Crown Cork prices mega-deal, new bonds a mixed bag; Cablevision firms on results

By Paul Deckelman and Paul A. Harris

New York, Feb. 11 - Crown Cork & Seal Co. Inc. popped the top on the junk bond market's biggest new deal in nearly four years Tuesday, selling over $2 billion of dollar- and euro-denominated paper. Traders said that when the new bonds were freed for secondary dealings, the lower-coupon portion eased - but the higher-coupon issue traded up.

Among already established bonds, Cablevision's Corp.'s paper rose after the Long Island, N.Y. cable systems operator and sports team owner reported better fourth-quarter results. Other upsiders included Tesoro Petroleum Corp. and Pegasus Communications Corp. Losers included Fleming Cos. Inc.

Crown Cork & Seal's deal was completed in three high-yield tranches totaling $2.1 billion via bookrunners Salomon Smith Barney and Deutsche Bank Securities Inc.

At that size it was the biggest seen in high yield since Lyondell Chemical Co. priced $2.4 billion in three tranches in May 1999, edging a little ahead of Level 3 Communications' $1.16 billion and €800 million (the equivalent of just over $1.93 billion in total) in February 2000.

Crown Cork priced $1.085 billion of senior secured second lien notes due March 1, 2011 (B1/CCC+) at par to yield 9½%, spot on to the 9½% area price talk.

Also pricing were €285 million of senior secured second lien notes due March 1, 2011 (B1/CCC+) at par to yield 10 ¼%. The euro tranche was also completed spot on to the price talk, in this case of 75 basis points behind the dollar-denominated second lien notes.

In addition the company priced $725 million of senior secured third lien notes due March 1, 2013 (B2/CCC) at par to yield 10 7/8%. The third lien notes came inside talk which had put their yield 150 basis points behind the dollar-denominated second lien notes.

Last week, the deal was increased from $1.75 billion through the addition of the euro tranche. At that point Crown Cork also scrapped a proposed convertibles offering.

In a press release following in the wake of the transaction, the Philadelphia packaging products maker said the new notes are part of the company's comprehensive refinancing plan which is expected to include a $550 million first priority revolving credit facility and a $500 million first priority term loan B facility. Completion is scheduled for Feb. 26.

Proceeds will be used to refinance Crown Cork's existing revolving credit facility due Dec. 8, 2003 and various issues of senior notes as well as to pay fees and expenses.

Also during Tuesday's session in the primary market, MDP Acquisitions plc, the parent of Jefferson Smurfit Group plc, put $209.1 million of high-yield investors' cash in the box as the result of its drive-by deal.

And Resource America, Inc., which pulled a deal late last September, announced it would come back with a registered offering of $30 million.

Jefferson Smurfit's quick-to-market $205 million ($209.1 million proceeds) add-on to its 9 5/8% senior notes due Oct. 1, 2012 (B2/B) priced at 102.0 to yield 9.250%. The deal came at the cheap end of talk of 102-103. Deutsche Bank Securities and Merrill Lynch were bookrunners. The original $545 million deal, the sole dollar-denominated tranche of a three-tranche offering, priced on Sept. 23, 2002 at par.

Meanwhile during Tuesday's action, in a filing with the Securities and Exchange Commission Resource America, Inc. announced it will bring a registered offering of $30 million of 12% senior notes due 2008 via Bear Stearns and Friedman Billings Ramsey.

Concurrently Resource America is offering up to $65.336 million of new notes in exchange for all of its outstanding 12% senior notes due 2004.

No timing on the new deal was given in the filing.

On Sept. 26, 2002 the Philadelphia-based company, which develops, produces and transports oil and natural gas in the Appalachian Basin, pulled its offering of $125 million of eight-year senior notes (B3/B), citing "volatile market conditions."

During a Tuesday conversation with Prospect News, Tim Anderson, portfolio manager of the Harris Insight High Yield Select Bond Fund, said that the large transactions lately seen in the primary market - including Crown Cork & Seal's $2.1 billion, TRW Automotive's $1.575 billion, Georgia-Pacific Corp.'s $1.5 billion and Houghton Mifflin's $1 billion - likely reflect the fact that people on the buy-side are sitting on cash, and that high-yield mutual funds crave the liquidity of such large transactions.

While Anderson noted that the primary market has been "fairly active" of late he attributed the recent strength of the asset class to technicals, i.e. the money that has flowed in since mid-October 2002.

"The market hasn't done much since the second week in January," Anderson added. "We're kind of treading water until we get the Iraq situation taken care of."

He also noted that since the middle of January high yield has "decoupled" from the equity market.

"That's because of the technical strength of the high-yield market," he commented. "The money coming in has propped up the market. But if you look at the performance of the high-yield market since the middle of January it has actually trended down and underperformed the broader fixed-income market.

"If you look at where the performance has come in the high-yield market since the rally in the fourth quarter of 2002 and in the first couple of weeks in January, it's really been in the lower tier of the market. If you look at the triple-C sector of the market, as well as a lot of the beaten up names like the telecom sector and some of the electric utilities, those have really driven the performance of the market. That is typically early bullishness and it masks how fragile the market overall is.

Anderson cited the Merrill Lynch High Yield Master Index, which has been selling off since mid-January, and which is now up about 2.6% for the year.

"If you look what is driving that performance, the triple-C sector is up 7.2% and the telecom sector is up 6.6%, cable is up 4.5%, electric utilities are up 5.4%.

"A more defensive sector such as gaming is actually down for the year," he added.

"What has been driving the performance is the distress in the lower-tier quality of the market.

"Quality has not been in fashion since October, although it is becoming more so since people have started being a little more cautious."

In any event the mega-deals that have gone down thus far in the first quarter of 2003 have put the new issuance market on a footing to outpace the previous year.

The new year broke in front of its predecessor from the get-go, with $6.935 billion pricing in January 2003 against $6.703 billion in January 2002.

By the end of Tuesday's session the primary market had seen $4.413 billion of new issuance, excluding euros, during the first 11 days of February, already ahead of the $4.194 billion priced during the entire month of February 2002.

When the new Crown Cork bonds moved over into the secondary market, a trader said the 9½% second-lien notes due 2011 "pretty quickly traded below issue [price]," moving to 99.625 bid/par offered from their par issue price earlier in the session. But he saw the new 10 7/8% third-lien notes due 2013 firm to 101 bid/101.75 offered.

Another trader who pegged both issues of the new bonds in the same area explained the greater demand for the 10 7/8s - even though the maturity is longer and it gives its holders less security, as a third-lien note, than does the 9½% - by saying "people just wanted a little more yield."

He said that from where he sat, the Crown Cork deal and its aftermath constituted "about 90% of the activity today."

Among the established issues, Cablevision debt firmed after the company reported that its fourth-quarter net earnings totaled $517.4 million ($1.62 per share), versus a year-earlier loss of $281.6 million (74 cents a share).

Cablevision - which is trying to get out from under money-losing operations, such as its Wiz consumer electronics stores - reported a loss from continuing operations of $155.2 million (52 cents per share) - considerably smaller than the $213.1 million (74 cents a share) year-ago continuing operations deficit, although larger than the 42 cents per share of red ink that the analysts were looking for this time around.

That failure to beat expectations may have been behind the drop of 32 cents (1.87%) to $16.85 seen by the company's stock on Tuesday.

But on the bond side, Cablevision's CSC Holdings Inc. 7 7/8% notes due 2007 were better than a point higher on the session, to 98.25. Its 8 1/8% notes due 2009 finished around the same level, up two points on the day.

Bond investors were apparently heartened by positive guidance coming out of a conference call during which company executives predicted that 2003 revenues would be up about 10% to 12% from 2002 levels and that EBITDA should increase between 17% and 19%. They also said that Cablevision remains on track to meet its goal of achieving free cash flow in 2004.

A trader acknowledged that the Cablevision bonds "were up a little bit," quoting its 10½% notes due 2016 as having firmed a point to 104.5 bid/105.5 offered. He saw the company's 7 5/8% notes due 2011 as having firmed up to 97 bid from Monday's levels around 95 bid/96 offered, before coming off that peak level to end up a point at 96 bid/97 offered.

A market observer at another desk quoted Cablevision's 7 7/8% bonds due 2018 as having moved up to 92 bid from 90.5 on Monday.

Elsewhere in the communications world, Pegasus Communications' notes and shares were higher, although there was no firm fresh positive news out about the Bala Cynwyd, Pa.-based distributor of satellite television programming.

However, the internet investment advisory service Briefing.com reported the tantalizing tidbit that Pegasus was taking flight on "takeover speculation," although it did not elaborate as to who might wish to acquire the company, or for how much. On investment-oriented internet bulletin boards, the report was greeted with some skepticism, with posters pointing out the company's sizable debt load of $1.6 billion relative to its subscriber base - statistics which might make an acquisition problematic. Cynics suggested the stock rise was merely due to short covering.

Whatever the reason, Pegasus's shares zoomed $1.418 (10.53%) to $14.889 in Nasdaq dealings, after briefly flying as high as $16.09. Volume was about 334,000 shares, some 15 times the normal turnover.

On the bond side, Pegasus' 9¾% notes due 2006 firmed to 75.5 bid from 73 on Monday; a trader said those bonds were up as much as 10 points from their levels a week ago after several days of unspectacular, but steady gains. Its zero-coupon notes due 2007 rose to 49 bid from 46.

Another recently steady gainer has been Tesoro Petroleum, and its bonds were once again up on Tuesday, its 9% notes due 2008 gaining two points to close at 73 bid, while its 9 5/8% notes due 2012 were three points up, at 77 bid; as recently as 10 days ago, the latter bonds were trading under 65.

A trader, noting the recent gains in the bonds of the San Antonio-based petroleum refiner, opined that "with crack spreads widening out, the refiners are doing better in general." Crack spreads are the difference between what a refining company pays for a barrel of crude oil and the value of the various products refined from that barrel, such as gasoline, heating oil, jet fuel, kerosene and the like.

With demand for heating fuel skyrocketing in the frozen northeastern part of the U.S. - now enduring another blast of Arctic weather come down from Canada - and with recent drawdowns of U.S. stocks of heating oil and gasoline, refiners like Tesoro are able to post healthier profit margins. Tesoro's shares gained 30 cents (6.25%) in New York Stock Exchange trading Tuesday to close at $5.10, on volume of 1.35 million shares, almost triple the norm.

Another refiner, Giant Industries, was likewise on the upside, its 11% notes due 2012 quoted up two points at 74 bid.

Another gainer was Goodyear Tire & Rubber, whose bonds have been firming over the last several sessions from the lows to which they had fallen last week after the Akron, Ohio-based tire giant announced that it was in talks with its lenders in hopes of getting some covenant relief. Its 7.857% notes due 2011 were quoted a point better, at 64.

Skidding in the opposite direction, however, were the bonds of Fleming Cos., which had seemed to be recovering from the lows they hit early last week after the Dallas-based wholesale grocery products distributor - the nation's largest - had announced, along with top customer Kmart Corp. that they were terminating their multi-billion-dollar supply pact, a decision taken as Kmart continues to try to wrestle with its costs in hopes of coming out of bankruptcy.

But over the past two sessions, that rebound in the Fleming bonds has come to a halt; in Tuesday's dealings, a trader said, Fleming "is still sucking wind," its 10 5/8% subordinated notes due 2007 down a point at 32 bid/34. An observer elsewhere saw those bonds quoted offered at 35 with no bid, down from 34 bid. He saw Fleming's 10 1/8% senior notes due 2008 also a point easier, at 67, retreating over the past two sessions from its recent peak around 71. At the same time, he said, Kmart's 9 3/8% notes were a point easier at 15.

El Paso Corp. announced that chairman and chief executive officer William Wise would leave the troubled pipeline company by year's end, although he'll give up his CEO post as soon as a replacement is elected. The announcement came a day after the board of directors - encouraged by dissident shareholders - sought his ouster as the company struggles with a host of problems, including liquidity constraints, debt service, shareholder lawsuits and issues with federal regulators.

Moody's Investors Service on Tuesday took note of El Paso's problems as it slashed its ratings on the company's senior unsecured debt a breathtaking five notches, down to Caa1 from Ba2 previously, with a negative outlook.

The ratings agency cited "significantly reduced near-term expectations for operating cash flows; debt that remains high relative to the company's cash flows; the strain on liquidity from the increase in debt repayments required this year, [and] the uncertainty as to whether asset sales will provide sufficient and timely proceeds to help cover its larger-than-expected cash deficit."

Moody's also noted the execution risks related to the Texas utility company's efforts to scale back its merchant energy activities, including exiting energy trading, consolidating the power business of its Electron affiliate, and divesting its petroleum and liquid natural gas businesses.

The Moody's move follows Friday's two-notch Standard & Poor's downgrade in El Paso's long-term credit to B+.

A market source said that with all of that going on, El Paso's bonds "went up [possibly on the news of Wise's ouster] and then went back down" as Moody's released its downgrade message during the afternoon.

He quoted El Paso's 7 7/8% notes due 2012 - actually, the bonds issued by the former Coastal Corp., acquired by El Paso in 2001 , whose ex-chairman, Oscar Wyatt, spearheaded the palace coup against Wise - as having fallen to 67 bid from 69.5 on Monday.

El Paso's shares dropped 48 cents (9.23%) in NYSE trading Tuesday to $4.72, on volume of 23 million, more than double the norm.

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