Terra set to price 1st new deal in nearly a month; airlines rise

By Paul A. Harris and Peter Heap

New York, Oct. 2 - The high yield market prepared Tuesday for a major test of the extent to which confidence has returned after the terrorist attacks on Sept. 11. Terra Capital Inc. is set to price $200 million of senior secured notes at late morning Wednesday, the first new deal in almost a month. But junk players saw another widely anticipated offering, a total of $2 billion in various currencies and structures from Calpine Corp. snatched away from them as Moody's Investors Service raised the company to investment-grade. In the secondary, airlines snapped back as investors responded to positive news from the companies and the appealing values on offer.

Terra's offering will, if completed according to plan, break a four-week lull in issuance as the end of summer and then the World Trade Center tragedy shut down new deal activity. The last junk sales were on Sept. 6 when United States Steel LLC and Iron Mountain Inc. sold offering.

Talk emerged Tuesday on Terra's offering of $200 million of senior secured notes due 2008 (B3/BB-) putting them in the area of 12½%, one informed source told Prospect News. Pricing is expected late Wednesday morning.

One high yield trader said the market will be watching the Sioux City, Iowa-based agrichemical company's sale with bated breath - and not just because it's the only game in town.

"I think Terra should still be okay," the trader said, pointing out that other recent deals - including Sweetheart Cup Co.'s $275 million senior notes postponed Monday until mid-October and EEX Corp.'s $350 million senior unsecured notes, which was pulled Monday pending better market conditions - succumbed to stagefright just as the lights appeared to be coming up.

"Our market's not in such bad shape that nothing can be done," the trader said, "but I think there are going to be much fewer announcements," he added, again alluding to the Sweetheart and EEX deals.

"Certainly underwriters are going to be much less willing to make announcements when they ultimately have to pull a deal. Nobody likes doing that. People are going to try to get priced. And there are some guys out there who need financing, and will have to take whatever rate they can get."

Another trader said he would be watching the Terra deal to find out the real level of demand from investors. With the Federal Reserve cutting interest rates to levels not seen since the early 1960s, the environment has the potential to be appealing for companies to raise money.

But, he added, the question is: "Is the market able to price those deals? It's going to be interesting to see how much demand is really out there for paper. It's going to be an interesting couple of weeks and months going forward."

Also in Tuesday's primary market American Restaurant Group, Inc. announced a deal for $30 million senior secured notes due 2006, via Jefferies, with proceeds to refinance its existing debt and for general corporate purposes. Shortly after the Los Altos, Calif. restaurant company announce the offering, Moody's assigned a rating of B2.

As has been the case for nearly 10 days, much of the talk, Tuesday, concerned the Calpine $2 billion deal, originally rumored to involve substantial high yield issuance, but now upgraded to an investment-grade credit by Moody's.

Off in the wings, meanwhile, Luscar Coal Ltd's $250 million senior notes due 2011 (Ba3/BB), non-callable for five years, via Goldman Sachs, appears set to price, Friday. The proceeds are to refinance the Edmonton, Alberta coal producer's existing debt.

The market is still waiting for more information on Alaris Medical Systems Inc.'s plans to sell approximately $150 million senior secured notes due 2006. One source said there could be more information later this week on the offering with pricing possible mid-October or sooner "if that window should open." Part of the financing is set to replace the existing bank credit facility of the San Diego-based medical equipment and supplies company.

In the secondary, there was little reaction to the Federal Open Market Committee's decision to cut interest rates 50 basis points.

One trader said he didn't see Calpine Corp. trading "too actively" after its upgrade from Moody's Investors Service - and added that he wouldn't be seeing it at all in future. Like most shops, his firm handles 5B credits - like the newly upgraded Calpine - off its high-grade desk.

"The investment-grade guys were excited," he added. "It's the first name in a long time to go in their direction."

With credit quality deteriorating and some high-profile meltdowns such as Lucent Technologies Inc. and Xerox Corp., virtually all the movement between the two desks for many months has been in favor of the high-yield traders.

Another trader added that Calpine was about 55 basis points better, with the name now being quoted on a spread basis, as is usual for investment-grade names.

Elsewhere, the airline sector rebounded as the recent tide of negative news from the carriers turned more positive, prompting investors to look at the high yields on offer and some traders to suggest the previous drop had been overdone.

"If you believe they are going to make it through, they are looking really good," one trader said, although he added that the securities are not likely to return to their levels before the terrorist attacks on Sept. 11.

Better quality names snapped back two to three points during the day, he added. For example, he saw Delta Airlines 7.70% notes due 2005 rise to 88 bid, 90 offer by Tuesday's close from 86 bid, 88 offer late Monday and early Tuesday. United Airlines 9s of 2003 gained three to 88 bid, 90 offer from 85 bid, 87 offer previously.

"People believe that the better quality airlines will weather the storm" even if they have to slim down considerably to make it through, the trader commented. "They got oversold and there's value at those levels."

Other traders saw similar gains, and added Continental Airlines and America West to the list of rising names.

Whether the climb is a one-day phenomenon or the start of something more lasting is not, however, clear, the first trader said.

"This market is still very volatile," he noted. "Any indication in either direction, the market seems to move dramatically in that direction."

Low dealer inventory could be exacerbating the problem, he suggested.

The airlines were not the only bonds moving up. Traders mentioned several other credits that gained on the session, a marked change from the last several weeks when there has been pretty much nothing but bad news and falling prices.

Among the biggest movers was Metromedia Fiber Network, Inc. Its 10s of 2009 gained seven points to 19 from 12 previously after the company announced it had finally closed on $611 million of new financing after multiple delays and extensions. New financing was essential to the company's prospects; it had previously warned that it would have to file for Chapter 11 protection if it was unable to close on the extra capital. At the same time the New York-based fiber optic network company reduced its revenue expectations for 2001 but said it expects to be EBITDA (earnings before interest, taxation, depreciation and amortization) positive next year, a year earlier than previously.

Also gaining was B/E Aerospace, Inc. after it announced a cockpit security system late Monday. The company's 9 1/2s rose to 74 after trading at 67 last week, one trader said. He also saw the company's 8 7/8s up three to four points at 67.5.

Although there was no official announcement, he also saw Alaska Communications Holdings rising to 88 from 84 late Monday. The trader suggested the debt might have gained on takeover rumors although there was no confirmation that anything was happening. In parallel with the gain in the bonds, Alaska Communications' stock rose 82 cents to $7.82 Tuesday.

The trader also saw Bethlehem Steel three to four points stronger with its 10 3/8% notes up even more to 37 bid from 30 bid. Early in the session, the steelmaker said it had nearly all the commitments it needs for a new $750 million credit facility and that it had sold a short-line railroad for $33.5 million.

However another trader saw no price movement in the company's bonds and had the 10 3/8s unchanged at 28 bid, 32 offer.

Even the newly bankrupt Federal-Mogul Corp. managed to climb. After falling to 6.5 bid from 9 bid on Monday after the company filed for Chapter 11 protection, the debt was seen by one trader rebounding to 9 Tuesday.

Bad news from Moody's Investors Service on United Pan-Europe failed to shake its debt, although traders feel they have gone about as low as they can go anyway. Moody's downgraded the debt to Caa3 from Caa1 and said it sees a restructuring as a "strong possibility" and believes it would cause "considerable losses" to bondholders given the large amount of debt that is now senior to their claims.

But the company's bonds were unchanged on the day at 14 for the coupon securities and 6½ for the zeroes.

End

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