Levi tinkers with offering; Elan falls on new drug woes; Delphi threatened with junk status

By Paul Deckelman and Paul A. Harris

New York, March 3 - Levi Strauss & Co. was heard by high-yield syndicate sources Friday to be making some alterations to the San Francisco-based apparel maker's planned $550 million bond deal, dropping an add-on note tranche which had been envisioned as part of the deal. That was the big news in an otherwise pretty quiet primary sector, still digesting a pair of $600 million-plus offerings on Thursday for Host Marriott Corp. and Allied Waste Industries Inc.

In the secondary market, Elan Corp. plc - whose bonds had fallen sharply earlier in the week from levels above par on reports of problems with a new multiple sclerosis drug it was jointly developing, including the death of a patient taking it - was heard to be bouncing around at still lower levels on the news that a second patient taking that drug has come down with the same rare and very serious central nervous system disease. Elsewhere, Delphi Corp.'s borderline investment-grade bonds were threatened with junk status by two major ratings agencies as the automotive components manufacturer disclosed accounting problems and announced the resignation of its chief financial officer - the latest body blow to an already reeling automotive supplier sector.

On the heels of the drive-by riddled $1.450 billion Thursday session the primary market caught its breath on Friday.

Hence the week came to an end with just over $2 billion pricing in eight dollar-denominated tranches, up from the previous (four-day) week's $1.65 billion in six dollar-denominated tranches.

The year to March 4 has seen $23.7 billion price in 89 dollar-denominated tranches. Hence 2005 now significantly trails the same time-span in 2004, which saw just under $28 billion in 113 tranches.

IT prices €35 million add-on

Friday's sole transaction came from Milan high fashion brand owner IT Holding Finance SA, which priced a €35 million add-on to its 9 7/8% senior notes due Nov. 15, 2012 (B3/B+) at 100.50.

The deal, which was priced in London, came at the tight end of the 100 to 100.50 price talk.

Merrill Lynch & Co. and Banca IMI ran the books for the debt refinancing deal.

The original €150 million issue priced at 96.645 on Oct. 21, 2004 to yield 10½%, in a transaction that was downsized by €35 million, from €185 million.

$3.75 billion-plus week on tap

Meanwhile the first full week of March 2005 is shaping up to top the Feb. 28 week, as the week beginning March 7 figures to see nearly $3.75 billion of business.

At Friday's close, market sources had heard talk on only one deal on the forward calendar, a restructured two-part senior notes offering from Levi Strauss & Co.

On Friday it was learned that the company has withdrawn a planned add-on tranche from its offering (Caa3/B-), but has left the overall size of the deal unchanged at $550 million equivalent.

The add-on, which was to have tapped the company's 9¾% senior notes due Jan. 15, 2015, was dropped due to the strength of demand for the two tranches of new notes, according to an informed source.

The San Francisco apparel-maker now plans to sell dollar-denominated seven-year non-call-two senior floating-rate notes, which are talked at Libor plus 475 basis points area, and euro-denominated eight-year non-call-four senior fixed-rate notes, talked at the 8¾% area. Tranche sizes remain to be determined.

Pricing is expected on Monday via Banc of America Securities and Citigroup.

Asian deals coming

The March 7 week also figures to see terms emerge on a pair of Asian high-yield deals.

The Hong Kong trading firm Titan Petrochemicals Group Ltd. is in the market with $400 million of seven-year senior unsecured notes (B1/B+) via Morgan Stanley.

Elsewhere commodities trading and shipping firm Noble Group Ltd., also a Hong Kong-listed company, plans to price $500 million of 10-year senior notes (confirmed Ba1/BB+) via JP Morgan.

One source close to the Noble Group deal told Prospect News on Friday that although the roadshow still has a way to run the deal appears to be going well.

"In a market where people are looking for yield I suspect Noble will be okay," said the source. "It's a power manufacturer-turned-petrochemical shipper. And if you have been in the shipping industry during the last year you're doing real well because nobody had capacity in Asia. So the shippers were making a lot of money.

"It will be okay as long as they put enough yield on it."

The source also said that investors from beyond the traditional junk and emerging markets names are looking at the deal.

"Noble is being sold as much to high-grade accounts as it is to high-yield accounts," said the source. "It's Ba1/BB+, and has more of a high-grade covenant package than a high-yield covenant package. The competitors are Bunge and Glencore, both of which are at the bottom rung of investment-grade credits.

"So the high grade guys know the industry."

Big deal coming from DaVita

Going into the week of March 7 the big deal would appear to be from El Segundo, Calif., kidney dialysis services provider DaVita Inc., which is doing a $1.350 billion two-part debt refinancing.

On sale will be $500 million of eight-year non-call-four senior notes (B2/B+) and $850 million of 10-year non-call-five senior subordinated notes (B3/B).

JP Morgan has the books. The roadshow is scheduled to end on March 11.

One deal not on the calendar at Friday's close - and one which could substantially up the week's anticipated issuance - is the Stile Acquisition Corp./Masonite International Corp. $825 million two-part offering that was sidelined by a dispute between management and shareholders.

Heard to have re-entered the market in much the same form that it exited in late February, the acquisition financing features $300 million of eight-year senior floating-rate notes (B3) and $525 million of 10-year senior subordinated notes (Caa1).

Deutsche Bank Securities is in the lead.

One market source told Prospect News that the deal is expected to come during the March 7 week. Other sources, however, said that they had heard no such timing on Stiles/Masonite.

Rate rise may not prompt defaults, says Fridson.

In the March 4 edition of Leverage World, the weekly publication of high-yield strategy, junk bond strategist Martin Fridson said the likely rise in interest rates will not necessarily mean more defaults.

On the face of it, Fridson reasons, investors' fears that rising interest rates will trigger increasing defaults might seem well founded.

"Rising rates adversely affect a key measure of default risk, the fixed-charge coverage ratio, the measure of earnings before interest and taxes divided by interest expense," Fridson writes.

"As corporate borrowers' interest expense goes up in response to rising rates the denominator [interest expense] increases. That alone reduces the fixed-charge ratio, but the numerator [earnings before interest and taxes] may be affected as well. Higher interest rates restrain economic expansion and aggregate demand for goods and services, potentially reducing corporate earnings."

However, Fridson reasons, this seemingly logical scenario tends to be mitigated by several factors.

High-yield companies' interest costs will not rise immediately because they borrow mostly at fixed rates for multi-year periods."

In addition, Leverage World calculated the correlation between interest rates and default rates on a quarterly basis from the fourth quarter of 1987 through the fourth quarter of 2004 and found no statistically significant correlation between the 10-year Treasury rate and the contemporaneous speculative-grade default rate. "When we lagged the default rate by two years, however, we found a 24.8% correlation, which was statistically significant at the 94% confidence level," Fridson added.

"We cannot conclude, simply on the basis of the hypothetical dynamics of interest coverage ratios, that a rise in Treasury rates during 2005 will produce a worrisome escalation in defaults," Fridson asserts, adding that in addition to interest rates, defaults are sensitive to economic conditions, the availability of credit and the quality mix of high-yield new issuance in preceding years.

"Standard & Poor's is in fact predicting a small rise in the default rate this year," writes Fridson.

Elan bounces but weaker

Elan Corp. was "off its lows, but weaker on the day overall," said a trader, who quoted the Irish pharmaceuticals maker's benchmark 7¼% notes due 2008, which had closed Thursday at 92 bid, 93 offered, as having fallen as low as 87.25 bid, 87.75 offered, before coming off those lows to finish at 900.25 bid, 90.75 offered.

He saw its 7¾% notes due 2011, which had closed at 86 bid, 87 offered on Thursday, as having slid as far down as 82 bid, 84 offered, before partly rebounding off those lows to finish at about 85.

Elan's New York Stock Exchange-traded shares, meanwhile, lost 94 cents (14.14%) to finish at $5.71, on volume of some 104 million shares, or 11 times the usual handle, on the latest bad news related to the MS drug Tysabri, which Elan developed jointly with U.S. drugmaker Biogen Idec Inc.

The company's bonds had originally swooned into the lower 90s from levels above par this past Monday on revelations that one patient taking Tysabri had died of had died of progressive multifocal leukoencephalopathy, an apparent complication from the use of the medication, while a second patient had shown symptoms of the usually fatal disease. That caused the two drug makers to voluntarily pull the medication off the market, pending tests to determine whether Tysabri was indeed at fault.

On Friday, Elan and Biogen confirmed that the second Tysabri patient was indeed suffering from the same malady that apparently killed the first.

Both patients were taking Tysabri with Avonex, an older MS drug that Biogen had developed by Biogen Idec, and which is still on the market. The two companies stressed in a joint statement that there is no evidence - yet - that either drug taken on its own was linked to PML.

The drug was being used by about 3,000 MS sufferers in the United States and 22 people in Ireland before its withdrawal from the market. Tysabri was also withdrawn from clinical trials on sufferers of Crohn's disease and rheumatoid arthritis.

Tysabri is Elan's main product, accounting for as much as 90% of its revenues and profits, according to some estimates, and a prolonged - or possibly permanent - absence from the market would deal a severe blow to the company. Not surprisingly, Elan's chief executive, Kelly Martin, insisted earlier in the week that the company was hopeful of reintroducing Tysabri to the market later this year.

Delphi threatened with junk

Elsewhere, Delphi's investment-grade-rated bonds were seen lower after all three major ratings agencies threatened to dump them into junk bond land, after heads rolled in the executive suite at the Troy, Mich.-based supplier of vehicle electronic components amid an internal accounting investigation.

Delphi "was the most active issue in crossover land," a trader said, quoting its 6½% notes due 2009 down a point to 97 bid, 97.5 offered, while its 6½% notes due 2013 lost two points to finish at 90.25 bid, 91.25 offered, and its 7 1/8% notes due 2029 were nearly three points lower at 85.5 bid, 86.5 offered.

The bonds declined after the company announced in a filing with the Securities and Exchange Commission that Alan Dawes had resigned as CFO and was also stepping down as vice chairman and giving up his seat on the company's board. Delphi's chief accountant and controller, Paul Free, also left the company, while John Blahnik, up till now its vice president of treasury, mergers and acquisitions, was demoted.

The executive bloodletting comes in the midst of an internal accounting probe. A special audit committee scrutinizing the company's accounting practices found that Delphi had overstated its cash flow by $200 million in 2000 and overstated its pretax income by about $61 million in 2001. The committee said that investors ought not to rely upon independent auditors' reports for 2001 and subsequent periods because of extent of the problems.

The company plans to restate its earnings by June 30.

Reaction from the ratings agencies was swift.

Standard & Poor's warned that it may cut Delphi's BB+ corporate credit and senior unsecured ratings, saying in its ratings warning that the accounting problems "compound the challenges the company already faces in dealing with a very difficult operating environment in the industry."

S&P noted that Delphi has total debt of about $4 billion and underfunded benefit liabilities of about $13 billion.

Earlier in the day, Moody's Investors Service expressed similar concerns in threatening to downgrade Delphi's Baa3 senior unsecured rating, as well as its Prime-3 short-term rating.

And Fitch Ratings actually did cut the company's senior unsecured rating to junk, lowering it one notch to BB+ from BBB- previously. The ratings agency also warned that it might cut the company's ratings still further.

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