Burns Philp prices upsized deal at discount; power sector still struggles

By Paul Deckelman and Paul A. Harris

New York, Feb. 12 - Burns Philp & Co. Ltd. priced an upsized $199.32 million proceeds offering of eight-year senior subordinated notes Wednesday, selling the new bonds at a substantial discount to par. In secondary trading, they were quoted at higher levels, though with little activity seen. Among established secondary issues, power producers continued to reel in the wake of the problems of El Paso Corp. and the major ratings downgrade from Moody's Investors Service.

Australian yeast-maker Burns Philp's transaction, issued through Burns Philp Capital Pty Ltd. and Burns Philp Capital (U.S.) Inc., was increased to $199.32 million proceeds from $150 million, and the 10¾% senior subordinated notes due Feb. 15, 2011 (B3/B-) priced at 94.913 to yield 11¾%.

The deal, via bookrunner Credit Suisse First Boston, came at the wide end of the 11½%-11¾% price talk.

Also on Wednesday price talk of 11¼%-11½% emerged on FastenTech, Inc.'s planned $175 million of eight-year senior subordinated notes (B3/B-). The offering, which the Minneapolis-based fastener-maker will use to repay debt and settle interest rate swaps, figures to price Friday morning via JP Morgan and Lehman Brothers.

The news from Australian yeast-makers and Minneapolis snappers notwithstanding, sources in the primary market on Wednesday seemed to be basking in the afterglow of the $2.1 billion three-tranche Crown Cork & Seal Co. junk bond deal that priced Tuesday via Salomon Smith Barney and Deutsche Bank Securities - the biggest deal to price in the high-yield primary since Lyondell Chemical Co. transacted $2.4 billion (also in three tranches) in May 1999.

One official from the sell-side zeroed in on the euro piece of the Crown Cork & Seal deal, during a Wednesday conversation with Prospect News. This tranche came as €285 million of eight-year senior secured second lien notes (B1/CCC+) and priced at par to yield 10¼%.

Although euro-denominated, the official referred to this particular Crown tranche as an "America-style" deal, and added that investors on the Atlantic Ocean's eastern shores are presently thought to have an appetite for such deals.

"They added the euro tranche to take advantage of the euro demand that seems to be out there," the source said, adding that investors in Europe don't like buying "the implicit subordinated structure."

The sell-sider pointed to Eco-Bat Technology Ltd.'s recent offering of €165 million of 10-year senior guaranteed notes (B1/B+) which priced at par on Jan. 24, to 10 1/8%, in the middle of the 10%-10¼% price talk.

The Eco-Bat notes contained subsidiary guarantees, the source said, which - perhaps owing to preferences on the part of European banks - are uncharacteristic of euro deals.

"I think Crown Cork was able to get a euro deal done because it had subsidiary guarantees," the source commented.

And indeed the headlines seem to bear out the notion that European high-yield investors currently crave such guarantees. In a report on high yield defaults issued last Friday, Standard & Poor's cited the default rate among European high yield issuers during 2002 as 13.48% versus the U.S. rate of 7.24%.

When the new Burns Philp bonds were freed for secondary dealings, they were quoted by a trader as having risen to an offered level of 97, but with no bids seen, from the 94.913 issue price. He said he had not seen any actual trades in the new issue.

Crown Cork & Seal's new bonds, which priced on Tuesday, were seen Wednesday having eased. The 9½% senior secured second lien notes due 2011, which priced at par and then moved slightly below issue on Tuesday, were quoted by a trader as having been offered at 99, with bid levels estimated at 98. The 10 7/8% senior secured third lien notes due 2013, which had moved up to levels as high as 101 bid Tuesday from their par issue price, eased to 99.5 bid/ par offered.

Back among the established bonds, market participants said that activity was restrained. "I don't see very much moving today at all," one market-watcher declared.

But the energy sector showed weakness. El Paso's 7 7/8% notes due 2012 were seen having fallen to 60 bid from prior levels at 64.75; meantime, the San Antonio-based utility and merchant energy operator's shares plummeted to their all-time low, closing down $1.07 (22.67%) to $3.65 on New York Stock Exchange volume of 42.3 million shares, more than four times the usual turnover.

El Paso - wrestling with liquidity concerns that caused it to slash its stock dividend last week; debt worries, particularly because it has a lot of debt maturing this year and next; operational difficulties and federal regulatory scrutiny - on Tuesday had announced that chairman and chief Executive officer William Wise would give up the CEO job as soon as a replacement is chosen and would leave the company and the chairman's post by year-end. Wise's ouster was engineered by dissident shareholder on the company's board of directors. On top of that, Moody's slashed the company's debt ratings by five notches, dropping its senior unsecured notes to Caa2 from Ba2 previously. The ratings agency cited a laundry list of problems, including uncertainty as to whether asset sales will provide sufficient and timely proceeds to help cover its larger-than-expected cash deficit.

El Paso has announced plans to sell $2.9 billion of assets - but news reports cited some investor skepticism that this would be sufficient to make much of a meaningful dent in its $25 billion debt burden.

El Paso's troubles are symptomatic of the funk which the entire power generating and merchant energy sector has found itself in since the collapse of one-time energy trading powerhouse Enron Corp. in the fall of 2001. Since then, the accounting and energy trades of many other companies have come under regulatory scrutiny, heads have rolled in the executive suites of some companies, and efforts have been made to sell or close unproductive businesses. Many of the power generating companies were also into energy trading until the collapse of Enron, combined with a sharp drop in wholesale electricity prices, pulled that whole market down.

Wednesday's Wall Street Journal, for instance, reported that the current electricity glut - caused by overbuilding of new facilities by the power companies during the 1990s - would likely continued through 2005, holding prices and profit margins down. At the same time, the generating companies - which funded their expansion with a borrowing binge - are looking at approximately $20 billion due to be paid off or refinanced this year.

Among the companies which have struggled in this environment has been CMS Energy Corp.; the Dearborn, Mich.-based power producer's 9 7/8% notes due 2007 were quoted more than four points lower on Wednesday, at 82 bid. Its 7 ½% notes due 2009 were meantime seen five points down, at 78 bid.

A trader quoted the bonds of Arlington, Va.-based independent power producer AES Corp. two points lower on the session, pegging its 9 3/8% notes due 2010 at 62 bid/62.5 offered. However, at another desk, AES' 8 3/8% notes due 2007 were seen a point better at 47 bid, while Calpine Corp.'s 8 5/8% notes due 2010 were at 42 bid, down a point.

A trader said that Calpine's bonds "were up a point or two on Tuesday on the news" that the San Jose, Calif.-based power producer had reached deals with its turbine suppliers to restructure its orders so as to trim spending; Calpine will now have the option to cancel up to $3.4 billion in future orders if demand in the depressed electric utility industry does not pick up. However, he said: "They came back down" Wednesday, by half a point to a point.

A different facet of the energy industry is the petroleum refiners, recently strong on increased weather-driven demand for fuel oil, especially in the chilly U.S. northeast, and lower stocks of heating fuel and gasoline. Bonds of the sector have been steadily rising over the last two weeks; on Wednesday Giant Industries' 11% notes due 2012 tacked on another 2½ points to close above 76 bid.

Elsewhere investors continued to savor fast-food restaurateur Yum Brands Inc.'s fourth-quarter earnings results; its 7.45% notes firmed to 107 bid, up two-and-a-half points on the session. A trader commented that "they had decent numbers - but that's still a pretty fat bid."

Louisville, Ky.-based Yum, which operates Pizza Hut, Taco Bell and KFC, said late Monday that it had posted a fourth-quarter profit of $172 million (56 cents a share), up from $164 million (54 cents share) in the year-ago quarter. That beat analysts' expectations by a penny per share.

On the downside, Chiquita Brands International Inc. narrowed its fourth-quarter loss to $26.3 million (66 cents a share) from year-ago deficits of $73.7 million (98 cents a share). But EBITDA from continuing operations slid to $5 million from $18 million a year ago, pushed down by steep price declines in world banana prices.

Cincinnati-based Chiquita's 10.56% notes due 2009 were seen down more than three points, around 103, while its shares got peeled to the tune of $4.29 (30%), to end at $10.01.

Fleming Companies Inc.'s notes seemed to stabilize at lower levels after several sessions of slide killed their earlier rebound from lows hit last week when the Dallas-based wholesale grocery products distributor announced that Fleming and its top customer, the bankrupt Kmart Corp., had terminated their multi-billion-dollar supply pact.

In Wednesday's dealings, Fleming's 10 58% subordinated notes due 2007 were seen unchanged around 31 bid/33 offered, while its 10 1/8% senior notes due 2008 held steady at 64 bid/66 offered.

On the retailing front, a trader saw "good buying interest" in an otherwise dull market for Gap Inc.'s bonds, with its 6.90% notes due 2007 moving up to 100.5 bid and its 8.80% notes due 2008 at 112.5, both up a half.

The prospect of a bidding war for bankrupt Burlington Industries Inc. has pushed the Charlotte, N.C.-based textile maker's bonds up several points, its 7¼% notes due 2005 firming up to 37 bid/39 offered from recent levels around 33 bid.34 offered.

Financier Wilbur Ross sent a letter to the company's board of directors indicating that he and the holders of some $120 million of unsecured claims believe that the $579 million offer by billionaire investor Warren Buffett is inadequate; the offer by Buffet's Berkshire Hathaway would pay the debt holders 35 cents on the dollar for their claims. Ross is making a rival offer for the company. In Wednesday's dealings, the bonds came in slightly from their peak levels, ending quoted offered at 37.5

And American Airlines parent AMR Corp.'s debt was hovering in the mid-to-high 20s, in the wake of Moody's three notch downgrade in the Dallas-based air carrier's debt ratings to Caa2 from B2 earlier in the week. But even as its 9% notes due 2012 languished around 26 bid, 28 offered, a trader pointed out that the bonds were headed in that direction even before the downgrade, which he said was "not a shocker."

The Number-1 U.S. carrier this week asked its unions and other workers for $1.8 billion in annual cost cuts, hoping to avoid making a crash landing in the bankruptcy courts the way rival United Airlines and its corporate parent, UAL Corp. did.

Shares of AMR were down 20 cents (6.21%) Wednesday, to end at $3.02.

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