Rayovac, Level 3, O'Sullivan deals price; Rayovac glows, but Level 3 lags

By Paul Deckelman and Paul A. Harris

New York, Sept. 26- Rayovac Corp., Level 3 Communications Inc. and O' Sullivan Industries Inc. closed out the trading week Friday by pricing new deals, with batterymaker Rayovac clearly having the most juice, as it upsized its offering to $350 million and the bonds traded well when they were freed for secondary dealings. While Level 3's deal was larger, it failed to generate much interest in a secondary market generally characterized as quiet and range-bound.

"It felt good today," said a sell-side official late in the "generally positive" session.

"Things weren't skyrocketing, but it was receptive enough to get Level 3 done,"

The official was referring to Level 3 Communications' subsidiary Level 3 Financing Inc. which priced $500 million of eight-year senior notes at par to yield 10¾%. The Citigroup/Credit Suisse First Boston-led deal came "right at" the 10¾% area price talk.

Throughout the latter part of the week sell-side sources had been remarking the Caa2/CCC- ratings tacked onto the Broomfield, Colo. telecom company's new notes. The reasoning held that if the this "lower-tier" credit's notes sold in an orderly transaction it would indicate that the market - in spite of the recent mixed cash flows into and out of high-yield mutual funds - remains technically strong.

The deal is the lowest rated offering since AMC Entertainment sold $175 million of senior subordinated notes with a Caa3/CCC rating on Jan. 11, 2002, according to Prospect News' records.

In addition to Level 3, terms emerged Friday on a slightly downsized deal from Majestic Star Casino, LLC. It priced $260 million of seven-year senior secured notes (B2/B) at par to yield 9½%.

A Jefferies-led deal, Majestic Star priced on top of its 9½% price talk and was reduced from $270 million.

In drive-by action during the final session of the week Lamar, Mo. manufacturer of ready-to-assemble furniture O'Sullivan Industries, Inc. priced $100 million 10.63% senior secured notes due Oct. 1, 2008 (existing ratings Caa1/B-) at 95 to yield 12%, via Credit Suisse First Boston.

Finally, Rayovac Corp. priced an upsized offering of $350 million 10-year senior subordinated notes (B3/B-) at par. The deal was increased from $300 million.

With Banc of America Securities running the books the Madison, Wis.-based battery and lighting device company printed an 8½% yield on its new notes, at the tight end of the 8½%-8¾% price talk.

A sell-side source not in on the Rayovac transaction told Prospect News that the flashlight firm's deal seems to fit nicely into a recent pattern of transactions that have "been pricing quite well recently.

"We've seen all kinds of upsizings, tight-end-of-talk deals going back to Nextel, which seemed to be the start of it," added the official, referring to Nextel Communications, Inc.'s upsized $1 billion add-on to its 7 3/8% senior serial redeemable notes due Aug. 1, 2015 (B2/B+) which priced on Sept. 17 at 101 to yield 7.204%.

"That one went up from $500 million to $1 billion," the sell-sider emphasized. "Meritage was at the tight end of talk. EchoStar was upsized, with one tranche pricing through talk and the other coming at the tight end. Hines and Seminis were through talk.

"I would say it's going well."

Asked to comment on Thursday's news that AMG Data Services had reported an inflow of $153 million to high-yield mutual funds for the week ending Sept. 24, this syndicate official said simply: "It was insignificant. Anything under half a billion at this point does not seem to mean much.

"Leading up to that six of the 10 previous weeks had $1 billion-plus numbers," the source added. "This whole year has been kind of volatile. But specifically the past couple of months don't mean much."

Meanwhile on the eurobond front, price talk on ASPropulsion Capital BV's €200 million of 10-year senior notes (B2/B-) tightened to the 9 5/8% area from 9 ¾%-10%. The deal is expected to price on Monday via Lehman Brothers, Citigroup and Goldman Sachs.

Proceeds will help fund the LBO of the FiatAvio SpA aviation engine business by The Carlyle Group.

Also expected to price on Monday in Europe is EMI Group plc's split-rated €300 million of 10-year senior notes (Ba1/BBB-) via Royal Bank of Scotland, Barclays Capital and Citigroup.

With some exceptions, the London recording company's notes, talked at 8¾%-9%, will likely be sold to traditional high yield accounts, according to a source close to the deal.

And the emerging markets corporates asset class produced news on Friday as well.

CSN Islands, a subsidiary of privately owned Brazilian steel firm Companhia Siderurgica Nacional, priced a $75 million add-on to its 10¾% notes due Sept. 12, 2008 at 100.93. The JP Morgan-led offering came at a yield of 10½%.

Meanwhile the roadshow begins Wednesday for an offering from Magnitogorsk Iron & Steel Works subsidiary MMK Finance SA. It is bringing up to $300 million of notes maturing in up to five years (Ba3/B). UBS Investment Bank and ABN Amro will lead the Regulation S, deal that will be marketed via a Europe-only roadshow.

Also from Russia, wireless company Mobile TeleSystems is coming with a $500 million notes offering (Ba3/B+) via ING and Credit Suisse First Boston.

"The market continues to be in very good shape," commented one emerging markets official late in Friday's session. "It's been a little softer over the last few days, but we have had a ridiculous run, so you have to expect a little profit-taking here and there.

"Overall the market is in very firm shape. The big liquid sovereign names like Brazil, and some of the others, have been a little squishy over the last day or so, but remain at pretty elevated levels. And the higher grade names like Mexico and Chile continue to tighten ridiculously."

This sell-side official also advised Prospect News that at present the brisk emerging markets business is "being driven by technicals.

"There are a lot of people making tactical allocations to emerging markets," said the source. "We have a lot of new mandates being funded over the last month or so. And we see that continuing through the rest of the year."

A trader said that the new Rayovac 8½% senior notes due 2013 "as anticipated was pretty much over-subscribed."

He saw the new notes having moved as high as 103 bid, well up from their par issue price, before closing out at 102.5 bid,103 offered.

Level 3, however, was "a whole different thing, a horse of another color." He also referred to the deal as "an absolute pig," quoting the new 10¾% senior notes due 2011 as having come to market at par, then having traded as high as 102.5 bid "for about two-and-a-half seconds" before heading back downward, to close somewhere around the 99 7/8 - 99 15/16 area.

After having firmed initially, the Level 3 bonds "never saw the light of day," he said, declining to slightly below their issue price. "That wasn't a good one."

The new deal lagged even though Broomfield, Colo.-based high-speed operator Level 3 is considered one of the relatively few high yield telecom "success stories" - or at least, it is one of the last men still standing when so many of its industry peers who also sold loads of junk bonds in the heady go-go market of the late 1990s, have long since bitten the dust and filed for bankruptcy.

Its prospects were impressive enough to legendary investment guru Warren E. Buffett, whose Berkshire Hathaway Inc. investment vehicle, along with several other investors, put $500 million into the company last year, as they bought a big chunk of convertible bonds.

Buffett had been known up until that point for having passed on playing in the telecom area, missing both the high-flying late 90s tech-and-telecom bubble, and the resounding crash of the sector that followed.

However, earlier in the week, it was disclosed that Buffett had nearly halved his holdings in Level 3, as Berkshire sold 46% of the shares the company had acquired when it converted the bonds into stock in June. But Level 3's bonds continued to hang in there, with its benchmark 9 1/8% notes due 2008 holding steady in the mid-80s.

The trader suggested that the new 10¾% deal did not do well in secondary because "in my opinion, from what I hear when I talk to these guys, some of the [current] bondholders were forced into buying this one. If the deal didn't go down, supposedly [the company] was going to have to take out some new bank debt, which would be senior to the debt they were holding. But if they did this, it kept everything in line. So they kind of had to buy some of the paper. They bought it to get the deal done but they didn't want it."

He noted that while the new bonds trade around par, the 9 1/8s are in the mid-eighties. "This thing could drop another five, 10 points."

Also adding to investor reluctance to buy the new deal, he opined, "it's a funky situation, the way they structured it. It's another company that they used [the bonds were not issued by Level 3 itself but by a special purpose subsidiary, Level 3 Financing Inc.]. Then the funds from there go back up to the parent company."

He suggested that this might put some investors off, with so much of Wall Street coming under criticism for an alleged lack of real transparency and so many sizable companies operating with a confusing cornucopia of interlocking affiliates and subsidiaries.

Elsewhere, activity was restrained, with even the issues which had been moving around on Thursday mostly lapsing into inactivity.

A trader saw Flextronics International Ltd.'s 6½% notes due 2013 trading as high as 98.75 bid, 99.75 offered early in the day, up from Thursday's closing levels around 98. But at another desk an observer quoted the bonds later in the session up perhaps one-quarter point. Earlier in the week, Flextronics had fallen from 98-99 levels to as low as 96, after the Singapore-based electronics manufacturer was socked with a $934 million damage award in a suit another company had brought against Flextronics for breach of contract. Flextronics said it will appeal the verdict - particularly the $931 million punitive damages portion.

He also saw Levi Strauss & Co., whose bonds have been gyrating around for some days, essentially unchanged, with the San Francisco-based apparel maker's 11 5/8% notes due 2008 off a quarter point at 85.75 and its 12¼% notes due 2012 and 7% notes due 2006 steady at 84 bid and 80 bid, respectively.

And he saw no follow-up activity in Rite Aid Corp., which on Thursday had announced a much smaller loss for the just-concluded second quarter and raised its full-year net earnings estimate somewhat. The Camp Hill, Pa. -based drugstore chain operator's bonds "did nothing," a trader said.

Here and there, there was some measurable activity. Tenet Healthcare Corp.'s bonds "sure looked like they were up today," one market-watcher said, noting that its 7 3/8% notes due 2013 rose to 99.5 bid from 98.7 5 previously, while its 6 3/8% notes due 2011 firmed to 95.25 bid from 94 earlier; the Santa Barbara, Calif.-based hospital operator, trying to reassure investors and appease skeptical federal investigators, abruptly announced the resignation of the company's general counsel and chief corporate officer, Christi Sulzbach.

Sulzbach - who has been criticized in some quarters for alleged conflicts of interest between her two posts - said in a statement that it was "in the best interest of the company for me to leave at this time." Her resignation is effective Nov. 1.

On the other hand, there was no movement in NUI Corp.'s 8.35% notes due 2005, unchanged at 106.616; the Bedminster, N.J.-based natural gas company said that it would explore various options for selling the company.

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