Enron continues to falter on fears deal may die; Radiologix slates new offering

By Paul Deckelman and Paul A. Harris

New York, Nov. 26 - Just as it has done from most of the past week, the high yield secondary market remained riveted on the gyrations of almost-junker Enron Corp.'s stock and bonds as its proposed acquisition by Dynegy remained in jeopardy. In the primary market meanwhile, Radiologix Inc. joined the forward calendar as it announced plans to sell a tranche of seven-year notes, while drive-by deals for Nextel Partners and Toll Brothers took shape; their pricing is seen likely during Tuesday's session.

The primary market wasted no time gathering steam following the Thanksgiving break. One new deal hit the road, and two drive-bys surfaced on Monday.

Radiologix, Inc. started roadshowing a $160 million offering of seven-year notes. Marketing runs through Dec. 7 on the offering, which is via joint bookrunners Jefferies & Co. and Deutsche Banc Alex. Brown.

Also, two drive-by deals were announced, both expected to price Tuesday. Nextel Partners Inc. will offer $200 million of seven-year senior notes via Credit Suisse First Boston and Deutsche Banc Alex. Brown. Price talk is in the 14% area. Unusually, the coupon has already been set on the offering at 12.5%, which implies that the deal will sell at a discount. The company's outstanding senior notes are rated B3 by Moody's Investors Service and CCC+ by Standard & Poor's.

Also announced Monday for pricing Tuesday was a $150 million offering of 10-year notes from luxury home builder Toll Brothers Inc. The offering, via Banc of America Securities, is talked at 8 1/8%-8¼%. The issuer's existing debt is rated Ba2 by Moody's and BB+ by S&P.

Meanwhile, some confirmation of a rumor that has circulated in the primary market during recent weeks came from Bob Franklin, manager of the Neuberger Berman High Yield Fund.

He told Prospect News that he had some evidence state and local pension funds are presently taking a very close look at the high yield asset class.

"We've been in a couple of searches," Franklin said. "I do know that our sales force that covers institutions is seeing more inquiries."

Franklin commented that it was plausible those searches could be motivated by the notion that history repeats itself: the 1989-1990 recession which led to the worst ever year for defaults in the high yield market was followed by returns in excess of 40% in 1991.

"There's a lot of expectation for the reason that coming out of a recession equities do well and high yield does well and people are looking for that to repeat itself," he said.

Franklin also said that for the remainder of 2001 high cash levels from the buy side could bring some "hairy" deals to the high yield market.

"There are certain deals coming that can get done in a hot market and high yield is hot right now," he said.

In addition to the expected pricing of the two drive-bys mentioned above, price talk on upcoming new offerings from Global Auto Logistics SA (€100 million of eight-year notes) and Majestic Investor Holdings LLC ($145 million of seven-year notes) is expected Tuesday.

It was pretty much as case of "more of the same-old same-old" for secondary players tracking the deteriorating fortunes of Enron, the Houston-based energy marketing concern. The company's nominally still investment-grade bonds continued to slide precipitously while its shares briefly slid below their all-time low close before rebounding a little to close above that point, but still well down on the day.

Enron's 6½% notes due 2002 and 7 5/8% notes due 2004 each dropped about five points on the session to 61 bid and 50 bid, respectively; its 6.4% notes due 2006 were being quoted as low as 48 bid from last week's closing levels in the mid 50s. A trader saw Enron's 7 7/8% and 9 7/8% notes, both due 2003, as having opened around 65 bid and having fallen to between 55 and 65 by day's end; a week ago, the paper was trading in the lower 80s. Its 6¾% notes due 2005, which had ended trading last week at 70 opened at 52, with no bid Monday. He also saw some of its longer-dated paper, maturing in 2019 and 2028, trading as low as the 45-55 bid range, well down from recent levels in the upper 70s.

"The paper continues to weaken across the board," the trader said. "It's undergoing some serious downturn, falling 10, 15 points from recent levels and not bouncing back too much. People want some sort of definite announcement what's happening with them."

Speculation was rife on Wall Street that the $9 billion takeover deal announced earlier this month by Enron and its smaller, but more financially secure rival, Dynegy Inc., may have to be restructured or may even be scrapped all together. The agreement contains escape clauses which Dynegy could exercise if it feels Enron's value or operations have been materially adversely affected.

Enron's shares fell another 70 cents (14.86%) Monday to $4.01, after at one point in the day having touched $3.76, under its all-time low of $3.94, reached in 1987. The value of the company's shares has fallen some 60% from the $10.41 per share at which the company was valued under the terms of the Dynegy offer announced.

News reports said that amid concerns that Enron might run out of cash before the Dynegy deal could be finalized, J.P. Morgan Chase and Citigroup were trying to line up investors for as much as $2 billion of financing. But there was no definitive word late in the day as to the status of the financing, causing many in the financial markets to become restless and wary.

"Investors need some verification" that the Dynegy deal really is going to happen and is not going to be scuttled by the sharp slide in the company's stock price or the recent fall-off in its energy trading business," the bond trader said. "The market's just pummeling this stuff. Its short-term paper, before all of this began, was in the 98-99 range, and now it's down in the 60s. There's a lot of blood out there on this paper right now."

Elsewhere, a trader said, "the airlines keep moving up bigtime," as the jitters touched off by the events of Sept. 11 seem to have receded. He saw particular strength in Continental Airlines and Northwest Airlines paper, with Continental's 8% notes up a point to 76 bid, even as the carrier's shares gained about $2. Meanwhile, Northwest's 8 7/8% notes due 2006 were up around a point-and-a-half to 78 bid, "a huge move," he said. On a yield basis, the bond, recently north of 20%, was yielding about 16% or so, reflecting the price gains.

With the holiday shopping season now officially under way, retailers, he said, were showing some strength, even amid predictions of a lackluster season and challenged earnings. Kmart, due to report third-quarter numbers Tuesday "was up even in the face of (the numbers)" he said, quoting its bellwether 9 3/8% notes due 2006 up a point at 92 bid and its 9 7/8% due 2008 at 90.5 bid. Another credit which shows strength, he said, is apparel maker Tommy Hilfiger.

Another trader also saw Kmart doing well, speculating that amid predictions of a lackluster holiday buying season, consumers looking to get more bang for their gift-giving bucks might desert the conventional department stores in favor of Troy, Mich.-based Kmart and other discounters.

"The discounters look like that's the way people are going," he noted, quoting Kmart's 8 3/8% notes due 2004 trading up around 97 from mid-90s, while there was "some selling into strength" in the the 9 3/8% notes due 2006, which he quoted around 93, well up from the mid 80s about a week or so ago, "so they made a quick bounceback. We'll see if any sellers emerge and kind of pound that down again." Telecoms, he said "continued to be topsy-turvey," with Nextel Communications Inc.'s 9 3/8% benchmark notes starting the day around the 80.5-81.5 bid level, trading around the 81 level and "hanging in there, though with not much movement."

Meanwhile, Level 3 Communications Inc.'s 9 1/8% market bellwether issue "had some activity today," he said, starting the day in the 58-60 range, dipping to 56-58, and then trading up again between 58 and 59, "so there was some activity there," though not necessarily much price movement.

Xerox paper continued to be strong, the trader said, after having bounced up four to six points last week as the Stamford, Conn.-based copier giant successfully staged a big convertible debt sale, announced new equipment funding agreements with General Electric Capital Corp. and precicted a return to profitability next year. He saw its 8 1/8% notes due 2002 "still at that par-101 level, the 5 ¾% still 98.25-99.25, 5 7/8% due 2004 still around the 86-88 level, so they're all hanging in there."

A trader saw some of the beleaguered steel sector names firmer in the wake of bankrupt LTV Corp.'s moves to liquidate its assets. He saw Bethlehem Steel Corp.'s 10 3/8% notes improving to 7 bid from prior bid levels around 5.5-to-6, and Algoma Steel's 12¾% notes up around the 17-18 area, versus recent levels around 14-15. "It looks like there will be less competition and steel prices may go up," he opined - although all of that will come too late to help LTV, the Cleveland-based Number-4 U.S. steelmaker, which sought protection from its junk bond holders and other creditors last December.

On the downside, he said, "oil bonds and natural gas continue to get weaker" as world crude prices remained at their lowest levels in several years on signs of economic slowdown in the U.S. and other key economies. He quoted Magnum Hunter Resources' 10% notes offered at 97, after having previously traded around 98 bid.

Also on the slide were Lucent Technologies Inc. bonds, in tandem with the company's shares, said a market observer who quoted the Murray Hill, N.J.-based telecommunications equipment maker's 7¼% notes due 2006 dipping to 86.5 bid from last week's levels around 88 and its 6.45% debentures due 2029 down a point at 69. At the same time, Lucent's shares retreated 35 cents (4.17%) to $8.04 on the New York Stock Exchange, after analysts from Morgan Stanley and ABN-AMRO downgraded their ratings on the company's equities.

ABN-AMRO'S Kenneth Leon, in a research note, warned that absent stronger revenue growth, Lucent - which has already seen two waves of operational restructuring since January - could see a third one. He also expressed doubt whether Lucent can achieve positive EBITDA (earnings before interest, taxes, depreciation and amortization, a key bond market measure of a company's cash-flow generation ability and debt-service capacity) by the second quarter of 2002, as has previously been projected.

Leon, in cutting his rating on Lucent to "hold" from "add" previously widened his estimate of Lucent's likely fiscal year 2002 loss to 53 cents per share from a previous forecast of 39 cents per share.

Volume in Lucent stock was an active 31 million shares.

A bond trader said that the junk market "continues to watch the stock market and see how it correlates with our stuff. Some of the good names are getting weaker - and some of the weak names are getting better."

"He said that "it's not a whole market consensus - just on a case-by case basis. Some names in a certain sector are doing better than the sector itself, and vice versa.

End

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