Kmart active but little changed; Haliburton, Georgia Pacific bounce after sharp Wednesday declines

By Paul Deckelman and Paul Harris

New York, Jan. 24 - Kmart Corp. continued to hold center stage in high yield secondary trading Thursday, but despite a sizable amount of volume, there was not a corresponding amount of price movement. Elsewhere, American Tower corp. bonds continued to firm smartly, and two investment-grade credits which junk marketeers already have in their sights - Haliburton Co. and Georgia Pacific Corp. - were on the rebound, after having been slammed Wednesday by investor angst over their asbestos exposure.

In the primary sector, meantime, participants were preparing for three new deals set to price Friday, led by PanAmSat Corp.'s $500 million.

Kmart remained the focus at many junk trading desks, including one distressed-debt shop where a trader exclaimed that "some other things were flying around - but the main dish was Kmart. It seems like the whole world is trading them."

That may well have been - but if so, the world kept the troubled Troy, Mich.-based discount retailing giant's unsecured bonds in a narrow range in the mid 40s, little changed from their levels Wednesday. The distressed-debt trader quoted the notes "down a couple of points," to bid levels in the 43-45 area, but others saw even narrower movement. A trader at another shop saw the company's structured paper (bonds secured by payments on various leases Kmart took out on certain store properties) up a couple of points, but said the unsecured bonds were unchanged to down half a point on the day.

Another desk likewise quoted Kmart debt down half a point pretty much across the board, noting that its 13½% notes ended at 47.5 and its 8 1/8% bonds were at 46.

Kmart sought protection from the holders of more than $2.7 billion of junk bonds and other creditors via a Chapter 11 filing on Tuesday with the U.S. Bankruptcy Court for the Northern District of Illinois in Chicago, driven to seek shelter as weak sales eroded its ability to compete with its main rivals, Wal-Mart Stores Inc. and Target Corp. Restive suppliers worried about not getting paid added to the problem when they stopped making deliveries to Kmart, leaving frustrated consumers to stew over empty shelves in some departments at Kmart's 2,114 stores nationwide.

But after going into Chapter 11 and announcing that it had a $2 billion line of debtor-in-possession financing with which to pay vendors and employees during its restructuring, one balky key supplier came back to the fold Thursday; Fleming Cos. Inc. which supplies Kmart stores with food items and other consumables under a lucrative 10-year contract, was declared a "critical vendor" this week by the bankruptcy court, which authorized payment of a $76 million pre-petition merchandise claim.

Kmart - which operates on a seven-day invoice system with Fleming - had missed the weekly payment, causing the Dallas-based wholesale supermarket supplier to suspend its shipments.

Kmart has been banking on its expanded "Super K" format superstores (incorporating supermarket and pharmacy areas into the traditional discount store format) as a means of challenging the much larger Wal-Mart, which also has several hundred of such stores, so the loss of the grocery supply line Monday was serious enough to be the immediate catalyst for Tuesday's bankruptcy filing. With the court having declared that the payment would be made, Fleming ordered its trucks to begin rolling toward Kmarts again. It said in a statement Thursday that it would again extend trade credit to Kmart on its weekly payment cycle, noting that "the priority given in bankruptcy to post-petition trade creditors adequately protects Fleming's interests."

Fleming further said that in addition to the $76 million, it has an additional net claim of approximately $30 million, primarily representing merchandise shipped after Jan. 18, and other non-merchandise receivables, such as unreimbursed transportation costs and vendor rebates. Fleming will submit a claim against these receivables.

The court's granting of priority claim status to Fleming, whose contract with Kmart - its largest individual customer - is worth an estimated $4.5 billion a year, helped boost its bonds Thursday. Its 10½% notes were up three points, to 95 bid, while its 10 5/8% notes were likewise up a trey, at 93. Fleming's shares were up 94 cents, or 5.13%, to $19.31 in New York Stock Exchange trading.

Elsewhere in the retail world, Rite Aid Corp. debt appeared to stabilize Thursday, after having gotten slammed over two straight previous sessions on investor concern over whether the Camp Hill, Pa.-based drugstore chain operator would be able to boost sales and earnings and cut its debt significantly in a tough retail environment. It was unchanged from the lower levels to which it had swooned Wednesday, with its 6 7/8% notes at 48 bid and its 7.70% notes at 46 bid.

On the upside, on-line retailing giant Amazon.com continued to bask in the glory of its first-ever quarterly profit, which was reported Tuesday. The Seattle-based bookseller - which had lost nearly $3 billion since going public in 1997 - parlayed a strong turnout from holiday shoppers into a 15% rise in sales and a fourth-quarter net profit of $5 million (1 cent a share) - a sharp turnaround from its year-earlier loss of $545 million ($1.53 a share). Amazon.com's 10% notes advanced to 80 bid from 77 the session before. Its Nasdaq shares shot up on Tuesday, retreated Wednesday and were back on the upside Thursday, closing up $1.54 (12.35%) at $14.01. Volume of 23.1 million shares was nearly double the usual daily handle.

Apart from the retailers, American Tower Corp.'s bonds continued to firm smartly for a second straight session despite a lack of clear news; its 9 3/8% notes due 2009, which rose three points on Wednesday, tacked on another three Thursday to end quoted at nearly 76 bid.

Conseco Inc. 2002 paper continued to firm for a third straight session this week, powered by the Carmel, Ind.-based insurer's recently announced buyback of $34 million of the bonds - and talk heard here and there that it might be in the market to buy back still more of the debt.

Conseco's 10¼% notes due 2002, which were up four points Wednesday, gained another point Thursday to 95 bid/96 offered. Its 6½% notes due 2002 closed higher at 88 bid/89 offered, while its 8½% 2002 paper ended at 87 bid/88 offered, up about two points on the day.

The company said last week that it had so far bought back $266 million of the notes since last June 30 - fully 30% of the approximately $864 million of public debt of Conseco itself and its Conseco Finance unit scheduled to mature this year.

Haliburton Co. bonds - which have recently been quoted trading in dollar prices like junk bonds, despite the Dallas-based oilfield services and construction giant's Baa2/A- investment grade rating - bounced back somewhat Thursday after a sharp fall Wednesday, when its bonds had fallen anywhere from five to 10 points, its widely traded 6% notes due 2006 dropping to 86 bid. On Thursday, a trader said, the bonds were up about two points or so, in line with a big rebound on the equity side. Haliburton's shares jumped $2.63, or 24.35%, in NYSE dealings, to $13.43; volume of 33 million shares was more than three times normal.

Haliburton's comeback was attributed to Wednesday's conference call, during which management explained how the company was keeping its asbestos liability problems under control. Fears about asbestos claims rising from its Dresser Industries and Kellogg, Brown & Root units had recently weakened the company's shares and debt, causing Moody's Investors Service to cut the latter's rating this week two notches to Baa2 from A3 previously. But Haliburton said on the conference call that several recent large jury awards were not typical, adding that they were confident the awards would be overturned, or the dollar amounts greatly reduced, on appeal.

Haliburton on Wednesday also reported that net income rose to $139 million in the fourth quarter - up sharply from $5 million a year earlier. Asbestos-related lawsuits in the latest quarter only reduced overall net income by $2 million, or 1 cent per share.

Another nominally investment grade name which has gotten knocked around over the last few session - and whose bonds are quoted in dollars, like Haliburton's - is Georgia Pacific Corp., and its debt too was up on Thursday, after having retreated considerably the previous two sessions. The Atlanta-based forest products company - whose 8 7/8% bonds due 2031 had dipped to 79 bid Wednesday from 81.5 bid previously - was up anywhere from three to five points across the board.

Like Haliburton, Georgia Pacific has some potentially serious asbestos liability problems: it estimated that it would take a $350 million asbestos related charge, but said it did not include it in its fiscal fourth quarter results because the exact number has not yet been finalized, a spokesman said.

Chief Executive Officer A.D. Correll told investors on a conference call that the impact of asbestos on the company "is grossly overblown," and will not have a material impact on its operations during the 10-year period through 2011, since most claims are covered by insurance. The asbestos charge of about 96 cents a share for asbestos liabilities through 2011 will be included in its final audited fourth-quarter financial statements.

The Georgia Pacific executive also declared "we are not on the verge of insolvency."

Apart from the asbestos problem, Georgia Pacific reported fourth-quarter net income after special items of $31 million (15 cents a share), versus a year-ago loss of $131 million (98 cents a share). The earnings rise was powered by strong results from its Dixie Cup and Brawny paper towel division. The company also unveiled plans to spin off its building products division.

Looking to Friday's high yield primary, the investment bankers at Credit Suisse First Boston and Deutsche Banc Alex. Brown will be manning the controls, watching to see whether PanAmSat's $500 million of 10-year senior notes (Ba3/B) achieve escape velocity. Price talk is 8½%-8¾%.

Prescott Crocker, portfolio manager of the Evergreen High Yield Bond Fund, told Prospect News on Thursday that he has been tracking PanAmSat and approves of its trajectory.

"It's a pretty low risk credit in an area that has treated investors well," said Crocker.

"Its return was way above the market last year and it gets better every day. And if they get this merger with DirecTV they'll be upgraded to BB."

Crocker, whose fund is in the Morningstar 17th percentile year-to-date, the 15th percentile over the past 12 months and the 18th percentile over the past three years, said that the EchoStar-PanAmSat merger could easily spare the combined entity considerable capital expenditure.

"The great thing is that when (EchoStar CEO) Charlie Ergen buys PanAmSat he's just saved himself $400 million because he doesn't have to put any more birds up," commented Crocker. "He can provide local TV. He can even provide dirty pictures at night time in every house in America with the excess capacity in PanAmSat.

"That's his game," Crocker continued, "providing more markets with local TV. Up until now that required putting up more birds, and spending $200 million a bird. Now he's got a going business that he paid 5.5-times cash flow for, which has extra capacity that he can use at no capital cost to himself, to expand his coverage.

"So it's a fabulous deal."

Crocker also said that investors who are limited by charter from owning too much EchoStar paper will likely see PanAmSat's new notes as a means of bypassing those thresholds

"It's another way for everybody to own more EchoStar, because most people were maxed out at 2% or 2.5% - by agreement or by law or whatever - that they won't take any more of a name. And this is a way to get around that," Crocker said.

In addition to PanAmSat, Friday's high yield primary market expects terms to emerge on U.S. Oncology, Inc.'s $175 million of 10-year senior subordinated notes via joint bookrunners UBS Warburg, Wachovia Securities and Deutsche Banc Alex. Brown. Price talk of 9½%-9¾% came out Thursday on the company's new paper.

Terms are also expected Friday on a dollar-denominated emerging markets deal for Azteca Holdings SA de CV's $150 million senior notes due July 2003 (B3/B-) via Bear Stearns & Co. Price talk is 10½%-11%, according to a syndicate official.

Notwithstanding these three deals - totaling $825 million - that figure to conclude the week of Jan. 21 on the primary, conversations with buy-siders and sell-siders have recently taken a subdued tone.

Although it has been noted around the market that significant cash has flowed into the high yield asset class, Margaret Patel, portfolio manager of the Pioneer High Yield Fund, said that investors may presently be focused on the risks.

"I think clearly there is an appetite for income out there," said Patel, whose fund posted a return of 16.7% in 2001. "And considering how low short rates are right now it's surprising that we haven't had much more money flow into high yield.

"I think that just reflects the fact that investors are still risk-conscious, if not risk-averse.

"We've had some money coming in," she continued. "But if someone told you last year that short rates will be under 2%, you would have thought that high yield flows would be enormous. And they've just been alright.

"I think that reflects the fact that there is a high level of caution among investors, what with the high defaults, with the blow-ups of things like Enron, and with what's happened in the equity markets over the last year and a half, and the uncertainty in the economy. That has limited the money flow."

Sell-side officials have lamented what they have characterized as a less-than-anticipated volume on the 2002 forward calendar, thus far.

"There's not a whole lot of acquisition-activity, or anything of that nature, in the high yield market right now, that is going to require a lot of debt," one sell-sider commented.

"A lot of sectors recapitalized in 2001."

This official conceded that redemptions of notes that become callable in 2002 could bring some new business.

"The thing is, a lot of that issuance came on the heels of the Telecommunications Act of 1996," the official said. "And telecom companies can't refinance right now. So it would be everyone outside of telecom, who issued non-call fives in '97. But if you take out telecom from '97 you're taking out about 30% of the market."

End

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