Tower Automotive falls on lower outlook, sector holds firm; Bally pricing rumor dissipates as book fills up

By Sara Rosenberg

New York, Oct. 5 - The auto sector was big on peoples' minds as Tower Automotive Inc.'s bank debt took a hit on lowered third quarter guidance. But, even though some names in the sector did start the day feeling a tad weaker in reaction to the Tower news, they brushed the negativity off by day's end to close either unchanged to stronger.

Meanwhile, the winds have shifted in a positive direction for Bally Total Fitness Holdings Corp.'s $175 million five-year term loan (B2/B) as it now appears as if the deal is pretty much done. Pricing remained at Libor plus 450 basis points following previous rumors of a potential flex up by 25 to 50 basis points.

Tower Automotive's first-lien term loan fell off by about three quarters of a point on Tuesday to 97¾ bid, 98½ offered, according to a trader, as the company revised its third quarter earnings guidance to a net loss of between $22.5 million and $25 million, or $0.39 to $0.43 per diluted share, compared to previous guidance of a net loss between $10.4 million and $12.8 million, or $0.18 to $0.22 per diluted share.

Furthermore, the Novi, Mich.-based designer and producer of vehicle structural components and assemblies lowered revenues for the quarter to a range of $710 million to $720 million versus previous guidance of between $725 million and $735 million.

The revisions were attributed to lower vehicle production volumes in North America, continued escalation of steel costs and, to a lesser extent, higher launch costs on new business.

"The combination of lower production volumes on our key platforms in North America, along with continued steel cost increases, added further challenges to the third quarter," said Kathleen Ligocki, president and chief executive officer, in a company news release. "Additionally, even though our launch costs on one major launch are running slightly above plan, it is important to point out that we have met all of our timing and quality commitments to our customers."

Auto sector stays strong

Despite the unfortunate Tower Automotive news, the auto sector in general managed to stay pretty positive after an initial softening.

"The sector didn't need any bad news. It has been under a lot of pressure. Although over the last couple of days the sector has felt good," a trader said. "At open things got a little weak but later in the day things moved back or even moved higher."

For example, Meridian Automotive Systems Inc., a Dearborn, Mich.-based auto parts company, saw a late day pop up in levels in its first-lien bank debt to 96 bid, 97 offered compared to the 95 bid, 96 offered context that the paper closed with on Monday, the trader said.

And, Intermet Corp. - a Troy, Mich.-based automotive components maker that's debt has been on the rise since last week's Chapter 11 filing - continued its trend, moving to 94½ bid, 95½ offered from around 93 bid, 95 offered on Monday.

Tides turn for Bally

On the primary side, market sentiment on Bally's in-market term loan appears to have done a complete back flip, with some buyside sources now expecting the deal to get done as is, compared to prior rumors that juicier pricing may be needed to catch enough investor interest.

"I did hear that the book is actually filled out," a fund manager said with some surprise. "It doesn't sound like by much though. Given that info, they may not flex it up. The deal will probably trade [poorly] though when it breaks."

Although there was speculation that the deal was moving slowly, even as of Monday afternoon, some couldn't quite understand what was holding investors back since the spread - on first glance - seems pretty reasonable for the rating especially given the current market environment.

J.P. Morgan Securities Inc. is the lead arranger on the deal that will be used to refinance existing debt including the existing $100 million securitization facility.

The term loan will increase the company's liquidity by $75 million, which will be used for general corporate purposes.

Bally Total Fitness is a Chicago-based commercial operator of fitness centers.

Encore Medical closes

Encore Medical Corp. closed on its $180 million senior credit facility (B1/B) consisting of a $30 million revolver and a $150 million term loan B. Bank of America was the lead bank on the Austin, Texas, orthopedic company's deal.

Proceeds from the loan, combined with proceeds from a $165 million 9¾% senior subordinated notes offering and available cash, were used to fund the acquisition of Empi Inc.

Encore paid approximately $172.7 to the Empi common shareholders and option holders in cash, along with 8 million shares of Encore common stock, and repaid about $155 million of outstanding Empi debt for a total purchase price of about $362.7 million.

"All of us at Encore are excited that we completed this acquisition because it positions us as the only orthopedic company that can offer a comprehensive continuum of products for the needs of orthopedic surgeons, therapists and their patients by offering products that include surgical implants, as well as rehabilitation therapy equipment for both the therapists' office and for home use by the patient," said Kenneth W. Davidson, chief executive officer, in a company news release.

"We expect that our stand-alone projected 2004 revenues of approximately $120 million will increase to approximately $300 million for the combined company in 2005. Additionally, we believe our stand-alone 2004 operating income, which we have projected to be between $10.5 and $12 million, should grow to approximately $44 million on a combined basis in 2005."

Jostens IH closes

Josten IH closed on its $1.27 billion credit facility (B1/B+) consisting of a $250 million five-year revolver with an interest rate of Libor plus 250 basis points and a 50 basis point commitment fee, a $150 million six-year term loan A with an interest rate of Libor plus 250 basis points and an $870 million seven-year term loan B with an interest rate of Libor plus 250 basis points.

Pricing on the term loan originally went out to lenders at Libor plus 275 basis points, but the tranche was reverse flexed during syndication on strong market reception.

Credit Suisse First Boston was the sole lead arranger and bookrunner, and Deutsche Bank and Bank of America were co-syndication agents.

Proceeds were used to help fund the creation of one large company through the combination of Jostens Holding Corp., Von Hoffmann and Arcade Marketing that is owned by Kohlberg Kravis Roberts & Co., DLJ Merchant Banking Partners, management and certain other investors.

The transactions included KKR's acquisition of Von Hoffmann and Arcade and the contribution of Von Hoffmann and Arcade to Jostens Holding in exchange for stock of Jostens Holding, which was then recapitalized. With the completion of the recapitalization, KKR and DLJ Merchant Banking each own a 45% stake of Jostens Holding. The remaining 10% stake is held by the management team, as well as a small group of existing minority investors in Jostens.

Jostens is Minneapolis provider of yearbooks, class rings and graduation products. Von Hoffmann is St. Louis printer of educational textbooks and supplemental materials and direct marketing print services. And, Arcade is New York printer and manufacturer of sampling products for the fragrance, cosmetics, consumer products, and food and beverage industries.

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