Owens Illinois unit sells upsized $1 bln new deal; ratings agencies slash Kmart ratings again

By Paul Deckelman and Paul Harris

New York, Jan. 16 - A unit of Owens Illinois Inc. wowed the high-yield market by selling $1 billion of new bonds in a sharply upsized offering - but despite brisk primary investor demand, the bonds failed to generate much enthusiasm when they were freed for secondary dealings. Also in the secondary, Kmart Corp. was on the receiving end of not one or two, but three ratings agency downgrades, as speculation it might file for bankruptcy soon continued to mount.

Well before the noon bell rang Wednesday, news of the massively upsized $1 billion offering from Owens-Brockway Glass Container, Inc. emerged.

The deal, which priced at par to yield 8 7/8%, must have paved the way for a comparatively comfortable afternoon in the vicinity of the syndicate desk at Banc of America Securities, which ran the deal.

Prospect News heard one customarily subdued official exclaim that the Owens Brockway offering had been the beneficiary of "fabulous execution."

A source close to the company, asked if he had anticipated the $1.2 billion that flowed into high yield mutual funds the week prior to launching the deal, told Prospect News: "If I could read the future that well I would be retired."

"What a deal, huh?!" exclaimed another sell-sider, not on the Owens-Brockway syndicate. "First $300 million, then $500 million, then a billion! Wow! If that isn't solid evidence of major market demand, I don't know what is!"

This official was referring to the fact that Owens began life as a respectable $300 million deal, beefed up to a more imposing $500 million when price talk came out last Monday, before undergoing its gargantuan metamorphosis at Wednesday's pricing.

Elsewhere in the primary market, two new deals surfaced - both from issuers headquartered beyond the borders of the US.

Azteca Holdings, a subsidiary of TV Azteca, of Mexico City, will bring $150 million of 1.5-year notes (B3/B-) via sole bookrunner Bear Stearns & Co., a syndicate source said. The deal is expected to prices, without roadshow, during the week of Jan. 21.

Also, Netherlands-based offshore oil services company Bluewater Energy Services BV will hit the road Monday with an offering of $200 million notes via ING Barings. The Bluewater deal will roadshow in Europe starting Jan. 28, and possibly price later that week.

Also Wednesday, price talk of 10%-10¼% came out on Longview Fibre Co.'s $185 million seven-year notes via Banc of America Securities. The deal is expected to price late Thursday.

And price talk of 8 7/8%-9% emerged Wednesday on Coinmach Corp.'s $400 million of eight-year notes via Deutsche Banc Alex. Brown, which are expected to price midday Thursday.

In secondary action, the new Owens Brockway notes "came at par, then opened (for secondary dealings) at 100.25, but the last I saw of them, they were 99.5-par," a trader said.

"People wanted it thinking it was so hot that it was going to run," he said of the greatly increased issue, "but it didn't run anywhere. So there were some nervous holders who just wanted out at par or above. That's why they were par-to 100.25 for a short period time."

Accounts, he concluded "were a little disappointed with the aftermarket."

The Toledo, Ohio-based packaging company's existing 7.85% notes were meantime quoted at 97 bid, while its 8.10% paper was unchanged at 92.

Kmart bonds were generally seen lower Wednesday, as the Troy, Mich.-based discount department store operator got slammed with separate downgrades from Moody's Investors Service, Standard & Poor's and Fitch.

Moody's kicked off the downgrade parade as it cut Kmart's bond ratings two notches to Caa1 from B2; it was only Friday that Moody's had dropped Kmart three additional notches, to B2 from Ba2.

About two hours later, Fitch reduced its rating on $4.7 billion of bonds and other debt to CCC and warned that "it appears increasingly likely that Kmart will choose to file Chapter 11, in part as a means to eliminate undesirable leased store locations."

Later in the session, Standard & Poor's, which on Monday had pushed Kmart's ratings down four notches, to B- from BB, chopped them back still further to CCC-.

In downgrading the debt for the second time in less than a week, S&P and Moody's both criticized Kmart management for creating a climate of uncertainty about what it intends to do to right its ship, by not giving out enough information to the financial community. That, sniped S&P, has stoked fears among investors that Kmart will be forced to "implement a financial strategy with high risk for creditors." Kmart's board met on Monday and Tuesday, but the eagerly awaited announcement of the company's next move in its efforts to stay solvent was never forthcoming.

Besides the financial and public relations problems engendered by the latest ratings downgrades, Kmart management Wednesday wrestled with the prospect that it could lose one of its most lucrative and well-known product lines, as The Wall Street Journal reported that the diva of domesticity, Martha Stewart, might take her celebrated line of housewares to some other merchandiser in the event of a Kmart bankruptcy filing. Stewart-branded bed linens, towels, cookware and even paint accounted for about $1.5 billion of Kmart's $40 billion sales total last year, the Journal said.

Such Kmart rivals as Target Stores, J.C. Penney and Sears have been bandied about in the media as possible alternative destinations for the goddess of gracious living in the event she severs her ties with Kmart.

All of this, of course, is "not a good thing" for the embattled store chain, and the latest negative developments were reflected in another spectacular slide Wednesday in Kmart's shares, which were down 85 cents, or 34.65%, to $1.60. Staggeringly heavy volume of 178 million shares was 22 times the stock's normal turnover on the New York Stock Exchange.

The equity side was not the only place where there was brisk activity. On the debt side, Kmart's benchmark 9 3/8% notes due 2006 bounced wildly between highs around 56 bid and troughs around 40, on volume of $273.6million - easily the most active name on the Nasdaq FIPS 50 high yield market tracking index.

But with Kmart's future in flux, there were differing assessments of where its bonds, which have recently converged down around the 50-55 bid range, were going.

Kmart "got crushed today," a trader said, while another said its paper "opened significantly weaker, but it went out up about two points. The structured paper (i.e., secured by real estate or dedicated revenue streams) went out up two points, in the mid 50s." At another desk , a market observer asserted that Kmart "really didn't do anything - it was down about a point." He theorized that the company's bonds had already slid so far in the past two weeks that they seemed to be leveling off. Elsewhere, some of the issues were heard steadying in the upper 40s.

Closely intertwined with the fortunes of Kmart are those of Fleming Cos. Inc., thanks to the Dallas-based wholesale grocery company's long-term contract to supply Kmart's 2,100 stores with grocery products.

Fleming's debt was quoted down two points on Kmart's latest troubles, its 10½% notes dipping to 91 bid and its 10 5/8% notes at 89.

Elsewhere, a trader saw "some activity" in Conseco Inc. bonds, following its downgrade by Standard & Poor's which cut its senior debt ratings a notch from B+ to B. While one desk quoted the Carmel, Ind.-based insurer's 10½% notes unchanged at 79.125 and its 6.40% paper likewise steady at 58 bid, another trader saw the notes up about three points across the board. He opined that after the downgrade, the bonds were taken off negative watch, meaning another downgrade soon, a la Kmart, is unlikely.

Perhaps even more heartening to bond investors, he continued, was the company's statement that it had bought another $34 million of its short-term debt at a discount since Dec. 6, as part of its overall plan to whittle down its $6 billion of debt. Since June 30, Conseco has repurchased $266 million, or 30% of the bonds scheduled to come due this year.

"They spoke of more asset sales looming, and pretty much assured everyone that the '02 maturity indebtedness is money good, and there is no problem for them" paying the bonds when they mature. The trader quoted the 6½% notes due 2002 at 80 bid, the 8½% notes due 2002 at 78 bid, and the 10¼% notes due 2002 closed at 90 bid.

Adelphia Communications Corp. bonds firmed after the Coudersport, Pa.-based cable-TV system operator announced that it had increased its liquidity by a cool billion-and-a-half dollars by selling $500 million of new convertible notes and raising $1.02 billion with the sale of 40 million shares of common stock.

Adelphia's 10¼% notes due 2011 were up two points to 103 bid .

At another desk, those bonds were quoted as having firmed to 105.25, up two.

Also, the company's 8 1/8% notes were up a point-and-a-half to 100.5 bid. Its 7½% notes gained a point to 99. Adelphia's 10 7/8% notes due 2010 pushed as high as 107.5 bid.

Kaiser Aluminum's bonds fell sharply, as the market digested the full import of Tuesday's announcement that the troubled aluminum producer planned to hold talks with the holders of $799 million of bond debt in hopes of reducing its heavy interest burdens. "They got killed today," one market participant asserted.

The prospect that bondholders might be asked to tender or exchange their bonds at levels below recent market prices sent the paper skidding. Its 9 7/8% notes due 2002 lost five points from their recent levels around par; Kaiser's 10 7/8% notes due 2006, which had recently hovered around 90, were quoted as low as 72 bid Wednesday, while its 12¾% notes, last heard in the lower 70s, were quoted as low as 60 bid near the close.

Calpine Corp. bonds, such as its 8½% notes due 2011, were quoted down about two-and-a-half points across the board, at 84 bid, after the San Jose, Calif.-based independent power producer - hurt by declining electricity prices and lingering sector fallout from the spectacular crash of Enron Corp. - cautioned that fiscal 2001 earnings would come in around $1.95 per share, down from analysts' estimates of $2. The results are to be reported Jan. 31.

Calpine further warned that for 2002, it only expects to make $1.70 per share - down 13% from the anticipated 2001 results and well below Wall Street's consensus estimate of $2.20 per share.

The company said that while it would proceed with plans to building 27 power plants this year and next, at a cost of $3 billion, Calpine plans to put work on 34 other plants on the backburner until electricity prices rebound, saving $2 billion.

Enron - whose once high-flying shares were delisted by the NYSE Tuesday - was quoted on the debt side down two-and-a-quarter points to 18.75 bid.

End

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