Refco jumps as more bidders emerge; Hanger hung out to dry; E*Trade add-on deal prices

By Paul Deckelman and Paul A. Harris

New York, Oct. 28 - Bonds of bankrupt Refco Inc. were once again seen solidly higher Friday, as still more potential buyers for some or all of the New York-based financial company put their toes in the water, assessing whether to actually make a bid for its futures unit or other parts of the company at the asset auction early next month.

Elsewhere, a trader saw a definite retreat in the bonds of Hanger Orthopedic Inc., citing lackluster earnings posted by the Bethesda, Md.-based provider of orthotic and prosthetic services to patients.

A ghostly quiet prevailed in the high-yield primary market during the final session before Halloween. No issues were priced, however E*Trade Financial Corp. completed a reverse inquiry-driven $250 million add-on transaction after dark on Thursday night.

And while the pre-Halloween primary market may have scared some issuers away (for example Roundy's Supermarkets, Inc.) others appear game.

Hertz Corp. plans to plunge into the haunts of the high-yield early next month with a $3.05 billion deal.

And sources say others are certain to follow.

A sluggish market

Sources marked the high-yield market unchanged on Friday.

One sell-side official characterized the session as "sluggish," and added that throughout the Oct. 24 week the market fared worst on days when Treasuries sold off.

The official said that the yield on the 10-year Treasury increased by as much as five basis points during Friday's trading, but improved to close only two basis points higher on the session.

"The short end of the curve took it the worst," the official commented, adding that the 10-year closed yielding 4.565%.

E*Trade with Thursday night drive-by

Although no issues priced Friday, E*Trade Financial Corp. priced a $250 million add-on to its 7 3/8% senior notes due Sept. 15, 2013 (existing ratings B1/B) at 99.00 on Thursday night, resulting in a yield of 7.54%.

There was no official price talk on the reverse inquiry-driven deal, a syndicate source told Prospect News.

Morgan Stanley and JP Morgan were joint bookrunners for the acquisition financing.

The original $350 million issue priced at par on Sept. 14, so E*Trade's interest rate on the add-on notes increased by 16.5 basis points - although the spread was 30 basis points better at 302 basis points.

Over a billion on the week

The E*Trade add-on, which generated approximately $248 million of proceeds, took the new issue market over the $1 billion mark, in four dollar-denominated tranches, in terms of issuance for the week of Oct. 24.

With one October session remaining the market has generated slightly more than $2.8 billion in of issuance in 14 tranches on the month - all-in-all an anemic month by 2004 standards: October 2004's volume topped $7.7 billion in 40 tranches.

Including the E*Trade transaction, the market has seen year-to-date issuance of slightly more than $81 billion of dollar-denominated in 318 tranches.

In the run-up to Halloween 2004 the market had generated $111.5 billion in 455 tranches, $30 billion more than the present year.

In the driver's seat

High-yield investors of a certain age may recall a television commercial from the Nixon era which depicted a motorist suspended in mid-air gently descending into the driver's seat of a rental car.

Now the vehicle rental company which ran that commercial, Park Ridge, N.J.-based Hertz Corp., is preparing to put bond buyers in the driver's seat with a $3.05 billion offering of high-yield notes that is expected to cruise into the primary market early next month.

The structure remains to be determined.

Deutsche Bank Securities, Lehman Brothers, JP Morgan, Goldman Sachs & Co. and Merrill Lynch & Co. will be joint bookrunners.

The company will also obtain a $3.6 billion credit facility.

Proceeds will be used to help fund the $15 billion LBO of the company by Clayton, Dubilier & Rice Inc., The Carlyle Group and Merrill Lynch Global Private Equity from Ford Motor Co.

And the calendar builds

One roadshow start was heard on Friday.

The Tunica-Biloxi Gaming Authority, a Louisiana-based native American operator of a lodging and gaming operation, will begin a roadshow on Tuesday for a $150 million offering of 10-year senior notes (expected ratings B2/B+).

Deutsche Bank Securities will run the books.

Meanwhile price talk emerged on another native American gaming company's deal during the session.

The Chukchansi Economic Development Authority released price talk on its planned sale of $310 million of bonds in two parts (B2/BB-): a $200 million offering of eight-year fixed-rate notes at the 8% area, while a $110 offering of seven-year floating-rate notes at Libor plus 350 basis points.

Pricing of the Merrill Lynch-led deal is expected on Monday or Tuesday.

In addition to Chukchansi, the market expects terms to emerge this week on:

* Vitamin Shoppe Industries Inc.'s $165 million (B2/B+) via Bear Stearns, BNP Paribas and Banc of America Securities;

* SemGroup LP/SemGroup Finance Corp.'s $250 million (B1/B+) via Banc of America Securities;

* Little Traverse Bay Bands of Odawa Indians' $195 million (B3/B), also via Banc of America Securities; and

* Chinese specialized property group Hopson Development Holdings Ltd.'s $300 million (Ba1/BB+) led by Credit Suisse First Boston.

In addition to those, one sell-side source told Prospect News late Friday that Chesapeake Energy could show up with an approximately $500 million deal which is expected to be led by Lehman Brothers.

Refco higher

Back in the secondary realm, Refco's volatile 9% notes due 2012 were seen ending the week "up another three to five points," a trader said, pegging the bonds at 71.5 bid, 73.5 offered, up from Thursday's levels in the upper 60s, and from levels in the 50s at the beginning of the week.

Another trader saw even more pronounced movement, with the bonds moving up to 71 bid, 72 offered from prior levels around 65 bid, 66 offered, although he didn't see any news about the company.

"It was just move buyers coming in, covering shorts," he said.

"Wow," yet another trader exclaimed when he examined what he said was better than five-point move in the bonds, to 71 bid, 72 offered.

"What was it a week or so before, like 30?" he asked, rhetorically.

Those Refco bonds were smashed down to that lower level over several sessions earlier in the month, after disclosure of a bad $430 million loan to a company controlled by then-chairman and chief executive officer Phillip R Bennett; the heretofore undisclosed loan was hidden deep in the company's balance sheet, allegedly disguised so as not to interfere with Refco's highly successful initial public offering this past summer. Although Bennett repaid the loan, he was ousted from his executive positions after it came to light and indicted by a federal grand jury for alleged securities fraud.

That caused the bonds to tumble from lofty levels around 108 before the scandal broke to new, lower levels - first into the 90s, then the 70s, the 60s, the 40s, and finally down to around 30. As the bad news multiplied, Refco suspended operations of its Refco Securities unit, began unwinding its futures trades, and began shopping its valuable futures unit around. It entered Chapter 11 on Oct. 17 - ironically, just missing by hours the deadline by which it had to file in order to enjoy the protection of the more lenient debtor protection rules that were part of the Bankruptcy Code up till that point.

In announcing its filing, Refco said that it had agreed to sell its futures business to a buyout group led by former Goldman Sachs & Co. banker Christopher Flowers for $768 million, plus a 2.8% breakup fee, which caused the bonds to bounce off their lows and begin heading steadily back up.

Then, a second buyer, Interactive Brokers, an option trading and brokerage firm, came in with a higher offer, which it later improved again, to $858 million, currently the high bid.

That eventually caused the Flowers-led group to drop out. But by that time, other would be buyers had expressed interest, including Dubai Investment Group LLC, acting in concert with California supermarket tycoon Ron Burkle's Yucaipa Cos. LLC, through DIGL Inc., bidding $828 million.

Also said to be in the hunt were futures brokerage firm Man Financial; Marathon Asset Management LLC; Apollo Capital Management LLC; and more recently, futures commission merchant TradeLink LLC and its co-founder, Walt Weismann.

News reports Friday said that still other potential suitors might yet emerge, to make bids either singly, or as part of a group. Bids have to be submitted to the U.S. Bankruptcy Court by Friday, Nov. 4, with the formal auction to be held on Nov. 9, and a hearing confirming the winner to be held the following day.

Apart from Refco, a trader said there were "not a lot of people in the street doing any trading. It was pretty slow."

Market mostly quiet, weak

He saw no activity in either the new add-on notes issued by E*Trade, or the new 6.8% notes due 2015 priced Thursday by Colorado Interstate Gas Co.

And despite a sharp rise in equities - the Dow Jones Industrial Average zoomed 172 points on better-than-expected economic growth despite the recent hurricanes - "there was no follow-through in the high-yield market. There was no conviction."

Another trader saw "a quiet day," with "general weakness across the board" to the tune of at least half a point.

Hanger drops after earnings

One issue which he saw doing even worse than that was Hanger Orthopedic, whose 10 3/8% notes tumbled to levels around 97 bid, 98 offered, well down from prior levels about 101 bid, 102 offered. He cited the company's less-than-stellar numbers, released Thursday, as the likely proximate cause for the downturn.

While the company reported that net income for the third quarter was $2.8 million (13 cents per diluted share), a bit better than $2.4 million (11 cents per share) seen in the prior year, including a non-cash goodwill impairment charge, its cash-flow figures were less positive; cash flow from operations decreased by $19.2 million to $13.4 million in the nine months ended Sept 30, compared to $32.6 million in the prior year.

GM down again

General Motors Corp. bonds continued lower Friday, although one trader said that the retreat was "more orderly" than the slide seen Thursday, when the carmaker's bonds reacted to news of a Securities & Exchange Commission probe into its accounting, and to bankruptcy speculation making the rounds, which was later denied by the company.

La Quinta Corp.'s bonds were seen little changed, even as the Dallas-based lodging chain operator reported a third quarter profit versus a year-earlier loss, and company executives told analysts on their conference call that the company had reduced debt during the quarter and was prepared to go forward with a strong balance sheet and ample liquidity (see related story elsewhere in this issue).

La Quinta's 7% notes due 2007 were quoted at 101.5 bid, 102.5 offered, and its 7% notes due 2012 were at 101.75 bid, 102.75 offered, both unchanged on the day.

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