Buyout buzz boosts Kmart; Conseco clobbered on restructure worries; Magnum Hunter upsizes, trades higher

By Paul Deckelman and Paul A. Harris

New York, March 13 - Market speculation that a suitor for Kmart Corp. may be on the horizon helped boost the bankrupt retailer's bonds smartly Wednesday. Meantime, the possibility that troubled insurer Conseco Inc. might try to restructure its debt burden at less than optimum terms for the bondholders sent its notes down sharply.

In primary market dealings, Magnum Hunter Resources Inc. brought an upsized offering of 10-year notes to market, but Agrokor was forced to go the other way and downsize its tranche of new euro-denominated bonds.

Several sources around the high yield primary market, including a source from the syndicate, told Prospect News Wednesday that Magnum Hunter Resources, Inc. hit a gusher with its upsized deal for $300 million of 10-year senior notes. The deal was increased from an initial size of $250 million and priced at par to yield 9.60% compared to official talk of 9.625%-9.875%. Bookrunner was Deutsche Banc Alex. Brown.

Soon after the Texas E&P's deal priced, a syndicate source told Prospect News that Magnum Hunter's new notes were trading in the secondary "in the context of 103-103.25 right now, which is just behind a 9% yield to worst."

Another sell-side source, considering the levels at which the company's new paper was heard trading in the secondary, commented that, even upsized, the Magnum Hunter book must have been massive.

Also on Wednesday Joy Global, Inc. priced its $200 million of 10-year senior subordinated notes via joint bookrunners Credit Suisse First Boston and Deutsche Banc Alex. Brown.

A B2/B+ deal, Joy Gobal's new junk bonds priced at par to yield 8¾%.

Louise D. Rieke, portfolio manager of the Waddell & Reed Advisors High Income Fund, spoke to Prospect News Wednesday morning, before terms had emerged on either Magnum Hunter or Joy Global.

However, in light of single-B credits Sinclair Broadcasting, Coast Hotels, and Entravision, all of which priced during the past eight days with yields inside of 8 3/8%, Rieke commented that the tightness, or "richness" of certain deals must be viewed on a credit-by-credit basis.

"In every market you're going to have those deals that price really rich, and those that don't," she said. "I would say that this isn't anything different than what we've seen in past cycles.

"These deals were done in sectors that the market thinks are safe," Rieke continued, alluding to Entravision, Coast Hotels and Sinclair Broadcasting.

"In the broadcasting sector people are looking for M&A transactions because the cap was lifted by the court so that you can have cross-ownership," she added.

"With Entravision I assume it's the Univsion connection that caused that one to price so rich. And it's a safe credit if you've got money to put to work, and hide in it for a while, and sell it and flip it, or sell it down the road and get out of it."

Recalling the high yield market of 1998, "where everything had an eight-handle on it," Rieke said that she did not believe those same dynamics were in play at present.

"Regarding the stuff that's priced under 8% or around 8%," she said, "people are going to start being suspect of it because it trades tighter to Treasuries than the rest of the market does. And if you think that as the economy picks up Treasuries trade off and you run the risk of rising interest rates then that's not necessarily the stuff you want to own.

"You're going to move down the credit curve and out the yield curve because historically the more you get into a recovery that's the stuff that's going to out-perform.

"So at some point you're going to have a shift."

Rieke declined to comment on any specific deal on the forward calendar. "We're just being selective in whatever we look at," she specified. "Historically we're very credit-driven. And I don't see any reason to step away from that now."

However, when asked whether she had thought the market was open to a credit such as Philippine wireless company Globe Telecom, which announced a $175 million 10-year deal on Tuesday, Rieke conceded that she was indeed surprised.

Terms also were heard Wednesday on a downsized deal from Agrokor DD. The offering of four-year senior guaranteed secured notes was cut to €130 million from €150 million and priced at par to yield 11% via joint bookrunners Credit Suisse First Boston and Deutsche Banc Alex. Brown.

Late in Wednesday's session terms had not been heard on Resorts International Hotel & Casino's $175 million of seven-year first mortgage notes (B2/B) via Merrill Lynch & Co. Price talk on that deal was reported to be 11½%-11¾%.

A syndicate source informed Prospect News that the deal is now expected to price Thursday morning.

Wolverine Tube, Inc. piped $115 million of new seven-year senior notes onto the primary market forward calendar Wednesday, in a deal that will come to market via Credit Suisse First Boston and Wachovia Securities. (See story on page one)

Word of the deal came seemingly in conjunction with a warning from the company's auditors, Ernst & Young LLP, who said there is "substantial doubt" about Wolverine's ability to continue to operate as a "going concern" because it has not yet extended or replaced its current revolving credit facility. The new deal will be used to repay bank debt.

Finally on Wednesday, price talk emerged on four deals still set to price during the week of March 11:

--Steel Dynamics' offering is talked at 9½%-9¾%, with pricing set for Thursday

--Rotech Healthcare's deal is talk at 9½%-9¾%, expected to price Friday morning,

--Von Hoffman Corp.'s notes are talked at 10¼%-10½%, with pricing set for Friday, and

--Colonial BancGroup's trust preferreds are talked at 8¼%-8 3/8%, with pricing expected late Thursday or early Friday.

In secondary dealings, Kmart paper was markedly better Wednesday, "and I don't know why," a trader marveled.

He quoted the embattled Troy, Mich.-based discount department store operator's 9 3/8% notes due 2006 as having moved up to closing levels at 48.5 bid/49.5 offered from Tuesday's late levels around 44.

"That's pretty strong for a company whose common stock is trading below two bucks a share," he opined, although he noted that the stock, too was up substantially; it closed at $1.78, up 19 cents (11.95%) in New York Stock Exchange dealings, on heavy volume of 78.1 million shares, almost three times the normal turnover.

The trader acknowledged the possibility that the shares and bonds may have risen as a show of investor confidence in the ability of turnaround specialist James Adamson, who this week replaced Charles C. Conway as chief executive officer (after having already supplanted Conway as company chairman shortly before the Jan. 22 bankruptcy filing). Adamson was seen moving quickly to assemble his own senior management team, replacing the last members of Conway's regime with new people who, like himself, are bankruptcy process veterans, in preparation for the restructuring campaign ahead.

Still, he mused, with the news of the management shakeup already out there for two whole days, Wednesday's rise "was pretty drastic - kind of a dramatic snap. There must be kernel of new news out there somewhere."

One possibility, he continued, was news reports indicating that the company's bank debt had firmed somewhat on rumors that French-based global supermarket giant Carrefour SA - thought to be the world's second-largest retailer after Kmart's main rival, Wal-Mart Stores Inc. - might be mulling making an offer for Kmart.

Another trader said the Kmart bonds had jumped to 48 bid/49 offered from levels in the mid-40s Tuesday and from levels in the 38-40 range last week "primarily on the rise in the stock, and the takeover rumor," referring to the Carrefour story.

"That's the beauty of small dollar numbers and retail guys" (i.e., non-institutional investors) willing to step in and push the bonds higher, he added.

Another retailing name on the upside - although not on account of any takeover rumors - was Rite Aid Corp., whose bonds had risen strongly in Tuesday's dealings on the Camp Hill, Pa.-based drugstore chain's report that same-store sales (sales at stores open for at least a year, considered a key measure of a retailer's performance), in the five weeks ended March 2, had increased 9.2%.

The momentum continued into Wednesday's session, with Rite Aid's 11¼% notes quoted up three points at 80 bid and its 10½% notes up a deuce to 96.

Also higher were the bonds of Chiquita Brands International. The Cincinnati-based banana importing giant's 10¼% notes due 2006 were quoted up more than five points on the session to around the par bid level; a bankruptcy court judge on Friday approved the company's reorganization plan, which would convert some $700 million of debt into equity and leave bondholders in control of the company.

On the downside, Conseco "has been topsy-turvy today," a trader said, noting that the troubled Carmel, Ind.-based insurer's bonds were off at least seven to eight points in early trading; the slide had worsened as the day wore on, so that by mid-day, Conseco's 9% notes due 2006 had dropped to about 45 bid/48 offered from Tuesday's close around 55. "They're definitely down."

At another desk, Conseco's 8¾% notes were pegged at 54 bid, down from 62 on Tuesday, while its 10¾% bonds had dipped to 49 bid from 58.

The trader cited news reports that Conseco had sent out what one analyst termed "cryptic" letters to its bondholders indicating that it "is considering making a proposal" to certain of those holders. The bondholders were asked to indicate whether they could be considered qualified institutional buyers under federal securities laws, with Conseco apparently eyeing a transaction under which holders of the public bonds would be offered the opportunity to exchange that outstanding debt for new privately placed Rule 144A securities, carrying longer maturities.

While a Conseco spokesman confimed that the letters had been sent, he declined to shed any light on the nature of the proposal, leading to speculation that company was floating a trial balloon to its debt holders, to gauge their reaction to such a plan before proceeding with it.

The trader agreed with published reports indicating that the retreat in the bonds could be yet another sign that the investment community is skeptical of Conseco CEO Gary D. Wendt, who was brought in a year-and-a-half ago to turn the sagging company around and initially was greeted by some on Wall Street as almost akin to a miracle worker; of late, however, Wendt has come under increasing fire from critics for overly optimistic assessments - and opaque explanations - of how Conseco's turnaround is progressing. "The honeymoon has been over for some time," he said, somewhat acidly adding that "Gary has recently turned into a prolific memo writer, since he has to send out a "Turnaround Memo" every time his stock's down" in order to try to pump it back up.

Conseco stock was up 15 cents (4.57%) to $3.58 on the NYSE on volume of about 8.4 million shares, slightly more than double the usual.

Another trader said the Conseco bonds had "popped about three or four points higher" before falling back from those levels; he meantime saw the stock having opened lower before coming back to end higher.

"People were scratching their heads looking at the equity, trying to figure out whether it's telling you something or if it's just a bunch of crazy retail guys bidding it up."

Wendt, he continued, "is a guy everybody is careful with." The Conseco CEO "puts out a very opaque letter about what's going on, saying they're not going to dilute the equity but they may be talking to the bondholders bout doing something. There's a lot of smoke and I don't think anybody has the answers - at least we don't. We don't know what he's going to pull out of his bag of tricks, so everybody is being very careful about that."

Equity players, he asserted "may be getting little excited about this, maybe they think there's something positive about it. I' m not sure that there is. There's a lot of confusion."

Lucent Technologies Inc. bonds, which had fallen sharply on Tuesday when the Murray Hill, N.J.-based telecommunications equipment maker cut its earlier revenue estimates and said its return to profitability would likely be put off till next year, continued to languish on Wednesday. Its long-dated paper "took it on the chin," said market source, who quoted Lucent's 6½% debentures due 2028 and 6.45% debs due 2029 down about two points on the session to around the 64 level. "The longer ones were worse than the shorter ones," he said.

Also in the telecommunications world, the bonds of nominally investment-grade long-distance giant WorldCom Group - which had already widened out about 60 basis points on Tuesday - worsened another 100 basis points Wednesday, its paper "in freefall, trying to find a level," an observer said. WorldCom's 8% notes due 2006 ended quoted at bid levels 500 basis points over the comparable Treasury note. Its 7½% notes due 2011 closed at 445 basis points over, 80 basis points wider on the session. In recent weeks, accounting and liquidity concerns - including a Securities and Exchange Commission request to WorldCom for documents - have caused the bonds of WorldCom and several other nominally investment-grade companies to sometimes trade down to levels which have drawn some passing interest from junk investors.

But apart from specific names with stories attached to them, such as Conseco, Kmart or Lucent, "Secondary is slow," a trader said. "It seems like everyone is paying attention to, and sorting through the new-issue stuff. The AMG (mutual fund flow) numbers have been so strong, and there's a lot of cash being put to work, but it's all going to the new-issue paper. Secondary has been very slow."

He saw recently priced deals doing very well once they cleared for secondary activity; "that stuff all seems to trade at a premium. It's priced and then it moves up a bit."

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