Bethlehem bonds better on consolidation; Hayes higher after Chapter 11

By Paul Deckelman and Paul A. Harris

New York, Dec. 5 - Bonds of Bethlehem Steel Corp. shot up Wednesday as the junk market latched onto the possibility that Bethlehem and several other troubled steel makers might combine with industry leader U.S. Steel Corp. in an effort to cut their costs and reorganize their production capacity.

Meanwhile in the primary, three new deals representing an even $700 million of issuance - two with roadshows, one without - joined the lengthening parade of new issuance that figures to price during the final weeks of 2001.

"Most of the focus was on the steel sector today," said a trader, quoting Bethlehem's 10 3/8% notes at 11 bid and its 8.45% bonds at 22 bid, both up five points on the session.

According to news reports, besides Bethlehem (currently in Chapter 11) and U.S. Steel, the talks have also involved National Steel, as well as two other bankrupt steelers, LTV Corp. and Wheeling-Pittsburgh Corp. However, the debt of the other companies has so far not benefited much from the consolidation speculation.

U.S. Steel's bonds were unchanged from Tuesday, when its 10¾% notes were quoted down a point at 98; National Steel's bonds were unchanged, its 8 3/8% notes at 31 and its 9 7/8% notes at 25. LTV's 11¾% notes were unchanged at 1 and Wheeling-Pittsburgh's 9¼% notes were unchanged at 3. The 10½% notes of the latter's corporate parent, WHX Corp., which is not in bankruptcy, were unchanged at 49.

On the equity side, investors were enthusiastic about the possibility that the beleaguered steelmakers might combine and somehow off-load their pension costs onto the federal government, which they say would leave them financially strong enough to battle foreign steel producers.

Bethlehem was seen as the biggest likely beneficiary of such an arrangement. Its shares were up 28 cents, or 59.57%, on the New York Stock Exchange, ending at 75 cents; volume of 7.1 million shares was about five times the average 1.4 million-share daily handle. U.S. Steel closed up $1.31, or 7.73%, at $18.26 on NYSE volume of 2.3 million shares, about three times normal. National Steel was up 59 cents, or 47.20%, to $1.84, on volume of some 388,000 shares, ten times normal. WHX - which has other interests besides steel - was up a penny on the NYSE to $1.50, on volume of 46,000 shares, versus the usual 29,000-share turnover. LTV, whose shares trade on the over-the-counter bulletin boards, was up nearly 50%, from about four cents per share to a shade under six cents, its 6.2 million-share volume more than six times normal.

But the whole scheme could fall apart if Washington does not step in to assume the steelmakers' legacy costs, i.e., the pension and benefit costs for already retired employees. There are literally tens of thousands of these, dating back to the days when the big U.S. steelmakers were far larger.

News reports Wednesday quoted a key U.S. official, Trade Representative Robert Zoellick, as describing the steelmakers' plans to have Uncle Sam pick up the tab for the pensions as being "a little rich." But he also did not rule out the possibility, noting that were the steelmakers to go out of business instead of merging, something industry leaders say is quite possible without direct federal help, then Washington would probably have to assume those pension liabilities anyway.

The stronger showing of at least some steel industry bonds (chiefly Bethlehem's) could have some coattails in related industries; the trader said that Kaiser Aluminum and Chemical Corp.'s short maturity paper "has been up for the past month or so," finishing Wednesday at par bid/100.25 offered.

Also among the old-line Rust Belt "smokestack economy" names, Hayes Lemmerz International Inc., sought protection from its junk bond holders and other creditors via a Chapter 11 filing with the U.S. Bankruptcy Court in Wilmington, Del. The Northville, Mich.-maker of metal wheels for the automotive industry said its filing said its filing was made necessary by declining market conditions and excessive debt.

Hayes' 11 7/8% notes, which had been trading in the 38-40 range before the filing, were quoted afterward at a wide 41 bid/45 offered, trading flat, or without accrued interest. The changeover from trading with interest to trading flat effectively amounts to the loss of several additional points beyond any nominal price change.

The company's subordinated debt was far lower, its 8¼%, 9 1/8% and 11% bonds unchanged at 2 bid.

No movement was seen in other bonds in the automotive sector, including the bonds of Federal-Mogul Corp., which were unchanged at 13.25 bid/14.25 offered; Lear Corp. bonds were unseen, market participants said.

Enron Corp. bonds, which had been rising over the past two sessions from their recent lows on expectations that the newly bankrupt Houston-based energy trading company might be able to restructure successfully and emerge as a smaller but more financially stable entity, were essentially unchanged at around 24 bid.

But its shares were up for a third straight session Wednesday, rising another 14 cents, or 16.09% to end at $1.01 on heavy volume of 239 million shares, more than seven times their usual daily NYSE turnover, although one bond trader marveled at this.

"We sat here, looking at each other," he said. "And we're trying to figure out how, if they're (going to restructure) in bankruptcy, how's the stock going to have any value?" He speculated that the rise must be attributable to short-covering, because "I can't imagine how the existing equity is going to have too much value" in any restructuring scenario. One other possibility, he agreed, was that investors were loading up on the shares once they dipped under $1 and might now be ready to take their profits and scoot.

"Let's just hope it's all the people who had bought the bonds in the 60s (last week) the day before they fell out of bed and now were able to make their money back by buying the common (stock), because there are a lot of people hurting out there."

Even as the Enron bonds seemed to pause after their most recent rebound, Azurix Corp.'s paper also seemed to plateau, at least temporarily, its 10 3/8% and 10¾% bonds hanging in around the same 65 level seen Tuesday. Houston-based Azurix is an Enron water-supply subsidiary and is expected to be sold as the parent disposes of non-energy assets.

Elsewhere among energy-related names, Premcor - the the former Clark USA - was higher on the session, its 10 7/8% notes moving up to 83 bid from prior levels around 80-81. A trader cited the news that the St. Louis-based petroleum products refiner had hired Morgan Stanley to manage its planned initial public offering.

In the greater macroeconomic sphere, there was key development Wednesday which could bode well for the names in the high yield energy patch, as Russia, relenting to intense pressure, agreed to reduce its production by 150,000 barrels a day to help prop up sagging oil prices. That was expected to trigger a 6% cut by the Organization of Petroleum Exporting Countries in its official crude oil output. On the New York Mercantile Exchange, January contract light, sweet crude initially surged more than $1 early in the session on the Russian news to a day's high of $20.78. However, prices fell back later on market skepticism about whether Russia - or OPEC - would stick to their planned output cuts, with prices closing down 16 cents on the session at $19.49 a barrel.

Speaking generally, a trader opined that there seemed to be a scarcity of "cash-flow" names, i.e., bonds of companies actually generating positive cash-flows.

"I don't know whether it's because a lot of dealers have closed their books, but you have the distressed guys watching Enron and then you have so much money coming into the market that's got to be put somewhere, so that of the cash-flow names, you really can't find too much in the way of offerings on them."

He noted that "Host Marriotts have been bid up, and homebuilders have been well-bid for. It seems like any time you've seen an offering in a company that's cash flow- positive, with all of the money pumped into the high yield market, it seems like they're trading up."

That would seem like pretty good news for the bond market - but the trader said sometimes, it could get a little frustrating in a way. "I might get an inquiry and find bonds that I think I can fill the inquiry with - and then the next day, they're gone, they've traded up. So it's just kind of a weird environment," he concluded.

Meanwhile in the primary, the heavy calendar of new issues in the reaction to the flow of money into the high yield market was also prompting questions.

One sell side official wondered aloud to Prospect News just how much new business the market can handle.

"I'm worried, as we're up against the calendar here - with nothing really happening between Christmas and the New Year as usual - we're going to get so many additions to the calendar in the next couple of weeks that you're basically going to turn this into a buyer's market, where right now it's a seller's market," the official commented.

"We saw this in June, where the market was hot and everybody rushed to get in," the official continued. "Of course we didn't have the year-end calendar up against us then. But all of the sudden in the last week of June the bubble burst, and buyers could say 'We've got a lot of other places to put our money right now.'

"I don't think we're at that point right now," the sell-sider stipulated. "I think the calendar is still manageable at about $2 billion, which is about where it's at, by my estimations. But I think if we add another billion in the next week we've got a problem."

When the official spoke with Prospect News mid-morning Wednesday, the Dow Jones Industrial Average was driving toward the 10,100-mark, which, the official commented, puts pressure on the Treasury market, but bodes well for high yield.

"We've got seven consecutive weeks of positive inflows from AMG," the sell-side source said. "We knew that clients were sitting on cash going into that period. Five of those last inflows have been very significant. And they've got to put that cash to work before the year end.

"So we do have some technicals working in our favor. I think we're in decent shape - as decent as we can be, going into the second week of December."

The new deals announced Wednesday include:

--IPC Acquisition Corp. will sell $150 million of eight-year notes via Goldman Sachs & Co., to price Dec. 14;

--Senior Housing Properties will offer $200 million of seven-year notes via UBS Warburg, to price late the week of Dec. 10; and

--Host Marriott Corp. will sell $350 million of five-year notes in a drive-by offering via Deutsche Banc Alex. Brown and Banc of America Securities, with pricing either Thursday or Friday.

Two deals priced Wednesday, one each on either side of the Atlantic.

By sunrise New York-time terms had emerged on Findexa's offering of €145 million notes, which priced to yield 10¼%, at the tight end of the 10¼%-10½% price talk. Salomon Smith Barney was bookrunner.

One syndicate official, speaking to Prospect News from London, wondered if Findexa might close the book on the 2001 European high yield primary market.

"It's now the fifth of December," the official said. "There is a possibility of doing something more, but as far as the whole roadshow process and going through the mechanics of a full high yield deal, that would be difficult, without having something in the pipeline, now.

"If something were to come up at short notice, with a short execution time, then it's a possibility."

The official from London also commented that, like the highly liquid U.S. high yield market, there is cash aplenty waiting to be put to work in the European high yield markets.

"There are a few opportunities out there being chased by all the banks," the official said. "And there's no supply. So all the accounts sitting with cash are wanting to do something with it, especially since a lot of our accounts receive funding at this time of year anyway and need to put their cash somewhere."

The deal that priced Wednesday on the U.S. high yield primary was Stone Energy Corp. $200 million of 10-year notes which priced to yield 8¼%, at the tight end of the 8¼%-8 3/8% price talk.

Finally on Wednesday, price talk came out on three deals that are scheduled to price Friday:

--Radiologix's $160 million of notes are talked in the 10 3/8% area'

--OM Group's $400 million of notes are talked in the 9¼% area; and

--CSK Auto's $225 million offering is talked at 12½%-12¾%.

End

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