AES in freefall again; Penney firm head of results; forward calendar fattens up

By Paul Deckelman and Paul Harris

New York, Feb. 20 - AES Corp. bonds continued to careen southward Wednesday after Moody's Investors Service threatened the embattled electric generating company with a possible ratings downgrade; on the upside, J.C. Penney bonds were being quoted higher ahead of what are expected to be favorable fourth-quarter results due out Thursday.

In the primary market, a forward calendar which was largely swept clean by a burst of pricing activity at the tail end of last week was growing measurably, as expected new dollar-denominated deals were heard emerging for Shop at Home, Entercom, Key Energy Group and Penn National Gaming - and from the other side of the pond, a sterling-denominated offering was announced by Britain's Enodis Group plc.

AES - whose steady erosion has dominated the attention of much of the junk market over the past several sessions - was back in that same familiar role Wednesday, its bonds and shares getting pounded again after Moody's, in putting the company's Ba1 senior unsecured and Ba2 subordinated debt ratings under review for a possible downgrade, warned that the move "reflects Moody's concerns about the adequacy of cash flow relative to the large debt load of the company as well as the stability and predictability of that cash flow."

AES's bonds "were still getting hammered," said a trader who quoted its senior bonds "finding levels in the mid-50s. This is not a name for the faint of heart."

At another desk, AES' 9 3/8% senior notes due 2010, which on Tuesday had fallen six points to around the 58 bid level, were down another three points Wednesday to 55. Its 9½% senior notes were quoted as having gone from 60 bid to 56 bid.

A trader saw even the heretofore fairly strong short-dated debt getting slapped around, quoting AES's 8¾% notes maturing later this year as having fallen to late-day levels around 78 bid/83 offered. On Wednesday, he said, the bonds, which are expected to be money-good at their redemption, had opened up offered around 95, then had fallen to offered levels around 92 during a conference call which investors believe did more harm to the company's image than good.

He meanwhile saw the company's subordinated debt having fallen into the 30s, with its 8 3/8% subs due 2007 quoted as low as a wide 30 bid/37 offered. "It was truly ugly," he said, "absolutely incredible." At another desk, those bonds were seen going home down three points on the session at 37 bid.

The company's shares - which had been trading at levels just below $10 as recently as early last Friday, before losing half their value on heavy volume in the past two sessions, meanwhile ended down another 50 cents (10.53%) to $4.25 on the New York Stock Exchange Wednesday on volume of 25.2 million shares, a more than sixfold increase over the usual activity level.

In warning of the possible ratings downgrade, Moody's added that the trouble area it will scrutinize first (and perhaps, it seems, foremost) will be "the company's ability to repatriate cash from its international investments and its sensitivity to exchange rate fluctuations."

In recent weeks, the Alexandria, Va.-based global power generating company's bonds and stock have already been weakening - perhaps not entirely fairly - on market perceptions that it might somehow share the problems of the failed Enron Corp., since the two companies are in much the same line of business, power generation and trading. But the AES securities really began to tumble in earnest last week, after problem-plagued Venezuela announced that it was letting its currency, the beleaguered bolivar, float against the dollar, and the Venezuelan currency unit proceeded to drop sharply. That was seen as a big potential negative for AES, which has a key subsidiary in Venezuela, the CA La Electridad de Caracas utility; not only does the company generate much electricity for the Venezuelan capital city, but up till now, it has been a major generator of cash-flow for corporate parent AES.

Moody's further said that it would examine the ability of the company "to significantly reduce its capital expenditure plan without impairing its cash flow," as well as "the impact of changes in business mix on the risk profile of the company, as well as the timing and use of proceeds of announced asset sales."

AES announced early Tuesday - and then reiterated in a morning conference call that did not inspire very much investor confidence - that it would seek to raise between $1 billion and $1.5 billion by selling assets, including some merchant and trading operations in New York, California and the U.K., its Cilcorp utility in Illinois and stakes in other properties as far away as the Caribbean and Latin America and as near as Indiana. It also pledged to cut capital spending, so it would not have to tap the volatile capital markets again the year.

The debt of AES rival Calpine Corp. was quoted down anywhere from three to four points on the session, with the San Jose, Calif.-based independent global power producer's 8½% notes due 2011 quoted going out at 69 bid/70 offered, down about three points on the session. The 8 5/8% notes due 2010 lost three points to close at 70. Calpine suffers from many of the same unfavorable industry dynamics as AES, as well as the market's continued psychological baggage from the Enron debacle.

Even other power producers which have not been whacked around like Enron, AES or Calpine are feeling the strain. Mirant Corp.'s Ba1/BBB rated 8.30% notes due 2011, for instance, started the day around Wednesday's 84 bid close, a market source said, but then edged their way down to 81 bid and, finally, to 79 bid/80.75 going home. "Some desks are already quoting then in dollars, others still on spread," he observed.

He also saw continued erosion in the bonds of nominally high-grade telecommunications operators who've run into problems; Qwest Communications and WorldCom Group have recently gone that route, and on Wednesday, it was Sprint Corp.'s turn in the shooing gallery. "Their bonds took a nosedive," he said, and widened out as much as 70 basis points. Sprint's 7 5/8% notes due 2011, for instance, went from bid levels 390 basis points off Treasuries to 450 basis points over, even as "for the most part, all the telecoms were wider." The Wall Street Journal reported Wednesday that Westwood, Kan.-based Sprint, the third-largest U.S. long-distance carrier, was "finding it more difficult to get access to the commercial paper market amid investor scrutiny of its finances."

Yet another ostensibly high grader behaving suspiciously like a junk issue was Computer Associates International Inc., whose 6¼% notes due 2003 widened out drastically to 650 basis points over Treasuries from 475 previously, while its 6 3/8% notes due 2005 likewise widened out to 625 basis points.

On the upside, a trader said J.C. Penney debt "was impressive" ahead of the expected release Thursday of earnings data. He saw the retailer's bonds up ¾ to a full point on the session.

And debt of TV station owners such as Young Broadcasting and Sinclair Broadcast Group firmed slightly - about half a point or so - as a federal appeals court ordered the Federal Communications Commission to revisit its decision to retain limits barring television broadcasters from reaching more than 35% of the national TV audience. The court also struck down the prohibition on a company owning both a cable system and a broadcast television station in the same market.

Salomon Smith Barney media analyst Stevyn E. Schutzman wrote in a research note that the decision would likely encourage TV industry consolidation, so "we expect that the high yield pure play broadcasting sector will continue to trade better due to the merger & acquisition activity that will eventually take place."

But investors might want to move quickly, for the gains will likely be short-lived; Schutzman added that "we believe at this time, investors should take advantage of the opportunity to reduce their positions in high yield broadcasting names as they begin to run up."

The analyst noted that with the court having told the FCC to essentially rewrite rules in this area, "an FCC decision on the ownership rules will take some time, and with the high yield broadcasting sector continuing to fundamentally underperform, many of these names will trade up and then back down on this news."

In the primary, the sizable surge in business Wednesday saw $560 million of new dollar-denominated deals along with £100 million of sterling issuance announced.

Nashville, Tenn.-based interactive TV and web retailer Shop at Home announced Wednesday that would bring $135 million of seven-year senior secured notes via sole bookrunner Fleet Securities.

Proceeds, according to a syndicate source, will be used to redeem its $75 million of 11% senior secured notes due April 1, 2005. Those notes become callable on April 1 at 105.5.

In a recent 10-Q filing the company announced that on Aug. 1, 2001 it obtained a $17.5 million revolver from a financial institution (unidentified in the filing). The revolver matures on Aug. 1, 2003. The filing stated that the company "failed to comply with the cumulative EBITDA covenant for the six months ended Dec. 31, 2001, and has been granted a waiver of the EBITDA violation within an amendment to the loan agreement from the lending bank. The amendment also prospectively eliminates the EBITDA covenant through June 30, 2002, and reduces the requirement thereafter."

The roadshow on Shop at Home's new deal starts Tuesday and pricing is expected at the end of the week of March 4.

Also on Wednesday, Pennsylvania-based broadcasting company Entercom Communications Corp. unveiled an off-the-shelf deal for $150 million of 12-year notes via joint bookrunners Credit Suisse First Boston and Deutsche Banc Alex. Brown. The company will start the roadshow Thursday and price the deal during the week of March 4.

Late in Wednesday's session the market received news of a drive-by offering from Penn National Gaming: $175 million of eight-year senior subordinated notes via joint bookrunners Bear Stearns & Co. and Merrill Lynch & Co. Thursday roadshow stops are scheduled for New York and Boston, with pricing also expected to take place Thursday, according to a syndicate source.

A sterling deal from London-based food preparation equipment manufacturer Enodis plc, for £100 million of 10-year senior notes via Credit Suisse First Boston and RBS was announced Wednesday. Pricing is expected to take place March 19.

And Key Energy Services, Inc. announced Wednesday that it is "evaluating the issuance" of a $100 million add-on to its 8 3/8% senior notes due March 1, 2008. Lehman Brothers and Bear Stearns ran the deal for the original $150 million of 8 3/8% senior notes, which priced March 1, 2001. However a source from that syndicate told Prospect News on Wednesday that whether or not the syndicate for the add-on would be the same could not be confirmed.

Finally on Wednesday price talk of 10¼%-10½% was heard on Circus and Eldorado Joint Venture/Silver Legacy Capital Corp.'s $160 million of mortgage notes due 2012. The deal is expected to price Friday.

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