AK Steel up on strong earnings, bond-call plans; Dobson prices upsized $825 million

By Paul Deckelman and Paul A. Harris

New York, Oct. 26 - The steel sector continued to steal the secondary market spotlight for a second straight session on Tuesday, traders said, with the name du jour being AK Steel Corp., which reported stronger-than-expected third-quarter earnings, and which announced plans to call $150 million of its outstanding bonds. AK's rise followed a generally stronger showing by the sector on Monday on the heels of news of a giant merger transaction involving, among others, high-yield issuers International Steel Group Inc. and Ispat Inland corporate parent Ispat International NV.

The primary market saw just shy of $1 billion of business price during the Tuesday session, as Dobson Cellular Systems Inc. upsized the second priority piece of its three-part issue by $125 million, on what one source said was heavy investor demand.

And as with Monday, there were no new roadshow starts announced.

New issue market "reasonably priced"

A high yield fund portfolio manager, speaking on background, told Prospect News that very little has changed in recent weeks, with respect to the junk bond market.

"It's very quiet," said the investor. "The market is better bid for and there is not enough supply to meet the demand.

"And with Treasury rates staying where they are and drifting lower, it just increases the bid for high yield.

"New issuance is not enough to sop up demand," the buy-sider added. "The new issue market is priced reasonably. In the secondary market, better quality is continuing to be marked up into ever more stratospheric levels."

The investor added that low defaults continue to attract money into the asset class.

"Treasuries have actually gone down in yield, so you're not getting any relief on the Treasury side," the investor said.

"When you have issues that are multiple-times oversubscribed they are going to be priced to clear the market.

"I think there is a lot of demand for the higher-yielding, lower-quality new issue paper."

Dobson upsizes on heavy demand

Although this investor did not become involved in the Dobson Cellular deal, the color that circulated the market would certainly seem to bear out the heavy demand for "higher-yielding, lower-quality new issue paper."

In its three-part upsized $825 million transaction priced Tuesday, the tranche that was upsized was the lowest rated of the three, the eight-year fixed-rate second priority senior secured notes (B3/CCC).

The tranche was increased to $325 million from $200 million and priced at par to yield 9 7/8%, at the wide end of price talk.

Dobson Cellular also priced $500 million of seven-year first priority senior secured notes (B2/B-) split evenly between fixed- and floating-rate tranches, both of which priced at the tight end of talk.

The fixed-rate notes priced at par to yield 8 3/8% (talk was 8 3/8%-8 5/8%) and the floaters came at three-month Libor plus 475 basis points, at the tight end of the three-month Libor plus 475-500 basis points price talk.

Morgan Stanley, Lehman Brothers and Bear Stearns & Co. ran the books.

Proceeds from the initially announced $700 million will be used to refinance Dobson Cellular debt and for general corporate purposes, including the funding of the subsidiary's planned acquisition of RFB Cellular Inc.

The additional $125 million that the company raised by upsizing the deal will be used to repurchase Dobson Communications' debt including a portion of 10 7/8% notes due 2010 and/or its 8 7/8% notes due 2013, according to a press release issued Tuesday.

Choctaw on top of talk

Elsewhere on Tuesday, Choctaw Resorts Development Enterprises sold $150 million of 15-year non-call-seven amortizing senior notes (B1/BB-) at par to yield 7¼%, right on top of the 7¼% area price talk.

Banc of America Securities ran the books for the notes, which have an 11.85-year average life. The sinking fund repays $4.5 million per year at par during years one to 14, with an $87 million balloon payment at maturity.

The Choctaw, Miss., tribal gaming enterprise will use proceeds from the new deal to refinance debt.

Superpages, National Mentor talk

Details emerged Tuesday on two offerings set to price by the end of the final week of October.

Price talk of 9¼%-9½% emerged on Advertising Directory Solutions Holdings (Superpages Canada)'s $210 million of eight-year fixed-rate senior notes (Caa1/B-), expected on Thursday via JP Morgan, Banc of America Securities, Deutsche Bank Securities and Merrill Lynch & Co.

And price talk is 9 5/8%-9 7/8% on National Mentor Inc.'s $150 million of eight-year non-call-four senior subordinated notes (B3/B-), expected on Wednesday via Banc of America Securities, JP Morgan and UBS Investment Bank.

Going for #3

A sell-side source took a minute to crunch some issuance numbers, Tuesday morning, and forecast that 2004 will not top 2003 in new issuance volume, but is likely to be the third biggest year ever for new junk.

Specifying that at present 2004 year-to-date issuance is $111 billion ("plus or minus"), the source said that a meaningful assault on 2003's $138 billion is impractical. Nor is 2004's total likely to threaten the standing record, 1998's $147.2 million.

However in order to place third issuance, must still cross the 1997 threshold of $126 billion, meaning that approximately $15 billion of new issuance would have to price before 2004 comes to a close.

Choctaw up in trading

When the new Choctaw Resort 7 ¼% notes due 2019 were freed for secondary market dealings, they were heard to have firmed up to levels around 102 bid, 102.5 offered from their par issue price earlier in the session, although a trader observed that he "really didn't see" the new bonds trading around.

A trader meantime saw the new NorthWestern Corp. 5 7/8% senior secured notes due 2014, which priced Monday at par and which moved up on the break to 102.5 bid, 103 offered, as having firmed a little bit further Tuesday, to 103 bid, 103.5 offered. He said that he had not seen the relatively small ($110 million) and illiquid Hawk Corp. offering of 8¾% senior notes due 2014, which priced Monday at par and then disappeared.

AK Steel gains

Back among the established issues, AK Steel's 7¾% notes due 2012 were being quoted as high as 101 bid, well up from their prior levels around 98. A market source also saw the Middletown, Ohio-based specialty steels maker's 7 7/8% notes due 2009 push up to 101.75 bid from 99.5, while its 8 7/8% notes due 2008 firmed to 103.125 from 102, and its 9% notes due 2007 edged up slightly to 101.625 bid from 101.5

AK announced plans to call the latter two note issues, totaling some $150 million principal amount, using some of the steelmaker's excess cash (see "Tenders and Redemptions" elsewhere in this issue for full details.)

AK said that once it calls those notes, it will realize interest cost savings of $14 million per year, and will have no significant debt maturities before 2009.

That announcement came as AK reported stronger than expected third-quarter earnings - the second straight quarter in which the company turned a profit, after previously having wallowed in red ink for several years along with the rest of the domestic steel industry.

Unlike many of the other companies in that sector, which went bankrupt and ultimately were chopped up and sold off to new buyers, AK endured the losses, hung in, overhauled its management, cut costs and survived. Now, it is riding the crest of the hottest market for steel in years (see related story elsewhere in this issue).

The booming steel market enabled the company to report net income of $83.1 million (76 cents per share) in the third quarter, a sharp turnaround from its year-earlier net loss of $277.5 million ($2.56 per share). Income from continuing operations was $118.6 million ($1.09 per share), versus a year-earlier continuing operations loss of $286 million ($2.64 per share). Excluding a net tax benefit equal to $50.2 million (46 cents per share), the company's earnings from continued operations were equivalent to $68.4 million, or 63 cents per share. Wall Street had been expecting just 50 cents a share.

AK said its operating profit during the third quarter was $94.5 million, or $61 per ton, versus an adjusted operating loss of $123.8 million, or $82 per ton, a year earlier.

International Steel, Ispat steady

A trader, while noting that while AK Steel "popped up one to 1½ points on their news," Tuesday, said that Monday's big gainers, Ispat Inland and International Steel Group "pretty much leveled out [Tuesday]."

Another market source also saw those bonds holding steady after their big gains on Monday, with Ispat's 9¾% notes due 2014 still hovering around 121-122 bid, after jumping as much as a dozen points Monday on the news of the big merger, while he saw International Steel's 6½% notes due 2014 holding steady around 106.5, their closing level Monday after having firmed six points on the merger news.

"The market has been strong," he said, in explaining why there seemed to be no further gains, "but it's one of those situations of there being not enough paper around to let the market get two-sided and trade."

Amkor higher despite loss

Also on the earnings front, Amkor Technology Inc.'s bonds were "up a little bit," a trader said - even though the West Chester, Pa.-based high-tech manufacturing company swung to a third-quarter loss from a year-ago profit.

He saw Amkor's 9¼% notes due 2008 as having risen to 96.25 bid from 95.5, while its 7 1/8% notes due 2011 and 7¾% notes due 2013 firmed to 87 and 86.75, respectively, from 86 on Monday.

Citing a slowdown that has affected the entire computer-chip industry, Amkor reported third quarter red ink of $22.3 million (13 cents a share), versus its year-earlier profit of $15.8 million (nine cents a share). However, the company did note that sales rose 16% to $490.8 million.

Level 3 better

Elsewhere, Level 3 Communications Inc. bonds were seen "up a few points," a market-watcher said, quoting the Broomfield, Colo.-based fiberoptic network operator's benchmark 9 1/8% notes due 2008 as having pushed up to 82.5 bid from 80 previously. He also saw the company's 11% notes due 2008 rising to 86.75 from 84, its 10½% notes due 2008 at 82.75 bid from 80, and its 7¾% notes due 2008 ending at 89.5 bid, up from 87.

He linked the movement in the issue to a report in The Wall Street Journal that cable-TV giant Comcast Corp. has started to select vendors for its coming push into the phone business. The WSJ, citing unidentified sources, said Level 3 and Sprint Corp. are two likely early winners, as Comcast - the nation's largest cable operator - is expected to buy space on their long-distance networks for the launch of its Voice-over-Internet Protocol (VoIP) phone service.

Pathmark rebounds

And a trader saw Pathmark Stores' bonds higher on the session, bouncing off the lows they hit Monday after the Carteret, N.J.-based supermarket operator issued lower guidance and Standard & Poor's cut its ratings. Those 8¾% notes due 2012 fell to 87 bid on Monday because of that, well down from prior levels around 94 - but on Tuesday, he saw those same bonds bounce off the lows and come at least part of the way back to 91.

There was no fresh hard news out on the company, but the trader cited rumors - as yet unsubstantiated - making the rounds of the investment community that the company might be sold.

"There was some noise out there that they're a possible M&A candidate, and that had the bonds going up," he said, along with shorts being covered.

Investment-oriented internet message boards have actually been buzzing since early October with speculation that Pathmark might be a takeover candidate, with Media General Inc. one name that keeps coming up as a possible suitor - even though the diversified communications company is not known to have any supermarket holdings and has given no indication that it is looking for any.

Someone must obviously put some stock in the takeover buzz, though.

Pathmark's Nasdaq-traded shares had fallen 16% on Monday after the company revised its EBITDA expectations down to $140 million to $146 million from $154 million to $165 million earlier, citing lower than expected sales. That warning prompted S&P to cut its ratings a notch, dropping Pathmark's bonds to CCC+. But the shares jumped 35 cents (10%) Tuesday to close at $3.85.

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