Werner debt tumbles many rungs on lost ladder contract; Parmalat down further

By Paul Deckelman and Sara Rosenberg

New York, Dec. 22 - Werner Holding Co.' s bonds and bank debt were sharply lower Monday after the company said that it will no longer be selling its line of metal ladders through Home Depot - which had accounted for fully 31% of its sales. However, both its bank debt and bonds appeared to have firmed off their early lows later in the session.

Elsewhere, the bonds of Italy's Parmalat Finanziaria SpA continued to head south as the dairy products concern appeared likely to file for bankruptcy protection in the wake of billions of euros of missing or non-existent funds, while prosecutors began scrutinizing the situation and Italy's prime minister said the government would intervene to save the company.

Werner's bank debt began that day at levels around 85 to 86 bid as investors reacted to the company's latest announcement that it will no longer be supplying Home Depot with extension ladders. However, in true Werner fashion, the bank debt rebounded by late afternoon to 91 bid, 92 offered, ending the day only four points down from Friday's levels, according to a market source.

On the bond side of the ledger, the company's 10% notes due 2007 - which back in October fell to levels in the lower 70s from around par after Home Depot said it would stop selling Werner's line of step ladders and would examine whether to drop other Werner products, such as the extension ladders - dropped to 55 bid from last week's levels around 73.

At another desk, a trader actually saw the Werner bonds substantially lower at the open, quoting them as low as 43 bid in the early going before the finish at around 56. "They were really out there today" in an otherwise mostly lackluster session, he said.

Late Friday, the Greenville, Pa. ladder company - the nation's largest manufacturer of ladders and other climbing equipment - revealed in a Securities and Exchange Commission filing that it was discontinuing the supply of Werner branded products to The Home Depot. The latter company is the nation's largest retailer of hardware and building supplies and equipment - such as ladders - aimed at contractors and do-it-your-selfers.

However, the company also revealed that it has entered into a long term agreement with Home Depot's biggest rival, Lowe's Cos. Inc. under which Lowe's will be the exclusive source for Werner's climbing equipment.

Sales of all products to The Home Depot, including extension ladders, stepladders, attic ladders and assorted accessories accounted for $161.3 million, or 31%, of the company's total net sales in 2002 and $100.1 million, or 27%, of total net sales during the nine months ended Sept. 30, 2003. Lowe's up till now has accounted for about 18% of the company's sales, although this is likely to increase substantially as a result of the new agreement.

"I think people are just kind of looking at the situation and realizing that things might not be as bad as they seem to be on the surface," the market source who saw the bank debt bouncing off its lows said.

"It's a manageable situation," the source continued. "Without Home Depot, I estimate EBITDA at the $60 to $65 million range. They have about $185 million senior secured debt - $180 million term loan, undrawn revolver and about $5 million in leases and other things. [Using those estimations], on a bank debt basis, leverage is just over three times and total leverage is just over five times.

""Things are looking better at Lowe's than Home Depot, so I think people are taking that into account," the market source added.

It should be noted that a similar reaction in Werner's bank debt - down sharply but then bouncing off the lows to end only moderately lower - was seen towards the end of October when the company revealed that Home Depot would no longer be purchasing aluminum and fiberglass stepladders from Werner.

Moody's Investors Service weighed in with a ratings downgrade, cutting Werner's senior implied rating to B1 from Ba3, its senior secured bank credit facility rating to B1 from Ba3, and its senior subordinated notes to B3 from B2. The rating outlook is changed to negative from stable.

Moody's said the downgrades reflect the company's latest Home Depot announcement, and added that the negative outlook "reflects Moody's expectation that covenant compliance in the coming year will be challenging as the company seeks new markets to replace the lost Home Depot business."

Elsewhere, Reliant Resources Inc.'s bank debt came in a little bit on Monday, basically stabilizing from its recent run up with levels around 97¾ bid, 98¾ offered, according to a trader, compared to Friday's levels of 98 bid, 98 5/8 offered.

The paper had moved higher by about 2½ points late last week in reaction to the Houston-based energy and electricity company's proposed credit facility amendment that would increase pricing on the facility in return for an extension in the time period to purchase assets with proceeds that are currently in an escrow account.

Also on the energy front, a distressed-debt trader quoted the bonds of Mirant Corp. at around 62 bid, 64 offered, though little moved, after the Atlanta-based energy generator posted a narrower third-quarter net loss from a year ago ($33 million or 8 cents a share in the latest quarter versus a restated loss of $41 million or 10 cents a share in the year-ago quarter).

Revenue rose on higher market prices for power.

The trader also quoted the bonds of troubled St. Louis -based chemical company Solutia Inc. "about where they've [recently] been," with its 11¼% senior notes due 2009 trading in an 86-88 context, but its subordinated 7 3/8% bonds due 2027 and 6.72% bonds due 2037 bouncing around at levels in the lower 30s, even though the 2037s are putable back to the company in 2004.

A trader said that Levi Strauss & Co. bonds "were getting a little beat up," and saw the San Francisco-based blue jeans maker's bonds left offered at 67, with no bids, down from prior levels at 67.5 bid, 68.5 offered.

Levi has several series of bonds out - the 7% notes due 2006, the 11 5/8% notes due 2008 and the 12¼% notes due 2012 - whose trading levels normally are a few points different from one another. But the trader said that he had noted "a convergence - they're all trading about on top of one another" - a pretty sure sign, he said, that a bankruptcy is coming up, since during a reorganization all bonds with the same level of seniority in the capital structure will see the same recovery, regardless of coupon or maturity.

"It looks like [bankruptcy] is getting closer and closer, around the corner. We're waiting for the next shoe to drop."

Out of Europe, the shoes were continuing to drop in the case of Parmalat - with news reports suggesting that the staggering company's total debt load, widely reported at around €6 billion to €7 billion - may actually be closer to €9 billion or even €10 billion, with an Italian newspaper quoting the company's former chairman as saying the group had not bought back €2.9 billion of bonds as detailed on its books.

That comes on top of Friday's startling admission that some €3.95 billion supposedly held in a company account at Bank of America apparently exists only on paper, with B of A labeling a document asserting the funds are there as false.

Prosecutors in Milan and the dairy products maker's home base of Parma were starting to circle, with one Milan prosecutor saying it was an "obvious" case of false accounting. Company founder Calisto Tanzi and other former executives are reportedly targeted for investigation as probers try to get to the bottom of a burgeoning scandal that has been compared to the Enron Corp. debacle in the U.S.

Parmalat's bonds, which last week had fallen to levels in the upper 20s, were now being quoted as low as around a 22-24 context, including its dollar denominated 6 5/8% notes due 2008 and such euro-denominated issues as its 6¼% notes due 2005.

Italian Prime Minister Silvio Berlusconi has said that his government will step in to bail out Italy's largest food prodcing firm, although the European Union has warned member state Italy that any such bailout must comply with E.U. rules designed to avoid market distortions from such a step.

Meantime, newly appointed CEO Enrico Bondi was meeting with bankers and government officials on Monday trying to cobble together a plan to stave off the creditors while Parmalat gets its house in order, and the company's board was scheduled to meet Tuesday, with many quarters seeing a bankruptcy filing as likely following the meeting.

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