AES bonds rise as company plans $1 billion deal; Allied Waste, Resolution, others price

By Paul Deckelman and Paul A. Harris

New York, April 4 - AES Corp. announced plans Friday to bring a billion-dollar junk bond mega-deal to market - proof positive that even a company in a sector that's been having its troubles can get a deal done in the current cash-plentiful primary environment. AES' existing debt firmed on the news that some of it would be taken out with the proceeds from the new offering.

Also in the primary sphere Friday, anticipated forward calendar deals priced for Allied Waste Industries, Inc., Resolution Performance Products LLC and Frontier Oil Corp., as well as an opportunistic, quickly shopped add-on offering for United Rentals Inc.

AES' $1 billion offering will be made up of second priority senior secured notes.

Proceeds from the Rule 144A deal will be used to fund a cash tender for outstanding senior and subordinated notes and to pay down $475 million of senior bank facility borrowings.

No further details were available on the new bond offering.

But Salomon Smith Barney and UBS Warburg LLC are the joint dealer managers for the tender offer, which expires on May 2.

Allied Waste's new deal, part of a major refinancing plan that also includes offerings of stock and mandatory convertibles along with a new credit facility, was substantially upsized at pricing. In addition to being raised to $450 million from the planned size of $300 million, the 10-year senior notes (Ba3/BB-/BB-), came at the tight end of talk, yielding 7 7/8%. Talk had put the yield in the 8% area.

JP Morgan, Credit Suisse First Boston and Deutsche Bank Securities Inc. were joint bookrunners for the offering from the Scottsdale, Ariz.-based waste services company, which sold the notes through its Allied Waste North America, Inc. subsidiary.

Also upsizing and pricing at the tight end of talk was a transaction from Frontier Oil Corp. to help fund its acquisition of Holly Corp. The Houston-based refiner increased its sale of 10-year 8% senior notes (B2/B+) to $220 million from $200 million and priced them at 99.156 to yield 8 1/8%. Talk for the offering was for a yield in the 8¼% area.

Bookrunner for the deal was Bear Stearns & Co.

While not increased in size, Resolution Performance Products LLC brought its $175 million of seven-year senior secured second priority notes at a better level than talk, pricing the securities at par to yield 9½%. Talk was 9 5/8%-9 7/8%. Morgan Stanley was bookrunner on the offering for the Houston maker of epoxy products which issued it jointly with its RPP Capital Corp. subsidiary.

And continuing the recent trend of quickly shopped deals, United Rentals (North America), Inc. emerged with an add-on offering during the day and priced it before Friday finished.

The $200 million of 10¾% notes due April 15, 2008 (B1/BB-) priced at 103.5 to yield 9.676% via Credit Suisse First Boston.

The yield was nearly 200 basis points lower than the company achieved with its previous add on to the issue late last year. On Dec. 17 it brought $210 million, pricing the issue at 97.045 to yield 11½%.

Although $1.045 billion priced during Friday's session, it didn't clear out the calendar. In addition to the announced $1 billion offering from AES, roadshow starts were heard Friday for two deals set to go in the eurobond market.

Brake Bros. is set to get underway Tuesday with the roadshow for its sale of £175 million of eight-year senior paper (B3/B-). in sterling and euro tranches. That deal, via Credit Suisse First Boston and JP Morgan, is set to price later in the week of April 7.

And Fresenius AG will begin marketing €300 million of six-year notes on Thursday. Bookrunner is Deutsche Bank Securities.

On the heels of the news that the cash-laden high-yield mutual funds took in an additional $1.2 billion of inflows for the week ending April 2, Mike Difley, vice president and portfolio manager of the American Century High Yield Fund, told Prospect News: "It seems to be a wholesale allocation to the asset class, where people are thinking that yields out there are so low that high yield looks attractive.

"Maybe people don't want to be in stocks right now because they think they're still pricey, or because of the volatility. And there are signs out there that the worst could be over for the high yield market, given where the default rate has been going.

"So I think high yield is just sitting in the sweet spot, in terms of an asset class, now."

All of the cash, Difley added, brings with it a certain set of problems for a portfolio manager to solve. "It's tough to buy bonds. It's a good thing to be growing assets. Every management firm likes to see that. But it does make the job more difficult when there is so much in cash coming in, and not enough bonds coming in to fill the need.

"One thing that certainly happens is that it pushes the secondary market higher."

In the secondary market, AES was the big name of the day, with the Arlington, Va.-based independent power producer's bonds up across the board, but especially the subordinated notes scheduled to be taken out with the proceeds of the upcoming refinancing, since the company's bonds have recently been moving up anyway - along with the whole merchant energy/utility sector in general - and the senior notes are already trading not far from fully priced levels.

At one desk, AES' 8½% and 8 3/8% subordinated notes due 2007 were quoted as having firmed to 83 bid from prior levels at 74.5, while its 10¼% subs due 2006 jumped to 89.5 bid from 76.

"The junior paper really went up," a market source opined, while AES's senior notes, such as its 9½% notes due 20009 and 9 3/8% notes due 2010 "had already been moving up." Still, he quoted the latter two bonds as having firmed a bit to 92 bid from prior levels at 89, while its 8¾% notes due 2008 firmed four points, to 90 bid.

At another desk, AES's 8 7/8% senior notes due 2011 were heard trading in a context of 88-90 bid, while its long-dated 8 7/8% subordinated notes due 20207 had improved several points to the 69-71 range.

In a high-yield research note Friday, Merrill Lynch's David Silverstein urged that investors maintain an "overweight" position in AES, asserting that "while the transactions reduce total debt modesty and should be neutral in terms of near-term liquidity, we believe this will be a prelude to the company repurchasing additional bonds with excess liquidity."

Silverstein noted that "in conjunction with this [refinancing] transaction, AES is seeking an amendment to its credit facility to permit the proposed new financing and use of proceeds, as well as other changes not specified. We believe the company will be seeking approval to buy back additional securities with excess liquidity."

The Merrill Lynch director, in maintaining his company's recommendation that investors overweight AES relative to other issuers, also reiterated that "investors [should] continue to consider purchasing lower dollar price securities, such as AES senior subordinated notes."

The likelihood that the company will be able to get rid of some of its approximately $5.7 billion of parent company debt via the proposed refinancing transactions also cheered equity investors, with AES stock rising 70 cents (17.50%) to $4.70 in New York Stock Exchange trading Friday, on turnover of about 7.5 million shares, three times the norm.

Should the refinancing take place as scheduled, it would be the second such big deal for AES in a matter of months. Back in December, the company completed a $2.1 billion bank and bond refinancing that averted a nearly certain bankruptcy filing and extended the maturities on its debt.

The fact that utility and merchant energy companies like AES can still access the debt markets, even though they are carrying big debt loads and are further burdened by weak wholesale electricity prices and the collapse of the energy trading system following the fall in 2001 of onetime energy trading leader Enron Corp. is seen as a big positive for the sector, which was badly battered earlier in the year but which has been moving up smartly in recent weeks, aided in part by news of refinancings or other funding deals.

Among these have been such varied names as Allegheny Energy Inc., which refinanced in February; El Paso Corp., which did it last month; and Reliant Resources Inc. and Dynegy Inc., which managed to pull it off this past week.

Reliant's case was typical; the Houston-based power operator raced against a March 31 deadline to either refinance $5.9 billion of debt or face likely bankruptcy. Just in the nick of time, it was able to persuade its bankers to roll over the $5.9 billion and extend it another $300 million in fresh capital, buying it much-needed time in which to get its financial house in order.

The continued ability of these companies to do deals have powered their bonds; on Friday, CMS Energy Corp., whose bonds had firmed earlier in the week, partly on news that the Dearborn, Mich.-based energy operator had swung an $850 million financing deal while projecting 2003 profit goals somewhat above analysts' expectations, were "status quo," a trader said, with "no real weakening there" after the sizable gain. He quoted CMS's 6¾% notes due 2004 at 99 bid/par offered, while its 7 5/8% notes due 2004 were at 97 bid/99 offered.

He also quoted Calpine Corp.'s 8½% notes due 2011 as having firmed all the way up to 69 bid during the day's trading before coming off that peak to close at 67 bid/68 offered, up from 63 on Thursday.

At another desk, a market source was pegging the San Jose, Calif.-based independent power producer's 7 5/8% notes due 2006 as having jumped to 73 bid/75 offered, up at least five points on the session, while its 8¼% notes due 2005 were at 81 bid/83 offered and its 8 5/8% notes due 2010 were at 68 bid/70 offered, all of them "up three, four, five points" on the session.

He also quoted Houston-based energy operator Mirant as "looking like it was up five, six, seven points with AES." He saw Mirant's 7 5/8% notes due 2006 as having moved up to the 68-70 bid neighborhood. Power industry watchers have speculated that either Calpine or Mirant, or possibly both, might soon join their peers and announce their own refinancing deals.

Elsewhere, Riviera Holdings' Corp.'s 11% notes due 2010 were being quoted as high as 96 bid, about five points above recent levels, given a boost by the news that Italian investor Fabrizio Boccardi offered to buy the debt-laden Las Vegas-based gaming operator for $30 million in cash plus the assumption of $216 million of debt.

At another desk, a market-watcher said the bonds were hovering around 93, but acknowledged they had moved up from 88 at the end of March.

The cash portion of the offer translates to $8.50 per share, a considerable premium over where the company's stock has been trading lately, although on Friday, the shares jumped 79 cents (14.34%) to $6.30 in trading on the American Stock Exchange.

Further intrigue was generated by a report in Friday's edition of the New York Post that Atlantic City casino tycoon Donald J. Trump has quietly bought a 10% stake in Riviera, although The Donald - who has long hankered for an entree into the Las Vegas gaming market - was quoted as saying that his stake is strictly for investment purposes; the report said that Trump promised in regulatory filings not to unload his Riviera shares on the open market, seek to change the board membership or try to merge the company with another gaming concern - his Atlantic City-based Trump Hotels & Casino Resorts, for instance.

Also on the merger and acquisitions scene, Indianapolis-based broadcaster Emmis Communications Corp. said it was in preliminary talks with Rupert Murdoch's international media giant, News Corp., about buying certain News Corp. television assets, as well as the latter's Los Angeles Dodgers baseball team. Financial details were not disclosed. Emmis' 8 1/8% notes due 2009 were unchanged at 104.25 bid.

Among more widely traded names, Charter Communications Holdings Inc., whose bonds had strengthened noticeably during the week on news that the company's controlling shareholder, billionaire Paul Allen, proposed lending the troubled St. Louis-based cable operator $300 million, was little changed on Friday, its 8 5//8% notes due 2006 hanging in at 56 bid, along with its 8¼% notes due 2007.

Nextel Communications Inc.'s benchmark 9 3/8% notes due 2009 were seen "off a little," a market participant said, dipping to around 106 bid from 106.75 Thursday. But he said that the Reston Va.-based wireless operator's affiliate that sells its branded service in medium and smaller markets, Nextel Partners, was "continuing to move up," its 11% notes due 2010 pushing to 102.5 bid Friday from 101 previously.

Among the airlines, American Airlines' 9% notes due 2012, which had pushed as high as the upper 30s earlier in the week on the hopes that the troubled Fort Worth, Tex.-based air carrier might be able to wring concessions from its unions, while the federal government might extend $3 billion of aid to the ailing industry, were lower on Friday, dipping as low as 32 bid/34 offered Friday. After that big upward move, a trader quipped, "they never did take off."

Among the newly priced issues, the trader quoted Allied Waste's 7 5/8% notes due 2013 as having moved up modestly to 100.75 bid/101 offered from their par issue price earlier in the session. But he said that Frontier oil's new bonds - which had priced at 99.15 - managed to push up to 102 bid/102.25 offered in "active" initial secondary dealings. Meantime, the Resolution Performance Products 9½% notes, which priced at par, closed at 103 bid.

Overall, the trader said, the market "was well bid for. With a $1.2 billion inflow [to high yield mutual funds in the most recent week reported by AMG Data Services], it kind of set the tone the whole week."

All of that money (over $6.6 billion coming into the mutual funds alone in the past six weeks, according to a Prospect News analysis of the AMG figures) chasing a limited number of bonds worth investing in has made for "a difficult market" that has pushed prices up and pushed yields on some bonds down to levels where junk investors don't find it worth it to play in them. That's forced them lower their guard a little and move down the credit quality scale a bit to find bonds paying sufficient yields to make it worth their while.

"You can't find paper," the trader lamented. "New deals aren't really abundant yet - and nothing is loosening up at all."

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