Chesapeake upsizes sterling issue; Allied Waste, Revlon slate deals; Enron up on Dynegy news

By Paul Deckelman and Paul A. Harris

New York, Nov. 13 - It was back to work for the high yield market Tuesday after the three-day Veterans' Day holiday break, and the primary arena was hopping, as Chesapeake Corp. sold an upsized sterling-denominated deal and Allied Waste and Revlon readied new offerings. In the secondary, Enron Corp. debt jumped on news it will be acquired by Dynegy Inc., but that combination appears to preclude Enron falling any further into the clutches of junk bond traders.

Tuesday's US high yield primary market awoke to news from London of another upsized deal priced at the tight end of talk: Chesapeake Corp. raised its sale of 10-year notes to £115 million from £90 million and priced them at 10 3/8%, the tight end of the 10½%-area price talk. Bookrunners were Credit Suisse First Boston and Goldman Sachs & Co.

One investment banker said the spate of upsized, tight-end-of-talk deals in October and thus far into November said it was neither magic nor universally slick execution.

"It's just characteristic of how the market is operating now - investors have tons of cash, and are looking to put it into new deals."

Ed Schriver, manager of the ING Pilgrim High Yield Fund, concurred with this banker's assessment of the cash positions of the funds.

"Portfolio managers are going to have a hard time figuring out what to do with their cash, as we approach year end," Schriver said.

However, he added, don't expect the funds - especially his - to shoot off into a pre-holiday shopping spree, merely in the name of spending down cash.

"We're already structured the way we want to be," the ING Pilgrim fund manager said. "And I think there are a lot of people like us.

"We gave up a lot of ground in October because of some specific credit bets. We're going to stick with them, and stick with our sector-structure. There will be a lot of people doing the normal window-shopping - it will probably be like Christmas shopping, with retail moving up each year so that Christmas is over by the end of November.

"But people that have good results are going to move to protect them right now. They're going to be all defensive.

"There's nothing we need to do or want to do, right now, except pray for some of our specific credits, where we have big bets."

Schriver also intimated that the sell-side might be somewhat overstating the accounts' exuberance to spend down cash, in light of terrorism, recession and war.

"If people start taking money out, you don't want to be in a position to have to sell into a down market," he observed. "Everybody's still skittish."

As to the cures for this skittishness, Schriver listed two: victory and a coherent economic stimulus package from the government.

"Markets don't like uncertainties, and wars are uncertain things," he observed.

"But more importantly, you have to get back to the basic economics. People just aren't sure where we're going, economically. Everybody's already played the defensive sector-game. But the problem is, people can't tell whether it is time, yet, to move into a more aggressive posture."

Also in Tuesday's primary market, word reached Prospect News that a deal which had been generating speculation in the high yield primary for the past week, Revlon Consumer Products $250 million of four-year notes via Salomon, was on the road and expected to price Nov. 19 or 20.

In addition, a drive-by deal emerged from Allied Waste North America, Inc. for $500 million of seven-year notes (Ba3/BB-). Pricing is possible as early as Thursday, via joint bookrunners J.P Morgan and Salomon Smith Barney.

Finally Tuesday, price talk in the 10¼% area emerged on Compass Minerals Group $200 million of 10-year notes via Credit Suisse First Boston, and J.P. Morgan. Pricing is expected Thursday.

In the secondary market, a trader said that even with a large new deal coming for Allied Waste and with "a credit situation with them that keeps getting more interesting by the quarter, the bonds hang in there."

He noted that the new deal, "if they do get it done, is going to effectively subordinate the 7 7/8% senior notes due 2009 by maturity and will subordinate the 10% senior subordinated notes due 2009 in the capital structure even more than they already are."

But against that potentially bearish backdrop, he quoted the 10% notes as ending down only about a point and change, at 102.25 bid/103, with the 7 7/8% paper going home quoted bid in the 99.5-par level, "down a touch. You'd think they would have been hit a little bit more than they were, being sub debt." Meanwhile, the company's less liquid issues, like the 7 5/8% notes due 2006 were left bid at 100.25 and "looking for the right (offered) side. The bonds weren't hit as much as they would have been ordinarily, which is kind of surprising. I think the whole (debt) structure is going to settle in, and has found its bottom."

Despite the Scottsdale, Arizona-based refuse disposal company's recent problems - last week, it reported adjusted third-quarter net income of $24.6 million (13 cents per share), down 52% from its year-earlier $51.3 million (27 cents per share) - its bonds "continue to perform well, maybe because (for the high yield market), it's the only game in town for waste-management services."

Elsewhere, Enron Corp. bonds "were up five to 10 points across the board, depending on the issue," one market observer said, in response to the news, announced jointly by Enron and Dynegy Inc. after the market had closed Friday, that the two Houston-based energy marketers would merge - on Dynegy's terms.

Dynegy thus acquires its larger, but financially troubled rival at the bargain-basement price of $9.5 billion, a steal compared with its estimated $80 billion market value in the summer of 2000. Since then, energy prices have fallen radically, and Enron itself has been hurt by allegations of improper reporting practices, which sparked a formal Securities and Exchange Commission investigation, led to a purge of several high-ranking executives and forced the company to restate its results over the last five years downward.

All of that caused Enron's bonds, once solid investment-grade credits which traded on a spread basis like any other high-grade bond, to recently trade at a steep discount to par and quoted in dollar terms, on the expectation that it might soon become a fallen-angel junker.

But the prospect of being bought by the financially stronger and better-rated Dynegy boosted Enron's bonds Tuesday (they did not trade Monday due to the holiday), with the 7 7/8% notes due 2003 pegged at 87 bid, up from Friday's 77; its 6.40% notes due 2006 climbing to 81 bid from 76; and even its long-dated 6.95% notes due 2019 getting into the act with a nine-point rise to 75 bid.

As Enron's ratings fell to Baa3/BBB, some junk desks actually began trading it and other high yield marketeers looked forward to joining them, but it appears that assuming the Dynegy merger is not derailed by antitrust or other concerns, the bonds will fall no further and may even be upgraded to Dynegy's levels, currently at Baa2/BBB+, effectively moving them out of range of the junk denizens.

"I'm p.o.'ed," one trader exclaimed, tongue only partially in cheek. "I was looking forward to trading it. So close, but so far away."

High yielders may have to content themselves with continuing to trade the bonds of Enron's Azurix Corp. affiliate, which have always been junk-rated. Those 10 3/8% senior notes due 2007 were quoted Tuesday at 85 bid, up from 79 Friday, presumably on the news about its parent.

The trader opined that the Houston-based water-supply management company might soon be on the auction block. Dynegy "might look to sell some of the properties that are outside this country (Azurix recently announced that it had completed the sale of its North American subsidiary to American Water Works Company, Inc. for $141.5 million) or other assets that don't fit their (energy) business. With the purchase of Enron, he said, Dynegy "is already taking on a huge amount of debt, so they would want (just) the assets that fit their business and would allow them to grow without getting them too far diversified" into non-energy areas.

In the ever-volatile telecommunications constellation, traders said that Nextel Communications Inc. debt firmed smartly Tuesday, its benchmark 9 3/8% senior notes due 2009 rising to 79.375 from prior levels at 75.75 bid/76.5 offered. Nextel's zero-coupon bonds due 2007 advanced to 74.75 bid from 72.

A trader said the Reston, Va.-based wireless operator's paper "had been doing well anyway lately, and there are a fair amount of shorts in the Street." But it got added impetus, he said, from last week's Federal Communications Commission ruling letting large wireless operators have greater control of frequency spectrum in their markets. The rule changes were being pressed by the industry-leading giants such as AT&T Wireless, Cingular and Verizon Wireless. Nextel, the No. 5 U.S. wireless carrier, would also be able to increase its share at the spectrum; at the same time, telecom analysts believe the new rules will spur consolidation within the wireless industry, and they see Nextel potentially being in play as a takeover target for one of the still-larger fish in the pond.

Also in telecom, "there was some activity Global Crossing, with mostly buyers in the morning; then the sellers came out in the afternoon. He saw the Bermuda-based global telecom operator's 9 5/8% notes due 2008 at around 15 bid, up perhaps three quarters point on the session.

He said that much of the activity may be linked to the fact that Global Crossing "has a large interest payment due on the 15th. People are trying to arrange their positions before that date."

The trader speculated that "the general feeling is they're not going to make the payment, and they're going to try to restructure - which is a smart thing to do."

He noted that while the company has the cash to pay now, "at the next interest period, they're going to be strapped for cash, and the way things are looking now, they can't get any more cash." A wiser move, he says is "go into the open market and buy back your bonds. If bonds return to a higher level, at least in the 30s (after such a buyback), maybe some of their customers may feel a bit more comfortable and give them more orders. With bonds trading in the teens, it just doesn't give people any confidence."

The prospect of bonds being bought back helped boost King Pharmaceuticals' 10¾% senior subordinated notes due 2009. The Bristol, Tenn.-based drugmaker announced last week that it would tender for those bonds, which had already been quoted well above par, around the 110 level. News of the tender pushed quotes up to 121 Tuesday, although the bonds were not trading around.

Chiquita Brands International's bonds were quoted by a trader as having risen about five to six points across the board to the mid-80s, after the Cincinnati-based banana importing giant announced that it had reached a deal with its bondholders to reduce the company's $950 million debt by about $700 million, via a pre-packaged reorganization plan to be filed with the U.S. Bankruptcy Court.

He noted that the bonds had been trading as low as the mid-40s just a month or so ago, so the new agreement "gives the bondholders a leg to stand on."

There was not too much activity observed in AMR Corp. bonds Tuesday, a day after the disastrous crash of one of the company's planes minutes after takeoff from New York, with all 255 persons aboard killed. While AMR shares had tumbled Monday, along with those of other airlines, on market fears the crash might somehow be terrorism linked, the shares bounced back on Tuesday to end higher as officials downplayed that possibility.

On the bond side, AMR's 9% notes due 2012 dipped to 88 bid/90 offered from 89.5 bid/90.5 offered Friday, but activity levels were restrained.

"Most of the (AMR) structure was off two points, and the rest of the airline paper was pretty much unchanged in the last couple of days," a trader said. "There was not a whole lot of trading activity in it, and certainly no price action to speak of. I think everyone is coming to the conclusion that it was an accident, a mechanical thing, but it wasn't anything to be alarmed about (in terms of terrorism) and flying is still the safest mode of transportation going."

End

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