MGM sells upsized two-parter; GM steady, Delphi up on employee buyout plan

By Paul Deckelman and Paul A. Harris

New York, March 22 - MGM Mirage's quickly marketed and opportunistically priced two-part senior note offering proved to be anything but a desert-inspired optical illusion Wednesday, generating enough buyer interest to warrant upsizing when the deal was priced; the larger of the two tranches was then seen to have moved solidly higher in aftermarket dealings, while the other tranche at least held its own.

The new-deal market also saw a small add-on offering from a unit of Eschelon Telecom Inc. upsized and priced.

In the secondary market, there was big news from General Motors Corp. and its bankrupt former subsidiary Delphi Corp., which reached agreement with the United Auto Workers union on a plan that could help Delphi shed some of its heavy labor costs by shifting part of the burden to its former corporate parent - which will pay the cost of buying out a good portion of the Delphi work force and which will absorb some other Delphi employees. GM will also offer buyouts to many of its own employees. GM's bonds, and Delphi's, initially strengthened on the news, which had been expected by many in the market for some days - but then they came off those highs, with GM seen ending little changed, and Delphi up only modestly.

Elan Corp. plc's bonds were seen easier on the news that the Food and Drug Administration will need some more time to develop a safety protocol for the Irish pharmaceutical company's multiple sclerosis drug Tysabri, which has been off the market for over a year after having been linked to several unexpected patient deaths.

Also on the downside, Fairfax Financial Holdings Ltd.'s bonds were lower on the news that the Toronto-based insurance company and its chief executive officer had received subpoenas from the Securities and Exchange Commission, which is investigating statements made during the company's recent earnings conference call.

A sell-side official said that the mid-week session saw the high-yield market "still pretty quiet, but up a tick," and added that equities had a good day.

MGM Mirage playing to the "sweet spot"

With junk bond watchers roundabout proclaiming the primary market to be open for drive-by action from on-the-run names with double-B credit ratings on both sides of the slash, Las Vegas casino and hospitality firm MGM Mirage decided to roll the dice on Wednesday.

The company priced an upsized $750 million two-part senior notes deal (Ba2/BB) that was led by Banc of America Securities, Deutsche Bank Securities, JP Morgan and Merrill Lynch.

MGM Mirage priced a $500 million issue of seven-year notes at par to yield 6¾% and a $250 million issue of 10-year notes at par to yield 6 7/8%.

The combined transaction was upsized from $600 million. Both issues priced on top of price talk and traded up in the secondary, sources said.

One informed source said that the deal was "right in investors' sweet spot," adding that MGM Mirage is a "liquid name, double B" credit.

Earlier in the day sources told Prospect News that MGM Mirage - then marketing a combined $600 million - intended to price a minimum of $250 million in either tranche.

Hence the size of the 10-year tranche came exactly at the minimum while the seven-year tranche was double the minimum.

The informed source conceded that the demand for the shorter maturity paper had been more intense and reasoned that the spread between the two bonds is only 12.5 basis points, noting: "You give up an eighth but take out three years."

Eschelon upsizes add-on

Also pricing Wednesday was Eschelon's upsized $48 million add-on to its 8 3/8% senior second secured notes due March 15, 2010 (B3/B-).

The tap came at a dollar price of 95.00, on top of talk, resulting in a 9.343% yield to worst and a 9.929% yield to maturity.

The sale generated $45.6 million of proceeds.

Jefferies & Co. ran the books for the deal, which was upsized from $35 million.

The original $100 million issue priced at 84.813 on March 10, 2004 to yield 12%. A $65 million add-on priced on Nov. 19, 2004 at 79.0 resulting in 14.132% yield to worst.

Hence Eschelon walked away from Wednesday's transaction with a substantial savings in interest relative to both of the previous transactions.

Wood Resources hits the road

Joining the raft of off-the-run names now winding their ways along the high-yield investor roadshow circuit was Wood Resources LLC.

The Greenwich, Conn., plywood producer started marketing its $75 million offering of seven-year senior secured floating-rate notes via Jefferies.

Elsewhere Mobile Satellite Ventures talked its $300 million offering of seven-year senior secured discount notes at a yield of 13¾% to 14%.

The deal, which is being led by Merrill Lynch & Co. and Morgan Stanley, is expected to price on Thursday.

MGM Mirage strong in trading

When the new MGM Mirage 6¾% notes due 2013 were freed for secondary dealings, a trader saw the bonds firm to 101.25 bid, 101.5 offered from their par issue price earlier in the session.

The trader also saw the company's new 6 7/8% notes due 2016 little changed from their par issue price, at par bid, 100.5 offered.

Market participants did not see any secondary dealings in the Eschelon Operating add-on offering of 8 3/8% notes due 2010, which had priced at 95.

GM, Delphi up, GM slips back

Back among the established issues, GM's bonds, and Delphi's initially firmed on the news that the world's largest automaker and its former subsidiary, Delphi - still its single biggest parts supplier - had jointly announced their agreement on offering buyouts to many Delphi and GM workers. That agreement was reached with the UAW, which represents most of Delphi's 34,000 unionized hourly workers and most of GM's more than 100,000 hourly employees.

The two companies are also in the process of negotiating similar deals with smaller unions who represent part of their respective work forces.

Under the terms of the sweeping agreement, Delphi will offer early retirement to some 13,000 workers, with lump-sum payments of up to $35,000 as inducement to leave the company. GM will fund those lump-sum payments, and will also take up to an additional 5,000 Delphi workers, who will be allowed to "flow back", or transfer back to GM, which will assume some post-retirement benefits for those Delphi employees who go back to work for GM.

GM will meantime offer its own UAW-represented workers early retirement, with payouts of between $35,000 and $140,000, depending on an employee's length of service, as an inducement.

A trader said that GM's bonds traded up in the early going, with the benchmark 8 3/8% notes due 2033 firming to 76 bid from Tuesday's closing levels around 74 bid, 75 offered, "but then [people in the market] decided they didn't care for the news," and the bonds came back down to close around the same 74 bid, 75 offered level at which they had started.

He saw Delphi's bonds, all trading on top of one another, as having improved a point on the day to 66 bid, 68 offered.

At another desk, a trader saw the GM bonds improved by perhaps ¼ point on the session at the most, at 74.25 bid, 74.75 offered, and saw Delphi registering a one-point gain at 66.5 bid, 67.5 offered.

Yet another trader actually saw the GM bonds losing a point when all was said and done, seeing the 8 3/8s opening at 75 bid, trading up a point but then falling back to end down a point at 74 bid, 75 offered.

Delphi's long bonds, the 7 1/8% notes due 2029, "traded up a couple of points," to peak levels at 69 bid, 70 offered, the trader said, but then dropped back to close at 67 bid, 68 offered, which at that desk was considered to be unchanged.

Delphi's shorter paper, like the 6.55% notes slated to mature this year, were seen to have gotten as good as 68 bid, 69 offered, but also ended unchanged at 65 bid, 66 offered.

Another trader, who also saw GM a loser on the day, explained that he had seen "right out of the gate, there was a little bit of selling on the news," because over the previous session or so the bonds of both companies "had moved up on speculation that something was going to get done."

He saw the GM 8 3/8s as good as 75.75 bid, 76.75 offered early in the morning, but then "they slowly faded and drifted down to where they are now," at 74 bid, 74.5 offered, which he called a 1½ point loss on the day in response to the news.

Delphi's '06s were as good as 67.75 bid early on, "but then that bid got popped and they did the same kind of move - roll over and play dead - that GM did," ending pretty much unchanged around 66 bid, 67 offered.

The trader noted that Moody's Investors Service said it was continuing to eye GM for yet another downgrade.

"The accelerated attrition agreement is viewed [by Moody's and others in the market] as constructive," he said - "but it's not going to contribute much in the way of savings, obviously this year," with GM's already strained finances having to absorb the cost of Delphi's employee buyouts and its own. "Moody's said that down the road it's going to help - but this is one piece in a huge puzzle that they have to put together.

"At the end of the day it quantifies what they [GM] are on the hook for with Delphi. Down the road it can potentially save them money," but for now, the actual cash benefits won't be immediately seen, he said.

Delphi, which was spun off by GM in 1999, has long complained that its labor costs are way too high for a parts-supplier company, since it inherited the kind of contracts that carmaker GM was paying.

After filing for Chapter 11 protection from its junk bond holders and other creditors in early October, Delphi began insisting that GM and the UAW give it some breathing room on its labor costs, which it estimates at $75 per hour in wages and benefits. It has several times threatened to ask the bankruptcy court to allow it to junk the current union contracts, but has each time relented and extended the deadline by which it said it had to have an agreement so the three parties can keep talking. Currently, they are running against a March 31 deadline. Should that deadline pass without extension and Delphi go to court and try to void the contracts, its various unions have threatened a strike. That's a scenario GM wants to avoid at all costs, since a strike shutting down Delphi would badly disrupt the steady flow of parts it needs from the company to keep its own assembly lines operating.

A spokesman for Delphi confirmed for Prospect News that the Troy, Mich.-based automotive electronics manufacturer might be able to shed more than half of its 34,000 hourly employees under the new deal - 13,000 through the buyouts and up to 5,000 going back to GM - and he added that further headcount reductions could come about if Delphi negotiates similar buyout deals with the International Union of Electronic Workers and the United Steel Workers union. "The big bang was today - but there's still a decent chunk left," of about 9,000 to 10,000 employees, "that we still have to have some discussions on."

Over at GM, which also seeks to cut its labor costs by cutting headcount, and which has already outlined plans for reducing its hourly work force by about 30,000 by the end of 2008, a company spokesman, Dan Flores, said that the carmaker was offering all of its nearly 100,000 UAW-represented workers the buyout option - which could unexpectedly leave the carmaker in a pickle if too many of its rank-and-file decided workforce to take the company up on its offer.

"Theoretically, every GM UAW hourly employee is eligible for some portion of this program - but certainly, we do not expect or even anticipate that anything close to all of our employees would participate in the program," the spokesman said.

In the unlikely event that "there's a plant where there's heavy participation and there's an issue of manpower shortage, there are provisions within this agreement that will allow us to handle it."

He said that "we certainly hope this program allows us to take a big step toward reaching that [30,000] number - but we don't have a target number that we're working toward or how many people we think will take the [buyout] program."

With no idea at this point how many employees will take advantage of the buyout - and what percentage may be older, more senior workers who would get the bigger lump-sum payments - GM is for now making no estimate at what the buyout plan might cost, or how much the buyouts may save the company over time.

Elsewhere in the automotive sector, bonds of GM's financing arm, General Motors Acceptance Corp., were unchanged on the day, in line with the lack of real price movement in the parents' bonds. GMAC's 8% notes due 2031 were being quoted at 92.25 bid, 93.25 offered.

Ford steady

A trader saw GM arch-rival Ford Motor Co.'s benchmark 7.45% notes due 2031 little changed at 74 bid, 74.5 offered, and saw the latter's Ford Motor Credit Co. financing subsidiary's 7% notes due 2013 at 88.5 bid, 89 offered, up ¼ point on the day.

Dana soars after results

The big winner among the auto-related names Wednesday was Dana Corp., whose bonds jumped several points, resuming an upside ride that began with the Toledo, Ohio-based components maker's March 3 Chapter 11 filing and continued for almost two weeks after that, before stalling out of the previous several sessions.

But Dana was back with a vengeance Wednesday, a trader seeing its 6½% notes due 2008 pushing all the way up to 82.5 bid, 83.5 offered from 79 bid, 81 offered. He saw the company's other bonds also having firmed smartly, with its 6½% notes due 2009 at 82 bid, 83 offered, its 10 1/8% notes due 2010 at 82 bid, 84 offered, its 5.85% notes due 2015 at 78 bid, 80 offered, and its 7% notes due 2028 and 2029 at 79 bid, 81 offered, all up more than two points on the day across the board.

Another trader, who saw the 2009 bonds at 81.25 bid, 82.25 offered, noted that he had seen those bonds go home Tuesday at 78.5 bid, 80.5 offered. He called their rise Wednesday "incredible," saying that they had firmed to about 80 bid, 81 offered by lunchtime, and then continued to gain until trading was done.

"They didn't do 'the GM flop', going up and then coming back down. They just went up and stayed there."

Since its bankruptcy filing, Dana bonds have firmed some 15 to 20 points across the board from pre-filing levels in the low-to-mid 60s. Some of the rise is attributable to technical factors - a demand for Dana bonds to satisfy settlement requirements on some credit default swaps contracts on Dana debt that holders bought to protect themselves against the possibility of a default - while some in the market have opined that Dana has a lot of assets whose liquidation, if need be, would assure its bondholders of getting a substantial recovery.

During Wednesday's session, Dana released preliminary 2005 fourth-quarter and full-year results. The company said that sales for the latest were $2.046 billion, up from $1.988 billion during the same period in 2004. The company expects to report a net loss of $376 million for the quarter, including a loss from continuing operations of $231 million - wider than the net loss of $136 million in the fourth quarter of 2004, which included a loss from continuing operations of $72 million. The loss more than doubled from a year ago on restructuring costs, the company said.

Dana also said that it will not file its annual report with the SEC by the extended deadline of March 31, but now expects to file the report by April 30.

Dana further declared that it will focus on growing its four core businesses, and expects a net new business increase of at least $900 million by 2008.

Elan weak on Tysabri delay

On the downside Wednesday, Elan's bonds were seen lower in the wake of the announcement by the drugmaker and its partner, Biogen Idec Inc., that the FDA will be taking an additional three months to study the risk-management strategy proposed ensuring the safety of patients taking the companies' jointly-developed MS drug Tysabri.

A trader saw Elan's 7¾% notes due 2011 at 95.25 bid, 96.25 offered, and its 7¼% notes due 2008 at 99 bid, par offered, each down a point.

Another trader saw the '11s down ¾ point on the day and the '08s half a point lower, around the same levels.

There had been some speculation that the FDA might act by month's end to allow Tysabri back on the market, especially since members of a 12-person advisory panel unanimously recommended such a course. But now the decision is anticipated by late June.

Elan, which has been counting heavily on the success of Tysabri, and the more diversified Biogen Idec, began selling the drug as a remedy for multiple sclerosis in late 2004 - but pulled it from pharmacy shelves in February 2005 after the drug was linked to occurrences of a rare brain condition, progressive multifocal leukoencephalopathy, or PML, as a side effect in several patients who had taken it. Two of the patients died. The FDA began reviewing Tysabri's safety, but the advisory panel said that despite potential risks, Tysabri should be available as an option for MS sufferers who can't find relief with current medicines.

The companies hope to get it back on the market this year with appropriate safeguards, including prominent warning labels indicating that some patients might be susceptible to PML, limited closely supervised distribution, and quick testing and follow up in potential PML cases to catch the side effect quickly and deal with it before the patient suffers harm.

Fairfax drops on SEC move

A trader saw Fairfax Financial's 7¾% notes due 2012 at 88.5 bid, 89.5 offered, down 2¾ points on the day. Its New York Stock Exchange-traded shares slid $16.97 (12.96%) to close at $113.93, on volume of 908,000, some 13 times the norm. The company said that it had received a subpoena from the SEC in connection with an answer given to a question on the company's Feb. 10 investor conference call involving Fairfax's finite insurance contracts. The company's CEO, Prem Watsa, its independent auditors and a shareholder have also received SEC subpoenas.

Federal regulators have been looking into Fairfax's non-traditional insurance activities or reinsurance product transactions since last fall. Fairfax said it is cooperating with the SEC and the Justice Department.

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