Kerr-McGee widens sharply after fall to junk; Whiting prices deal; funds see $196 million outflow

By Paul Deckelman and Paul A. Harris

New York, April 14 - Kerr-McGee Corp. bonds were unceremoniously and unanimously dumped into junkbond land Thursday by the top three ratings agencies, and proceeded to widen sharply in response, as the debt community expressed its dismay at the energy company's plans to tender for $4 billion of its shares - using borrowed money.

In the primary market, energy operator Whiting Petroleum Corp. and oilfield services firm Parker Drilling Co. each priced new deals, the latter offering an add-on to Parker's 9 5/8% notes due 2013. Those pricings, in turn, followed that of yet another energy name - Chesapeake Energy Corp. - during Wednesday's session.

And after trading had wrapped up for the day, market participants familiar with the weekly high-yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that $196.43 million more left the funds than came into them in the week ended Wednesday - the ninth consecutive week in which the funds hemorrhaged money, including the $327 million outflow seen in the previous week (ended April 6).

In those nine weeks, net outflows have totaled about $4.386 billion, according to a Prospect News analysis of the AMG figures.

That comprises most of the $5.312 billion cumulative outflow that the funds have seen since the start of the year, an increase from $5.116 billion seen the week before, according to the Prospect News analysis. Outflows have now been seen in 12 weeks out of the 15 so far this year, the analysis further reveals.

The figures exclude distributions and count only those funds that report on a weekly basis.

The fund flow numbers are considered a measure of junk market liquidity trends.

Junk suffered a general market retreat Thursday that followed on the heels of a stock market drop precipitated by investor anxiety about interest rates and the still spotty economic recovery.

"The market got its jugular nicked today," a bond trader said, "and it's gonna start bleeding tomorrow.

"The whole market was weaker," he continued. "Throw out a bond name - and it went down."

The junk market "took a general drubbing across the board," another trader observed, "along with stocks. We're setting the table for GM and everything else. Everything is re-adjusting. Everything is on sale. Everything must go.

"Everything got clobbered pretty much equally today."

Among the casualties was Chesapeake's new 6 5/8% notes due 2016, which were seen to have traded as low as 97.75 bid, 98.5 offered. A trader said he had heard them offered 98.625 late in the day, but added that "an offer without a bid is just a number." The notes had priced Wednesday at 99.069.

Another trader declared that "they got beat up" and quoted them going out at 98 bid, 98.625 offered, down more than a point from their Wednesday issue price and down even more from the small initial gains to 99.25 bid, 99.375 offered which those bonds had notched after they were freed later Wednesday.

He saw the Oklahoma City-based energy company's existing notes also sliding, with its outstanding 7½% notes due 2014 dropping to 104.5 bid, 105.5 offered, from 106 bid, 107 offered previously.

Kerr-McGee plunges

But it was the bonds of another Oklahoma City-based energy operator - Kerr-McGee - that were really getting clobbered, even as its stock shot up in the wake of the company's announcement of a Dutch-auction tender offer for up to $4 billion of its common stock, or anywhere from 27% to 29% of its outstanding equity float, depending on the price at which the shares are repurchased.

Those bonds - which were still being quoted on a spread over Treasuries basis like the investment-grade instruments they used to be - were seen to have widened out by about 50 basis points after the company announcement and the resulting ratings agency actions.

A trader quoted Kerr-McGee's 7 7/8% notes due 2031 as widening to a bid level of 260 basis points over the yield on the comparable Treasury issue and an offered level of 250 bps over, well outside the 210/200 bps spread seen going home on Wednesday.

He saw its 6.65% notes due 2011 also widening out by 50 bps, to 165/155 over from 115/105 previously.

Another trader saw the spread on the company's 6.95% notes due 2024 having increased about 50 bps to 255/240 bps over.

A third trader said simply that the bonds "got clobbered," but said that his shop wasn't trading them off the high-yield desk - yet. But in view of the downgrades, "see me tomorrow," he quipped.

The stock buyback - which the company initiated in response to threats of a proxy fight from disgruntled large shareholder Carl Icahn - will be debt funded. Kerr-McGee said it has obtained commitments from JP Morgan and Lehman Brothers, Inc., with some of the anticipated proceeds of the upcoming financings to also go towards working capital needs.

Even so, Kerr-McGee chairman and chief executive officer Luke R. Corbett insisted in a company statement that "with the proceeds from the [planned] separation of the chemical business [from the energy operations], divestitures of selected oil and gas assets, and cash flow, which has been underpinned by an expanded hedging program for 2005 through 2007, we expect to be able to reduce debt in the range of approximately $3.5 billion to $4.5 billion during the next two years."

Rating agency worries

The ratings agencies, however, weren't buying it.

Standard & Poor's lowered its corporate credit rating on Kerr-McGee to BB+ from BBB- and kept the rating on CreditWatch negative - meaning another downgrade is possible - noting that the coming share buyback will be funded entirely through the issuance of debt and borrowings under new credit facilities, which "materially harms the company's credit profile."

S&P also said that external pressures on management to enhance shareholder value - i.e. Icahn's demands that management boost the stock price or face his proxy challenge - have been "a major rating concern associated with the negative CreditWatch listing."

Moody's Investors Service expressed similar qualms in dropping the rating on the company's senior unsecured bonds three notches to Ba3 from Baa3. It cited "the material shift in the company's risk profile as reflected by its share repurchase announcement and the corresponding increase in leverage," which will increase its balance sheet debt outstanding about 2.25 times to over $7.2 billion.

"KMG's higher leverage exacerbates its weak fundamental operating performance and portfolio durability as shown by inconsistent organic reserves replacement and correspondingly high finding and development (F&D) costs over the past three years. The downgrade further reflects the time necessary over the medium term for KMG to transform its portfolio from a higher risk predominantly exploration focus to a lower risk balance of exploitation and exploration," Moody's warned.

Fitch Ratings also lowered Kerr-McGee, all the way down to B from BBB for its senior unsecured debt. It assigned a BB senior secured rating.

Kerr-McGee's action "is an abrupt change in the company's financial and operational strategy," the ratings agency remonstrated." As a result, Fitch said it questions Kerr-McGee's long-term strategy and future expectations regarding reserve bookings, production, capital expenditures and debt reduction.

While debt holders and the ratings agencies groused, Kerr-McGee's New York Stock Exchange-traded shares were up $4.93 (6.66%), to $78.90, on volume of 24.8 million shares, more than six times the average daily turnover.

Unisys lower on loss

Elsewhere, Unisys Corp.'s bonds weakened after the Blue Bell, Pa.-based provider of information technology solutions announced that it had swung to a first-quarter net loss from a year-ago profit, because of increased pension expenses and declining revenue.

That sent its 8 1/8% notes due 2006 down a point to 101.5 bid, 102.5 offered, a trader said, from a previous 102.5 bid, 103.5 offered context. He also saw the company's 6 7/8% notes due 2010 at 95.5 bid, 96.5 offered, down from recent levels around 97 bid.

Another trader saw those 6 7/8s at 94 bid. 95.75, pegging them down three points from their prior levels.

Unisys recorded a loss of $45.5 million (13 cents per share) for the 2005 first quarter ended March 31, a sharp deterioration from its year-ago net profit of $28.9 million (nine cents per share). The company cited a more than doubling of its pension expenses as the key factor behind the slide - but even without those pension costs it would have still shown a loss of $13.7 million (four cents per share), versus a profit of $44 million (13 cents per share) on a similar basis a year-earlier. Revenues fell to $1.366 billion from $1.462 billion in the year-earlier period.

On a conference call following the release of the results, company president and chief executive officer Joseph McGrath and chief financial officer Janet Haugen repeatedly said that the first quarter had been "challenging" but that the company was making progress on initiatives it had previously put in place to cut costs, drum up new business and fix the problems of its troubled outsourcing business.

For the second quarter, Unisys expects per-share earnings of between a 2-cent profit and a two cent loss, with revenues "relatively flat" versus year-earlier levels.

For all of 2005, it expects per-share earnings of between 50 and 60 cents, not counting pension expenses, although Haugen said this would probably come in at the lower end of that range. She also said the company anticipated single-digit percentage revenue growth for the year, and free cash flow of better than $50 million.

Haugen also noted on the call that the company had repaid $150 million of debt at maturity in January - its 7¼% senior notes, which were repaid in full on Jan. 18 using cash on hand, which reduced total long-term debt to about $900 million.

She further said that Unisys had no outstanding borrowings against its revolving credit agreement as of the end of the quarter and had $442 million of cash on hand.

Primary struggles

It was an upwind haul for the high-yield primary market on Thursday as $270 million priced in two tranches.

Both deals came from energy-related sectors, with Whiting Petroleum pricing $220 million wide of the price talk, and Parker Drilling completing a $50 million add-on.

Also the forward calendar took aboard more passengers as the slate of pending euro-denominated deals had topped €2.25 billion by the end of Thursday's session.

Diminishing liquidity?

Those in search of negative numbers on Thursday need not have hunted far. One trader commented that on the equity side the S&P 500 gave up a full percentage point, while the Nasdaq ended the session down 1.4%, and has given up 10% so far in 2005.

Various sources also reported recently priced junk bonds trading off - some of them sharply - in the secondary market.

"A lot of people were long on a lot of spread product," one market source commented.

"There are probably a lot of leveraged positions with people trying to get out. And it looks like the economy may be taking a little bit of a turn here.

"You combine that with a flow of funds that is going the wrong way and it has taken a lot of the liquidity out of the market. And things have fallen.

"People are selling GM and Ford in anticipation of a downgrade because a lot of people won't be able to hold it if it gets to that point. Frankly the spread at this point has more than a downgrade priced into it: some of that paper is trading 600 basis points off."

Whiting Petroleum wide of talk

Among deals that have been traveling the investor roadshows, Whiting Petroleum Corp. was the only one to complete a transaction on Thursday.

The natural gas acquisition, exploration and exploitation company priced $220 million of 7¼% eight-year notes (B2/B-) at 98.507 to yield 7½%, well wide of the 7% to 7¼% price talk.

Merrill Lynch & Co. and Lehman Brothers ran the books for the debt refinancing deal.

The new Whiting Petroleum 7 ¼% notes due 2013 were not seen to have broken into the aftermarket by the time Thursday's trading finished up, participants said.

Parker Drilling drive-by

Elsewhere Houston-based Parker Drilling Co. priced a quick-to-market $50 million add-on to its 9 5/8% senior notes due Oct. 1, 2013 (B2/B-) at 111.0 on Thursday, resulting in a 7.214% yield to worst, with Lehman Brothers running the books.

Parker is using the proceeds, along with cash on hand, to take down $65 million of its 10 1/8% senior notes due 2009.

The original $175 million issue priced at par on Oct. 3, 2003. Hence Parker realized interest savings of over 241 basis points with Wednesday's add-on.

NationsRent starts $150 million on Monday

Two offerings were added to the forward calendar during the session.

NationsRent Cos., Inc. will start a roadshow on Monday for its $150 million offering of 10-year non-call-five senior unsecured notes, via Jefferies & Co.

The Fort Lauderdale, Fla., full service equipment rental company will use the proceeds to repay debt.

Iesy starts €525 million

Meanwhile in Europe, the merger of two of the companies that were owned by Deutsche Telekom prior to privatization will produce new issuance.

German cable operator Iesy Repository GmbH will begin a roadshow Monday in New York City for its €525 million equivalent offering of 10-year non-call-five senior notes in dollar and euro tranches (existing ratings Caa1/CCC+).

Citigroup, Deutsche Bank Securities and JP Morgan will be joint bookrunners for the deal which is being done to fund the acquisition of German cable operator Ish and to refinance debt.

With the addition of Iesy, the euro-denominated deals now positioned on the forward calendar, and thus considered to be in the market, now tops €2.25 billion.

Talk on Saur, Cheniere

Elsewhere Thursday price talk was heard on a pair of deals that have completed their roadshows.

French water treatment company Saur Group SA's €265 million offering of 10-year non-call-four senior notes (B1/B+) is talked at 8 1/8% to 8 3/8%, and is expected to price on Friday via BNP Paribas.

And Cheniere Energy's $500 million offering of 10-year non-call-five senior notes (B+) is talked at a yield in the 8¾% area, and is expected to price on Monday via JP Morgan and Credit Suisse First Boston.

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