in the face of new digital picture technology.

Delta Air Lines Inc. bonds were seen losing altitude as the struggling Atlanta-based Number-Three U.S. airline carrier posted a big second-quarter loss and The Wall Street Journal reported that some of the company's senior executives now believe that a bankruptcy filing is virtually inevitable, sooner or later.

Overall the high-yield market weathered a turbulent Thursday session basically unchanged to slightly lower, according to sources.

In the face of further terrorist strikes against the London mass transit system and China's revaluation of its currency, one source on a high-yield syndicate desk spotted the market unchanged while another had it down an eighth or less.

In the primary arena, Ashtead Holdings plc, Digicel Ltd. and The Interpublic Group of Cos. Inc. were heard to have priced new deals Thursday - the latter a quickly appearing offering of floating-rate notes. UPC Holding and Coso Partners were floating new deals around the market, while Methanex Corp. and Stanley-Martin Communities were packing their bags in preparation for roadshows for their prospective offerings, each scheduled to begin on Monday.

And near the end of the trading day, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that some $52.5 million more left the funds in the week ended Wednesday than came into them. It was the second consecutive week in which a modest outflow had been seen, on top of the $12.4 million reported in the previous week (ended July 13).

Since the beginning of June, fund inflows and outflows have followed a choppy pattern of here a week or so of inflows, there a week or two of outflows. In recent weeks, the inflows and outflows have been relatively modest - under $100 million most weeks - a sign of lack of conviction by fund investors one way or another.

Since the week ended June 1, inflows and outflows have been pretty much evenly matched in terms of the number of each - but a net total of approximately $597 million more has come into the funds than has left them, even counting the latest week's outflow, according to a Prospect News analysis of the AMG numbers. That surge has helped to revive the junk bond primary market and has given a boost to the secondary market as well. However, before that, outflows had solidly dominated the first part of the year, including one 15-week losing streak, from mid-February through late May, in which more than $6.7 billion bled from the funds, which are seen as a measure of overall market liquidity trends.

Outflows have now been seen in 22 weeks of the 29 since the start of the year, against only seven weekly inflows. Cumulative net outflows for the year total around $7.104 billion, according to the Prospect News analysis, up from about $7.051 billion last week. Over the past two weeks, outflows have totaled $64.9 million, the analysis said.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

Ashtead, Digicel price

Meanwhile the primary market saw action Thursday as two issuers completed sales of junk bonds.

In a deal said to have played to both high-yield and emerging markets audiences, Jamaica's wireless operator Digicel Ltd. priced an upsized $300 million issue of seven-year senior notes (B3//B) at par to yield 9¼%, on top of price talk that had been reeled in from the 9½% area.

Citigroup and JP Morgan ran the books.

Earlier in the week Digicel was reported to have built up an order book in excess of $1.5 billion.

Elsewhere Ashtead Holdings plc priced a $250 million issue of 10-year second-priority senior secured notes (B2) at par to yield 8 5/8%, tight to the 8¾% area price talk.

Citigroup, JP Morgan and Deutsche Bank Securities ran the books on the debt refinancing deal from the Leatherhead, England equipment rental company.

Stanley-Martin $125 million starts Monday

One roadshow start was heard during the Thursday session.

Stanley-Martin Communities will start a roadshow Monday for its $125 million offering of 10-year senior subordinated notes (expected ratings B3/B-).

Wachovia Securities has the books for the debt refinancing and general corporate purposes deal.

The issuer is a private home builder in the Washington, D.C. area, and is headquartered in Reston, Va.

The China float

Meanwhile Thursday one high-yield market source told Prospect News that China's decision to float its currency by a margin of 2.1% will, in the end, cause spreads to widen.

"It looks like it will be done in gradual steps, much like the Fed has done with interest rates," the source wrote in a Thursday email message.

"The end result will be that China will continue to cut back on its purchase of U.S. assets. Since they are using a 'basket' approach to the peg, they will be buyers of Japanese and European assets in very small doses, moving forward.

"The bottom line is that to some extent it will take a very large buyer out of the market for U.S. assets for a portion of their investment requirement.

"Higher rates look like they are in the cards, and maybe the Fed rate hikes will start getting some traction in the longer end.

"Credit spreads will widen."

Digicel. Ashtead up in trading

A trader said that the two new deals he had seen trading around in the secondary market "went out pretty strong," with the new Digicel 9¼% notes due 2012 having pushed up to 103 bid, 103.375 offered from their par issue price earlier in the session, while Ashtead Holdings' new 8 5/8% notes due 2015 firmed to 102.25 bid, 103.25 offered, also up from a par issue price.

Another trader said the Digicel bonds "traded pretty well," up to a peak of 103, before going out at 102.75 bid, 103.75 offered, and observed that Ashtead "was basically just bid for, we didn't trade any of them"; he saw that deal also going home at 102.75 bid, 103.75 offered.

"People just liked that Digicel deal," he said, adding "we hear it was very well subscribed."

"Wow!," exclaimed a third trader upon seeing the aftermarket strength of the Digicel deal, with the bonds trading around 102.75 bid, 103.75 offered, "very nice."

At that same desk, the new Ashtead bonds were seen at 102.5 bid, 103 offered, which the trader called pretty impressive, considering that Treasuries were down" in the wake of all kinds of bad karma, ranging from China's move to uncouple the yuan from the dollar to comments from Federal Reserve chief Alan Greenspan perceived by the bond markets as hawkish on possible interest-rate hikes. There were also the reports of new explosions in terrorist-jittery London, as well as stronger-than-expected leading indicators numbers.

"The government market was down pretty hard," a junk trader said, noting that the benchmark 10-year bond's yield, after ending Wednesday at 4.16%, had blasted all the way back up to 4.272% by Thursday's close. "Stocks sold off, but came back" most of the way, he said, although the equity markets still ended lower on the day, with the bellwether Dow Jones Industrial Average closing off 61.38 points, at 10627.77, the Nasdaq losing 9.97 points to finish at 2178.60, and the S&P 500 8.16 points lower, at 1227.04. Still, he said, "high yield looks like it did pretty well."

"The high yield market basically opened up a little on the firm side," another trader said, "as Treasuries weakened, and it continued like that for most of the day, but it was a little bit softer going into the close. Prices aren't materially different, but it feels weaker."

Eastman Kodak down

One name seen lower was recent fallen angel Eastman Kodak, whose 7¼% notes due 2013 were seen by one market source as having retreated 1½ points to 101.5 bid.

A trader at another desk saw the Kodak bonds still being quoted on a spread versus Treasuries basis like the investment-grade instruments which they were up until recently. Those bonds widened out by 15 basis points, to a bid level equivalent to 280 bps over Treasuries and an offered level at 270 bps over, the trader said, after Moody's Investors Service, Standard & Poor's and Fitch ratings all downgraded the company's debt, which had fallen into junk territory earlier in the year - in early February for Fitch, in late April for S&P and in early May for Moody's.

In Thursday's action, S&P cut Kodak's corporate credit and senior unsecured debt ratings to BB from BB+ previously, with a negative outlook, Fitch did likewise, and Moody's slashed Kodak's senior unsecured rating by two notches to Ba3 from Ba1, and lowered its corporate family rating by one notch to Ba2 from Ba1.

The triple-barreled downgrade followed Wednesday's announcement by the company that it suffered a second-quarter net loss of $146 million (51 cents per share), a sharp deterioration from the year-earlier net profit of $136 million (46 cents a share). Even excluding costs related to restructuring and other one-time items, it had a profit of 53 cents a share, far below analysts' forecast for a profit of 79 cents a share.

To right the ship, Kodak said that it will cut up to 10,000 more jobs - this on top of 15,000 job cuts announced earlier in the year - and will also reduce its manufacturing assets for traditional film and cameras, including plants, factories and other equipment, to about $1 billion, compared with $2.9 billion in January 2004.

Delta falls on loss

Also on the earnings front, Delta's bonds were lower across the board, after the air carrier reported a quarterly loss for the second quarter ended June 30 - historically the airline industry's strongest seasonal period.

"Delta had terrible numbers and the bonds fell," said a trader who quoted the company's 8.30% notes due 2029 as having dropped to 24 bid at the opening from Wednesday closing levels at 25 bid, 27 offered, before firming slightly off the lows to end at 24.5 bid, 25 offered.

"Delta's earnings were not as bad as expected," another trader argued and indeed, the $382 million net loss posted for the quarter ($2.64 per diluted share) represented a considerable improvement over the yawning year-earlier deficit of $2 billion ($15.79 per share) - although it should be noted that $1.65 billion of that year-earlier red ink was attributable to two non-cash charges for deferred income taxes and pension contributions.

Excluding special items related to pension costs and to tax considerations, the June 2005 quarter net loss was $304 million ($2.11 per share), somewhat improved from the comparable year-ago loss of $312 million ($2.55 per share) ex-items, and better than the consensus $2.39 per share loss Wall Street was looking for.

However, the trader said "there was an article in The Wall Street Journal saying they may have to file for Chapter 11, so that pushed the bonds down a little bit," with the 8.30s down two points on the day, at 25 bid, 26 offered, the 7.90% notes due 2009 at 31.75 bid, 32.75 offered, down three points on the day, and the company's benchmark 7.70% notes slated to come due on Dec. 1, at 84.5 bid, 86.5 offered, down 2½ points Thursday.

Yet another trader saw an even sharper deterioration in the Delta bonds, with the 7.70s off four points on the session, to 83 bid, 85 offered; the 7.90s as five-point losers, from 35 bid, 37 offered to 30 bid, 32 offered; the 8.30s down three points at 24 bid, 26 offered, and the 10% notes due 2008 four points at 35 bid, 37 offered.

Taking their cue from the Journal article, some of the analysts participating in Delta's conference call following the release of the quarterly numbers peppered management with questions about whether a bankruptcy filing is in the cards; management continued to insist that it has no plans for such a step (see related story elsewhere in this issue).

Other airline bonds were seen quiet and little changed; "it was all about Delta," a trader said.

Level 3 slips on earnings

Level 3 Communications Inc.'s bonds were a little lower, after the Broomfield, Colo.-based telecommunications company to reported that its second-quarter loss came in at $188 million ( 2 cents per share), triple the year-earlier loss of $63 million (nine cents a share). The latest quarter's figures included a charge related to job cuts.

A market source saw the company's benchmark 9 1/8% notes due 2008 at 82.5 bid, down half a point, and its 2010 notes down a point at 81 bid.

A trader at another desk quoted the 9 1/8s at 81 bid, 82.5 offered, down a point on the session, while another trader saw its 10¾% notes offered at 84, down from 83.5 bid, 84.5 offered on Wednesday.

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