Union Carbide dives on Moody's cut to junk; no buying surge on inflow; Case sells $300 million add-on

By Paul Deckelman and Paul A. Harris

New York, Sept. 5 - Union Carbide Corp. bonds were heard to have nosedived on Friday after Moody's Investors Service downgraded the Dow Chemical Co. unit's ratings all the way down to a very junky B1 from a respectably investment-grade Baa2, citing potential asbestos liability concerns. Carbide was the big mover in a secondary session characterized by a lot of bidding activity, but not a lot of trading, even on the heels of a second-straight $1 billion-plus inflow to high-yield mutual funds, a reliable proxy for overall junk market liquidity trends.

In the primary sphere, farm equipment maker Case New Holland Inc. - which sold $750 million of 9¼% senior notes due 2011 back on July 29 - came back to the junk market and harvested another $300 million with an upsized, quickly shopped add-on tranche. PGN Euro Finance 2003 Ltd. sold a $150 million issue of 10-year notes. And Equus Cayman Finance Ltd. sold an upsized $400 million offering of five-year bonds for parent Hyundai Motor Co.

Back in the secondary market, Union Carbide "was the big thing of the day," a trader who watches crossover issues said, noting that the Danbury, Conn.-based chemical company's 6.70% notes due 2009 - which had been trading around 103 bid Thursday - careened all the way down to 84 bid, 87 offered after the five-notch Moody's downgrade, although he said that the bonds came off those lows and started to creep back up.

At 85 bid, 88 offered, "we started seeing some bid-side activity. It started trying to push up from there," with the bonds finally ending the session "nice and wide" at 86 bid, 91 offered.

"It was one of those things that was all over the map," he continued. "No one really wanted to sell, even though they knew they should be. People didn't know exactly where the bid was going to firm up, so it kind of went out wide."

But even though the bonds did come off their lows to improve slightly by the end of the day, still, "that was ugly," he said, noting how far they had fallen from their levels when the day opened up.

Moody's, in downgrading Carbide's bonds, said its action "reflects the absence of a guarantee from its parent company The Dow Chemical Co., uncertainty over the financial impact of asbestos-related liabilities, lack of access to credit from any independent source and the substantial reduction in Carbide's operating assets. "

Moody's attached a negative outlook to the Carbide debt, worrying particularly about "limited visibility with regard to the company asbestos liabilities and the concern that lawsuits and settlement payments could significantly increase over the next few years." It also said the outlook "reflects uncertainty over Dow's willingness to continue to support Carbide, if these liabilities increase significantly or if insurance reimbursements fail to materialize."

The ratings agency called the size of Carbide's asbestos liability relative to its operating assets "a significant concern." It noted that while the liabilities "are largely offset by a large insurance receivable, the lack of detailed information on the nature and terms of the insurance reimbursements raises uncertainty over the timing of cash receipts from insurance relative to settlement payments. Carbide hired a well known firm to generate an estimate of its future asbestos-related liabilities. However, Moody's believes that the lack of detail on trends in new cases, pending cases, and settlement costs per claim increases the uncertainty over the size and timing of payments related to future asbestos settlements."

Moody's noted that as of the end of the second quarter, Carbide's potential insurance coverage was roughly $1.47 billion, and its non-current asbestos-related liabilities account declined by roughly $160 million - an indication, the ratings agency said "that settlement activity was elevated in the first half. Likewise, its total insurance receivable declined by roughly $95 million, indicating that Carbide is receiving reimbursements from its insurers."

Rapidly proliferating claims for damages linked to medical problems resulting from the wide use of fire-retardant asbestos in construction and other industrial applications for decades during the last century have driven a number of large U.S. companies into bankruptcy since the mid-80s, when insulation maker Johns Manville became the first - but by no means the last - to duck under the Chapter 11 umbrella to keep from drowning in damage claims.

Even now, such high yield issuers as auto brake producer Federal-Mogul Corp., insulation-maker Owens-Corning, chemicals maker W.R. Grace & Co. and flooring manufacturer Armstrong Worldwide are in Chapter 11, while other junk bonders such as packaging makers Crown Cork & Seal Co. Inc. and Owens Illinois are considered to have potential asbestos liability problems but have not sought bankruptcy protection. In some cases, companies are being sued because they acquired other companies which had made or used asbestos decades ago, with the litigation emerging like a long-hidden ticking time bomb. Industry is looking to Washington to do something to help it resolve the flood of claims and set up a mechanism for settling future claims while capping the overall potential liability number, but a $108 billion plan to set up such a system is currently languishing in Congress.

Moody's thinks that Midland, Mich.-based chemicals maker Dow will continue to support Carbide "unless it is overwhelmed by the combination of rising settlement costs and the exhaustion of insurance coverage, or the inability to obtain insurance reimbursements." The ratings agency warned that "if either current asbestos-related liabilities or current asbestos-related insurance receivables increase by several hundred million in any one quarter or as non-current asbestos related insurance receivables fall below $700-800 million, Moody's could take additional negative rating actions."

On the other hand, Moody's opined that "if federal legislation is passed that would greatly reduce uncertainty over Carbide's ultimate asbestos-related liability, Moody's could reassess the appropriateness of the B1 senior unsecured ratings.

The trader said that nobody was surprised that Moody's chose to downgrade Union Carbide's ratings - even to junk levels - but "a lot of people were surprised at how far the downgrade went." He said that while many people expected the rating to go to junk, they were thinking more in terms of a BB, and the single B "kind of blew everybody away."

Standard & Poor's rates Union Carbide's debt at A- at least for the moment. The trader noted that S&P has it on CreditWatch, "so everyone is waiting for the other shoe to drop," joking that it isn't very often that you see a credit rated at a B1 level by one agency and A - by the other.

Elsewhere, the trader said that the overall junk market "had a pretty decent tone to it, but quite honestly, it was a very slow day."

He noted that the market had great inflows - the $1.143 billion reported Thursday by AMG Data Services came on the heels of the record $3.258 billion net inflow seen the week before, and together, they just about counterbalance the approximately $4.9 billion of outflows which had been seen over the five previous weeks, according to a Prospect News analysis of the weekly AMG figures, which count only those funds reporting on a weekly basis and which exclude distributions.

But even with all of that cash burning holes in investors' pockets, while "there were a lot of things we saw that were bid without [offers] throughout the day, there was not a lot of activity, not a lot of individuals telling me there was a lot of trading going on."

At another desk, a trader agreed that there was no buying surge - in fact, he said, "even though we had the inflow, I saw some stuff loosen up [i.e. start to be offered around] a little bit. We saw a lot of bid [wanted] lists that we hadn't seen in a long time."

He noted that for instance, Levi Strauss & Co. paper "really softened up today," with the San Francisco-based apparel maker's 11 5/8% notes due 2008 dipping to 95 bid, 97 offered, down from levels as high as Thursday's 99 bid, 101 offered. "That was a big move." Levi's 12¼% notes due 2012 lost nearly a point to end at 94.25.

The trader said that names such as Levis "just ran [up] so much over the past few months that some sort of pullback was inevitable.

"You have names that are just way overvalued. Guys are looking for yield and certain things have to peak out. Guys that own the paper and that watched it run up start selling it.

"We had a big bid list today. A lot of [guys who hold] bonds are just looking for an exit. You're going to see that, even though the market's stronger, you're going to see that on certain names, names that have gotten too tight. That's the problem. They have five, 10 or 15 points built into the price and they shouldn't be that tight, so [holders] are unloading."

He also noted that with the year now almost three quarters done, "we're getting to the latter part of the year here, the last quarter, so it's time to time to take some profits."

He concluded that "even though there is strength, these was some selling, selling into strength, which I guess is a smart idea."

Be that as it may, traders saw a rebound Friday in the bonds of Collins & Aikman Products Co., whose bonds had fallen four or five points on Thursday on news that DaimlerChrysler's Jeep unit had cancelled a $90 million contract for the Troy, Mich.-based auto components maker to supply plastic parts for use in the bumpers on the popular Jeep Liberty. The contract represented about 2% of the annual revenues for the company, which counts DaimlerChrysler as its biggest individual customer (although the cancellation has no impact on numerous other individual project supply contracts Collins & Aikman has with the third-largest U.S. automaker).

On Friday, the 11½% subordinated notes due 2006 were quoted by a market source as having firmed to 74 bid from around 69 late Thursday, while its 10¾% senior notes due 2011 rebounded to 88 bid from 84.

Charter Communications Holdings LLC - whose bonds rose several points Thursday on news that the troubled St. Louis-based cable operator, looking to get its financial house in order, had agreed to sell several non-core cable systems for $765 million total - continued to firm Friday, its 8 5/8% notes due 2009 and 8 1/8% notes "up maybe a point," a trader said, to 80 bid and 83 bid, respectively.

Back on the downside, Express Scripts Inc.'s 9 5/8% notes due 2009 were a point lower at 108.75; the Maryland Heights, Mo.-based pharmacy benefits management company was seen by industry analysts as likely to be adversely affected by the proposed $5.6 billion merger of two of its rivals, AdvancePCS Inc. and Caremark Rx Inc., which was announced during the week.

Traders saw not much activity in the bonds of MGM Mirage Inc., which was one of those "good news/bad news" situations on Thursday; on the one hand, the Las Vegas-based gaming giant raised its third-quarter adjusted earnings guidance to 35 cents a share from the previous 30 cents - Wall Street is looking for 34 cents a share in adjusted per-share earnings for the quarter - citing stronger trends at its 14 casino resorts, particularly at its home base, where the company owns half a dozen casino-hotels on the fabled Vegas Strip, including the Bellagio, the MGM Grand and the Mirage. It also is part owner, along with Boyd Gaming Corp., of the glitzy new Borgata gambling palace in Atlantic City, which opened amid much fanfare on July 3.

The company also announced that it had bought back $25 million of outstanding debt securities, part of the approval by its board to repurchase up to $100 million of debt, depending upon market conditions.

But MGM Grand also said that it had bought back 2.8 million shares of its stock, which caused Standard & Poor's to downgrade its ratings to junk levels, including cutting its corporate credit rating and senior secured debt to BB+ from BBB- previously and its subordinated debt rating to BB- from BB+, though with a stable outlook, indicating that further immediate movement is unlikely.

While the ratings agency noted that MGM Mirage was continuing to pare down debt (repaying $106 million during the first six months of 2003), it also noted that the continued stock repurchases have extended the timing for reducing debt leverage beyond S&P's previous expectations, "prolonging the time frame in which credit measures will remain weak for the rating."

Still, its 8½% notes due 2010 were being quoted around 111.75 bid, not much changed from their levels around 112 at mid-week; apart from having seen a couple of bid-wanteds on the name, a trader said, "pretty much nothing was going on."

A trader said that with Treasuries stronger Friday in the wake of a much weaker-than-expected report on new-job creation - July non-farm payrolls actually fell by 93,000 jobs, while analysts had expected an 18,000-job rise - "anything linked to Treasuries tightened" - such areas as housing, REITS and the like.

Overall, he had seen "a lot of bids," although he qualified that a little; "not that things were just screaming up," he said, "but there were still a lot of bids. People put money to work."

In the primary sector, terms were heard on one U.S. issue during Friday's session, as tractor-maker Case New Holland made another pass through the high yield field and reaped a substantially lower interest rate.

And as sources foretold during the run up to Labor Day, companies are emerging from the emerging markets corporates sector in earnest, attempting to get dollar-denominated deals done. Terms on three such transactions were heard during the final session of the four-day Sept. 2 week.

After having downsized its eight-year notes deal to $750 million from $1 billion in late July, Lake Forest, Ill.-based tractor and combine manufacturer Case New Holland returned Friday with a quick-to-market add-on and found the high-yield market in the wake of a record-breaking two weeks of cash inflows to the mutual funds to be much more fertile.

The company priced an upsized $300 million add-on to its 9¼% senior notes due Aug. 1, 2011 (Ba3/BB-) at 104.0 to yield 8.373%.

Price talk on the UBS Investment Bank-led deal was 103.5-104 and the offering was increased from a planned $250 million.

Case's downsized July 29 transaction, coming at the onset of a five-week period of negative fund flows, priced at 98.621 to yield 9½%, wide of its 8¾% area price talk.

Hence the money Case borrowed Friday came at an interest rate just shy of 100 basis points lower than that of its downsized transaction of five weeks ago.

Terms also were heard Friday on three emerging markets corporate deals and two of those were also upsized.

Hyundai Motor Co.'s Equus Cayman Finance Ltd. priced an upsized $400 million of 5½% five-year senior guaranteed notes (Ba1/BB+) at 99.634 to yield 5.585%. The deal was increased from $300 million.

JP Morgan, Morgan Stanley and Credit Suisse First Boston were underwriters on the offering of notes which are guaranteed by Hyundai.

CSN Island VII, a subsidiary of Brazil's Companhia Siderurgica Nacional, priced an upsized offering of $200 million 10¾% five-year notes (B2/B+) at 99.527 to yield 10 7/8%.

The notes were increased from $150 million and priced at the tight end of the 11% area price talk, with JP Morgan running the books.

And Indonesian gas transportation company PT Perusahaan Gas Negara's issuing entity, PGN Euro Finance, priced a $150 million 7½% 10-year eurobond offering at 98.669 to yield 7¾% via Credit Suisse First Boston.

Also on the emerging markets corporate front, timing was heard on the offering from AmBev's Companhia Brasileira de Bebidas subsidiary, which is planning to sell $300 million of 10-year notes. The deal is expected to price during the Sept. 8 week, according to a company source.

Citigroup is bookrunner Brazilian brewer's deal.

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