Collins & Aikman crushed; Solo, Salton fall too; Borden talk emerges; funds see $404 million outflow

By Paul Deckelman and Paul A. Harris

New York, May 12 - Collins & Aikman Products Inc. bonds "got destroyed" Thursday, in the words of one trader, with the debt skidding downward to the tune of 18 to 20 points after the Troy, Mich.-based automotive components manufacturer announced the resignation of its chief executive officer, David A. Stockman, disclosed that it had breached its loan covenants and was forced to seek waivers from its lenders, and revealed a perilous liquidity situation.

Collins & Aikman pretty much set the pace for the high-yield market, which saw a number of issues get chopped off at the knees after reporting bad news, including Salton Inc., which posted a smaller quarterly loss but which also signaled that it had no clear plan for refinancing an issue of bonds coming due in December. Defensive company officials took no questions from analysts or the media on a conference call that one trader derisively dismissed as "little more than a dog-and-pony show."

Another big downsider was Solo Cup Co., after reporting what were considered to be disappointing quarterly results.

The primary sector was quiet, with price talk emerging on Borden Chemical Inc.'s upcoming two part bond issue, but no actual pricings seen by the close.

And after trading had wrapped up for the day, market participants familiar with the fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that $404 million more left the junk funds in the week ended Wednesday than came into them - almost the same size outflow as the $400 million seen in the previous week, ended May 4.

That stretched the funds' losing streak to 13 consecutive weeks, during which time outflows have totaled about $6.098 billion, according to a Prospect News analysis of the AMG figures.

That comprises most of the $7.022 billion outflow seen so far this year, which widened out from a $6.618 billion cumulative outflow seen the week before, according to revised calculations by Prospect News. Outflows have now been seen in 16 weeks out of the 19 since the start of 2005, with just three weeks in which more money came into the funds than left them.

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.

The negative number was widely expected, given the soggy, sloppy performance of the secondary market so far this week, including and especially, the automotive sector.

While the outflow is a little larger than the $400 million seen the previous week, more significant, according to one source, is that the 13 consecutive outflows tie the standing market record of 13 consecutive negative weeks that took place from Sept. 22, 2000 to Dec. 15, 2000.

Day starts well

The junk market got off to a hopeful start during the Thursday session on the back of what players perceived as strength in the economic numbers being reported.

"Retail sales numbers came in strong," a buy-side source said bright and early Thursday morning.

"The market seems better bid, particularly in Europe.

"I bought some paper there two days ago at 101. It went out at 99 yesterday. It's at 101 this morning.

"Rhodia had good numbers. Delphi announced that they were going to get some secured credit, which has their bonds up three to four points - even the short paper.

"With the retail sales number coming in really strong our market has been beat up so much that there is clearly value here.

"If we just get the fundamentals to come around a little bit we will be a little healthier."

Driven down by automotive sector

However by lunch time in New York the tune transformed into the much more familiar high yield dirge, as negative news from the automotive sector - the seemingly bottomless wellspring of bad news for the bond markets in recent weeks - caused junk to trade off following Collins & Aikman's announcement.

"The decent tone at the opening based on the retail sales quickly faded," a sell-side official said.

"With equities trading lower and Collins & Aikman news we saw pretty solid selling pressure all day."

Collins & Aikman plunges

Collins & Aikman stepped firmly into the uncomfortable spotlight with a lengthy morning announcement detailing the resignation of Stockman and his replacement on an interim basis by a former Collins & Aikman director, Charles E. Becker. The company also revealed, at length, details about its deteriorating liquidity situation (see related story elsewhere in this issue).

That was enough to send the company's bonds careening downward like a runaway truck.

"Oh gosh, and how," exclaimed one trader who was asked about the descent into oblivion, particularly for the company's 12 7/8% subordinated notes due 2012, which he saw at closing levels of between seven and eight cents on the dollar, way down from their closing levels Wednesday around 24 bid, 26 offered.

The company's 10¾% senior notes due 2011 weren't much better off, swooning down to 46.25 from prior levels around 66.

"CKC got destroyed," another trader said, pegging the 103/4s at 45.5 bid, 46.5 offered, down 20 points on the day, while the junior bonds "were just annihilated," falling from Wednesday's close around 23 bid, 24 offered to intra-day lows of 4.5 bid, 5.5 offered, before coming black slightly to end at 7 bid, eight offered, still down some 16 points on the day by his calculations.

"It was just total destruction."

"You might as well just say you're going to file [for bankruptcy], that's the way I look at it," the first trader said. "The head of Heartland [Industrial Partners LP, which along with affiliate Heartland Industrial Associates LLC is far and away Collins' single largest shareholder] gets canned as your CEO - if that's not a message that you're going to restructure . . . it just seems like it's imminent."

That was also the exact word used by high yield automotive and industrials analyst Joseph J. Farricielli Jr. of Imperial Capital LLC in Beverly Hills, Calif. He noted that the company has only $13.4 million in cash and available credit - while facing interest payments on its bonds of $26.9 million on June 30 and $26.7 million on August 15, "so that's definitely obvious." He said the company will likely file before the June 30 due date on the first interest payment, "that they don't have."

He also thought it was intriguing that "they're pulling all of their guidance for '05, and that their audit committee is investigating their first-quarter '05 guidance. So it seems like there's - something. Something went wrong. Either someone knew something that should have been disclosed, or - something just doesn't smell right."

It's his opinion that the company "put this announcement out there because their lawyers are telling them they need to put some kind of bad news out there" - or else, presumably, face the consequences somewhere down the line from disgruntled shareholders and debt holders.

Farricielli said that Stockman, on the company's last conference call some weeks ago, may have asserted that the company would be OK liquidity-wise "because he knew that they had a term loan B add-on in the works, [for] an additional $75 million, but obviously," things didn't quite shake out that way.

He pointed out that capital spending totaled some $50 million in the first quarter, "which was higher than they guided to - they said it would be $130 million for the year. I think maybe there were some [new product] launch costs in there, and obviously, there was something else that he either missed or did not report."

On top of this higher-than-expected capex eating up liquidity, the Imperial analyst also noted that the recent ratings downgrades for General Motors Corp. and Ford Motor Co., which lowered their Standard & Poor's ratings to junk levels, clearly threw a monkey wrench in the company's financing calculations, on the use of its accounts receivable facility.

"They then either had to quickly pay down the A/R facility, so the concentration [of the now split-rated Ford and GM] is reduced, or they have go out and start buying credit default swaps," as a hedge against the possibility - admittedly unlikely, but theoretically possible - that either of the two auto giants might file for bankruptcy.

He also cited the company "blowing their leverage [vs. EBITDA] covenant, so they obviously have operational issues as well."

Farricielli also observed that while Collins & Aikman got a covenant waiver from GE Capital, the lender on the company's A/R special-purpose vehicle facility, "the two revolver and the term loan lenders still need to provide them with an amendment."

And he said that Collins will now have to provide GE Capital with weekly liquidity reports, "and usually, when banks go to weekly liquidity reports, it means that things are pretty tight and dire."

Elsewhere, a trader noted that with Heartland Industrial Partners, Collins & Aikman's biggest holder, also being the controlling shareholder in Metaldyne Corp., "we wondered whether that would also drag Metaldyne down along with it?"

The answer, he said, was no, making an analogy: "these guys (Collins & Aikman] are the ugly sister of Heartland Partners, and Metaldyne is the good-looking sister."

He said the latter's 11% subordinated notes due 2012 were down perhaps a point at the most, at 73 bid, 75 offered, while its 10% senior notes due 2013 were 85 bid, 88 offered.

The company, he said, had "decent numbers" recently, and their bonds were "hanging in there.

"It looks like the good-looking sister looks OK vis a vis Collins. It's just interesting that they're owned by, and their management is intermingled with each other."

In fact, interim CEO Becker is a director of Metaldyne - and that company's CEO, Timothy D. Leuliette, sits on Collins & Aikman's board and on Thursday was named as part of a three-member board troika that will act as a steering committee and assist Becker. Leuliette and another steering committee member, Daniel P. Treadwell, in turn are also managing partners of Heartland.

"Financially," however, the trader said, "they're completely separate companies - and it looks like people are treating them separately."

Delphi rises on loan plans

Elsewhere in the automotive sphere, a trader saw Delphi Corp.'s 6.55% notes due 2006 and 6 ½% notes due 2013 "start to move up in the early going" after the Troy, Mich.-based automotive systems maker's announcement that it will amend and increase its $1.5 billion credit facility, and obtain secured term loans to preserve its liquidity. Delphi expects the deal, arranged through JPMorgan and Citigroup, to close in June.

That caused the bonds to pop up, with the 6.55s rising to 95.5 bid from prior levels around 92 bid, 93 offered, and the 61/2s get as good as 74 bid, 75 offered from 71 bid, 72 offered.

But then, he said, the Collins & Aikman news hit the market, and particularly, the automotive sector, and the bonds fell back from their highs, while still ending up about half point to a point, at 83 bid, 94 offered, and 71.5 bid, 72.5 offered, respectively.

The trader saw nothing but a drop for Dura Operating Corp., whose 9% notes due 2009 lost five points on the day, 63 bid, 64 offered, while ArvinMeritor's 8 ¾% notes due 2012 dropped three points, to 91 bid, 92 offered.

Ford holds steady

One automotive name which did not shift into reverse - even though it had good reason to do so - was Ford, which instead pretty much idled in neutral, unchanged on the session, despite Moody's Investors Service downgrading its debt ratings to Baa3, just one last step above junk.

"I guess people took solace in the fact that it wasn't cut to junk," the trader said, in quoting the carmaker's 7.45% notes due 2031 at 76.5 bid, 77.5 offered, unchanged.

Another market source saw Ford's 7.4% notes due 2046 "pretty much unchanged" at 70. "All of the falling took place last week [when S&P cut Ford to junk]. The markets weren't surprised by this. It was already built in."

Solo drops on earnings

Outside of the automotive sphere, Solo Cup's 8½% notes due 2014 were seen having fallen to 91 bid, 92 offered, a trader said, after the disposable cup maker reported quarterly numbers, "and people didn't like 'em." He had seen those bonds late Wednesday at 97.5 bid, 98.5 offered.

The trader also saw steel issues retreat, on what he described as a CNBC report on possibly weaker demand for steel and lower prices, with AK Steel Corp.'s 7¾% notes due 2012 down two points at 86.5 bid, 87,5 offered, and its 7 7/8% notes due 2009 a point down at 92 bid, 93 offered.

"There were all kinds of minefields out there today," he observed.

Salton plunges

Salton's bonds "got mushed," the trader said, quoting its 10¾% notes coming due in December as having fallen to 50 bid, 52 offered, a 10 point drop, while its 12¼% notes due 2008 were six point lower at 44.5 bid, 46.5 offered.

The Lake Forest, Illinois-based maker of the popular George Foreman grills and other small appliances reported earnings for the fiscal third quarter ended April 2, and while the company managed to cut costs and produce a smaller net loss than it had in the year-ago period, it's liquidity remains very tight, with just over $4 million of available cash and credit at present.

The company faces the maturity of its $125 million of the 103/4s in December - but still has not lined up definite financing for that.

Unlike its last quarterly conference call, in February, when clearly skeptical analysts peppered management with sharp questions about where the company thinks it's going to get the money to pay off the bonds, this time around, there were no such questions - because management did not allow any questions, period. Company executives read their prepared statements - and then thanked everyone for listening in (see related story elsewhere in this issue).

A market source opined that "the fact that they're not taking questions on a conference call usually is a negative sign, and the market interprets that negatively. I sure did. What's the difference between [what they did] and a press release? Not much."

Another trader, meantime, quipped that "if they should file [for Chapter 11], maybe George Foreman" - who reportedly has made more money endorsing products for Salton and other companies than he ever made as a prize-fighter - "could put up their DIP funding."

Talk on downsized Borden deal

Meanwhile Thursday no deals were priced in the new issue market.

The only piece of primary market news was talk on the Borden U.S. Finance Corp./Borden Nova Scotia (Borden Chemical Inc.) issued priced talk Thursday on its downsized $150 million two-part offering of notes (B3/B-).

Talk is 99.0 to 100.0 on the three-month Libor plus 475 basis points second-priority senior secured floating-rate notes due July 15, 2010.

Meanwhile talk is 98.50 to 99.50 on the 9% second-priority senior secured fixed-rate notes due July 15, 2014.

The $150 million total size may, at the issuer's discretion, be split between both tranches, with tranche sizes to be determined, or may be issued entirely in one tranche or the other.

The acquisition deal is expected to price on Friday.

Credit Suisse First Boston, JP Morgan and Morgan Stanley are joint bookrunners.

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