Charter firmer on buyout possibility; Georgia-Pacific ups deal to $1.5 billion; funds see outflow

By Paul Deckelman and Paul A. Harris

New York, Jan. 23 - Charter Communications Holdings LLC bonds firmed a bit Thursday on a report that several private equity firms have been looking to take control of the troubled cable television company and would likely swap equity for debt to bring its bloated debt load down to more manageable levels.

In the primary market, the tissue boxes at a couple of investment banks likely sat untouched during Thursday's busy primary market session as Georgia-Pacific Corp. upsized and priced $1.5 billion, the brawniest-sized deal to hit the high-yield market since Charter Communication (in more halcyon days) did a $1.502 billion transaction on May 10, 2001.

And even as the Georgia-Pacific mega-deal was rolling down the chute, market sources said that the most popular gauge of the junk bond market liquidity that has made such huge deals possible - high-yield mutual fund flows - took a modest step backward, its first in six weeks, as $81.4 million more was reported to have left the funds in the week ended Wednesday (Jan. 22) than came into them.

That outflow was the first weekly reduction seen in the junk fund flows since the week ended Dec. 11, when the outflow totaled $447.3 million, according to AMG Data Services of Arcata, Calif.

In the intervening weeks since then, a net total of approximately $2.756 billion had flowed into the funds, according to a Prospect News analysis of the weekly AMG figures. The outflow in the week ended Wednesday was the first so far this year; in the previous two weeks since the start of 2003, approximately $1.953 billion more had come into the funds than had left them, according to the Prospect News analysis. In the week ended Jan. 15, net inflows had totaled $927.8 million.

Although the mutual funds are estimated to only hold a relatively small portion of the over $600 billion of bonds circulating in the high yield universe, analysts and other market participants consider the behavior of the fund inflows and outflows to be a reliable barometer of overall liquidity trends in the junk market.

The surge of net fund inflows seen since about mid-October - a stretch interrupted only by the occasional week in which an outflow was seen - has coincided with both the solid bounce from previously depressed levels which the junk secondary market has seen over the last three months of trading, as measured by performance indexes compiled by many major investment banks, as well as the sharp revival of primary market activity over the last three months of 2002 following an extended late-summer/early fall new-deal drought, and on through the beginning of this year. That reinvigorated new-deal sphere was again in sharp focus Thursday, with the massive Georgia-Pacific offering.

Georgia-Pacific's deal had already been increased once; during Wednesday's session Prospect News had learned that the size had been increased to $1 billion from the originally announced $500 million.

At the final $1.5 billion size, Georgia-Pacific's senior notes (Ba2/BB+) came in two tranches via Goldman Sachs & Co. and Banc of America Securities.

The company priced $700 million of seven-year 8 7/8% bullets at 99.360 to yield 9%, in the middle of the 8 7/8%-9 1/8% price talk, and $800 million of 10-year-non-call-five notes at par to yield 9 3/8%, in the middle of the 9¼%-9½% price talk.

In a press release that appeared shortly after the deal priced, the company said it will use proceeds beyond the initial $500 million to repay borrowings on its revolver, leaving it with $1.7 billion outstanding on the facility and $1.3 billion of available liquidity. The first $500 million will be used to repay a capital markets bridge loan.

"We are very pleased to successfully complete this important financing and to have increased it significantly from its original size of $500 million due to attractive terms and strong investor confidence in Georgia-Pacific," said A.D. "Pete" Correll, Georgia-Pacific's chairman and chief executive officer, in the news release. "We believe the offering addresses any possible liquidity concerns that investors may have had. The market's positive reaction reaffirms the strength of Georgia-Pacific's businesses and its solid long-term fundamentals."

Meanwhile price talk of 10½%-10¾% was heard on AMI Semiconductor, Inc.'s upcoming sale of $200 million 10-year senior subordinated notes (B3/B) via Credit Suisse First Boston and Lehman Brothers. The Pocatello, Ida. chipmaker figures to price the deal Friday.

Price talk of a yield in the 9¼% area emerged Thursday on Central Garden & Pet Co.'s $150 million of 10-year senior subordinated notes (B+) via Banc of America Securities and CIBC World Markets.

Ansd the price talk is 10¼%-10½% on New Orleans-based Freeport McMoRan Copper & Gold Inc.'s $250 million of seven-year senior notes (B3/B-), according to a syndicate source. JP Morgan, Merrill Lynch & Co. and UBS Warburg are joint bookrunners on the deal.

Talk of 104.5 was heard Thursday on Herbst Gaming Inc.'s $45 million add-on to its 10¾% senior secured notes due 2008 (B2/B) via Lehman Brothers.

And finally official price talk circulated Thursday on Houghton Mifflin Co.'s two-part $650 million high-yield offering. That deal, being managed by Goldman Sachs, CIBC World Markets and Deutsche Bank Securities, is comprised of $250 million of eight-year-non-call-four senior notes (B2/B), which are talked at 8¼%-8½%, and $400 million of 10-year-non-call-five senior subordinated notes (B3/B) that are talked at a yield in the 175 basis points area behind the seniors.

All of them are in addition to Eco-Bat Technology Ltd.'s €185 million of 10-year senior guaranteed notes (B1) via Credit Suisse First Boston and Salomon Smith Barney have a decent probability of pricing before the four-day Jan. 20 week reaches its conclusion. Price talk is 10%-10¼%.

Meanwhile the $81.4 million outflow from high-yield mutual funds reported by AMG was being taken calmly by at least one banker.

"That is not a problem," one sell-side source commented.

Another sell-side official, characterizing it as a "small outflow," said: "There is still a lot of money out there and people want to put it to work.

"It was a tough week for the equities," this source added. "We're down for the year again."

However as evidence of the present vitality of the high-yield primary market this official pointed to Wednesday's slightly upsized American Tower Corp. $420 million (from $400 million) transaction. The Boston-based tower company priced units comprised of a senior subordinated discount note (B3/CCC+) and a warrant at 51.966 to yield 12¼% via Credit Suisse First Boston.

"I think discount notes are a bull market phenomenon," this sell-sider said.

"Look how well that deal did," the source continued. "It was expensive but it was a very successful offering, especially considering that they were paying equity.

"It's going to cost them. But the fact that a senior sub discount note can get done is pretty remarkable, especially for a company that size in a sector that's not performing that great."

Back in the secondary market, Charter Communications bonds were "a little firmer," a trader said, in the wake of a report from the internet investment website TheDeal.com that several private equity firms are considering bids to gain control of Charter, and that any deal would likely involve some kind of a swap of equity for a portion of Charter's $20 billion of debt.

While the trader was not especially convinced that this was what was pushing the bonds up - "I don't think it is the first time that we've heard this kind of stuff," he said - he did see the St. Louis-based cabler's 9.92% notes as having pushed into the 40-41 range from prior levels around 39 bid/42.5 offered, and saw its 10% notes due 20011 also firmer at 46 bid/48 offered.

Another trader, though, declared that Charter had moved up on the TheDeal.com story, "and then quieted down," with its benchmark 8 5/8% notes due 2009 having firmed as high as 47 bid before going out around 46.5, still well up from recent levels around 43. Yet another trader saw the company's bonds about a point better across the board, pegging both the 8 5/8s and the 8¼% notes due 2009 in the 46 bid/47 offered region.

TheDeal.com, citing unidentified sources in the cable industry, reported that several buyout firms were considering making bids of more than $1 billion to gain control of Charter, which is currently controlled by billionaire Microsoft Corp. co-founder Paul Allen.

It said that Goldman Sachs Capital Partners has teamed with former Charter president and CEO Jerry Kent, who now runs Sequel 3, to form one potential bidding group, while Boston-based Thomas H. Lee Partners and Washington D.C.-based The Carlyle Group were said to be considering forming a second team. A spokesman for Sequel 3 was quoted as saying that neither Kent nor his company has been playing any role in a possible Charter restructuring.

The report, citing a recent filing with the Securities and Exchange Commission, further said that 55% holder Allen might be mounting his own bid to take the company private and quoted a source as saying that he had retained an investment bank to study the situation.

The website, noting Moody's Investors Services' recent assessment that Charter could comfortably support only about $14 to $15 billion of debt, said that whoever gains control of the company would likely have to mount a debt-for-equity exchange to bring the debt down to those manageable levels.

Meantime, TheDeal.com also reported that Charter has been auditioning prospective restructuring bankers and could make its choice this week, with Lazard Freres so far said to have the inside track, but with UBS Warburg, Goldman Sachs and Morgan Stanley in the running. It quoted a source as saying that given the size of Charter's debt load, whichever bank wins the assignment could reap as much as $250 million in fees. Charter declined comment on the TheDeal.com report.

Charter's Nasdaq-traded shares were up a nickel (4.10%) to $1.27 on volume of 13.4 million, only slightly higher than normal.

Elsewhere things were being described by various traders as a pretty quiet day, with much of the corporate bond market's attention absorbed by General Electric Corp.'s $5 billion bond deal and AT&T's plans to buy back $4.3 billion of its debt - Telephone's investment-grade rated 7.3% notes due 2011 were quoted at 111, up from about 107.5 previously - and junk players mesmerized by the huge Georgia-Pacific offering. Georgia-Pacific's existing 8 1/8% notes due 2011 were about two points easier at 91.75.

Fleming Cos. Inc.'s 10 1/8% notes due 2008 were seen trading as high as 79.5 bid early in the session before ending at 79, up from 76.25 late Wednesday. Its 10 5/8% notes due 2007 were a point better, at 56.

The Dallas-based wholesale grocery distributor reported that it posted a fourth-quarter net loss of $89.8 million, ($1.66 per share), versus a year-earlier profit of $5.7 million (12 cents a share), with most of the damage coming from discontinued operations such as its money-losing retail supermarkets division, now in the process of slowly being sold.

Excluding the discontinued operations, the company made $5.8 million (11 cents a share) - down from $8.6 million (19 cents a share) a year earlier, and in line with its recent warning to investors that profits from continuing operations would only come in somewhere between $5 million and $6 million (10 to 12 cents), due to soft sales, inflated meat prices and higher employee-related costs, as well as stiff levels of competition seen by its retail supermarket customers, such as Albertson's, and the problems of its largest single client, the bankrupt Kmart Corp.

The earnings warning caused Fleming's bonds to slide more than 10 points in one session last week - a slide which continued for several more days before the bonds started moving modestly back upward again.

Fleming on Thursday raised the possibility that it might dump its contract with long-time customer Kmart as the latter struggles to extricate itself from Chapter 11. Fleming is currently studying what impact Kmart's recent announcement that it plans to close 326 of its over 1,800 stores might have on Fleming, which supplies packaged grocery items and other merchandise to Kmart. Dropping the supply contract with the troubled Troy, Mich.-based discount retailer would free up cash and some of its distribution network to use for other customers, Fleming executives said on a conference call.

Kmart, meantime, said Thursday that while it remained in round-the-clock negotiations with its creditors over its plan of reorganization, it intends to file the plan Friday even if the parties cannot come to an agreement on every point. Kmart, which sought bankruptcy protection a year ago this past Wednesday, said it anticipates emerging from Chapter 11 by April 30.

Its 9 3/8% notes due 2006, which were recently quoted as high as 22.75 bid, were seen Thursday at 16 bid, although at another desk, a trader described them "firm around 18."

Participants saw no bond market response seen to the news that AK Steel Corp. Is making a surprise $825 million bid for bankrupt National Steel Corp., seeking to trump a $750 million offer already on the table from United States Steel. But AK's 7¾% notes due 2012 were quoted down more than a point, at 100.375 bid. Its 7 7/8% notes due 2009 were at 100.56.

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