Little secondary movement despite EchoStar talks; Fleming bounces; Casella Waste deal prices

By Paul Deckelman and Paul A. Harris

New York, Jan. 21 - News that large high-yield issuer EchoStar DBS has been in talks with News Corp. Ltd. and Liberty Media Inc. - reportedly to discuss the possible sale of the Littleton, Colo.-based satellite broadcaster - left the junk market mostly unmoved on Tuesday. Not much else seemed to be going on in secondary dealings either, although the battered bonds of wholesale grocery distributor Fleming Cos. Inc. were seen having firmed off of their recent lows.

In the primary market, Casella Waste Systems Inc. turned trash into treasure by successfully selling $150 million of new 9¾% senior subordinated notes due 2013 at the tight end of pre-deal market price talk.

And details on two new deals surfaced, one each from American Tower Corp. and Herbst Gaming Inc. Both will probably price before the four-day week of Jan. 20 expires.

Meanwhile the research team at Deutsche Bank Securities Inc. reports that the high-yield new issuance calendar can handle "a substantial amount" of additional new deals with a minimum impact on pricing.

After pulling its proposed issue from the wastes of the late-July 2002 primary market, when junk bond deals were dropping left and right, Casella Waste of Rutland, Vt. priced $150 million of 10-year-non-call-five senior subordinated notes (B3/B) at par to yield 9¾%, at the tight end of the 9¾%-10% price talk. Bookrunner was Goldman Sachs & Co.

Meanwhile the forward calendar built out on Tuesday as two issuers stepped forward.

American Tower Corp. will sell $400 million of units made up of five-year senior subordinated discount notes and warrants with pricing expected on Wednesday.

The Rule 144A notes will come to market via bookrunner Credit Suisse First Boston.

In a Tuesday press release, the Boston-based tower operator said that after closing the net proceeds will be held in escrow pending the consent of its bank lenders. A credit facility amendment is needed to allow American Tower to carry out the unit offering and to use up to $216 million of cash on hand and proceeds from the units to repurchase its 2.25% convertible notes. As part of the proposed amendment, American Tower expects to repay at least $200 million of its term loans and that the revolving credit facility amendment will be reduced by no less than $200 million.

Also on Tuesday details emerged on an add-on deal from Herbst Gaming. The Las Vegas-based gaming firm will do a $45 million add-on to its 10¾% senior secured notes due 2008 (B), set to price later this week via Lehman Brothers. The original $170 million issue priced on Aug. 24, 2001.

Although the forward calendar grew by two deals Tuesday, according to Deutsche Bank's high-yield analysts, led by David Bitterman and Andy Van Houten, considerable capacity remains in the new issue supply line.

In its "One Stop Weekly" high yield report issued on Jan. 17, the analysts noted that liquid assets are currently 8.2% of the total assets held by high-yield mutual funds "very high not only by historic standards but also in comparison to equity and high grade funds."

They went on to state that "the dismal returns offered by cash instruments offer little justification for keeping $8 billion out of the market. Although the poor returns and the fact that high yield bonds have returned less than Treasury instruments for the last five years offer somewhat of an explanation we think the lack of new issuance also plays a significant role.

"In our opinion, mutual fund managers are not able to find sufficient alternatives in the current high yield market and are still overweight in high quality issues such as gaming and homebuilding. This, of course, is making it all the more difficult to put new cash to use, especially when new issuance is also slow during periods of positive funds flows. Therefore we think the relatively slow pace in the primary market over the past 12 months has further compounded the liquidity problem."

According to Deutsche, $60.5 billion worth of new bonds came to the market in 2002, "not only below historic average but also significantly less than the current amount that left the high yield universe due to defaults."

To test that hypothesis the Deutsche high yield researchers examined the relationship between the percentage change in invested (i.e. non-liquid) mutual fund assets and monthly fund flows.

"The data suggests that mutual funds would be willing to put a greater percentage of their assets to use if they can find sufficient opportunities in the primary market," the Jan. 17 report stated.

"Furthermore the timing of the new issuance appears to be important and to pull as much cash into the market as possible, the burst in primary market activity should ideally coincide with large cash inflows. Although it is rather difficult to time new issuance in this fashion, a forward calendar that has a number of relatively flexible issuers should make it easier to place bonds immediately when new cash comes in.

"Another conclusion of this study is that there is a lot of room from new issuance. Given the very high liquidity ratio and the continuing momentum in fund flows the market could probably handle a substantial amount of new bonds with a minimum impact on prices."

Back in the secondary sphere, traders reported no real reaction to the reports that EchoStar chairman Charlie Ergen was shopping his company to News Corp., controlled by billionaire international press baron Rupert Murdoch, and to John Malone's Liberty Media.

A trader quoted EchoStar's 9 3/8% notes due 2009 unchanged at 105 bid/105.5 offered.

"I can't believe that they're going to deal with each other," he said, referring to Ergen and Murdoch.

Back in the late 90s, Murdoch was all set to take a 50% stake in DirecTV, an EchoStar rival owned by Hughes Electronics, itself a unit of General Motors Corp., but Ergen was able to upset that deal. Murdoch later made another offer to buy all of DirecTV - but Ergen again stepped in and convinced DirecTV to accept EchoStar's competing offer. That would-be transaction went on for the better part of last year, before the federal government finally turned thumbs down on it on potential antitrust ground , at which point News Corp., this time with the backing of partner Liberty, again entered acquisition dealings with Hughes.

Observers speculate whether the latest flurry of activity is just one more tactic in Ergen's bag of tricks, to again freeze out DirecTV and keep his rival from getting the deep-pocketed parent it needs in order to compete with EchoStar's DISH network. They think it unlikely that Murdoch will want to deal with Ergen, although another body of opinion holds that Murdoch may actually be encouraging the EchoStar talks in order to play hardball with DirecTV and its corporate owners. Tuesday's Wall Street Journal reported that the talks between EchoStar, News Corp. and Liberty Media are at an early stage, and it is unclear who started talking to whom first.

"I did not see any big movement in EchoStar," a market observer said, quoting the 9 3/8% notes at 105 bid/106 offered, and pegging the company's 10 3/8% notes due 2007 at 108.5 bid, and its 9¼% notes at 104.5 bid/104.75 offered.

EchoStar's Nasdaq-traded shares, meantime, certainly did not seem to reflect any kind of a possibility that the company might be bought out by Murdoch and Malone; they fell $1.02 (3.96%) to $24.75 on volume of 4.6 million, up only a bit from the usual turnover.

Elsewhere, there seemed to likewise be not much junk market response to the news that Gap Inc. had switch chief financial officers over the three-day Martin Luther King Day holiday weekend, which saw U.S. financial markets closed on Monday.

Gap's 5 5/8% notes due 2003 were seen holding steady at par bid/100.75 offered, while its 6.90% notes due 2007 were at 99 bid/99.75 offered. Another trader quoted Gap's 6.90s at 98.75 bid/99.5 offered, "perhaps a quarter point weaker on the offered side - but that's it."

Heidi Kunz is out as CFO of the San Francisco-based apparel retailer, replaced by Byron Pollitt, who, like recently installed chief executive officer Paul Pressler, comes to The Gap from Walt Disney Co., where he was the financial chief for the company's Parks and Resorts unit, which Pressler formerly headed.

Observers said that the shake-up was not so much a reflection on Kunz as it was simply a case of Pressler wanting to install his own management team, including Disney veterans such as Pollitt whom he had worked closely with previously.

Kunz joined the company in 1999 and actually ran it on an interim basis for several months last year between the time when long-time CEO and retailing legend Mickey Drexler left in May and Pressler was hired away from Disney and came aboard in September.

Gap's shares were down 64 cents (4.32%) to $14.18 in Tuesday's New York Stock Exchange dealings, on lighter-than-usual volume of 5.2 million shares.

Fleming - whose bonds and shares slid sharply last week after the Dallas-based wholesale grocery distributor warned that fourth-quarter earnings would come in below previous forecasts, and said that the sale of its money-losing retail supermarket unit was going slower than expected and would likely generate less in the way of proceeds - started the new week by bouncing slightly off those lows.

Fleming's 10 5/8% notes due 2007 moved up to 56 bid, while its 10 1/8% notes due 2008 firmed to 74 bid, up two points apiece. However, following several days of slide last week, those bonds are still down more than 10 points from where they had been before the earnings warning.

Fleming plans to issue its fourth quarter and 2002 results before the market opens on Thursday.

Another upsider Tuesday was AES Corp., whose 10% notes due 2005 were a 1½ points better at 97.5 bid, while its 8 3/8% notes due 2007 were up a point at 51 bid.

On the downside, Georgia-Pacific Corp.'s 8 1/8% notes due 2011 were seen two points lower at 93.5 bid, after the Atlanta-based forest products company reported a wider fourth-quarter loss and Moody's Investors Service dropped the formerly investment-grade-rated company's debt ratings another notch deeper into junk bond land.

Georgia-Pacific reported a net loss of $234 million (94 cents per share), widening out from its year-ago loss $187 million (81 cents per share). The company noted that excluding one-time items such as a $298 million loss on the sale of its Unisource paper distribution business and a $315 million charge for asbestos-related costs, earnings per share actually were break-even, in line with previous guidance.

Still, its executives acknowledged in a conference call that the combination of weak demand for its products amid depressed forest product market conditions and lackluster overall economy, rising asbestos-related costs and a heavy debt-service burden made the current situation "the worst possible of all worlds" for Georgia-Pacific.

Moody's would seem to agree; the ratings agency cut the rating on about $9 billion of the company's debt one notch to Ba2 from Ba1. It said the ratings action "is based on Georgia-Pacific's continued high level of debt, the uncertainty associated with its rising asbestos liabilities, and a weak near term outlook for the company's commodity products, which Moody's expects will impede the company's ability to achieve significant debt reduction in the near term."

Beyond that, however, "it was a pretty slow day, with not a whole lot of numbers, or a whole lot of trades," a trader said.

He noted, for instance, that Northwest Airlines Corp. posted a fourth-quarter net loss of $488 million ($5.68 a share), more than double the year-earlier red ink of $216 million ( $2.55 a share), although excluding one-time items, the latest quarter's loss was $178 million ($2.08 a share) - a bit better than the $2.14 a share deficit that analysts had forecast.

That was scant consolation for the Minneapolis-based fourth-largest U.S. air carrier, which warned that due to continued weakness and uncertainty in the airline industry, it could not say when it might return to profitability.

The bad news only increased, as Standard & Poor's lowered its ratings on Northwest's NWA Trust No. 1 Class A, equipment trust certificates to BB from BBB- previously and on the Class B certificates to B+ from BB, citing " substantial deterioration in collateral coverage". The certificates are secured by liens on the carrier's aircraft. S&P also affirmed the corporate credit ratings of parent Northwest Airlines Corp. and its Northwest Airlines Inc. subsidiary at BB- with a negative outlook.

And late in the session, the federal Department of Transportation indicated that it would it would challenge plans by Northwest and rivals Delta Airlines and Continental Airlines to proceed with a tri-partite marketing alliance in defiance of some conditions set by regulators to preserve competition.

Even so, said the trader, "there was not a lot of fallout from the Northwest numbers" and the other news, "and not a lot of change;" he saw its 8 3/8% notes due 2004 offered at 90, "maybe half a point weaker."

It was his view that coming off Friday's abbreviated session and the three-day weekend that followed, "people were still just getting in" on Tuesday and doing little in the way of actual trading.

"It was a sleeper today," another trader agreed, "with nothing really changed from Friday."

He said "even the more active names from last week mostly took a breather. The new Remingtons (10½% senior notes due 2011) saw no trade at all, Levi (Strauss) nothing, telecoms quiet.

"Today was just basically a useless day."

© 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.