Downsized Rexnord, upsized Avis deals price; Hertz gains on IPO news

By Paul Deckelman and Paul A. Harris

New York, July 14 - Rexnord Corp. was heard to have successfully priced a two-part junk bond issue on Friday - but not before the Milwaukee-based industrial manufacturer downsized one tranche and was then forced to offer a bigger coupon to get the deal done. Syndicate sources also heard that Avis Europe plc - which carries the flag for the world's second-largest car rental company in Europe, Africa and Asia - priced an upsized offering of euro-denominated seven-year notes.

Avis' bigger rival, Hertz Global Holdings Inc., meanwhile announced plans for a $1 billion initial public stock offering - and the Park Ridge, N.J.-based vehicle rental operator's bonds rose even in advance of the official announcement after The Wall Street Journal reported that Hertz would file for the IPO.

Also on the upside were the bonds of Petco Animal Supplies Inc. on the news that the San Diego-based pet store chain has agreed to be acquired in a $1.8 billion deal, which includes assumption of its outstanding debt.

Ford Motor Co. bonds, and some of the other automotive names, were lower, after Moody's Investors Service downgraded the ratings for the Number-Two domestic carmaker and its Ford Motor Credit Co. financing arm.

Homebuilders also eased, after D.R. Horton Inc. lowered its earnings guidance.

With crude oil prices pushing up over $78 per barrel and equity markets plummeting, sources marked the broad high-yield market lower on Friday.

"The Mid-East crisis is weighing on peoples' minds, and moving markets lower," a sell-side official commented well after Friday's close.

"$80 per barrel oil will get peoples' attention," the official added.

"At that level it's truly inflationary."

The source said that junk was ¼ to ½ point lower, or 10 to 15 basis points wider on a yield basis, for the session.

The official also reckoned that the broad market is 2 to 3 points lower over the course of the first two weeks in July, or 40 to 50 basis points wider on a yield basis.

Despite the Friday sell-off in junk, three issuer priced four tranches totaling $1.085 billion and €250 million.

Rexnord gets it done

The largest dollar-amount of issuance came from RBS Global, Inc. and Rexnord Corp., combining to price a downsized, restructured $785 million two-part deal.

The Milwaukee-based motion technology products manufacturer priced an upsized $485 million issue of eight-year notes (B3/CCC+) at par to yield 9½%.

The yield came 12.5 basis points wide of the 9¼% area price talk. The senior notes tranche was upsized from $420 million.

The company also priced a downsized $300 million issue of 10-year senior subordinated notes (Caa1/CCC+) at par to yield 11¾%.

The issue priced 50 basis points wide of the 11%to 11¼% talk, which had been revised from earlier talk of the 10¾% area. The subordinated notes tranche was downsized from $365 million, after having been downsized earlier in the week from $420 million.

The overall transaction was downsized from $840 million, with $55 million shifted to the company's credit facility.

Credit Suisse, Merrill Lynch & Co., Bear Stearns & Co. and Lehman Brothers were joint bookrunners.

Proceeds, together with equity from an affiliate of Apollo Management, LP, will be used to finance Apollo's purchase of RBS Global from The Carlyle Group.

A sell-side source who watched from the sidelines said that the deal "looked pretty brutal," but added that "they had to get it done.

"When the sponsor feels strongly about the equity return, getting the deal done is a lot more important than 25 extra basis points," the source added.

"When people aren't forced to get capital it is more likely that they will pull the deal."

Avis Europe tight to talk

Investors apparently gave a much warmer reception to Avis Finance Co. plc's upsized €250 million issue of non-rated seven-year senior floating-rate notes.

The deal priced Friday at par to yield three-month Euribor plus 262.5 basis points, at the tight end of the three-month Euribor plus 275 basis points area price talk. It was increased from an original size of €200 million.

Barclays Capital, The Royal Bank of Scotland, Dresdner Kleinwort and Societe Generale were joint bookrunners for the Regulation S debt refinancing issue from the Bracknell, U.K.-headquartered car rental company that operates in Europe, Africa, the Middle East and Asia.

A market source said that the Avis Europe book was more than six-times oversubscribed.

Enterprise Products hybrid deal

Also pricing Friday was Enterprise Products Operating LP's $300 million issue of 60-year fixed-rate to floating-rate junior subordinated notes (Ba1/B+/BB+), which sold at par.

The notes will pay an 8 3/8% fixed rate of interest until August 1, 2016, after which the interest rate will float at three-month Libor plus 370.75 basis points.

Wachovia Securities was the bookrunner and structuring adviser. Lehman Brothers was the joint bookrunner for the debt refinancing and general partnership purposes deal from the Houston-based provider of processing, transportation and storage services to the natural gas, natural gas liquids and crude oil industries.

Market sources told Prospect News on Friday that despite its high-yield credit ratings the deal was tailored to investment grade-type accounts.

A $2 billion week in the primary

Tallying Friday's $1.085 billion of dollar-denominated issuance, the week ending July 14 came to a close having seen $2.032 billion price in six dollar-denominated tranches.

No dollar-denominated issues were priced during the previous week, which most sources counted as a three-session week in the United States because of the Independence Day holiday.

At Friday's close year-to-date issuance stood at slightly less than $72.72 billion.

Hence in terms of dollar amount 2006 issuance now tops that of 2005 on a year-over year basis by more than $18.4 billion. At the July 14, 2005 close the market had seen slightly more than $54.27 billion of issuance price.

However in terms of deal count, 2006, with 210 dollar-denominated tranches having priced year-to-date slightly lags the 221 tranches that had priced by the July 14, 2005 close.

One high yield syndicate official warned late Friday that high yield issuance may be poised to slow down.

"It looks as though deals are just going to get beat up," the official said, remarking that given that it is summer and a sell-off is underway, there are more deals in the market than might be expected under the current conditions.

"Some investment banks are no doubt telling their clients that it would be best to do their financing now because we could see a sustained market downturn for a period of time," the official commented, adding that primary market volume could easily slow from now until the Labor Day recess.

The week ahead

Downturn or no, there are deals in the market. And four of them are expected to price before the July 21 close.

Dollar-denominated deals include:

• Penhall International Corp.'s $175 million offering of eight-year second-lien notes (B3) via Deutsche Bank Securities and CIBC World Markets;

• Mobile Services U.S./Mobile Storage Group Inc.'s $160 million offering of eight-year senior note (B3) via Lehman Brothers; and

• Caribbean-based wireless operator Digicel Ltd.'s $150 million add-on to its 9¼% senior notes due Sept. 1, 2012 (B3//B) via Citigroup and JP Morgan.

Also expected to price is NTL Cable plc's £300 million equivalent of 10-year senior notes (B2//B) in dollar and sterling tranches via JP Morgan, Deutsche Bank, Goldman Sachs & Co. and The Royal Bank of Scotland.

Rexnord up in trading

Back in the secondary market, traders saw a typical summer Friday pattern - some activity in the morning, but volume levels dwindling drastically once noon rolled around, with many participants heading for the exits well before the official close, to get a better jump on the weekend.

A trader said Friday afternoon that he had not seen the new Rexnord bonds, indicating that with allocations still going on well past 4 p.m. ET, after-market trading would be "Monday business."

But still later in the session, traders at two other desks said the new bonds had indeed broken - although there were few people still around to actually trade them. They quoted the company's 9½% senior notes due 2014 at 100.25 bid, 101 offered, and its 11¾% notes due 2016 at 100.5 bid, 101.5 offered, both up from their respective par issue prices earlier in the session.

Hertz higher

Back among the established issues, Hertz' bonds were pushed upward by a report in Friday morning's editions of The Wall Street Journal that the company was in final preparations for an IPO, with registration with the Securities and Exchange Commission expected within days. Although the paper said the exact expected value of the stock offering was still unknown, it was expected to be one of the largest this year.

Late in the session, Hertz confirmed what the Journal had reported - that parent Hertz Global Holdings, Inc. had indeed registered with the SEC to sell up to $1 billion stock, planning to use the proceeds from the sale to repay borrowings outstanding under the $1 billion loan facility the company entered into at the end of June, which financed a dividend paid to the privately held company's shareholders.

Hertz - which did not say how many shares it planned to sell, nor at what price - said that the remainder of the proceeds, if any, would be used for general corporate purposes, which may include the repayment of borrowings outstanding under the senior credit facilities of its indirect subsidiary Hertz Corp.

A trader saw the company's 8 7/8% notes due 2014 up ¾ point at 104.25 bid, 104.75 offered, and its 10½% notes due 2016 at 108 bid, 108.5 offered, which he called a 1½ point gain. He said that the bonds notched their gains in the morning in apparent response to the Journal story, "but didn't move around after that."

Another trader saw those 101/2s at the same level, although he called it a 1 point gain, and estimated the 8 7/8s to also be up 1 point on the day at 104 bid, 104.5 offered.

Yet another trader called the 101/2s up 2 points on the day at 108 bid, 109 offered, and the 8 7/8s 1 point better at 104 bid, 105 offered.

A market source at another desk, looking at some of the less widely traded issues, saw the Hertz 6.3% notes scheduled to come due on Nov. 15 at 99.25, a ¾ point gain, and saw its 7 5/8% notes due 2012 and 7 5/8s due 2007 each up that same ¾ point, at 96 bid and 101.75, respectively.

The IPO will bring Hertz full circle, back to its earlier roots as a publicly traded company - although at various points in its history, Hertz has been a subsidiary, at one time or another of such business luminaries as General Motors Corp., the former RCA Corp. (now a division of General Electric Co.), UAL Inc. (a predecessor company of the present-day UAL Corp.) and, more recently, Ford. The automaker sold the company to buyout operators Clayton Dubilier & Rice, The Carlyle Group and Merrill Lynch Global Private Equity in a transaction valued at about $15 billion, including the assumption of debt, which closed this past December.

Petco higher

Elsewhere, a trader saw Petco's 10¾% senior subordinated notes due 2011 as having moved up to 106.5 bid, 107.5 offered, a 1 point gain from Thursday's levels, on the news that the company will be bought by private equity shops Leonard Green & Partners LP and Texas Pacific Group in a $29 per share buyout that values the company at $1.8 billion.

That figure includes its debt, which at the end of the fiscal first quarter on April 29 included the $89.267 million of outstanding bonds, $80 million in outstanding borrowings under its $350 million revolving credit facility, and $35.6 million of outstanding letters of credit. The notes become callable on Nov. 1 at 105.375 - a fact that the trader noted, saying the bonds were "call constrained."

The official merger agreement between Petco and its purchasers - whose buyout vehicle, humorously, is called "Rover Holdings Corp." and its subsidiary, "Rover Acquisition Corp." - also provides for the company to tender for the notes and seek consents to indenture changes from the holders, should "Rover" request it.

Under the terms outlined in the merger agreement, the buyers have lined up $850 million of debt financing for the deal from banks including Credit Suisse, Bank of America and Wells Fargo, and they have gotten a commitment for another $500 million of debt financing from GS Mezzanine Partners 2006 Onshore Fund. Green has made a $350 million equity investment commitment, and Texas Pacific agreed to kick in $415 million.

Petco's Nasdaq-traded shares jumped $8.44 (43.39%), to $27.89, on heavy volume of 28.19 million shares - almost 50 times the average daily turnover.

Ford off on Moody's cut

On the downside, Ford's benchmark issue, its 7.45% notes due 2031, dipped to 71 bid, 72 offered a trader said, a loss of a point, after Moody's cut the carmaker's ratings. It lowered Ford's own corporate family and senior unsecured ratings two notches to B2 from Ba3 previously, and lowered the Ford Motor Credit's senior unsecured rating a notch to Ba3 from Ba2. All of the ratings have a negative outlook.

The downgrade "reflects Moody's expectation that the company's performance in North America will face considerable additional stress due to high fuel prices and the resulting shift in consumer preference away from the very profitable SUV segment," the agency said in its downgrade message.

Moody's noted that during the first six months of this year, Ford's sales of mid-size SUVs fell by 24.7% and sales of large SUVs declined by 32.1%. "Despite the fact that solid market acceptance of Ford's new mid-size and full-size cars has helped maintain U.S. market share above 18%, the dramatic shift away from the SUV segment undermines prospects that Ford's Way Forward restructuring program will materially strengthen its weak credit metrics before 2008," Moody's warned.

The agency further cautioned that besides the market shift away from SUVs, Ford faces "considerable challenges in other areas," including implementing its extensive Way Forward restructuring initiative, reversing the chronically poor performance of Jaguar, contending with the ongoing erosion of its domestic supplier base, addressing the growing competitiveness and share gains of Asian manufacturers, and preparing for the renegotiation of its UAW contract in late 2007.

Moody's did acknowledge that while Thursday's decision by Ford's board of directors to cut both the company's dividend and their own director fees by half - the annual dividend will decline to about $350 million from $700 million - "will have minimal impact on Ford's cash flow," the move "may contribute [to] the constructive character of the dialogue with the UAW."

Another trader was quoting the Ford Motor Credit 7% notes due 2013 down ½ point at 85.75 bid, 86.25 offered - but pointed out that those levels were from the morning - and he had not seen any levels on the credit after the Moody's news hit the tape.

Visteon lower

He saw the bonds of former Ford subsidiary Visteon Corp. easier, with the Van Buren Township, Mich.-based automotive components supplier's 8¼% notes due 2010 at 91 bid, 91.75 offered, a loss of a point on the day. That movement, he said, had occurred "in the afternoon" after the Moody's announcement came out. However, he pegged the company's 7% notes due 2014 unchanged at 81 bid, 82 offered.

GM slips

The trader meantime saw GM's flagship issue, the 8 3/8% notes due 2033 unchanged at 79.25 bid, and its General Motors Acceptance Corp. 8% notes due 2031 half a point lower at 94.75 bid, 95.25 offered.

News of Ford's ratings cut by Moody's apparently overshadowed whatever interest there was in the thin market in Friday's scheduled face-to-face talks between GM boss G. Richard "Rick" Wagoner and Carlos Ghosn, the chief executive officer of both French carmaker Renault SA and its 44% owned alliance partner, Nissan Motor Co. The two auto chieftains were to meet in Detroit to talk about the possibility of bringing GM into the Renault-Nissan alliance, and about Renault and Nissan possibly taking a sizable equity stake in GM. As of Friday evening, there was no news out on the outcome of the Wagoner-Ghosn talks.

Prior to his meeting with Wagoner, Ghosen again said Friday that contrary to speculation in the media and in some financial circles, he has absolutely no interest in taking Wagoner's position as head of GM in the event the three companies do partner up.

Housing falls on D.R. Horton forecast

Apart from the autos, traders saw weakness in housing issues Friday, after D.R. Horton, the nation's largest builder, cut its full-year earnings forecast by almost a third.

The Fort Worth, Tex.-based builder cited tough conditions in the residential-real-estate market in lowering its full-year guidance to $3.65 per share from its earlier projections of $5.25 to $5.35 per share. It expects to close on 50,000 new homes this year, down from last year's 51,383.

A trader saw Horton's 5 5/8% notes due 2016, which are normally quoted on a spread-versus Treasuries basis, as having widened by 15 to 20 basis points. He said that was equivalent to about a 1 point fall in the bonds to 88.75 bid, 89.25 offered.

Also down a full point, in sector sympathy, he said, was Hovnanian Enterprises Inc.'s 8 5/8% notes due 2017, which finished at 96 bid, 97 offered.

Another trader sad that "the morning was a little active, with the homebuilders trading off, though the activity ended around noon."

He saw Red Bank, N.J.-based Hovnanian's 8 7/8s open at 95.5 bid, 96.5 offered, down a point from Thursday's close, but then trade back up to as high as 97 bid before finishing at 96.75 bid, 97.75 offered, about unchanged.

While the second trader did not see any D.R. Horton quotes, he did see Atlanta-based Beazer Homes USA Inc.'s 8 1/8% notes due 2016 offered at 95.5, with no bid seen, and called that about down as much as a point.

Another market source, however, saw the Beazer bonds down only marginally, with the 8 1/8s falling ¼ point to 96.25. Its 8 5/8% notes due 2011 were likewise down 1/4, at 99.875.

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