Extended Stay America jumps on Blackstone buyout; Ispat Inland, California Steel slate new deals

By Paul Deckelman and Paul A. Harris

New York, March 8 - Lodging and steel were where it was happening in the high yield market on Monday, with Extended Stay America Inc.'s prospective $3.1 billion acquisition by The Blackstone Group giving its bonds a lift, while Meristar Hospitality Corp.'s plans to sell five of its hotels and use the proceeds to repay debt nudged its bonds a little higher as well.

While the hoteliers held sway in the secondary market, the steelers stole the show in an otherwise pretty quiet primary, with Ispat Inland heard getting ready start a short roadshow on Wednesday for an $800 million two-tranche deal, while California Steel was heard to be on the verge of bringing a $150 million 10-year issue to market, perhaps as early as Tuesday.

In the secondary market, the late-Friday announcement that Blackstone will acquire Spartanburg, S.C. -based Extended Stay for about $1.9 billion in cash, plus the assumption of $1.1 billion of Extended Stay debt helped push some of that debt up smartly on Monday.

Extended Stay's 9 7/8% notes due 2011 were seen by one market source to have firmed to 117 bid from prior levels down around 111, while a trader at another desk saw those bonds in a 116-118 context.

However, the company's other outstanding issue - its 9.15% notes due 2008 - were unchanged at 103.5 bid; the market source noted that those bonds are callable later this year and are trading "fully priced at that call level, so they're not going anywhere."

While the 9 7/8% bondholders certainly liked the idea that the company is to be bought out and their bonds repaid, the ratings agencies were more wary. Standard & Poor's and Moody's Investors Service both indicated that they were considering a downgrade of Extended Stay's debt.

Extended Stay stockholders were enthusiastic, as could be expected; they took the company's shares up $3.43 (21.70%) to $9.24 on busy New York Stock Exchange trading of 11.9 million shares - around 30 times the usual 400,000-share turnover.

The bond trader said that Blackstone is paying the equivalent of about $60 per room to buy Extended Stay, "about what it would cost to build a hotel room unit, so this is essentially at replacement cost, and it speaks well for the sector."

He also noted the rise in Meristar Hospitality's bonds on the recent news that the Arlington, Va.-based lodging company is selling five of its hotels in separate transactions, for total gross proceeds of $29 million.

Proceeds could be used to help pay down some of the company's debt.

He saw Meristar's 10½% notes due 2009 at 107 bid, 108.5 offered, its 9% notes due 2008 at 104 bid, 105.5 offered, and its 9 1/8% notes due 2011 at 105 bid, 106.5 offered, all a little better on the session, he said.

At another desk, Meristar's 9% notes were being quoted up as much as two points on the session, at 104.75.

Bally gains

Elsewhere, Bally's Total Fitness Holding Corp. finally ended the suspense and said that it plans to release its fourth-quarter and full-year 2003 earnings after the close of trading on Thursday and will host a conference call for analysts and investors on Friday morning.

Investor angst over when the Chicago-based fitness club operator planned to put out its quarterly and yearly results - which in most years would have already been released weeks ago - knocked both is bonds and shares for a loop last week, with the bonds dropping some 10 to 15 points; Bally's 9 7/8% subordinated notes due 2007 had been beaten down to about the 70-71 bid level while its 10½% senior notes due 2007 were driven down into the mid-80s from prior levels around par.

In trading Monday, however, the 9 7/8% notes were heard up at least three points to around 74 bid while the 10½% notes were also seen up more than three points to levels as high as 89.5 bid, 91 offered.

And finally, the market greeted pretty much with a yawn Warren Buffett's annual letter; a year ago, there was considerable reaction to the disclosure by the Oracle of Omaha that he had bought heavily in junk bonds in 2002, looking for value for his Berkshire Hathaway Group. But in his latest annual letter to Berkshire shareholders, the billionaire Wall Street guru declared that "In 2002, junk bonds became very cheap and we purchased about $8 billion of these."

Berkshire profited handsomely, he said, but "the pendulum swung quickly though and this sector now looks decidedly unattractive to us. Yesterday's weeds are today being priced as flowers."

Forward calendar builds

No straight-up junk deals priced during the opening session of the March 8 week, however Rogers Cable completed a $350 million split-rated offering.

Meanwhile the forward calendar continued to build, with drive-by deals and roadshow starts pending in the U.S. and Europe.

"The market seemed a little better earlier in the day, then a little weaker later in the day," said one sell-side source after Monday's close.

"It was probably unchanged overall," the official added.

The source commented that while it might easily be attributed to the fact that it was Monday, a malaise nevertheless seemed to come over the primary market, in which it seemed "tough to get people to focus."

Return of the drive-by

Sources have been telling Prospect New that reports of outflows from high yield mutual funds in three of the past five weeks may have served to stem the impressive tide of quick-to-market deals seen in late January and early February.

However, Monday's session produced news of two drive-by deals, both of which figure to price on Tuesday.

West Chester, Pa.-based microelectronics manufacturing services company Amkor Technology expects to sell $250 million of 10-year senior notes (B1/B) on Tuesday via Citigroup, Deutsche Bank Securities and JP Morgan.

Also California Steel Industries Inc., a flat rolled operation out of Fontana, Calif., will host an investor conference call at 11 a.m. ET Tuesday for $150 million of 10-year senior notes (existing ratings Ba3/BB-). That deal is also expected to price Tuesday afternoon. Banc of America Securities and Goldman Sachs & Co. are joint bookrunners.

Both of those companies will use proceeds from their respective bond sales to refinance debt.

Ispat, Rural Cellular take to the road

A second steel company, Ispat Inland, an integrated producer, will start its roadshow Wednesday for $800 million in two tranches of senior secured notes (Caa1/B-). The company intends to sell six-year non-call-one floating-rate notes and 10-year non-call-five fixed-rate notes.

UBS Investment Bank is the bookrunner.

And the roadshow starts Tuesday for another two-tranche deal, this one from Rural Cellular Corp.

The Alexandria, Minn.-based wireless services provider will offer $510 million, in tranches of six-year non-call-two floating-rate notes and eight-year non-call-four fixed-rate notes, with tranche sizes remaining to be determined.

Lehman Brothers and Banc of America Securities will run the books.

Roadshows also start for European deals

The roadshow starts Thursday in Europe for Riverdeep's planned €205 million of seven-year senior notes, with pricing expected to take place mid-week during the week of March 15, via Credit Suisse First Boston.

And Baxi Holdings Ltd and Baxi Heating Finance plc will start their roadshow on March 16 for an offering of £90 million 10-year mezzanine notes, via Royal Bank of Scotland.

Split-rated Rogers Cable sees junk play

Rogers Cable Inc. priced a split-rated $350 million of 5½% 10-year senior secured second priority notes (Ba2/BBB-) at 99.634 on Monday to yield 5.548%.

The deal priced right on top of the 175 basis points price talk, via Citigroup.

When asked whether high yield names played the split-rated issue a source - pointing to Rogers Wireless Communications Inc. $750 million company's 6 3/8% 10-year paper (Ba3/BB+/BBB-) that priced at par in a $750 million sale on Feb. 17 - responded in the affirmative.

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