Enron continues retreat, Azurix unit slides; Lyondell prices drive-by offering

By Paul Deckelman and Paul A. Harris

New York, Nov. 30 - Enron Corp. bonds continued their voyage toward oblivion Friday, even as the company drifted closer to a possible Chapter 11 filing following the collapse earlier of this week of its proposed merger deal. Meanwhile, the bonds of its Azurix Corp. water subsidiary were sharply lower in light of its parent's troubles.

In primary dealings, Lyondell Chemical Co. was heard by syndicate sources to have priced an upsized $393 million 10-year deal, the biggest offering in a session which saw no less than four deals price, including two which surfaced during Friday's session and a third which quickly firmed up after being on the horizon, and one more join the calendar of upcoming offerings.

And the activity wasn't just confined to New York, either. Syndicate officials on both sides of the Atlantic reported Friday to Prospect News that the high yield market is presently "hot."

"I think the market here is very strong," a sell-side official in London said. "There are not as many high yield issues outstanding, over here, so you don't have the potential for the repeat issuers to tap the high yield market, like you do in the states.

"But I think buyers are looking for product, so the market is hot."

An additional $790.5 million of new high yield was announced Friday, rendering a total of $3.59 billion in new issuance announced during the week of Nov. 26.

Of the four new offerings that appeared Friday morning, all but one had priced by the end of the session. Those that priced included:

--Lyondell Chemical's upsized $393 million senior secured seven years via joint bookrunners Salomon Smith Barney and J.P Morgan, which priced at the tight end of talk and yielded 9½%.

One syndicate source noted that the Lyondell notes were secured, and recited a list of secured deals that have come to the post-September market: Revlon, Allied Waste, American Restaurant Group, BRL Universal (add-on), Alaris, and Terra Capital.

"It seems like since September we've been seeing more of that," the official said. "Maybe that is a good way for issuers to tap into this market, to offer securitization to investors."

In addition to Lyondell, Friday pricings included:

--KB Home Inc. $200 million seven-year notes via Banc of America Securities in the middle of talk at 8.6875%;

--Young Broadcasting $250 million seven-year seniors via Deutsche Banc Alex. Brown and Wachovia Securities yielding 8½%. The deal had been in the works for a while but timing only firmed up Friday; and

-- Hollinger Participation Trust $140.5 million add-on to its senior notes due Nov. 15, 2010, via Credit Suisse First Boston, pricing at 83 to yield 15.65%.

Although the pricing of Majestic Investor Holdings LLC $145 million was expected on Friday, late in the session terms on that deal had not emerged, a syndicate source told Prospect News.

Also on Friday, market and syndicate sources informed Prospect News that Stone Energy would launch $200 million 10-year notes Monday, with pricing expected Friday, Dec. 7. Sources identified Merrill Lynch & Co. as the bookrunner.

Price talk of 9-9¼% was heard Friday on Ingles Markets, Inc. $200 million 10-year notes via joint bookrunners Merrill Lynch & Co. and Banc of America Securities. One syndicate source told Prospect News that the deal was clearly shaping up to be a blow-out.

Counting Stone Energy and Ingles Markets, eight deals are already on tap to price during the week of Dec. 3: Majestic, Horizon PCS, Findexa, Radiologix, OM Group and CSK Auto. The total in dollar-denominated business that will be on the table when the players take their chairs on Monday: $1.505 billion. And all hands on the sell-side say that there are bound to be more drive-bys.

In the secondary, Enron's senior bonds, which had crashed some 30 points in Wednesday's dealings and which fell several additional points Thursday to go home quoted bid in the 20-24 area, were once again on the slide Friday, dipping as low as 16 bid before ending quoted around 18 bid/22 offered. The bonds were trading flat, or without accrued interest, an effective loss of several additional points from previous falls in their nominal prices.

By the end of the trading session, the fallen Houston-based energy marketing giant had still not yet filed for Chapter 11 protection, which is considered by junk market participants to be the most likely scenario. Enron was thought to be trying to line up debtor-in-possession financing, which would allow it to maintain operations as it restructures.

Possibly tossing a spanner into the works was the emergence of a dispute between Enron and its erstwhile suitor, fellow Houston energy marketer Dynegy Inc., over the fate of Enron's Northern Natural Gas interstate pipeline company, which Dynegy had previously agreed to buy. In fact, backed by 27% owner Chevron Texaco Corp., Dynegy bought $1.5 billion of the pipeline company's preferred stock, and holds an option to buy all of its common shares. It now contends that such a stake effectively bars Enron from taking the company into Chapter 11 with the parent in the event of a filing. Enron, understandably, disagrees.

The pipeline is one of the few tangible physical assets which Enron actually has, and it is anxious to keep control of the valuable property in the event it is forced to seek bankruptcy protection. Whether that happens - as well as the larger question of just what Enron's real breakup value is - may determine whether any of its bondholders will see a recovery in a liquidation scenario, and if so, which ones and for how much.

"Someone said Enron has something like $60 billion in assets," a bond trader said. "No way. It's mostly got two pipelines (including Northern Natural Gas), and Portland General Corp. (an electric power holding company which Enron bought for $2.1 billion in 1997 but which it is in the process of selling for $1.8 billion). Beyond that, where are those assets? It's all trading contracts - and those are not assets that you can sell at face value."

He asked rhetorically "what would you pay for this contract or that? It might be worth par but if I say I'll pay 50 - that's that. It's very hard to value of this stuff until you go to sell it. You won't know what anything is worth besides the hard assets. The banks are going to want to get paid first, obviously. Maybe the bondholders will get paid - and maybe they won't."

Another Enron asset is its Azurix water supply unit, which now exists chiefly as a European operation, having sold off its North American businesses recently.

Azurix's 10 3/8% and 10¾% bonds were seen by market watchers to have taken a steep tumble Thursday down to the 67 bid level from prior levels around 82, in the wake of its corporate parent's troubles, and they were quoted down an additional 10 points Friday, at around 57.

Enron's woes over the last few sessions have fascinated the high yield market. As the company's bonds were suddenly downgraded from barely investment-grade to deep into junk territory; they went from trading at the high-grade desks at many shops straight over to the distressed-debt traders, essentially bypassing the regular junk bond trading venues.

But what is expected to be one of the biggest business collapses in U.S. history is actually not functioning as an albatross around the neck of the rest of the junk market in general or the energy sector in particular, with little negative carryover seen on the bonds of other companies.

"It didn't really have much effect on the overall market," a trader opined. "Maybe that's because these guys had their own internal situation, outside of the (junk) marketplace. They're trading as if they are in their own little world."

He cautioned, though, that other companies of interest to high yield players might be affected, "once the research is completed" and everyone can see who has how much exposure to Enron. But for now, the general consensus is that high yield energy players and related companies had negligible exposure at worst.

Elsewhere, XO Communications Inc.'s bonds, which had fallen to bid levels around 10 on Thursday on news the telecom company planned a restructuring which would give debtholders only pennies on the dollar, "moved back up today, substantially," one participant said. Debtholders appeared resigned to the deal to give them 18% of the restructured company's common stock, worth about $185 million, in return for doing away with about $4.7 billion of debt out of a total $5.7 billion debtload. Current shareholders will essentially get zilch.

Euro-cablers NTL Communications and Telewest Communications plc's bonds continued to retreat for a second consecutive session, following Moody's Investors Service's downgrade Thursday of industry leader NTL's bonds to Caa2 from B3 previously.

NTL's 11½% notes due 2006, which on Thursday had fallen to around 42 bid, slipped another four points to 38, while its 11 7/8% notes due 2010 dipped to around 37 from Thursday's finish at 40; on Thursday, both had fallen from pre-news bid levels around 48-49. The company's 10% notes due 2007 lost three points on the day Friday to go home bid at 36.

Telewest's bonds, which had also lost about three to four points Thursday on sector sympathy with NTL, likewise stayed on the downside. Its 11 ¼% bonds dropped to 85 bid from 87.

Outside of the telecom and cable sphere, Houston-based chemicals maker Huntsman Corp. confounded market players who had expected it to make the Dec. 1 coupon payment on its Huntsman Polymers 11¾% notes, using the proceeds of a newly announced $150 million Deutsche Banc Alex. Brown-led financing. Instead, Huntsman said that it would not make any of its Dec. 1 and Jan. 1 bond interest payments, and said it would seek to open talks with its bondholders on restructuring its debt and improving its overall financial flexibility.

One observer quoted Huntsman Polymer's 11¾% notes down three-quarters of a point to about 7 bid, while Huntsman Corp.'s 9½% notes due 2007 were seen unchanged around 9. The bonds of the much more financially secure Huntsman International (i.e., Huntsman ICI) continued to hold at correspondingly much better levels, its 10 1/8% notes steady at 93 and the company's zero-coupon bonds remaining bid around 25.

In the new-deal sphere, a trader said the freshly issued bonds of Huntsman's fellow chemical maker, Lyondell, "did really well" in secondary action, after having priced at par earlier in the day. Those bonds were quoted going home at 100.75 bid.

End

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