Fleming bonds rebound as El Paso continues plunge; Chukchansi prices at steep discount

By Paul Deckelman and Paul A. Harris

New York, Sept. 24 - Fleming Cos. beleaguered bonds seemed to get a lift on Tuesday, rising from their recent low levels ahead of the company's announcement - well after the financial markets had wound down for the day - that it would divest itself of its money-losing retail stores unit. On the downside, El Paso Corp.'s nominally still investment-grade bonds were badly battered for a second consecutive session and Xerox Corp. bonds fell back on news that the copier company is once again under federal scrutiny - this time by the Justice Department.

In the primary arena, terms emerged on Jefferson Smurfit Group plc's pricing of a tranche of 11-year PIK (payment-in-kind) notes as a follow-up to Monday's big dual currency offering of 10-year senior notes and Native American gaming operator Chukchansi Economic Development Authority rolled the dice on a seven-year senior notes issue, although it was forced to price the issue at a steep discount and very fat yield in order to get the deal done.

Jefferson Smurfit's €253.5 million equivalent of subordinated PIK notes due Oct. 1, 2013 were priced in addition to the approximately €905 million two-tranche deal the company although terms on the subordinated piece only emerged Tuesday. The notes, which are PIK for life and came with warrants for 1% of the company, priced at par to yield 15½%. The tranche sizes were €100 million and $150 million. Deutsche Bank Securities was the bookrunner and Merrill Lynch was joint lead.

Terms were also heard Tuesday on Chukchansi Economic Development Authority's $153 million face - approximately $140 million proceeds - of unrated senior notes due June 15, 2009. The 14½% notes priced at a discounted level of 91.476 to yield 16.671% via Dresdner Kleinwort Wasserstein and Banc of America Securities.

One informed source told Prospect News that the Chukchansi deal, to fund the construction of a tribal gaming and lodging operation in Coarsegold, Calif., near Yosemite National Park, contains several novel aspects that prompted hard shopping among investors. Principal among the novelties, the source noted, was the stipulation in Chukchansi's gaming license that it must have an operation up and running by late next June or risk forfeiting the license.

The source noted that investors extracted guarantees from the construction manager, and will be periodically appraised of the venture's progress. In addition Cascade Entertainment secured the deal with a letter of credit, a cash collateral account and the pledge of a portion of its management fees. Also the first three interest payments will be deposited and held in an escrow account for 1.5 years.

The source added that having priced the bonds are not likely to be traded and that given the 16.671% yield if the venture succeeds the notes are almost certain be taken out at the first call date, Oct. 1, 2006 at 113.00.

Revving noises were heard Tuesday, as the market learned that two roadshows are set to start during the remainder of the Sept. 23 week.

St. Louis scaffolding company Brand Services Inc. will begin putting its acquisition financing junk bond deal up before investors on Wednesday. Its $165 million of 10-year senior subordinated notes (B3/B-) via Credit Suisse First Boston and JP Morgan will finish roadshowing on Oct. 3.

Also set to tee off is Dallas-based business club and golf resort operator Clubcorp Inc., which will commence marketing its $225 million of eight-year senior notes on Thursday via Banc of America Securities and Deutsche Bank Securities. The refinancing deal is set to price during the week of Oct. 7.

As Brand Services and Clubcorp headed for the starting line the lights went out on an anticipated Rule 144A offering from GXS Corp., which had been expected to sell $235 million of 12% senior subordinated notes (B2). In a ratings release issued Tuesday, Moody's Investors Services stated that General Electric Co. would buy the notes itself, in order to speed up the acquisition of GE Global eXchange Services by Francisco Partners. That acquisition is slated to close by Oct. 31, 2002 (see related story in this issue).

Finally on Tuesday a source told Prospect News that the roadshow has been extended for TI Automotive Finance plc's $215 million of 10-year senior notes via JP Morgan and Salomon Smith Barney. The roadshow was extended, according to the market source, due to scheduling conflicts with the Deutsche Bank Securities high-yield conference which is taking place Sept. 25-27 at the Phoenician in Scottsdale, Ariz. Pricing on TI Automotive is expected to take place Oct. 1.

One senior official from the high-yield syndicate desk of an investment bank told Prospect News on Tuesday that although things are turning ugly in the capital markets in general there are reasons for those who sell and trade junk bonds to take heart.

"We had a huge week a few weeks back and it's been steady since then," the sell-sider commented, noting the $1.56 billion inflow reported by AMG Data Services for the week ending Aug. 28, and the three ensuing inflows that followed in its wake.

"This past week we had $153 million," the source added. "Since the beginning of August we've had about $2 billion.

"With equities weak and interest rates low the high-yield asset class remains strong."

This official also noted that most of the September transactions have been comparatively strong ones and went on to comment that at present there seems to be a re-emergence of "growth acquisition" deals whereas earlier in 2002 the new offerings had primarily been refinancing deals. This re-emergence of acquisition deals, the official commented, is also a positive sign for the market.

And there figure to be some large acquisition financing junk bond deals in the near and intermediate future, the official added, pointing to "yellow pages" deals that the market has been buzzing about since before Labor Day.

"It looks as if these directory deals that are coming will go well," the official said. "It appears that QwestDex will come first and that will be followed by BCE and Sprint.

"Those are low-growth, stabile-capital operations and I believe they will be gobbled up by the investors," the source added. "The question is, are SBC, Verizon and Bell South going to take the opportunity to capitalize their operations as well?

In closing the official noted that after the large directories deals work through the market high yield may find itself in need of a "breather."

Back among the established issues, Fleming's bonds "actually bounced back," a trader said. "It's unbelievable how much they had been beaten down, they've been trading like they were going out business," he observed, but quoted its subordinated 10 5/8% notes, which had fallen to lows around 35 bid/40 offered as the session opened, as having "started creeping up" before ending the day at 47 bid/50 offered.

"There were some buyers out there," he continued, "They would bid, 40, 42 and keep topping themselves. The guys who want to short it don't have it and the guys who are long don't want to sell it down here because they think it's going to bounce back, kind of like a Catch 22. If anything that would push it higher in the next couple of days, guys chasing it because they think it's cheap here, and the other guys who are long, maybe they didn't take their marks [unload the bonds at a higher level] like they were supposed to and now they're not looking to unload it because they think it might go back to $60 or $70."

He saw the same pattern in the senior 10 1/8% bonds, which opened at 65 bid/68 offered but pushed up to end at 72 bid/75 offered.

"It's pretty volatile, although there's not much trading - not like Kmart [ironically, Fleming's largest customer], when they went bankrupt and belly-up, Chapter 11, there was a lot of activity. Retail [investors] are involved in this - but not as much as in other names. You're not seeing as fast and furious a pace yet."

Another trader also saw Fleming "looking like it's in recovery," with the subordinated paper moving into the high 40s from prior levels in the 30s, or "maybe even 50."

There was speculation in the market that the issue was going up after having been beaten so far down in recent days on a variety of factors. Fleming's shares had fallen to all-time intra-day and closing lows in the $4 range on Monday, and its bonds remained on the slide, beset with a combination of investor worry about its links to bankrupt Kmart Corp., its biggest customer, allegations that the company and its vendor community are at loggerheads over unilateral discounts Fleming has imposed, the recent departure of several key executives and the weak performance of its retail store unit, and charges by disgruntled investors that Fleming misled them about how badly the retail unit was doing.

The trader, noting that Fleming competitor Supervalu Inc. had released lowered guidance Tuesday afternoon and that what's good (or bad) for one company in an industry often bodes well/ill for its rivals, opined that "I wouldn't be surprised if we see some puking [up the Fleming bonds they had bought] on Wednesday, people hitting bids here."

But late in the day - well after the financial markets had closed up shop - Fleming announced news that could keep its upside debt momentum going. The Dallas-based company said that after having conducted a strategic review of its operations, it has decided to sell its low-price food retailing unit, and focus solely on growing its wholesale distribution business. Fleming expects to get at least $450 million, net of taxes, from the sale of its retail division, which operates 110 stores under the Food 4 Less and Rainbow Foods banners. It expects to use the proceeds to reduce its debt.

Apparently having expected such an announcement, equity investors pushed Fleming stock up 86 cents (19.91%) in New York Stock Exchange dealings to $5.18 on volume of about three million shares, more than double the average turnover.

Other than the activity in Fleming, the trader said. Things were pretty slow, and the market seemed to have a generally weaker tone. Staying in the retailing area for a moment, he saw the bonds of Kmart - Fleming's biggest client - "continuing to die on the vine," quoting the bankrupt Troy, Mich.-based discount retailer's 8 3/8% notes at 15.5 bid/18 offered, down from prior levels in the last few days around 19 bid/20 offered, and predicted "look out below."

Also lower, he said, reflecting the generally weaker tone of the market in the face of the continued stock market retreat was Revlon's 8 5/8% notes due 2008, which eased half a point on the bid side to 35.5 bid/36.5 offered on "no news that I'm hearing," as well as United Airlines, whose longer dated bonds were being quoted in a 14 bid/17 offered context from prior levels around 16 bid/19 offered, even as the troubled Number-Two U.S. airline carrier awaits a specific counter proposal from its employee unions to the airline's proposed cost-cuts, which the unions have rejected. Other carriers also remain under the gun, he said, with industry leader AMR Corp.'s bonds languishing around 50 cents on the dollar on some of its issues, although he didn't see any trading in the credit.

The trader further saw Xerox bonds lower, after the Stamford, Conn.-based copier and office machines giant - which earlier this year settled Securities and Exchange Commission allegations of fishy accounting by paying a record $10 million civil penalty - said it was once again under federal scrutiny, this time by the U.S. Attorney's office in Bridgeport, Conn. In its statement late Monday night, Xerox said that the feds were looking into its "past accounting issues, which had been previously reviewed by the Securities and Exchange Commission." It promised cooperation with the new federal probe.

Xerox had announced on April 11 that it had reached a settlement with the SEC related to accounting matters that had been under investigation since June, 2000. The company said that under the terms of the settlement it "restated its financials for the years 1997 through 2000 and adjusted its previously announced 2001 results. On June 28, Xerox filed its 2001 10-K, which included its restated financials from prior years."

Xerox shares lost 71 cents (10.64%) to close at $5.96 on volume of about 11.8 million shares, more than double the norm. On the bond side, its 5 7/8% notes due 2004, which had closed at 80.5 bid/83.5 offered on Friday, had fallen to 78 bid/82 offered Tuesday. The 5½% notes due 2003 went from 88 bid/90 offered at the end of last week to the "high 80s" on Monday and then to 84.5 bid/86.5 offered Tuesday. "The longer stuff - only the Portfolio Manager In the Sky knows where they are," he quipped.

Also on the tech front, Amkor Technology Inc.'s 9¼% notes due 2006 were quoted down seven points, at 59.5 bid. Solectron Corp.'s 9 5/8% notes due 2009 closed at 78 bid, down six points.

A market source said that El Paso Corp. bonds - which had tumbled to junk-like price levels Monday despite its nominal investment-grade rating, after a federal administrative judge recommended that the biggest U.S. pipeline owner should be punished for restricting natural-gas supplies during last year's California's energy crisis - continued to erode in Tuesday's activity.

"They were down anywhere from eight to 12 points" on top of Monday's losses, he said. "They got hit pretty heavily." He quoted El Paso's 7 5/8% notes due 2011 - which had fallen on Monday from the high 80s to around 73 bid - as having dropped further to 63 on Tuesday. Its 7¾% notes due 2032, which had also dropped to 73 on Monday, were being quoted at 59 late Tuesday.

"The stock," which on Monday had plunged $4.16 (35.65%) in Monday's New York Stock Exchange dealings, "lost another $2, and that's a lot for a stock like that, and the bond guys just pulled away," he said. Actually, the shares plunged even further, ending off $2.21 (29.43%) to $5.30 on volume of 61 million shares, more than seven times the usual.

Part of the problem for El Paso investors is that while Federal Energy Regulatory Commission administrative law judge Curtis P. Wagner ruled that the company had withheld "extremely large amounts" of natural gas needed to keep California's electricity generating plants operating during its electricity crisis (November 2000 to March 2001) and said the company should face penalties he did not specify, leaving investors guessing as to what level of exposure they may be looking at.

Also on the energy front, Dynegy Inc. agreed to pay $3 million to settle an SEC investigation of a natural gas deal that improperly boosted the company's cash flow as well as its scrutiny of so-called "wash trades" in which participating utilities trade power contracts back and forth, producing no economic effect on revenues and profits while artificially boosting their volume levels, apparently to make themselves look busier and more important.

The federal agency said that Dynegy had engaged in securities fraud regarding disclosures and accounting of the five-year gas deal, dubbed Project Alpha, although Dynegy agreed to the SEC's terms without either admitting or denying its findings.

The SEC further said that the Houston-based energy marketer had misled investors about the wash trades with CMS Energy Corp. in two press releases issued early this year.

Dynegy's 6 7/8% notes due 2011 dipped to 35 bid from prior levels around 40 bid while its 8¾% notes due 2012 went from Monday's close at 42 to 38 late Tuesday. Its 7.45% notes due 2006 lost three points to end Tuesday's dealings at 40.

Dynegy shares were meantime up three cents (2.56%) to close at $1.20

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