Refco bonds jump as auction deadline nears; Mirant bonds, loans continue to firm

By Paul Deckelman and Sara Rosenberg

New York, Nov. 3 - Refco Inc.'s bonds jumped a good four points or so Thursday, traders said, as the Friday deadline neared for would-be acquirers to submit bids for the troubled financial company's valuable futures unit or other assets, and at least another firm buyer came out of the woodwork.

Meantime, Mirant Corp.'s 2003 bank paper gained another two points during the session, and its bonds were higher as well, although traders in each market said they did not see any particular news sparking that momentum. The bankrupt Atlanta-based power generating company also announced several personnel moves.

Refco's 9% notes due 2012 zoomed as high as 76 bid, a trader in distressed bonds said, before they came off those highs to end at 74 bid, 76 offered - still well up from where he had them closing on Wednesday, at 69 bid, 71 offered.

Refco was "up three or four points," another trader said, "on no real news - just a lot of talk about potential buyers for the company. That's something that will get worked out in the next several weeks."

While Friday is the deadline for companies to submit bids, "you won't know anything" for a while. The auction results are scheduled to be announced on Nov. 9, with a formal hearing to confirm those results the following day.

Refco, a New York based futures and commodities trading concern, went into Chapter 11 on Oct. 17 and announced it was trying to sell its futures unit - which was not included in the filing - after the company was rocked last month by a scandal over an alleged bad loan to the then-chairman and CEO, Phillip R. Bennett, the discovery of which ultimately led to Bennett's ouster from his executive posts and his indictment for securities fraud, which in turn caused many Refco clients to liquidate their accounts, putting the company on the ropes.

When it announced its Chapter 11 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. Then, a second buyer - Interactive Brokers, an option trading and brokerage firm - came in with a somewhat higher offer, which it later improved again to $858 million, currently the high bid, according to news reports.

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 Cerberus Capital Management.

An investor group including futures commission merchant TradeLink LLC and its co-founder, Walt Weismann expressed some interest, but news reports indicated it would likely not follow that up with a firm bid.

Reports also said that a group consisting of Merrill Lynch, Warburg Pincus and Susquehanna International Group had expressed interest in the futures business, as had Marathon Asset Management.

And on Thursday, yet another bidder stepped forward, as Alaron, a Chicago futures and options broker, said in a statement that it would bid for Refco's retail futures unit, although it did not publicly say how much it would bid.

Refco meantime laid down as a condition that any bidder would have to keep their bid open and active until the closing of the sale transaction with the winning bidder - so that if the winner were unable to complete the deal, Refco could go back to one of the also-rans to do a deal.

With the publicly identified offers already approaching $900 million and other bidders yet to be heard from, "as much as $1.1 billion could be bid for the company," a trader said, "so I guess that's up from what those guys [the initial bidders] were trying to steal it at, so I guess that's what that's about, he said, referring to the bonds' rise, He saw the notes at 73 bid, 75 offered, up from 69, "so they were up pretty good on the day."

Mirant gains

Mirant's 2003 bank debt was seen closing out the day quoted at 105 bid, 106 offered, according to a trader, who said that there was no particular news sparking the momentum.

A bond trader saw Mirant's junk bonds and convertible notes "up a point across the board," with its 2½% convertible notes due 2021 at par bid, 102 offered, its 5¾% converts due 2007 at 110 bid, 112 offered, its 7.90% notes due 2009 at 116 bid, 118 offered, and its 7.40% notes that were to have come due last year at 115 bid, 116 offered.

On Thursday afternoon, Mirant announced that, effective Nov. 7, James V. Iaco, Jr., will be appointed executive vice president, and prior to Nov. 15, he will assume the title of chief financial officer from M. Michele Burns.

Burns - who also formerly held the CFO post across town at Delta Air Lines Inc. - will continue to serve as Mirant's chief restructuring officer through the company's emergence from Chapter 11. She will then leave the company to pursue other interests.

Also effective Nov. 7, S. Linn Williams will be appointed executive vice president and general counsel.

"Jim and Linn bring extensive, valuable experience to the new Mirant," said Ed Muller, chairman and chief executive officer, in a company news release. "Their leadership and collective knowledge of energy markets, finance, law and operations will continue to strengthen the company and help us emerge from bankruptcy as a well-disciplined, highly-focused and more competitive company."

Iaco had been a private investor following a six-year career at Edison Mission Energy where he served as president, Americas Division, as well as chief financial officer.

Williams was Edison Mission Energy's general counsel from 1994 to 1998 and led the company's European Division as its chief executive officer from 1998 to 2000. Until joining Mirant, he was an arbitrator with the International Chamber of Commerce and a private investor.

Evaluating Curative Health

Elsewhere, a trader saw Curative Health Services Inc.'s 10¾% notes due 2011 continuing to languish "in the mid-60s", estimating them at 64 bid, 66 offered and trading flat, or without their accrued interest, after the Hauppauge, N.Y.-based medical products and services company announced that it would not make the scheduled Nov. 1 coupon interest payment on those bonds, instead invoking the standard 30-day grace period and saying it would hold talks with its noteholders and evaluate all of its options.

"There's a lot of differences of opinion as to what the ultimate outcome of this bond will be," he said. "There's someone who put out a report saying Curative [bondholders] would have a recovery in the mid-70s - but that seems verrrrry optimistic. The best that these guys are going to be able to hope for is some sort of debt-for-equity exchange with the largest holders. But you would have to really believe that this is a $20 million to $25 million [annual] EBITDA company to put the kind of [8x to 10 x] multiples on it where the bonds are trading currently. My guess is EBITDA is going to be significantly below what people are expecting."

At best, he continued, "I don't think they're going to come anywhere near" that $20-$25 million area, but will instead be "in the mid-teens.

"So the recovery is going to be significantly lower." While the company has bought itself about a month of breathing room by delaying the Nov. 1 payment, the likely outcome of the process, the trader agreed, will probably be a restructuring via a pre-packaged Chapter 11 process, but "how the valuation will go is the thing that will catch some people by surprise."

He further went on to say that "these guys have disappointed every quarter since they got haircut by the California Department of Health Services" last year not long after the bonds were sold, "and it's just been a struggle every quarter. They're making their $3 million to $5 million of EBITDA every quarter - but it's all add-backs and adjustments, so figuring what the real cash flow of the business is," is a little dicey.

On top of that, he noted, the company's old nemesis in Sacramento, the California Department of Health Services, is facing off against them again, going after three retail pharmacies in the state whom they say over-charged the state's MediCal healthcare system for blood-clotting medication the druggists had bought from two Curative subsidiaries Apex Therapeutic Care Inc. and eBioCare.com. The pharmacies potentially could claim the terms of their purchase agreement with the Curative units indemnifies them - which could leave the company holding the bag to the tune of as much as $38 million in alleged over-billing charges, depending on the outcome of the state audit of the pharmacies.

"I think that most people would argue that they do owe that money - and where will they come up with that," the trader asserted. "The bank debt is probably secure," but the company's bonds will be worth considerably less than they are now.

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