J. Ray McDermott sells 10-years; Hyundai shelved; Sbarro fall continues

By Paul Deckelman and Paul A. Harris

New York, Nov. 21 - The high-yield new issue market saw another $600 million of notes price during the concluding session of the Nov. 17 week, bringing the week's total to $4.3 billion in 20 tranches and taking the year-to-date tally to just over $125 billion.

In the secondary arena, the bonds of Sbarro Inc. were down for a second consecutive session following the release of the restaurant operator's latest financial results, although Friday's drop was much smaller than the dramatic ten-point plunge seen Thursday. On the upside, the distressed bonds of Allegiance Telecom Inc. were up smartly on reports that Qwest Communications International Inc. has made an offer to buy the bankrupt Dallas-based telecommunications company and assume its debt, as Qwest tries to increase revenues.

Also on the upside were the bonds of Dillard's Inc., after the retailer reported a smaller quarterly loss than analysts had been looking for and said that it had retired some maturing debt and had lowered its interest costs.

Friday's new issuance was evenly split among three deals, two of them upsized and priced at the tight end of talk.

But Korean automaker Hyundai Motor Co. called for a tow on Friday, pulling its $400 million bond deal indefinitely because of market conditions.

However sources around the market were hard-pressed to come up with any suggestions as to when and how conditions in the cash-stuffed high yield market might improve when Prospect News inquired Friday.

Well before the Hyundai news was known, Kathleen Gaffney, vice president and portfolio manager of the Loomis Sayles High Income Funds, said that the end of the rally in high yield is not presently in sight.

"I think we keep rolling along," Gaffney said. "Even all of the protectionist headlines don't seem to be really rattling the market today.

"That is a pretty big issue but the market seems to be ignoring it."

Away from the financial headlines, however, Gaffney allowed that a turn for the worse in geopolitical news would not do the market any good.

Alluding to news such as Thursday's White House evacuation, triggered by a radar scare, and the recent terrorist bombings in Turkey, Gaffney said news like that could, in the aggregate, register a negative impact.

"Thursday morning, when we were having our meeting, there was the news that they had evacuated the White House," Gaffney said. "You saw people ducking for cover pretty quickly. One of my traders, who usually has 20 Bloombergs when she gets back to her desk after the meeting, had zero messages Thursday because everybody was so focused on the White House being evacuated. I think there is a lot of anxiety out there."

When Prospect News asked Gaffney if she had been shopping lately in the junk bond market she invoked a seasonal symbol as she responded in the negative.

"I don't have a lot cash right now," she said. "We're pretty fully invested. And a lot of these new deals just look like turkeys."

When asked how she was positioning herself with regard to possible changes in the interest rate scenario in the months to come, Gaffney expressed confidence that such changes are unlikely - at least in the near term.

"Interest rates are not something I'm worried about over the next three or four months - even six months out," she said. "I think the Fed sits tight and the curve stays steep."

Meanwhile in Friday's primary market action, a triumvirate of $200 million deals were priced by the investment banks.

New Orleans-based energy services company J. Ray McDermott, SA sold $200 million of 11% senior secured notes due Dec. 15, 2013 (B3/B-) at 97.064 to yield 11½%. The Morgan Stanley-led deal came at the wide end of the 11¼%-11½% price talk.

Another energy name, North American Energy Partners, priced an upsized issue of $200 million of senior notes due Dec. 1, 2011 (B+) at par Friday to yield 8¾%, according to a market source. It was increased from $175 million.

Price talk was for a yield of 8¾%-9%.

BNP Paribas and RBC Capital Markets were the underwriters of the Rule 144A offering.

Proceeds will be used to finance the acquisition of the company by Sterling Group and others.

Also upsized Friday was Stamford, Conn. crude oil tanker company OMI Corp.'s $200 million of 10-year senior notes (B1/B+). The deal, increased from $150 million, priced at par to yield 7 5/8%. The Goldman Sachs-led offering came at the inside end of the 7 5/8%-7 7/8% price talk.

However the biggest deal that figured to be priced during the final session of the Nov. 21 week, Hyundai Motor Co.'s $400 million of seven-year notes (Ba1), was postponed indefinitely, with the Korean automaker citing "market conditions" as the reason it put the deal up on blocks.

In Friday's edition of Situation Room, the debt research daily from Banc of America Securities, David Goldman, that institution's head of debt research may have provided some backdrop from the foreign exchange markets for the Korean firm's decision to walk away from the deal.

"Be warned against doomsday predictors who seek to portray the spike in the USD/KRW this week as the beginning of an (premature) end to the positive Asian story," Goldman wrote. "Recent price action in the currency pair has been more a result of Korea-specific factors: market positioning (which has been heavily short USD/KRW), domestic concerns over liquidity related to credit card company woes and arguably an over-interpretation of a [Bank of Korea] policy speech, rather than reflective of a retracement in non-Japanese Asian currencies in general on the global geopolitical factor or the Sino-US trade spat."

One U.S. high yield market sell-side source told Prospect News in the wake of Hyundai's postponement that the deal had been more actively marketed to emerging markets names than to junk names.

Meanwhile two new companies announced their intentions of tapping the high-yield market in the near term.

Canadian convenience store operator Couche-Tard Inc. will start a roadshow on Dec. 1 for $340 million of 10-year senior subordinated notes (Ba3/B), which are expected to price Friday Dec. 12 via CIBC World Markets and Scotia Capital.

Coming in shorter order is Minneapolis-based maker of yearbooks, trophies and other commemorative products Jostens Holding Corp., which is expected to price $150 million of 10-year senior discount notes (Caa2/B-) on Tuesday.

The Credit Suisse First Boston and Deutsche Bank Securities-led deal will be marketed in an investor conference call Monday morning.

Finally, price talk of 6 7/8% emerged Friday on Chevy Chase Bank's $175 million of 10-year subordinated debentures (Ba3/BB-), which are expected to price on Monday, via Friedman Billings Ramsey.

Sbarro was the main item on the secondary menu for a second consecutive session, with its 11% notes due 2009 seen having fallen back to around the 75 bid, 77 offered level from Thursday's close at 79, although a trader said "there really was no trading in the issue."

The bonds had slid into the upper 70s from prior levels just below 90 on Thursday, after the Melville, N.Y.-based operator of a chain of cafeteria-style pizza and Italian food restaurants reported its results for the latest financial period to the Securities and Exchange Commission; the company lost $23.656 million versus a year-earlier profit of $2.888 million.

On Friday, Moody's Investors Service lowered its rating on the bonds to Caa2 from B3 previously while retaining a negative outlook, citing the company's declining liquidity reserves and likely debt impairment values in the event of a default, as well as the ratings agency's belief that "persistent sales declines and free cash flow deficits will not soon materially reverse."

Moody's also warned that "with termination of the unsecured revolving credit facility because of perpetual covenant violations and a high cash burn rate, Moody's believes that the company does not have sufficient liquidity to operate normally over the medium term."

Also on the downside, Biovail Corp.'s bonds "saw some activity today," in the words of a market source, who quoted the Canadian based drug company's 7 7/8% notes due 2010 three points lower at 95.5.

Biovail announced late Thursday that the SEC had opened an informal inquiry into its accounting practices for fiscal 2002 and fiscal 2003 to date, and said it would cooperate with the probe.

The tape saw a number of announcements during the day by lawfirms announcing the filing of legal actions against the company on behalf of disgruntled investors, and its shares swooned $4.33 (18.69%) in New York Stock Exchange Trading on Friday to $18.89 on volume of 14.66 million shares, around five times the norm. Even a midday announcement by the company that its board of directors had authorized Biovail to repurchase up to 10% of its outstanding stock, or around 13 million shares, failed to turn the tide - while the prospect that the company might spend as much as $240 million on such a stock buyback probably did not please its bondholders.

Biovail - apparently to no avail - also reaffirmed its 2004 earnings guidance of $2 to $2.20 per share, excluding certain items, and projected cash flow from operations in excess of $400 million.

A source said chemical maker Solutia's bonds were trading lower, with its 6.72% notes at 77.5 bid, well under its recent levels in the lower 80s.

On the upside, The Wall Street Journal reported that Denver-based regional Bell operating company Qwest had made a $350 million offer to buy bankrupt Allegiance Telecom, an offer which includes the assumption of Allegiance debt by Qwest.

Even though the Journal noted that this is far from a done deal, with at least two other bidders besides Qwest having expressed strong interest in Allegiance, the news apparently rang some bells among the bankrupt telecommer's beleaguered bondholders; its 11¾% notes due 2008 and 12 7/8% notes due 2008 each were quoted up five points on the session to end, respectively, at 40 bid and 40.5 bid.

Elsewhere, a source said that the wireless sector seemed to be stronger, quoting Dobson Communications Corp.'s 8 7/8% notes due 2013 as having firmed to 101.25 bid from prior levels around 100.75, while Rural Cellular Corp.'s 9¾% notes due 2010 advanced to 93 bid from 91.5 on Thursday, and Alamosa PCS' zero-coupon discount notes due 2009 firmed to 83.5 bid from 82.

However, wireless sector bellwether Nextel Communications Inc. went nowhere, the Reston, Va.-based Number-Five U.S. wireless company's benchmark 9 3/8% notes due 2009 actually down half a point at 108.5, while its 7 3/8% notes due 2015 were marginally better at 104.625.

Also in the communications sector, NTL Inc.'s 11 7/8% notes due 2007 rose to 102 bid from 100.5 previously, after the provider of cable and broadband service in the U.K. said it would tighten its belt by cutting between two and three thousand jobs in the next several years.

Dillard's debt "was on the move," a trader said, after the Little Rock, Ark.-based department store chain operator reported a loss in the fiscal third quarter ended Nov. 1 of $15.8 million (19 cents per share) - considerably wider than the year-earlier loss of $5.1 million, (6 cents per share), but well under the 32 cents per share of red ink which analysts had been expecting.

And Dillard's had good news on the debt front, reporting that it had retired $130 million of outstanding bonds when they matured last week and had cut its interest and debt expenses by about $5 million during the quarter.

A trader said that Dillard's longer-dated paper was up solidly, with its 7¾% bonds due 2026, for instance, at 95 bid, 97 offered, up from levels earlier in the week at 92 bid, 94 offered. "Clearly there was more of a jump on the longer end" of the curve, he said, quoting its intermediate debt like the 6.30% notes due 2008 up around a point, while the shortest-dated bonds were up less than that, with the 6 7/8% notes due 2005 up about three-quarters of a point at 102.75 bid, 103.75 offered.

Another retailer reporting numbers was Gap Stores - but even though the San Francisco-based operator of the Banana Republic, Gap and Old Navy chains reported third-quarter earnings of $263 million (28 cents a diluted share) for the fiscal third quarter ended Nov. 1, a penny better than analysts' expectations and well improved from $135 million (15 cents a share) in the same period last year, the bonds didn't show much appreciation.

A trader said that Gap paper "was already pretty well priced even prior to the numbers," quoting its 6.90% notes due 2007 up perhaps half a point, at 109.5 bid, 110.5 offered, and its 9.90% notes due 2005 at 112.875 and its 10.55% notes due 2008 at 122.875.

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