Collins & Aikman climbs; MCI off as Verizon combo threatened; Navarre deal latest to bite the dust

By Paul Deckelman and Paul A. Harris

New York, April 4 - Collins & Aikman Corp.'s bonds were driving to the upside Monday - a rare trip recently for the Troy, Mich.-based automotive components maker's securities - after the company won a waiver from its bank lenders of reporting delay restrictions in its loan covenants and, late in the day, announced a new $75 million loan facility.

Meantime, MCI Inc.'s bonds were seen lower as the Ashburn, Va.-based long-distance carrier's planned merger with Verizon Communications Inc. - previously seen as pretty much a done deal - now looks definitely to be endangered, with rival Qwest Communications International Inc. having gotten funding commitments for its larger offer to MCI - and Verizon now warning that it is ready to back out rather than stick around for a renewed bidding war if MCI deems the Qwest offer superior.

In the primary market, which saw little activity last week, Navarre Corp. was heard to have terminated its planned offering of seven-year notes, while Hughes Network was getting ready to market an offering of eight-year bonds.

Collins & Aikman "got their waivers, and their paper was up," a trader said, quoting the company's Collins & Aikman Products Co. 12 7/8% subordinated notes due 2012 as having risen to 47 bid, 48 offered and its 10¾% senior notes due 2011 as having pushed up to 83 bid, 84 offered, both up 1½ points on the session.

The rise followed the company's disclosure in a Securities and Exchange Commission filing on Friday that it had received from its lenders waivers of the timely reporting requirement in the covenants of its loan agreements.

Collins & Aikman had warned on March 17 that it would have to delay the filing of its 10-K annual report with the SEC due to its discovery of certain accounting problems, and further cautioned that even with the automatic 15-day extension upon the filing of its notice of delay with the Commission, it still might not have the report completed by that extended deadline.

Under the waivers announced Friday, the company's lenders have given it June 15, although that extension could end earlier if certain event of default scenarios described in the legal language of the filing were to occur.

Even as he was running down where the company's bonds had finished the day, the trader noted that Collins & Aikman had just announced that it had obtained a new $75 million credit facility via Credit Suisse First Boston, and observed: "I'm sure people had a clue. The bonds will probably go higher [Tuesday]."

Foamex down on earnings

Elsewhere in the beleaguered automotive supplier sector, the major mover was Foamex International Inc., whose bonds and shares fell sharply after the Linwood, Pa.-based maker of foam rubber products for the automotive industry and other industrial uses announced a wider fourth-quarter loss from a year ago. It reported a net loss for the fourth quarter of $15 million (61 cents per diluted share), substantially wider than the year-earlier net loss of $3.5 million (14 cents per share), primarily due to weakness in its automotive-related operations, and also said that it was restating its 2004 third-quarter financial statements to correct an error in recording the valuation allowance established in that period against its deferred income tax assets.

On a conference call following the release of the numbers, company executives further detailed amendments to Foamex's credit facility aimed at giving the company more financial flexibility and said they had a "viable" plan in place for addressing the upcoming maturity of its 13½% notes due Aug. 15 (see related story elsewhere in this issue).

The trader quoted Foamex's 9 7/8% subordinated notes due 2007 as having fallen as low as 46.5 bid from Friday's levels at 55. 5 bid, 56.5 offered, on investor disappointment with the numbers, but said that "the conference call must have been OK," because post-call levels crept back up to 51.5 bid, 52.5 offered at the close.

"They were still four or five points down on the day," he said, "but it was a pretty impressive comeback" from the earlier 10 point deficit.

He also saw Foamex's 10¾% senior notes due 2009 as having bounced off their lows for the day, although there, the gyrations were much less pronounced, with the bonds falling to 85 bid, 86 offered from Friday's close at 88.5 bid, 89.5 offered, and then coming back up to close at 87 bid, 88 offered, only down 1½ points.

The company's 13½% notes had last been seen offered recently around 92, but no activity was seen in the issue, which is only a small remainder of a previously larger issue.

Foamex's Nasdaq-traded shares nosedived 33 cents (17.93%) to end at $1.51, on volume of 375,000, more than triple the usual handle.

MCI falls as merger endangered

Also on the downside Monday, MCI's bonds were lower after Verizon Communications threatened to walk away from the planned merger of the two telecommunications companies if MCI deems Qwest's rival offer superior.

MCI's 8.735% notes due 2014 dipped to 108 bid, 108.5 offered from 109.5 bid, 110 offered on Friday, while its 7.688% notes due 2009 were a point lower, at 102.75 bid, 103.75 offered.

Qwest's bonds, buoyed by the possibility that the Denver-based regional Bell operating company might actually get the better of New York-based rival RBOC Verizon - a financially much stronger company - and walk away with MCI's network and its impressive cash hoard and roster of government and industry clients, were up about half a point, with its 7.90% notes due 2010 at 95.5 bid, 96.5 offered.

Both Qwest and Verizon last week raised their respective cash and stock bids for MCI - Qwest to $8.9 billion and Verizon to $7.5 billion, although up until now, Verizon was still seen as the more likely victor, despite its far smaller bid, because it was seen as much more financially stable and worthy partner for MCI than the debt-laden Qwest, still trying to get back on track after accounting irregularities caused problems for the company with securities regulators earlier in the decade.

But a number of MCI shareholders have clamored for approval of the higher Qwest bid, even though management has twice endorsed Verizon's offer over Qwest's. Although Verizon on Friday gave MCI management permission to hold talks with Qwest on its offer - which has a Tuesday take-it-or-leave-it deadline - on Monday, it said that should MCI decide the Qwest offer was superior, it would retire from the hunt and go home - in the process taking its $250 million breakup fee - rather than come back again with an improved offer.

"If the MCI board, capitulating to Qwest's artificial deadline, declares this bid to be 'superior,' it would seem to us that the decision-making process is being driven by the interests of short-term investors rather than the company's long-term strength and viability," Verizon warned. "Should this occur, we would no longer be interested in participating in such a process."

J.C. Penney rebound continues

Elsewhere, J.C. Penney & Co. Inc. bonds were seen rebounding for a second straight day, as bondholder fears of a possible debt-financed leveraged buyout acquisition of the Plano, Tex.-based department store operator rumored last week appeared more and more to be unlikely.

Penny's 8% notes due 2010 were seen at one desk up nearly two points at 105, while its 9% notes due 2012 were seen up as much as three points to 109.

However, at another shop, a trader had a different take on things - Penney, he said "was stronger in the morning, but then kind of settled in," with its 7.40% notes due 2037 getting as good as 96 bid, 97 offered in morning dealings, before coming off those highs to end at 94.5 bid, 96.5 offered, while its 6 7/8% notes due 2015, which started at 93 bid, 95 offered, got as good as good as 96 bid, 98 offered, before ending at 95.5 bid, 96.5 offered.

"They rallied a little and then gave a touch back, but not to their openings." The 2037 bonds, he said, are about 10 points better than recent lows hit when the LBO speculation was running high, while the 2015s were seven points off their recent trough.

Primary still quiet

The high-yield primary failed to gain its footing on Monday, following the dismal March 28 week that saw just $155 million pricing in two tranches.

No new issues priced during the Monday session.

However the market did hear news of another bond fatality: Navarre Corp.'s $125 million.

"The high-yield landscape has changed," said one sell-side official early in the session.

Meanwhile another market source, citing the downturn in high yield that took place during May 2004, commented that the spread widening seen during the past three weeks exceeds last May's.

The not-so-merry month of May 2004 also has come up in conversations regarding the present liquidity of the high-yield asset class. AMG Data Services has reported $2.62 billion of outflows from high-yield mutual funds over the two-week period ending March 30. Sources have told Prospect News that it is the largest combined two-week exodus of cash from the funds since the week to May 19, 2004.

Meanwhile junk bond strategist Martin Fridson has presented numbers to indicate that institutional money is also exiting the asset class. Leverage World's Fund Flow Investor Survey, which includes hedge funds and insurance companies as well as mutual funds, showed the number of managers reporting outflows exceeded managers reporting inflows by a 2:1 margin during the week to March 29. The previous week outflows exceeded inflows by a 5:2 margin (see related story elsewhere in this issue).

Banging on the pipeline

In the face of the dire market color heard on Monday, news did surface of bond deals on the horizon.

Among prospective issuers, Germantown, Md.-based broadband satellite networks provider Hughes Network Systems LLC plans to sell $325 million of eight-year senior unsecured notes (B1), via JP Morgan and Bear Stearns & Co. with the proceeds to be used to help fund the transfer of Hughes Network Systems' assets to Hughes Network Systems LLC, a newly formed company that will be 50% owned by SkyTerra Communications Inc. and 50% owned by The DirecTV Group.

Also on Monday AmeriGas Partners, LP announced plans to sell new debt securities in order to fund its offer to purchase $388 million of its outstanding 8 7/8% series B senior notes due 2011.

Credit Suisse First Boston is the dealer manager for the tender.

And South Korea's fixed-line operator, Hanaro Telecom, has mandated JP Morgan and UBS Investment Bank to run the books for up to $250 million of global bonds.

The issuance could come as an add-on to the company's 7% notes due Feb. 1, 2012 (existing ratings Ba2/BB). Those notes priced at 99.32 on Jan. 25, 2005, to yield 7 1/8%.

The deal is expected to launch during the second quarter of 2005.

Navarre pulls $125 million

Elsewhere on Monday Navarre Corp. joined the parade of pulled deals as it announced that it has terminated its $125 million offering of seven-year senior notes (B3/B+) due to "the recent weakness of the bond market."

Bear Stearns & Co. had the books.

Price talk was 10¼%-10½%, however a buy-side source who had looked at the deal told Prospect News late last week that the notes were then being marketed at 10¾%.

The investor also added that the subscription book, as of Thursday, March 31, had only been built to approximately $80 million.

Proceeds were to have been used to back Navarre's acquisition of FUNimation. Navarre reiterated in Monday's press release that it anticipates closing the acquisition prior to May 15.

Navarre became the eighth company to pull a deal thus far into 2005, representing slightly over $2 billion of dollar-denominated business in 10 tranches.

That list also includes

* Jan. 27, Di Giorgio Corp. $150 million;

* Feb. 3, Atlantis Plastics Inc. $125 million;

* Feb. 11, Hilite International Inc. $150 million;

* March 9, Telcordia Technologies Inc. $300 million;

* March 17, HLI Operating Co. Inc. (Hayes Lemmerz International Inc.) €120 million;

* March 23, Masonite International Corp. $825 million in two tranches; and

* March 30, White Birch Paper Co. $400 million in two tranches.

Primary not closed says Arsenault

Meanwhile, despite new issuance volume that has lately been reduced to a trickle, Morgan Stanley head high-yield strategist Brian Arsenault told Prospect News on Monday that the primary market remains open.

"The market is not shut down by any stretch," Arsenault said. "But you have to come to market with higher credit quality. Triple-C deals that might have worked late last year or during January and February of this year might not work now." (see related story elsewhere in this issue)

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