Georgia-Pacific eases on guidance, asbestos concerns; Houghton Mifflin, Premcor ready deals

By Paul Deckelman and Paul A. Harris

New York, Jan. 13. - Georgia-Pacific Corp.'s bonds were quoted lower Monday after the world's second-largest paper and lumber company warned that it is likely to do no better than break even in its operating results for the fourth quarter - and said it would take a large asbestos-related charge. On the upside, bonds of Elan Corp. were quoted firmer on news the company was buying back some of its debt at a discount.

In the primary market, timing and other details emerged on a pair of two-part deals that amount to over $1 billion of high-yield new issuance, as sources advised Prospect News that underwriters and investors have begun to train their ears into the distance, listening for the drums of war.

Boston publisher Houghton Mifflin will begin its roadshow on Wednesday for a $650 million two-part Rule 144A offering of notes. The deal is comprised of $250 million of eight-year-non-call-four senior notes and $400 million of 10-year-non-call-five senior subordinated notes.

Goldman Sachs & Co., CIBC World Markets and Deutsche Bank Securities Inc. are joint bookrunners on Houghton Mifflin's deal, which is expected to price on Jan. 24.

Prospect News also learned of a roadshow start set for Tuesday, for Premcor Refining Group Inc.'s two-part offering of $400 million senior notes. Tranche sizes remain to be determined, according to a syndicate source, who added that the Rule 144A notes will have seven-non-call-three- and 10-non-call-five-year structures. Credit Suisse First Boston is running the books on the Connecticut-headquartered refiner's deal which could price late in the week of Jan. 20 or early in the week of Jan. 27.

One sell-side source told Prospect News on Monday that specifically where Premcor is concerned but also with the market in general the probability of a U.S. war with Iraq beginning during the early part of 2003 is starting to become a factor.

"Investors don't seem to have panicked yet," the source said, "but you certainly see [the timing of a possible war factored into deals] in the energy sector, even if it's not specifically oil and gas.

"Everybody's concerned specifically with Saddam, but also in the U.S., if we go to war, what Bush's policies are going to be on oil and reserves and so forth."

Another sell-side source on Monday said that "underwriters, providers of finance and issuers" are very aware of the volatility that the geopolitical situation places on financial markets.

"I think the calendar is going to continue to build substantially," this official said. "As the geopolitical situation continues to be volatile I think issuers are going to take advantage of times when there is cash and will go out and raise financing, whether it's for acquisitions or refinancings."

This source added anticipated that high yield could see "around $4 billion" of new issuance in the next four to six weeks.

Prospect News also touched base Monday with a sell-side official in the emerging markets who said that at present there are no emerging markets corporates on the road, nor had any recently priced. The source said that emerging markets did $4.25 billion last week, all sovereigns (Mexico, Chile, Turkey and the Philippines), and added that all the deals were well-oversubscribed.

Regarding the dearth of emerging markets corporates the source explained: "Most of the corporates that can issue in our market can issue more cheaply in their local capital markets and in the commercial loan market, which is the way it should be.

"In our market there are the haves and the have-nots, as far as corporates are concerned. A lot of the corporates that had issued in our market tend to be the more highly-leveraged guys, and a lot of them - even in countries that are doing well, like Mexico - have hit the skids. And that of course has not helped the rest of the corporate market.

"And with the blue chip names, unless they're doing a big transaction and really need a lot of money, they don't need the international bond market."

Asked what impact the likelihood of war is registering in the emerging markets asset class, the source said: "I think it's having an impact. Obviously everybody's thinking about it, but it goes two ways. On the one hand we have a lot of oil producing countries. So if you're Mexico, and you're far away from the volatility, it's not necessarily as bad a thing. If you're Turkey it obviously has a greater impact. But if you're going to have a war it probably means the United States is going to make sure the International Monetary Fund keeps throwing money at you.

"So I think it's having a bigger impact on the timing of supply, because I think a lot of issuers are rushing to get into the market in January because they are concerned about the impact of a war on the market. The same thing has happened in the high-grade market.

"If you have to issue, and you have a fairly strong market backdrop you might as well get out there and do it."

After Monday's close, Lafayette, Calif. lawn, garden and pets products marketer and producer Central Garden & Pet Co. disclosed in a press release that it will bring $150 million of 10-year senior subordinated notes, in a Rule 144A deal the proceeds of which it will use to redeem its outstanding convertibles and pay down its credit facilities. No timing or underwriters were disclosed.

Back in the secondary arena, Georgia-Pacific's 8 1/8% notes due 2011 were quoted down two points at around 96 bid, after the Atlanta-based forest products concern said that it would report "disappointing" numbers when it releases its fourth-quarter and year-end results next Tuesday (Jan. 21).

Blaming higher costs and market conditions at its building-products and consumer-products businesses, the company projected that it would about break even from continuing operations - well down from the 22 cents per share that Wall Street has been expecting.

And Georgia-Pacific - which took a $350 million charge for asbestos-related expenses in the year-earlier quarter, said it would take another $315 million in charges related to its asbestos liability in the most recent fourth quarter, due to higher-than-anticipated asbestos-related costs, and would add another year to its projected payout schedule for those costs, stretching them out to 2012 . That charge will cause the company to show a net loss for the quarter, although Georgia Pacific said that it expects to remain in compliance with its existing debt covenants after recording this charge.

Standard & Poor's said that Georgia-Pacific's announcement that its fourth quarter earnings from continuing operations before unusual items will be approximately breakeven was expected. The ratings agency - which rates the company's corporate credit at BB+ with a negative outlook - noted that the company's projection of potential liability "still seems manageable with insurance expected to cover a portion of Georgia-Pacific's costs for a number of years. However, S&P cautioned, "if asbestos-related payments continue to escalate, or if asbestos liabilities hamper Georgia-Pacific's access to capital for debt refinancing, ratings could be lowered."

Although the company's ratings were lowered to junk bond status last year (Moody's Investors Service cut its senior unsecured bond rating to Ba1 last May), traders said that Georgia-Pacific's bonds are not seen that much in the junk pits, with most dealings still conducted off the high-grade desks or, in some cases, crossover specialists.

Georgia-Pacific shares were off $1.38 (7.68%) at $16.58.

Georgia-Pacific was not the only high-yield-rated company continuing to have problems related to asbestos lawsuit liability issues on Monday; Congoleum Corp. - whose bonds were cut to Ca, just a step above default, by Moody's in December - said Monday that it planned to file for bankruptcy after concluding a settlement of the asbestos claims pending against the company.

No quotes were immediately seen on the Mercerville, N.J.-based floorcovering maker's 8 5/8% notes due 2008.

A number of other high-yield issuers have been driven into the bankruptcy courts over the past year or so, under a barrage of asbestos related claims, including such company's as floorcovering maker Armstrong World Industries, auto parts maker Federal-Mogul Corp., insulation manufacturer Owens Corning, chemical producer W.R. Grace & Co. and metals maker Kaiser Aluminum.

Elsewhere, Irish pharmaceuticals maker Elan Corp. was reported by the [Dublin] Sunday Tribune to have bought $400 million face amount of its bonds at a discount of as much as 25% of their face value.

That caused its shares to jump 81 cents (24.70%) in Monday's New York Stock Exchange trading, to $4.09, on volume of 16.5 million shares - five times the norm.

"I understand its bonds were up quite a bit," a trader said, quoting the company's 7¼% notes due 2008 at 63 bid/65 offered, up four points from where those securities had been trading at mid-week last week.

At another desk, a trader said "it's obvious these bonds were up with the news," which Elan refused to confirm. The paper said the redemption of the bonds had quietly started last month.

He saw the company's zero-coupon convertible notes, which are putable this coming December, as having moved up a point and a half from prior levels around 51.5 bid/52.5 offered, but said he did not know whether any other bonds might be involved in the buyback.

"It's obvious that they're trying to restructure because of the pressure of the issue," he added. Elan is hoping to cut $1 billion of debt by year-end.

But market participants meanwhile saw no change in the bonds of Old Greenwich, Conn.-based energy refiner Premcor, which said Friday in a Securities and Exchange Commission filing that it planned to sell $251 million of new stock and $400 million of new bonds, with a portion of the proceeds to be used to redeem its $42.4 million of 11½% senior subordinated debentures due 2009, as well as $240 million of floating-rate notes due this year and next year.

A market source quoted Premcor's 8 3/8% notes due 2007 at 98, unchanged, and said they had been there for more than a week.

A trader said that "there's a whole lotta [stuff] there - the dust [on the Premcor business] hasn't really settled."

Generally, the trader said "it was a pretty strong market today," continuing the trend seen in the previous week when the participants, flush with ample liquidity and a desire to put that money to work, pushed prices on may sectors up to start out the new year.

He saw Charter Communications Holdings LLC's debt "up a good point on the session," with its benchmark 8 5/8% notes at 52 bid. One issue which he said "seemed to rally" was Pegasus Communications, whose 12½% notes had pushed up to 68.5 bid from around 63 late last week.

He saw another satellite TV broadcaster, EchoStar DBS's 9 3/8% notes having pushed as high as 107 bid.

But another trader called Monday's market "very quiet," joking that some participants were already acting as though it was Martin Luther King Day, even though that holiday was still a week away (The Bond Market Association has recommended a 2 p.m. ET close this coming Friday, Jan. 17, and a full close for the U.S. debt markets next Monday, Jan. 20).

He saw little activity beyond some weakness in Calpine Corp.'s bonds, with the San Jose, Calif.-based independent power producer's 8½% notes due 2011 easing to 51 bid/52 offered from prior levels around 52.5 bid/53.5 offered and its 9 3/8% notes due 2010, which backpedaled to 63 bid/64 offered, down two points from last week.

At another desk, Calpine's 8 5/8% notes due 2010 were pegged at 50 bid, down more than two points, while CMS Energy Corp.'s 7½% notes due 2009 lost a 1¼ points to end at 90 bid.

The bonds of Arlington, Va.-based independent power producer AES Corp. were likewise down two points, its 10¼% notes due 2006 dipping to 52 bid.

The whole utility/merchant energy sector seemed unchanged to somewhat heavier, as Duke Energy warned that its earnings for 2002 will fall short of earlier projections following a slump in power prices, and said that this year's profits would also be curbed.

The Charlotte, N.C.-based utility said that its 2002 earnings would likely come in somewhere in the $1.85-to-$1.95 per share range before special items, off a dime from its previous guidance. Including special items, like a 65 cent per share charge related to repair costs from ice-storm damage, net could sink to as low as $1.20 per share.

And it said 2003 earnings would likely be even worse, in the $1.35-to-$1.60 per share range before an accounting change - well down from the $1.84 Wall Street analysts' consensus. Duke will report its earnings on Jan. 28.

Duke's 6¼% notes due 2012 were quoted having eased to about 103.375 bid from prior levels around 104.75. Its NYSE shares plunged $3.13 (14.90%) to $17.87 on volume of 31.4 million, seven times the usual turnover.

Duke's warning was only the latest in a series of setbacks for the utilities, which are still trying to recover from the collapse of Enron Corp. more than a year-ago, which brought the whole sector under increased regulatory and investor scrutiny, compounded by a slide in wholesale electricity prices. On Friday, another major player, Mirant Corp., had issued similarly pessimistic projections.

And there was no further rise in the bonds of Allegheny Energy Inc,, whose 8¼% notes due 2012 had firmed seven points, to the 82 bid level, on news reports that the Hagerstown, Md. energy producer had reached broad agreement on a deal with its bank and bond creditors to give the company a $470 million cash injection and keep it out of possible bankruptcy.

No further movement toward finalizing such an arrangement was reported Monday, and market players said the bonds weren't seen trading around.

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