Visteon bonds gyrate on warning, downgrades, new chairman; GSI prices downsized deal

By Paul Deckelman and Paul A. Harris

New York, May 11 - Visteon Corp. bonds were seen bouncing around Wednesday after the Van Buren Township, Mich.-based automotive systems supplier delayed filing its quarterly report and said it was investigating possible irregularities discovered during an internal review. That caused the major ratings agencies to downgrade its debt levels - but traders said the bonds came off their earlier lows in the afternoon when Visteon announced the appointment of its next chairman.

Elsewhere, Bally Total Fitness Holding Corp. bonds strengthened on the news that the underperforming Chicago-based healthclub operator will look to sell its upscale Crunch Fitness chain and will presumably use the proceeds to improve its core operations.

The high-yield market continued to trade off on Wednesday on what one sell-side source characterized as a continuance of everything that has been concerning the market for the past six to eight weeks.

"The reason du jour is the rumored unwinding of positions from the hedge funds," the source said.

Another sell-side official said: "The market again began the day not as bad as expected after yesterday's Visteon announcement, with many bonds unchanged, especially in higher quality names, on light volume.

"The market worsened as the day progressed as equities declined, but then improved as equities turned positive in the afternoon, and went out feeling reasonably firm.

"Overall, however, the market was down on the day."

Hedge fund troubles

Yet another source from the sell-side, however, told Prospect News that a hedge fund bet gone double-bad could dramatically impact a high-yield asset class that almost certainly is facing a liquidity crunch at present.

"We heard that hedge funds longed the GM bond and shorted the stock, and all of the sudden an 87-year old man came out and caught them off guard," the sell-sider said, referring to investor Kirk Kerkorian.

"These rumors must have some sort of merit."

The official recalled that on May 4 Kerkorian came out with the tender offer for General Motors Corp. shares, and that a day later Standard & Poor's downgraded GM and Ford debt to junk.

"In the early part of last week there was a little bit of a rally in the bonds, but the shares didn't move at all," the sell-sider added.

"But as soon as the S&P news came out the bonds widened out by 200 basis points. But Kerkorian's offer still stood, and the shares were trading above the tender offer.

"So if you shorted the share and longed the bonds, Kirk Kerkorian and S&P hammered you on both trades.

"And it's a considerably leveraged play. So now the dealers that the hedge funds trade with have a hot potato."

Hedge funds' significant role

The sell-side official went on to recount that during the first quarter of 2005, and perhaps earlier, the hedge fund played a significant role in the junk market, which included soaking up a substantial amount of the new issue supply.

"You will recall that that took place against the backdrop of retail outflows," the official added, referring to outflows from the high-yield mutual funds totaling $6.619 billion since the start of the year, according to a Prospect News analysis of the figures reported by AMG Data Services.

"Now the hedge funds can't step up to the plate," the sell-side official added.

"So every deal is getting downsized, restructured, and price talk is being revised, with the deals sometimes coming wide of revised talk.

"Nobody is buying. Weaker credits are essentially shut out of the market."

The source concluded this dire discourse with Prospect News by prophesying that another substantial weekly outflow of cash from the high-yield mutual funds will be reported Thursday afternoon by AMG.

Paying up in the primary market

Meanwhile on Wednesday, evidence continued to be seen supporting the notion that the primary market is no longer a very friendly place for prospective issuers to do business.

Assumption, Ill.-based manufacturer and provider of agricultural equipment and services, GSI Group, Inc., priced a downsized $110 million issue of eight-year senior notes (B3/B-) at par to yield 12%, 37.5 basis points wide of the revised 11½% area, which had earlier widened from 10¾% to 11%.

Lehman Brothers ran the books for the debt refinancing deal that was downsized from $125 million.

When the new GSI Group 12% senior notes due 2013 were freed for secondary dealings, a trader said they straddled their par issue price at 99.625 bid, 100.625 offered.

Borden downsizes bonds, ups loans

Apart from the GSI terms, evidence emerged elsewhere that issuers are presently hoeing a hard high-yield row.

Borden U.S. Finance Corp./Borden Nova Scotia (Borden Chemical, Inc.) has downsized its two-part bond offering (existing ratings B3/B-) to $150 million from $250 million, and increased its term loan by $100 million.

Price talk on the bonds is expected to emerge Thursday with pricing to follow on Friday.

Credit Suisse First Boston, JP Morgan and Morgan Stanley are joint bookrunners for the acquisition deal.

The Columbus, Ohio-based chemical company plans to sell fixed- and floating-rate notes with terms and indentures that are identical to issues that it priced on Aug. 4, 2004. However upon completion of the pending merger of Borden with Resolution Specialty Materials Inc. and Resolution Performance Products Inc. the new notes will trade under new Cusip numbers, different from those of the existing issues.

Hence the new deal is not a conventional add-on.

Finally, Eric Martin, vice president of investor relations for Carter's, Inc. told Prospect News on Wednesday that the present sell-off in the high-yield market has deterred Carter's from using junk bonds to refinance its debt and fund the acquisition of OshKosh B'Gosh Inc.

"We will be keeping an eye on rates, and we may in fact come to the bond market as the closing of this acquisition approaches," Martin told Prospect News on Wednesday, noting that the deal is expected to close early in the third quarter of 2005 (see related story in this issue).

The Dimon deal, behind 15%

Some high-yield observers, on Wednesday, were still parsing the downsized, restructured $415 million issue of notes issued Tuesday by Dimon Inc., soon to be Alliance One International, Inc. after its merger with Standard Commerical Corp.

The Danville, Va. leaf tobacco dealer priced a $315 million issue of seven-year senior unsecured notes (expected ratings B2/B) at par to yield 11%, on the wide end of the 10¾% to 11% price talk and downsized from $325 million.

Dimon International also priced $100 million proceeds of 7.5-year senior subordinated notes (expected ratings B3/B) at 90.00, resulting in a 15.015% yield to maturity.

One sell-side official told Prospect News that it is necessary to turn back more than a dozen calendar pages - to March 2004 - in order to find a deal that price with a yield which broke the 15% level (excluding subsequent small deals from Phibro Animal Health Corp. and Levitz Home Furnishing Inc.).

On March 10, 2004 San Marcos, Tex.-based Grande Communications Holdings Inc. sold $136 million of 14% senior secured notes with warrants at 95.727 to yield 15%.

In market activity Wednesday, a trader saw Dimon's new 11% notes due 2012 ease slightly to 99.75 bid, 100.75 offered.

Prospect News asked this sell-side source whether the lately sluggish primary market could maintain its present pace right through the summer.

"That is certainly a possibility," the official said. "We have seen some dramatic changes in the market versus where we were a year or two years ago.

"So much of what we have been seeing lately is acquisition related. Very few issuers are coming right now who don't have to come for reasons of a refinancing that has to get done or an acquisition that is closing and that they are committed to, or a committed leveraged buyout.

"We've seen a lot of opportunistic refinancing just leave the market."

Another sell-sider from a different institution seemed to concur with this color.

"The only way to get to $100 billion of issuance in 2005 - which would represent approximately [a decline of] 30% from 2004 issuance - is through merger and acquisition and leveraged buyout activity, which has to remain steady," the source said.

"But a lot of these LBOs don't appear to be able to get it done. And they can't do it entirely in the bank market."

This source said that as far as fixed income is concerned there is presently a flight to quality.

"The high-grade market had a pretty good run today," the source said, pointing to transactions from Petro-Canada ($600 million), Berkshire Hathaway Finance Corp. ($1.5 billion, upsized from $750 million) and Citigroup ($1.5 billion in two parts).

To pay Paul

Finally on Wednesday, Prospect News spoke to an emerging markets portfolio manager in order to validate or negate the perception that recently emerging markets has been holding in while the U.S. and European high-yield markets have been tumbling.

While concurring that this indeed seems to be the case, the investor said that the present situation may bode ill for both asset classes.

"It still seems to be the case that the emerging markets have held in much better than high yield," the investor said. "But what we have heard is that some of the high-yield accounts that are suffering redemptions are finding better liquidity in their EM positions. So if they need to raise money they are going to sell their EM because there is really not a bid right now for most of the securities in the high yield."

Nervous morning

Back among the established issues, a trader said "there was [nervousness] in the morning," continuing the negative trend seen on Tuesday in reaction to market rumors about a number of hedge funds having gotten in trouble by shorting General Motors Corp. stock while being long in its bonds - only to see both of those strategies backfire, big-time, last week. On top of that, he said, news that the White House and Capitol had been evacuated when a small plane strayed into the capital's no-fly zone - briefly reviving terrorism jitters - also weighed on the market, and "stocks got whacked."

After that, however, "the market seemed to calm down, and started trading back up. It just followed stocks, tick for tick" - and stocks were rebounding when the Washington incident proved not to be terrorist related, and as oil prices fell. The Dow Jones Industrial Average, which plunged 103 points on Tuesday, closed Wednesday up 19.14 (0.19%) at 10,300.25, while the Standard & Poor's 500 and the Nasdaq indexes both role as well.

Junk "went right along with stocks the whole day,' the trader said. "You could watch the stock market and tell what the junk market was doing - but there wasn't a whole lot of trading going on, I don't think.

"It was really deathly slow."

Visteon down and up

One issue which was being traded around was Visteon, which said that it had delayed filing its 10-Q quarterly report with the Securities and Exchange Commission, saying it was investigating allegations of potential improper conduct by a former senior finance employee - and raising the possibility that it might have to restate some results.

Visteon's bonds were seen lower for much of the day, with its 7% subordinated notes due 2014 seen having fallen all the way down to 63 bid in the early going, before coming off that low to finish around 66 bid, 67 offered, the trader said, while the company's 8¼% notes due 2010 "actually were up after the downgrades," at 71 bid, 72 offered, from 69.5 bid, 70.5 offered. He saw the 7.95% notes slated to come due on Aug. 1 losing a point at 95 bid, 96 offered.

Another trader said "we thought we'd have a little uglier day, but it was a pretty uneventful day." He said that Visteon's afternoon news helped the bonds recover from their earlier lows, so that "net-net," the 81/4s, post news "got some wind behind their sails" and rose to 70 bid, 70.5 offered from late Tuesday's levels at 69 bid, 70, offered and at the 68.5 bid, 69.5 offered levels at which they had been anchored for "most of the day."

However, he had seen the 7.95s at 94.5 bid, 95.5 offered, well down from recent levels at 97.5 bid, 98.5 offered. Unlike the 81/4s, they did not take part in the late rally; the trader saw most of the action in the 81/4s and the 7s.

Visteon's New York Stock Exchange-traded shares lost 22 cents (5.77%) to $3.59, although those shares at one point earlier in the day had plunged as low as $3.14, from their opening level at $3.82. Volume of 4.2 million shares was more than double the usual turnover.

During the afternoon, the company announced that its president and chief executive offer, Michael Johnston, would also assume the post of chairman when Peter Pestillo retires from that post on May 31. Last summer, auto-industry veteran Johnston had succeeded Pestillo as president and CEO.

Earlier, the company was out with news that was not so favorably received, announcing the delay in filing the 10-Q with the SEC, as well as the discovery of the accounting irregularities.

The company said its audit committee would consult outside accounting and legal advisors to further probe the allegations that an employee in charge of accounting oversight for North American purchasing activities may have acted improperly.

An internal review identified errors in its accruals for costs mostly associated with freight and material surcharges that relate to prior periods.

Visteon said it could not estimate when it would file its first quarter report - and further cautioned that it "is not able to determine" at this point whether the errors it uncovered will require restatement of prior period results or further adjustments to its first-quarter 2005 financial results, which were reported in late April.

Visteon - which was spun off by Ford Motor Co. in 2000, but which still depends on its erstwhile corporate parent for about two thirds of its annual sales - also said that its previously reported ongoing talks with the giant carmaker aimed at restructuring their relationship were continuing and would not be affected by the accounting issues it announced.

It further said that "absent significant structural changes to Visteon's U.S. business," including an agreement with Ford that would allow the supplier to achieve "a sustainable and competitive business model, the company believes that cash flow from operations, including the impact of the Ford funding agreement, will not be sufficient to fund capital spending, debt maturities and other cash obligations in 2005," and, said it therefore, will have to incur additional debt.

It said that as of March 31, it was in compliance with its covenants relating to its existing credit facilities - although it cautioned that given current market conditions and the need to complete strategic and structural discussions with Ford, it could give no assurances that it will remain in compliance. While it said that its failure to file the 10-Q did not immediately constitute a breach of its covenants, "a significant delay in completing the investigation and submitting its Form 10-Q could result in non-compliance in the future."

Following the company's earlier announcement, S&P said it had lowered Visteon's corporate credit rating and senior unsecured debt to B- from B+ previously, while Moody's Investors Service lowered Visteon's senior implied and senior unsecured ratings to B3 from B1 and its speculative grade liquidity rating to SGL-4 from SGL-3.

Delphi lower

Also in the automotive sphere, Delphi Corp.'s bonds "were weaker out of the box," the second trader said, after the Troy, Mich.-based automotive electronics company - which also has uncovered accounting problems - like Visteon delayed its quarterly filing, and reportedly retained restructuring adviser Rothschild Inc. to help it cope with its deteriorating situation.

Since the accounting problems had already been announced some weeks back, "I don't think that [the need to delay the 10-Q] is going to do too much more damage," the trader said.

He saw Delphi's 6.35% senior notes due 2006, which had closed Tuesday at 93 bid, 94 offered, fall to 91 bid, 92 offered at the open Wednesday, before finishing down a point on the day at 92 bid, 93 offered.

He further saw Delphi's 6½% subordinated notes due 2013 fall to an intraday low of 69 bid, 70 offered from Tuesday's finish at 71.5 bid, 72.5 offered, before coming off the lows to end only down half a point at 71 bid, 72 offered.

Bally gains on sale plan

On the upside, Bally's 9 7/8% notes due 2007 were seen trading a point better at 84.5 bid, 85.5 offered on the news of the likely sale of Crunch Fitness, while its 10½% notes due 2011 were considered half a point better at 98.75 bid, 99.75 offered.

However, at another desk, the 9 7/8s were seen up around two points to the 85 level. A trader saw the 101/2s firm to 99.5 bid, 100.5 offered, well up from 97.5 bid, 99.5 offered.

Bally said it had started the process of selling Crunch Fitness as part of a larger restructuring effort to turn around the underperforming company.

Crunch is a relatively small, but potentially lucrative premium-priced chain that runs 21 high-end fitness centers in New York, Los Angeles and several other large cities.

Bally did not say what kinds of proceeds it anticipated from such a sale, which is being handled by The Blackstone Group LP, previously hired by Bally to help to company in its restructuring efforts. Bally said it would evaluate buyers' interest in Crunch before deciding whether to continue the sale process.

Proceeds from such a sale would be aimed at strengthening Bally's core operations. The company operates 440 gyms worldwide under such nameplates as its flagship Bally Total Fitness, as well as Crunch, Gorilla Sports and Pinnacle Fitness. Although it is the largest fitness club operator in the United States, it has been plagued by accounting problems and posted a loss last year.

Bally also said that it would continue to review all of its non-core assets to evaluate other strategic alternatives.

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