Tower Auto bonds sharply lower on bigger loss warning; AirGate price talk emerges

By Paul Deckelman and Paul A. Harris

New York, Oct. 5 - Tower Automotive Inc. bonds skidded lower Tuesday after the Novi, Mich.-based maker of auto structures, assemblies and components warned on Tuesday that it will lose more money in the third quarter than previously expected. Other automotive names were also seen easier, though none as dramatically as Tower.

On the new-deal front, American Seafoods Corp. was heard by primaryside players to have finally pulled up its nets and sailed for home without reeling in the $450 million that the Seattle-based fish processing company had hoped to catch with an offer of income deposit securities, which was heard to have been pulled. And price talk emerged on AirGate PCS Inc.'s upcoming offering of seven-year notes.

Secondary market traders saw the 12% notes due 2013 issued by R.J. Tower Corp., a unit of Tower Automotive, trading as low as 74 bid, 75 offered, down from prior levels around 81, following the parent company's loss warning, which Tower blamed on lower domestic vehicle production volumes, continued escalation of steel costs and, to a lesser extent, higher launch costs on new business.

Tower said that it expects to report a third-quarter net loss of between $22.5 million and $25 million, or 39 to 43 cents per diluted share. This compares to previous guidance for the quarter of a net loss of between $10.4 million and $12.8 million, or 18 to 22 cents per share. The net loss and diluted loss per share estimates exclude restructuring charges and certain non-recurring, non-cash charges.

The company also said that revenues have softened for the quarter to a range of $710 million to $720 million, versus previous guidance of between $725 million and $735 million. Liquidity as of Sept. 30, 2004, is expected to be in excess of $115 million.

Tower Automotive will give guidance for the fourth-quarter 2004 in connection with the third-quarter 2004 earnings release.

Tower's warning of a larger than-previously expected loss is the latest shell to shock the automotive components sector. Just last month, Intermet Corp., citing a drastic rise in raw-material costs in North America and Europe, warned that slowing auto production would cause it to lose $19 million to $24 million in the third quarter, versus a year-earlier profit, and would cause it to be in breach of financial covenants in its bank loan agreement.

That caused the debt and shares of the Troy, Mich.-based maker of automotive steering and suspension assemblies to tumble mightily, as the stock lost most of its value and its 9¾% notes due 2009 swooned down to the lower 30s from the mid 70s over the space of several sessions.

The company last week filed for Chapter 11 protection and since then the bonds have recovered somewhat, as has the company's bank debt and shares.

The 9¾% notes traded Tuesday around 41 bid, 42 offered, up from bid levels the previous session around 39-40. Those bonds are now trading flat, or without their accrued interest.

Other auto issues dip

But other automotive names were lower Tuesday in the wake of Tower's depressing news, although one trader noted that the damage to the sector was mostly confined to that one name, and another said that although there was "a little pressure on 'em, it wasn't a whole lot."

"The higher-quality guys really didn't get smooshed," he said, in quoting Collins & Aikman Products Corp.'s recently issued 12 7/8% notes due 2012 at 90.25 bid, 91.25 offered, down about a point on the day and the Troy Mich.-based components maker's 10¾% senior notes "not that much weaker," at 99.75 bid, 100.75 offered.

"It was mainly Tower and the Collins subs" that got hit, he said.

At another desk, the Collins & Aikman 12 7/8s were seen down 1½ points to 91 bid, while Lake Forest, Ill.-based auto parts maker Tenneco Automotive Inc.'s 10 ¼% notes due 2013 were quoted down a point at 114.

A high yield analyst told Prospect News that one of the main problems plaguing the automotive parts industry is overcapacity in a time of flagging demand. The partsmakers have only a limited amount of potential customers they can sell their products to - Detroit's Big Three, foreign rivals like Toyota, Honda, Nissan and Volkswagen, or the foreign carmakers' U.S.-based "transplant" operations. Right now, with consumer confidence in the economy's rebound still uncertain, car sales have slowed, forcing the automakers to resort to financing gimmicks to move their new cars off the showroom floor, or to cut production, as Ford did some weeks ago.

The analyst noted that as the carmakers throttle back on their output, that has a ripple effect all down the line to the parts suppliers, proving once again the Detroit adage that when the Big Three sneeze, the auto parts suppliers catch cold.

Another factor weighing on the sector, he said, was the fact that the component makers manufacture their products out of raw materials that are constantly increasing in price - whether the steel used to make the steering assemblies made by Tower or Intermet, or the largely plastic interior components made by Collins & Aikman. Steel prices have lately been on the rise, as plastics prices have been, since plastics are made from chemicals derived from petroleum, now hovering around $50 a barrel. On top of that, manufacturing is a very energy-intensive activity - and with energy prices at or near record highs, those costs represent another source of pressure on the partsmakers' earnings.

Most of the parts suppliers work under fixed-price contracts with the automakers and the analyst noted that they just can't raise their prices to pass on their increased raw materials and energy costs "because the carmakers don't want to hear it. They'll just point to their contracts and say 'tough,' and the component suppliers will have to swallow [the higher raw materials costs]."

It's not just automotive component makers who are affected, he further pointed out - the same holds true of any industry making use of increasingly expensive commodities such as steel or other metals or anything manufactured from petroleum. Companies making soda bottles or other plastic packaging materials, for instance, are also being increasingly impacted by elevated petroleum prices.

The problem for any such industry, he said is "can we pass our increased costs along to the customer - or will the customer push back?"

AK Steel up again

One of the companies on the other side of that tug-of-war between the auto parts makers and their materials suppliers, AK Steel Corp., has been lately having a feast off higher steel prices, even though it's meant famine for the partsmakers, and AK's bonds - which firmed smartly Monday in lines with gains in the Middletown, Ohio-based steelmaker's shares after Moody's Investors Service upped the company's speculative grade rating and J.P. Morgan raised its earnings estimates and target price for the stock - was again higher Tuesday.

The good news continued for AK, which announced that it anticipates reporting better-than-expected results for the third quarter.

That helped to push the company's 7 7/8% notes due 2009 up a point to 101 bid, 101.625 offered, while its 7¾% notes due 2012 were likewise a point better at 99.25 bid, 100.25 offered.

AK said that it expects shipments for the third quarter to be approximately 1.542 million tons and operating profit per ton to be approximately $61, or about $25 higher than the company reported in the second quarter. The company also noted that it expects to record a net non-cash tax credit for the third quarter of 2004.

The maker of flat-rolled carbon, stainless, electrical steel and tubular steel products, for the automotive, appliance, construction and manufacturing markets also said that its revised guidance reflects an increase of 17,000 tons over its previous shipping estimate of 1.525 million tons, and an increase of approximately $10 in operating profit per ton from the upper-end of the guidance it provided several months ago following the release of its second quarter results.

In that second quarter, AK Steel shipped 1.565 million tons and posted an operating profit of $56.4 million, or $36 per ton. It had net income from continuing operations of $20.2 million, enabling the company to end a string of eight straight quarterly losses.

While AK's bonds were up, a trader said that he'd seen no movement in other steel names, with Oregon Steel Mills Inc.'s 10% notes holding unchanged at 109 bid, 110 offered.

Charter continues rise

Elsewhere, another winner from Monday's session - Charter Communications LLC - was also better on Tuesday, although there was no fresh positive news out on the St. Louis-based cable company.

"They were getting better on no news," said a trader, who quoted Charter's 8 5/8% benchmark notes due 2009 at 79.5 bid, 79.875 offered, its 9.92% notes due 2011 at 79 bid, 79.75 offered and its 10% notes due 2011 at 79 bid, all up a point, while another trader saw its 10% notes due 2009 two points better at 82.25.

Other gainers, he said included El Paso Corp., whose 7.80% notes due 2031 firmed to 89.25 bid from 87.75, while its 7¾% notes due 2032 moved up to the same levels. El Paso Production Holdings 7¾% notes due 2013 were seen 1¼ point better at 100.25.

And he saw Bally's Total Fitness Holdings Corp.'s 10½% notes due 2011 power up to 97.375 bid from 96 previously, despite a lack of news about the Chicago-based fitness club chain operator. Bally's 9 7/8% notes due 2007 were at 82.5 bid, up more than a point on the session.

Primary stays quiet

The relative quiet that pervaded Monday's session in the primary market carried over into Tuesday, with no issues pricing and no apparent build-up in the new issue calendar.

Sources pointed to the Deutsche Bank Global High Yield Conference that is taking place this week in Scottsdale, Ariz., as a likely reason for the lack of activity. In addition, one source said, the bond market will have an early Friday close, ahead of the three-day Columbus Day weekend, which could also somewhat account for the dearth of primary market activity.

Price talk on AirGate floater

Price talk of three-month Libor plus 375 basis points emerged Tuesday on AirGate PCS, Inc.'s $175 million of seven-year non-call-two first priority senior secured floating-rate notes (B2/CCC+), which are expected on Thursday, via Banc of America Securities and Credit Suisse First Boston.

B&G saga continues

The B&G Foods Holdings Corp.'s $200 million bond deal continued to generate discussion in the primary market on Tuesday.

Price talk is 8%-8¼% on the seven-year notes (B2/B) from the Parsippany, N.J. based food company.

Lehman Brothers is running the books.

One compelling aspect of the deal, sources say, is that the seven-year notes are coming concurrent with, and their pricing is contingent upon, completion of B&G Foods' $340 million offering of Enhanced Income Securities (EIS) via RBC Capital Markets, Credit Suisse First Boston and Merrill Lynch & Co.

A market source told Prospect News on Tuesday that by the end of Monday's session the EIS deal had been 70% subscribed.

Meanwhile a source close to the B&G Foods financing, who declined to take issue with that subscription level, told Prospect News that the B&G Foods financing was no longer expected to price on Tuesday night.

"There are still a lot of moving pieces," the source said, adding that the principal players are now focused on getting the deal done before Friday.

On a related note Seattle-based American Seafoods Group LLC announced Tuesday that has withdrawn its $450 million offering of income deposit securities. The deal, which was being led by CIBC World Markets and Merrill Lynch & Co. had been postponed in August due to poor market conditions.

$675 million week

Given the completion of the B&G Foods $200 million seven-year senior notes offering, the high yield primary is looking for a total of $675 million of dollar-denominated issuance to price before Friday's early close. That compares with the previous week's $2.460 billion.

In addition to the above-mentioned $175 million floating-rate notes offering from AirGate PCS, the calendar contains just two tranches from two issuers that are thought likely to price before Friday's close.

Southern States Cooperative Inc., a Richmond, Va.-based supplier of agricultural products and services, is in the market with a $100 million eight-year debt refinancing deal (B3/B), via Wachovia Securities.

And Calgary, Alta.-based energy royalty trust Harvest Energy Trust is selling $200 million of seven-year notes (B3/B-), in a debt refinancing deal that is being led by Morgan Stanley.

Aside from the dollar-denominated market, one euro-denominated issue is expected to be completed during the present week.

Oskar Mobil, formerly Cesky Mobil, a subsidiary of Montreal-based Telesystem International Wireless Inc., is expected to sell €325 million of seven-year notes (B1/B) on Wednesday, via JP Morgan, ABN Amro and UBS Investment Bank.

Price talk is 7½% area.

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